Cheng v. Canada Goose Holdings Inc.

LI HONG CHENG and NATIONAL ELEVATOR INDUSTRY PENSION FUND, Individually and on Behalf of All Others Similarly Situated, Plaintiffs, v. CANADA GOOSE HOLDINGS INC., et al., Defendants.

No. 19-CV-8204 (VSB)

United States District Court, S.D. New York

July 19, 2021

Matthew I. Alpert Robbins Geller Rudman & Dowd LLP Melville, NY Counsel for Plaintiff

Robert G. Jones Ropes & Gray LLP Boston, MA Martin J. Crisp Ryan M. Royce Ropes & Gray LLP New York, NY Counsel for Defendants

OPINION & ORDER

VERNON S. BRODERICK, United States District Judge:

Lead Plaintiff National Elevator Industry Pension Fund (“Plaintiff” or “NEIPF”) brings this action against Defendants Canada Goose Holdings Inc. (“Canada Goose” or the “Company”) Dani Reiss (“Reiss”), Chairman, Chief Executive Officer (“CEO”), and President of Canada Goose Jonathan Sinclair (“Sinclair, ” and together with Reiss, the “Individual Defendants”), Chief Financial Officer (“CFO”) and Executive Vice President of Canada Goose; and Bain Capital, LP (“Bain Capital”) and its affiliates (collectively, the “Bain Defendants, ” and together with Canada Goose and the Individual Defendants, the “Defendants”), asserting violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Before me is Defendants' motion to dismiss Plaintiff's Consolidated First Amended Complaint.^[1](Doc. 60.) Because Plaintiff fails to plausibly allege false statements or omissions, a strong inference of scienter, and control person liability Defendants' motion to dismiss Plaintiff's Amended Complaint is GRANTED.

1. Factual Background ^[2]

Canada Goose is a clothing company known for its cold-weather gear that is listed and traded on the New York Stock Exchange. (Am. Compl. ¶¶ 22, 35.) During the entire class period, the Bain Defendants owned a majority of Canada Goose's voting shares. (Id. ¶ 30.) Canada Goose completed its initial public offering (“IPO”) on March 21, 2017. (Id. ¶ 41.) The company reported annual growth of 39% for fiscal year 2017 and 46% for fiscal year 2018. (Id.) In June 2018, a couple months before the class period began, Evercore wrote an analyst report calling Canada Goose “one of [the] top global growth brand stocks” and CIBC reported that Canada Goose had “vastly exceeded expectations” since the IPO. (Id. ¶ 42.)

Before the class period began, the company's revenue growth exceeded its inventory growth. (Id. ¶ 44.) In the fourth quarter of fiscal year 2018, Canada Goose sped up its inventory growth; on August 9, 2018, the beginning of the class period, the company's inventory growth was at 35.3% and rapidly increasing. (Id. ¶¶ 44-45.)

Canada Goose reports its results in two segments that are aligned with its sales channels: (1) wholesale, in which Canada Goose sells to retail partners and distributors at thousands of points of distribution; and (2) direct-to-consumer (“DTC”), which consists of e-commerce sites and retail stores. (Id. ¶ 38.) Canada Goose typically realizes a significant portion of its annual wholesale revenue during the second and third quarters of a fiscal year, while it typically realizes a significant portion of its annual DTC revenue in the third and fourth quarters of a fiscal year. (Id. ¶ 39.) Canada Goose's DTC channel is particularly important to its growth strategy, in large part because Canada Goose has higher margins on the products it sells through the DTC channel than products it sells in the wholesale channel. (Id. ¶ 11.) In fiscal year 2019, more consumers than usual in the DTC channel began to purchase heavyweight parkas earlier than usual, suggesting that the DTC channel would generate relatively less revenue than usual in its third and fourth quarters in fiscal year 2019. (Id.)

A. August 9, 2018: The Class Period Begins

On August 9, 2018, Canada Goose filed its Form 6-K with the SEC for the first fiscal quarter for 2019. (Id. ¶ 55.) The company reported $44.7 million in total revenue, an increase in 58.5% from the previous year. (Id. ¶ 56.) In a press release, Canada Goose stated that it expected an annual revenue growth of at least 20% in fiscal year 2019. (Id. ¶ 58.) Canada Goose also experienced 35.3% in inventory growth, lower than its revenue growth. (Id. ¶ 45.) The company further stated that “[t]he overall shift of sales from the wholesale segment to the DTC segment continued in the first quarter of fiscal 2019, and is expected to continue.” (Id. ¶ 59.)

During a conference call with analysts and investors, Reiss called the DTC channel “a standout performer” and highlighted the fact that it increased to 51.9% of total revenue in the first quarter, compared to 28.5% the previous year. (Id. ¶ 62.) Reiss also said on the call that Canada Goose would continue to “build demand ahead of supply.” (Id.) Similarly, Sinclair stated that “what we're also doing is making sure that inventory is there to meet demand.” (Id. ¶ 66.) Asked about timing shifts in the DTC channel given the company's statements that consumers were “buying parkas early, ” Reiss said only that he would not “speculate on what is going to happen in the future quarters.” (Id. ¶ 63.) Sinclair also denied that there was any “underlying shift in demand.” (Id.)

B. November 14, 2018: Second Quarter 2019 Financial Results

On November 14, 2018, Canada Goose filed its Form 6-K with the SEC for the second fiscal quarter for 2019. (Id. ¶ 71.) The company experienced 33.7% revenue growth and 46.4% inventory growth, the first time in four quarters that inventory growth exceeded revenue growth. (Id. ¶¶ 10, 72, 74.) In its accompanying press release, the company stated that-based on the company's strength, with a “particularly significant contribution from the DTC channel”-it had revised its fiscal year 2019 projections to estimate annual revenue growth of at least 30%, up from its initial estimate of at least 20%. (Id. ¶ 75.)

On a conference call with analysts and investors, Reiss stated that the company was “continu[ing] to significantly grow our wholesale business alongside the great success of our direct-to-consumer channel” and that the company was in “an amazing position going into our peak selling season.” (Id. ¶ 79); (see also id. ¶ 81) (Sinclair expressing similar sentiments). Asked about the company's increase in inventory, Sinclair and Reiss acknowledged that inventories had grown significantly, but both attributed it to the company adding six new stores and an additional website, which required more inventory. (Id. ¶ 83-84.) Sinclair stated that Canada Goose's inventory was “consistent with the sorts of levels of revenue growth and network growth that we're talking about, ” while Reiss stated that the company was “very happy with the growth rates.” (Id.)

C. November 2018: Reiss and the Bain Defendants Sell Shares

Sometime in November 2018, the Bain Defendants sold more than 7.4 million subordinate voting shares on the open market, earning gross proceeds upwards of $477 million. (Id. ¶ 32.) The Bain Defendants retained a majority of voting shares after the sale. (Id. ¶¶ 3132.) On or around November 29, 2018, Reiss sold 1.5 million shares of his subordinate voting stock, “[Canada Goose's] Subordinate Voting Shares Offering for proceeds of nearly $97 million USD.” (Id. ¶ 12.) Both transactions occurred when the company's stock was priced near its alltime high. (Id. ¶¶ 12, 32.)

D. February 14, 2019: Third Quarter 2019 Financial Results

On February 14, 2019, Canada Goose filed its Form 6-K with the SEC for the third fiscal quarter for 2019. (Id. ¶ 88.) The company reported 50.2% in revenue growth and 74.5% in inventory growth, meaning inventory growth outpaced revenue growth for the second straight quarter. (Id. ¶¶ 89-90.) Canada Goose reported gross margin declines in both the wholesale and DTC inventory channels, which it blamed on “higher labour costs due to the onset of Ontario's minimum wage increase.” (Id. ¶ 89.) Canada Goose again revised its projections for annual revenue growth in fiscal year 2019, projecting somewhere “in the mid-to-high thirties.” (Id. ¶ 91.) The company's third quarter management discussion and analysis (“MD&A”)^[3] stated that the decrease in DTC gross margins was due to “a shift in product mix, with a higher proportion of lightweight down jacket sales.” (Id. ¶ 94.) The company also stated that it had increased its funds “to acquire inventory . . . in anticipation of growing customer demand in the fourth quarter of fiscal 2019.” (Id. ¶ 93.) Sinclair, responding to a question about Canada Goose's rise in inventory, said that “what you see now is an inventory being built in advance of our fiscal year 2020.” (Id. ¶ 98.)

On a conference call with analysts and investors, Reiss again said that the company was continuing to “create demand ahead of supply.” (Id. ¶ 95.) Sinclair stated that Canada Goose was experiencing “significantly more purchasing occurring earlier” in both the DTC and wholesale channels, meaning that investors could expect “naturally lower rate of speed in both channels through the remainder of the fiscal year.” (Id. ¶ 96). Sinclair and Reiss said they were pleased with the high level of inventory growth, stating that a lot of that growth was preparing for fiscal year 2020. (Id. ¶¶ 98-101.) Reiss stated that the company was “really happy” with “our early indications for our wholesale order book next year.” (Id. ¶ 102.) Canada Goose's stock fell nearly 13% after the company's third quarter disclosures. (Id. ¶ 103.)

E. May 29, 2019: End of Class Period

On May 29, 2019, Canada Goose disclosed that, for the fourth fiscal quarter of 2019, revenue grew by 25% and DTC revenue increased by 29.1%, below the analysts'...