In search of higher margins, Canada Goose to make more of its own luxury coats

Luxury coat maker Canada Goose plans to bring more manufacturing in-house in a bid to boost margins and help it live up to lofty investor expectations as the most expensive stock among major luxury brands.

The Toronto-based company aims to make a least half of its outerwear itself in a few years, up from about a third now, Chief Executive Officer Dani Reiss told Reuters in an interview at the company's Toronto headquarters.

"We'd like to grow our internal capacity," Reiss said, referring to the move as one of its "pillars of growth."
"Here's an opportunity for us to have more in-house capacity and increase our profit margins, which is important for our investors and for us," he said.

By tightening their hold on manufacturing, luxury outerwear makers such as Canada Goose and Italian rival Moncler as well as Kering's Italian fashion label Gucci are able to increase control over quality to justify charging eye-watering prices.

"If you’ve got a multi-tier supply chain, you’re leaving profit margin throughout every element of the supply chain for everybody along the way," said Rod Sides, Deloitte's U.S. retail and distribution leader.

Companies still have to be able to predict future demand accurately for the strategy to succeed, and other factors, like the location of new facilities, can make a difference.

For instance, putting new facilities in Canada Goose's home province, Ontario - which has the highest electricity rates in Canada and raised the minimum wage 21 percent this year - would likely not help the bottom line, said Brian Madden, portfolio manager at Goodreid Investment Counsel.

But the risk is worth it for Canada Goose, which has all of its coats made in Canada and sells them for between $725 and $1,695. The company posted December quarter operating margins of 60 percent on online and own-store sales versus 43 percent from wholesale, causing investors to cheer the growth in its direct-to-consumer business.

The stock has almost doubled since it listed a year ago, vastly outperforming the flat Toronto stock benchmark, and is trading at 55 times forward earnings, more than double Moncler's.

Canada Goose, which opened the first of its own stores in 2016, plans to have as many as 20 by the end of 2020 from six now, compared with Moncler's 201 stores.

"At this point they're relatively under-penetrated across their ultimate audience, and they're going to grow into that," said Nomura equity analyst Simeon Siegel.

Despite Siegel's positive view, he has a neutral rating because of its valuation.

As it expands its footprint, and starts selling online in China and possibly Russia beyond that, Reiss said the company needs to ensure it can keep up with demand.

GRIP ON QUALITY

For many luxury companies, having a tight grip on quality for big ticket items is often crucial to convince customers to fork out small fortunes. Most luxury companies would also rather sell out temporarily at full price than produce too much and have to discount merchandise.

Moncler took control of its own jacket manufacturing site in Romania and slightly reduced the number of its suppliers in 2016. Most of its manufacturing and supply chain remains outsourced, though it declined to detail how much.

Kering's Gucci is also looking to bring more of its handbag production in-house this year with a new facility near Florence.

Though operating in a different sphere, France's Hermes , best-known for its $10,000-plus Birkin and Kelly handbags, makes all its leather goods at its own domestic workshops.

But outsourcing can also make sense, especially for basic items like T-shirts, if there are compelling cost reasons, or if expertise lies elsewhere.

Canada Goose has no plans to change suppliers for its knitwear lines from Italy and Romania, nor the exclusive external suppliers for its coats' components, according to the company.

It has six factories that make its outwear in Canada, and has lifted manufacturing capacity by building new sites, acquiring contractors and adding employees.

"What this offers is more control on the quality and timing and product," said luxury consultant Robert Burke, who has counted Canada Goose among his clients. "The risk is to ensure you buy (a facility) that's big enough for future growth but not cumbersome."