Good morning. My name is Mariama, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose Second Quarter 2020 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.
Thank you. I would now like to turn the call over to Patrick Burke, Senior Director, Investor Relations. You may begin your conference.
Thank you, and good morning, everyone. With me are Danny Reese, President and CEO and Jonathan Sinclair, EVP and CFO. After prepared remarks from Danny and Jonathan, we will take your questions. This call, including the Q and A portion, includes forward looking statements. Each forward looking statement, including discussion of our fiscal 'twenty outlook, 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 the Risk Factors section of our most recent annual report filed with the SEC and Canadian Securities Regulators. These documents are also available on the Investor Relations section of our website. Forward looking statements made on this call speak only as of today, and we undertake no obligation to update or revise any of these statements. Our commentary today will include certain non IFRS financial measures, which are reconciled in the table at the end of our earnings press release issued this morning and available on the Investor Relations section of our website at canadagoose.com.
With that, I will turn the call over to Danny.
Thanks, Patrick, and good morning, everyone. I am really pleased to tell you that the power of our brand and our business model pulled through despite a challenging external environment, and we delivered another strong set of results to finish the first half. And here are the highlights. In the Q2 relative to last year, revenue grew by 27.7 percent and adjusted EPS per diluted share increased 23 point 9%. Even with the unrest in Hong Kong, revenue in Asia nearly doubled to $48,900,000 Revenue in the U.
S. Increased by 38.5 percent on a constant currency basis. Revenue in Canada grew by 29.9%. Against tough comparisons in our most developed market, this is a strong result. From a brand perspective, it is great to see customers at home embracing our lightweight down jackets and knitwear.
From a channel perspective, wholesale led the way wholesale led the way with its largest quarter, with revenue increasing by 22.9%. This was complemented by direct to consumer growth of 47.2%. Like in the Q1, we continue to fulfill partner requests for earlier shipments on the back of increased operational flexibility. With that as a starting point, there are a couple of specific topics that I would like to address. Let me start with Hong Kong.
As I'm sure you're aware, the situation has intensified since our last call. With the impact on tourism and retail traffic, the performance of our store at IFC has impacted it significantly. The same goes for our recently opened location at Ocean Center, which is the 5th of our 9 openings this year. With this addition, we are established in the 2 most important luxury retail districts in the city, complementing the mix of guests we already reached through IFC. Although we wish that the situation was different today, we are developing markets and building stores for decades, not just for the next quarter.
Fortunately, during our Q2, strong top line performances in other markets offset the impact in Hong Kong. We're watching the situation closely and evaluating actions to streamline our cost base on the ground, including negotiating accommodations from landlords. Moving on, wholesale timing is another important topic for understanding our business. The channel operates largely as a planned economy. Our fall, winter and spring order books are set down to the color, style and or well in advance, and this gives us great visibility through the year.
The timing of when we ship these orders can and does shift from month to month in any given year. It comes down to a balance of when our partners want delivery and when we can manufacture their orders most efficiently. This year, we've been well positioned to fulfill customer needs earlier. The shape of every year has always been different and so movement of orders between quarters or months is not a reliable indicator of annual performance. I am really pleased that we've shipped so much of our fallwinter order book earlier, which naturally means less shipments in the next quarter.
It does not mean the underlying demand in the channel is changing. We continue to expect wholesale revenue to grow in the high single digits in fiscal 2020. This shift has already impacted our numbers for Europe and rest of world, where revenue decreased by 3.4% in constant currency. For the same reason, this is not something that I'm at all concerned about as it is our most wholesale centric region, and it grew by 79.7% in the Q1. So fewer orders shipped this quarter is a logical follow on effect.
As you have seen before, growth rates in any given geography can vary from quarter to quarter exactly
for this reason. Lastly, I
want to provide an update on inventory, which we discussed last quarter. We have continued to build an inventory buffer ahead of to maximize production efficiency and long term commercial flexibility. Going back to our IPO, a key growth strategy has been increasing in house production to control our own destiny, provide greater flexibility and to increase margin. Initially, this meant expanding in house capacity alongside expanding existing contractor production. In building 4 factories over the last two and a half years, over half of our downfield production is now in house, and we are at a stage where we can actively reduce our CMTs in the coming year.
I continue to feel very good about the size and the current composition of our inventory position. We continue to operate commercially with a disciplined and selective allocation model, both at wholesale and in our own DTC channels and always at full price. Going into next year, once the rationalization and transition are complete, we intend to improve inventory efficiency relative to sales and expect that our inventory levels relative to revenue will trend lower over time. I'm also excited to share with you a few things that we're doing with innovation and experimentation in retail this season. I believe that our customers own our brand, and the value of our brand is defined by the sum of their experiences.
Innovation and experimentation is an important part of that puzzle for us. With consumers looking to use outerwear to express their own personality more and more, our recent relaunch of Branta is a great example. A focused collection of 6 never to be repeated styles is an elevated interpretation of Canada Goose's heritage designed to inspire loyal brand fans and reach new audiences with Pinnacle product. Through versatile 4 in 1 and 3 in 1 and reversible styles that feature an artistic print luxury fabrics such as lower piano wool. Vranta has been a high impact centerpiece on our floors and the commercial response so far has been incredible.
We have also introduced pilot programs to encourage self expression, including the ability to add personal details on their jackets and to customize for consumers to customize their jacket with new hood brim options. Offering new reflective, comfort and insulated brim choices, consumers can tailor their jacket to where and how they use it in their own personal style preferences. The customer's response from these programs has been extremely positive, and we are learning a lot to inform future direction of both product and retail engagement. Similar to our innovation with cold rooms and customization and personalization pilot programs, we continue to experiment and evolve with retail formats. In a fast changing digital first world, you cannot succeed by repeating the same store concept again and again.
One box does not fit all. There are so many interesting opportunities out there to micro target to specific locations, customers, influences and experiences. This year, we've activated a number of new direct to consumer formats to test and learn what works where, what customers want and how we can deliver exceptional experiences in new ways. As we have done in the past, we are also utilizing pop ups activate markets and test locations for permanent openings. Later this week, we'll be opening at Tysons Galleria in Washington DC area, and we're excited to be bringing our amazing Canada Goose experience to life there.
Going back to my initial remarks, having global brand strength, multiple avenues of growth and the discipline and focus to execute well are so important in times like these. Winter has just kicked into high gear and I'm really encouraged by how we are performing despite the continued external headwinds and ongoing uncertainties. Despite that, we continue to see long lineups in our stores across geographies, which shows the power of great product and exceptional experiences. And with that, I'll turn it over to Jonathan to go into the specifics of our financial results.
Good morning, Denis. Good morning, everyone. Thank you for joining us. We delivered strong second quarter results in line with our expectations. The impact of disruptions in Hong Kong with strong performances in other markets.
Against external uncertainties, we're executing with discipline and we're pleased to be in a position to reaffirm guidance for the year. Now with that backdrop, I'll walk you through the numbers in detail. Please note that all figures are quoted in Canadian dollars. For the 2nd quarter compared to the same quarter last year, revenue grew 27.7 percent to $294,000,000 or 28.3 percent on a constant currency basis. Wholesale was a standout performer in the largest quarter, with revenue growing 22.2 percent or 22.9% constant currency basis.
This was primarily driven by growth from existing partners, complemented by earlier shipment timing relative to last year. Incremental revenue from Baffin in its peak sales quarter also had an impact. We continue to assume high single digit wholesale growth for the year. This reflects our performance through the first half with a materially higher proportion all winter orders fulfilled relative to last year. We also anniversary the acquisition of Baffin at the start of November.
For these reasons, we expect wholesale revenues in Q3 to decrease in the mid teens on a percentage basis year over year. This is purely a function of timing. With fewer remaining full winter orders to work through and that's what drives the quarter. Moving on to Q4, we transitioned to the spring order book and late season fallwinter replenishment. We're pleased to satisfy our obligations to our partners earlier, putting our 2,000 plus points of distribution in a better position for the peak season.
However, this does not change the commercial discipline with which we supply and operate this channel. DTC revenue increased by 47.2% or 47.4% on a constant currency basis. Now due to the transition to a 4.45 fiscal calendar this year, we lost one day in the quarter relative to last year. Excluding the extra day in the prior period, growth would have been 49.3%. Our established stores and e commerce markets performed well and our new store openings had good starts with Shenyang and Edmonton being particularly noteworthy.
Moving on to geography, we made great strides in key markets alongside continued growth at home. Starting with Asia, our top line nearly doubled to $48,900,000 Now while Japan growth was much lower than Q1 due to shipment type, it still continued to be a positive contributor, as of course did incremental revenue from DTC operations in Greater China. And Hong Kong specifically, our store was inevitably impacted by external disruption. That said, given the effects on tourism and traffic, we're pleased with how IFC performed. We're fortunate to have a global business with the resilience to offset this with strong performances in other geographies.
Now unfortunately, and as we're all aware, the situation in Hong Kong has intensified. As we enter the second half of the year, we also have an additional location at Ocean Center and we anniversary IFC's opening, making the headwind on DTC revenue growth more significant. As you'd expect, we're being also being very prudent with our local cost base and resource allocation, and that includes queuing accommodations with our landlords and service providers alike. Moving on to the United States, revenue increased by 38.5% in constant currency. This was driven by significant contribution from wholesale in its largest quarter, complemented by strong DTC performance both online and in store.
At home in Canada, revenue increased by 29.9%. Against a tough comparison in the seasonally smaller quarter, we were pleased with the performance of our highly productive DTC channel. Incremental bathroom revenue in its peak quarter was also particularly relevant to Canada. In Europe and Rest of World, revenue decreased by 3.4% in constant currency. You'll recall that in the growth in Q1 was very elevated, 79.7%.
We called that out as being driven by earlier timing shipment relative to last year. As an output, there were fewer remaining for winter orders to ship in Q2. And in our most wholesale centric geography, this was the fundamental driver of the decrease. Moving on to revenue, consolidated gross margin was 54.6%. At a channel level, wholesale gross margin came in at 47.5% as expected.
This represents normalization relative to the first half of last year, which was elevated through a number of temporary timing factors. As I've said before, in the mid to high 40s is right where we want to be over annual periods and our comparison normalize in the second half of this year. DTC gross margin came in at a strong 75.6%. This was driven by the net positive impact of pricing relative to costs. We saw the benefits of tailwinds from our core, which are more significant at this time of year relative to Q1 when the mix from non parker growth margin.
Wholesale operating was $90,900,000 with an operating margin of 41.4%. This reflects the gross margin shift versus last year, as I've just described, and relatively flat SG and A as a percent of revenues. Turning to DTC and excluding pre opening costs in both periods, our operating margin increased to 45.3% from 43.7%, with strong sales productivity and profitability across all components of the channel. We incurred $3,600,000 in preopening costs for the locations not yet open and this compares to $1,000,000 in the same period last year. Including these costs, DTC operating income was $30,000,000 representing an operating margin of 40.4%.
Unallocated corporate expenses were $43,200,000 compared to $34,200,000 last year, while unallocated depreciation was $2,300,000 compared to $1,800,000 a year. Increase in corporate SG and A was primarily driven by increased growth investments in marketing, corporate headcount and infrastructure, including Greater China. Combined, this resulted in total operating income of $75,400,000 That compares to $65,000,000 last year. On a non IFRS basis, adjusted EBIT was $79,200,000 compared to $66,500,000 last year. Net income was $60,600,000 or $0.55 per diluted share compared to $49,900,000 or $0.45 per diluted share last year.
Adjusted net income, which excludes a $4,000,000 impact from preopening costs was $63,600,000 or $0.57 per diluted share compared to $51,100,000 or 0.46 dollars per diluted share last year. It's also worth noting that earnings in the quarter benefited from a change in the effective tax rate to 12.8% from 18.1% last year. Now this is largely a temporary timing impact. It relates the differences in the transfer of inventory to the specific geographies and the applicable tax rates. We continue to assume an effective tax rate for the full year in the area of 21.3%, which is what we achieved in fiscal 'nineteen.
Turning quickly to the balance sheet. We ended the quarter with net debt $537,900,000 That includes $224,200,000 in lease liability as presented under IFRS 16. On a spot basis at the quarter end, net debt to EBITDAR on a trailing 12 month period was 2.0 times. This reflects a seasonal peak in the financing of our working capital cycle achieved through our short term facilities. Net working capital was $383,000,000 compared to $270,000,000 in the same quarter last year.
This reflects a continuation of our planned inventory build and was partially offset by increases in accounts payable and accrued liabilities. To support the staging needs of our international DTC expansion and maximize the efficiency of our new in house capacity coming online, we have built up buffer inventory in cumulative core styles for longer term commercial flexibility. This buffer gives us continuity as we rationalize 3rd party CMTs. Moving beyond this fiscal year, once this transition is complete, we expect our inventory levels to begin to normalize. In summary, we're really pleased with our performance through the first half of the fiscal year, and we're well positioned as we enter our busiest commercial period.
While external uncertainties are a reality, we remain confident in the power of the brand and indeed in our business model. Against this backdrop, we've continued to deliver strong growth in revenue and earnings, and we're pleased to reiterate our outlook for the year. Now I'll turn back to Danny for some closing remarks.
Thanks, Jonathan. 1st year the first half of the year has truly been great and with the peak season now in full swing, there are a number of exciting things on the horizon. We'll be opening our 1st store in Paris on Rue Saint Honore shortly. This is a dream come true for me personally, and I can't wait to see it up and running. We're also launching our 1st concept store at Sherway Gardens in Toronto, an experimental and experiential way to engage with our local fans.
And last but not least, we'll be introducing our 1st small format resort town location in Banff, which is one of Canada's most beautiful and popular international destinations. And with that, I will now turn it over to the operator to begin Q and A.
Your first question comes from the line of Kate Fitzsimons with RBC Capital Markets. Your line is open.
Yes. Hi, good morning, guys. Congratulations on the momentum. I guess my first question is, the growth rates in your more established markets, Canada and How do you think about what's driving the demand in the home market, particularly at the wholesale channel as well as growth opportunities go forward in North America? And then secondly on Asia, obviously very impressive growth there despite that disruption in Hong Kong.
Can you just dig into what you're seeing in other markets as an offset? And Danny, it's been about a year since you've been in China. What would you say have been the more interesting or surprising learnings there, more recently, just despite the fact that what's going on in Hong Kong? Thanks so much.
Thank you for your questions. I think that our brand heat has never been stronger and it continues to grow. Global awareness and affinity of our brand are in a great place and you can see that in our results. We have significantly grown our business in all geographies and we continue to achieve a very significant pace of growth off of a much larger base today. I think that some anecdotes as it's gotten colder, there are lineups at our stores.
We get again other people camping out overnight to get at some of our collaborations and to make sure they get one of them. So the demand for our products has truly never been stronger across all geographies. And to speak to China, and we've been operating there for a year. And as you can see, the results have been great. This quarter, we've had almost doubled our business in China, and I think that we took the right approach there by building by running China from China and investing in infrastructure and offices in country, and I think the results are showing dividends, notwithstanding obviously what's going on in Hong Kong and that we're hoping for that to resolve itself in a positive way for everybody.
But in the meantime, China is great, demand is strong and Chinese consumers, our brand is really resonating with them.
Great, guys. Best of luck for holiday.
Thank you.
Your next question comes from the line of Omar Saad with Evercore ISI. Your line is open.
Thanks. Good morning. Nice quarter. I wanted to ask about follow-up on a lot of your comments around the supply chain production, the inventory build. It looks like you're continuing to kind of build that quarterly production, how much you guys are producing.
Obviously, also doing more in house. I think you said 50% or over 50%. Maybe you could talk about do you expect production to still ramp, whether it's internal production or with your external suppliers over the next year or 2 from these levels? Or do you expect the production to level off at some point? And also on the own manufacturing, do you think you get to a level much above 50% over time?
Are you kind of happy where it is? And then help us think about I think there was a comment around building some of the core items longer term in inventory. Help us understand that dynamic and maybe you could frame it inventories per store or another metric that helps us understand and get comfortable with how the inventory flows through the seasons and throughout the year? Thanks, guys.
Thanks for the question. I'll talk a little bit about our manufacturing strategy. It does go all the way back to it was pointed out, as we're going public as one of our key growth strategies that we're going to bring a lot of our manufacturing in house by either building and or 4 plus facilities now since then, and we've been able to 4 plus facilities now since then. And we've been able to bring a lot more of our capacity in house to the point where I think last year it was close to 50% of our manufacturing. And I think that to your point of how high can that go, I think there's still room to go a bit higher than that.
We don't have an absolute target, but I think that there's still room to grow. And that is important for a number of reasons. It's important to be able to control our own destiny and to have control of our own supply chain. And also, obviously, we get to bring as we bring it in house, we increase our opportunity for additional margin. And so we're really excited to be able to do that.
And some of that has resulted in having a little bit more inventory because we obviously in our view, it's better to have more good inventory than not enough good inventory. And the thing about inventory that's important for you to know about our company is that we're different than many in that approximately 2 thirds to 75% of inventory is carryover inventory, and that's the stuff that we're making. So there's no excess inventory risk here. It's not risky inventory. It's inventory that will be sold at full price and it's inventory that will be available and has been available for many years.
So I think that I'm not worried at all about the inventory and inventory risk and the sort of inventory position is something that we're used to at Canada Goose. Even going back 10, 20 years when we're a smaller company, we have more inventory relative to sales. It wouldn't bother us at all because that's our company works.
John, do you
want to add any color to that?
Yes. I mean just building on that, it's clear that we build inventory in manufacturing ahead of the curve in core products in the way Dennis just described. That means it doesn't line up with quarterly sales trends and that's not what we're trying to do. And particularly here, we're sort of we're addressing a transition through CMT rationalization, and that puts us in a great position for continued growth in fiscal 2021 as well. So on the one hand, that's not dynamics we necessarily expect to change in the near term, but we do expect the position to improve relative to revenues once the fact of the rationalization takes effect.
And I think I'd take you back to something I said last quarter that we look at inventory in terms of turns in this business. Once you strip out manufacturing raw materials and work in process and that level of turns an average basis puts us pretty much in line with where others are in fast moving, highly seasonal businesses like this.
Your next question comes from the line of Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Good morning. Thanks for taking our questions here. So I guess you reiterated the guidance for wholesale will be up high single digits for the year, but then you gave us some color that we think they'll be down mid teens in Q3. I think
that leaves us with a
pretty wide range of outcomes in wholesale for 4th quarter where from positive double digits to even slightly negative. But I think, Dan, you described that as a period when you'll start shipping for spring and also replenishing for winter. Can you just help us understand the upside versus the downside in that guidance, speak to the scenario that could result in something near the low end there or even negative in Q4? And I also want to say within that guidance for wholesale revenues to be down in the Q3, what region do you think will see most impacted at that? Is that largely U.
S. Given the Q2 growth rates that we just saw? Thank you.
Yes. I mean, so we the way the wholesale business works, we come into the year knowing the wholesale order book for all the seasons. And therefore, to some extent, it's Danny describes it as a managed economy. To some extent, therefore, we know what the outcome is and that's why we assume high single digits within our guidance. And therefore, there's an inevitability that if we supply it sooner, if we supply it sooner, then the reality is the order book is fulfilled.
Now none of that stops our wholesale partners coming back and asking for more, but you'll also recall that we operate an allocation model here. And the allocation model is privileges our own stores first and then our e commerce. And then we consider replenishment of wholesale orders where it makes sense to do so. And that's consistent with what we've done in the past. So clearly, we get as and when those requests come through, we look at them in that context and against that model.
And I think the reality is as you look forward, obviously, then we've got a new season with being supplied in the Q4, which is springsummer, and that's got its own dynamics in any event. But from our point of view, we look at the wholesale channel as both important in the sense of being a very strong channel and also important in terms of its role it plays in the brand.
Our wholesale business for the year is looking like it's going to end up as we thought it would and we're really happy about that. And Michael, you asked about like the range between ups, downsides, upsides. Given that we feel very confident that it's going to end up where we thought it would. That's not a there's no downside there at all. It's just that's exactly what we thought it would be.
And we have inventory available for reorder should there
be should that come into play.
Okay. Thanks.
Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.
Hey, Danny, Jonathan, Patrick. Good morning. Let me add my congrats. I guess, Jonathan or Danny, just a question two questions on the wholesale. You guys have talked about the pull forward effect many times.
And again, like the brand is so strong that you're clearly getting orders earlier. Just kind of curious, is there any way to quantify the pull forward just so we can kind of think about the dollars that may be shifted into Q2 from Q3? And then Jonathan, there's been some normalization on the wholesale gross margin and you've been very helpful to kind of talk us through what's going on there. Any color on how to think about the wholesale gross margins in the back half and specifically Q3, just basically trying to figure out if there's any more normalization or dynamics we should keep in mind as we model that out? Thanks a lot.
That's okay. So I think if we let's start with the timing of when our customers want us to ship product. I mean, that's we're very much in their hands in that sense. And when they ask for it, we do our level best to ship it. Best way to look at this is to remember what our full year assumption is that underpins our guidance, which is high single digits.
And if you look at it in that context, the extent that it's way above that, then that's where we've got customers seeking to get the product sooner. And I think that's the best way to answer that. I think when it comes to the wholesale gross margin, we're right where we want to be, 47.5% in Q2. That's really the right sort of zone for this business. Comparisons inevitably with last year have distorted the read and they get easier through the remainder of the year.
There's different reasons both Q1 and Q2 last year, we have margins in the 50 area and we've been calling that out as atypical. And you saw last year that we landed at 48.1%. We continue to believe that the right way to look at this is mid to high 40s in the wholesale business in this sector.
Your next question comes from Alex Walvis with Goldman Sachs. Your line is open.
Good morning. Thanks so much for taking the questions here. So first question is on the operating margin guidance. You've reiterated the guidance for the full year and some expansion in the back half. And I wonder if you could talk us through the drivers of this between mix and then some operating leverage in each of the divisions and what are the key components of that are?
My second question is on the Branta product. I think you mentioned that this is intended to reach some new consumers. I wonder if you could elaborate a little bit on that point. Are you planning to distribute it at all through new channels going forward? And how could that expand the relevance of the brand?
Thank you.
So let me answer the guidance piece. I think the reality is we're guiding to 20% revenue growth, 25% earnings at least 20% revenue growth, at least 25% earnings growth this year. Now as we move into the 2nd semester, clearly DTC moves to the fall. And that's going to be the principal characteristic in the second half. We will continue to invest heavily in marketing as we move through the particularly the 3rd semester, which Q3, which is obviously very important.
And that will allow us to really leverage that channel, which as we know is our most profitable channel. So I think that's the fundamental dynamic that's going to shift as we move into the second half of the year. But the weight of the marketing in the Q3 is likely to mean that that will push margin expansion towards the end of that quarter into the 4th quarter.
And I'll just have been I'll ask and talk about Branta. Branta is something we're relaunching it. We had Branta products underline a number of years ago, and I think we're a bit early with them. At this point, we were seeing today, we're seeing tremendous demand for them, which is great. They continue to be obviously function first products.
They're also pinnacle products and they're really their intended to define performance luxury outerwear and to redefine performance luxury everywhere and not just to follow what's already been done, but do it in a completely different way. And I think that it's a finical product that's aimed at the top of the pyramid and consumers who've been Canada Goose fans for a long time who want something new and different, and it's really working and enable us to set our fans in new ways and to reach new audiences with this kind of product. So that's the thinking behind Varenter and why we relaunched it now, and I'm really happy that we did.
Your next question comes from Mark Petrie with CIBC. Your line is open.
Yes, I wanted to
follow-up actually on that line of questioning around Branta. And I guess more broadly, you've been pushing prices up and also introducing new parkas at higher price points and sort of push through some of the barriers that I think you had talked about previously. So I guess, what have you seen in terms of response? You already addressed Branta, but I guess in terms of the core parka business and how does that impact how you think about positioning the portfolio
going forward? I think that the category is the category of luxury outerwear is something that didn't exist 10 or 15 years ago and that we helped create, and I think that it continues to grow. I know it's a growing category, and certainly, we're introducing new products at higher prices, and that's working well for us. The products that we're putting to the market that are priced higher and have performed extremely well. So I think that bodes really well for the future and we're very excited about it.
And I guess just a follow-up on the wholesale gross margin topic. It is also down slightly from the level 2 years ago. Presumably, there is some leverage from the greater in house manufacturing. So what are the most material sort of headwinds on that number versus 2 years ago?
So I think it's worth reminding ourselves of the very small gen algorithm that we work with here of the tailwinds and headwinds because we do create tailwinds and we do that because we want to address that the headwinds. Tailwinds that we deal with, obviously, are pricing and scale and sourcing of forward. We have cost inflation in labor, which was probably more significant in the second half last year and the earlier part of this year. Then we also have cost price inflation in materials. And of course, we have reinvestment in new product as we continue to develop the product offering in both our existing and new categories.
And so how would you talk about sort of the product level margins in wholesale?
But our product level margins in wholesale are fine. I mean, they're absolutely where they belong. There's sort of an industry pricing structure, and we're very much in line with that. And therefore, that determines where your wholesale margins turn out, which is why we continue to say mid to high-40s is exactly where they belong.
Your last question comes from the line of Oliver Chen with Cowen. Your line is open.
Hey, good morning. This is Ross Collins on for Oliver. I just wanted to follow-up on the retail formats, the pop ups that you mentioned. I just understand kind of the timing of them. Will they just be for the holiday period or kind of a longer term basis?
And then also the kind of inventory and assortment implications of those pop ups? And lastly, just geography, will they just be within or I guess will they be within all of your geographies or just within 1 or 2? Thanks.
Thanks for the question. Yes, pop ups, these are important things. I think I wouldn't characterize them as a new strategy for us. We've done pop ups for a number of years, both with wholesale partners and on our own. It's kind of a bit of a catchall phrase.
And they're used for moment in time brand experiences and for events. And there are also really useful tools in figuring out future permanent store locations. If you could show up somewhere for a brief period of time and see how well that works. So for example, Tyson's Galleria specifically, which we're opening shortly, it's about exploring and testing that DC market area and seeing how well our full run store would perform in that marketplace. And I think in today's retail environment, the pop up strategy, well executed is really important.
And I think that it's the retail environment is changing.
It's important to be nimble and react with it. I think because they're experimental and because they represent learning experiences for us, the financial contributions they make are, of course, much less significant than the permanent retail stores. And I think it's important to keep that in mind. There's a wide range of sizes, of durations and that they represent. And of course, all of that is factored into our guidance.
Got it. Thank you.
There are no further questions at this time. I will now turn the call back over to Danny Reese for closing remarks.
Thank you, and thank you all for taking the time to be here with us today. We appreciate your interest and your support of Canada Goose. And this is our last earnings call for the year and in fact for the decade. We'd like to wish you a great holiday season and an early Happy New Year and I very much look forward to updating you on our progress when we report our Q3 results next year. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.