Q4 2020 Earnings Call

[music].

Good day, everyone and welcome to the gas fourth quarter fiscal 2000, <unk> earnings conference call on the call Carlos Brainy, Chief Executive Officer, Katy Anderson, Chief Financial Officer.

During today's call the company will be making forward looking statements, including comments regarding future plans strategic initiatives capital allocation and short and long term outlook, including potential impacts from the current a virus outbreak. The company's actual results may differ materially from current expectations based on.

Risk factors included in today's press release, and the company's quarterly and annual reports filed with the FCC.

Now I will like to turn the call over to Carlos.

Thank you operator, good afternoon, and thank you all for joining US today. It was only a few weeks ago that we were very excited about our performance on the grade here that we were closing.

Excited about our teams accomplishments I'm very well positioned to have yet another great here.

Unfortunately today, where in the middle of an unprecedented that time in our history. Our Hearts go out to all those impacted by the events unfolding.

Today, we reported our fourth quarter and year end result, and we were very pleased with our performance with a solid Q4, we closed a strong year for guests.

We grew revenues increased operating earnings and increased adjusted EPS by almost 50%.

Our free cash flow was $133 million and we ended the year with 285 million in cash.

This liquidity positions us well to navigate through the current crisis.

I have just celebrated my first year back with guess I'm very proud of what we have accomplished during this past year.

Want to thank our team for doing a great job. In addition to great financial performance, we made significant changes to upgrade on reorganize our leadership team, we managed our capital well we developed our long term strategic plan, which we share with you last December.

I still believe that the opportunities that we identified in this plan for our company remain in place for the long term and we continue to make good progress on the key strategic initiatives that we share with you.

As everyone. Several weeks ago, we were challenged with the extremely difficult situation presented by the virus outbreak.

Our team responded quickly and strongly to the initial signs in China and since then we have been actively managing the entire situation in all regions affected.

We consider the situation extremely serious I know enormous proportion and have been working diligently with our teams around the world to protect our people customers and partners and mitigate risk.

To preserve the health of our company has effectively S. weekend.

Of course, we hope the crisis would be resolved in the near term, but unfortunately based on recent developments, we believe that things will continue to get more challenging before they get better.

We are encouraged however by the renewed activity that we're seeing in China.

Our offices are open most of our stores have reopened and while we still have a long way to go to return to normal conditions. Our business is starting to show some signs of recovery.

We hope that other markets affected follow a similar or even better trajectory to normalcy.

I see you all know our business has an extensive global reach and most of the areas affected by the outbreak our markets, where we have significant businesses.

Until a few days ago, the markets, most affected where greater China, South Korea, Japan and Italy.

But during the last week, we have experienced a rapid acceleration of the outbreak that has impacted most of Europe, and the U.S. and Canada.

As a result, we have temporarily closed the majority of our stores in this regions.

I strongly believe that we're dealing with the crisis in a very effective way, we have been extremely proactive and our management team has jumped 10 to manage this crisis with that commitment determination and sense of urgency that I have never experienced before in my career.

We activated our global crisis management team as well as regional and local teams to monitor react to unmanaged specific situations by geography and country.

We are leading our business with strong discipline controlling inventories well and adjusting our expense structure to adapt to this unprecedented circumstances.

We focus first on our people to ensure their safety and protect their health, we provide a flexibility band travel limited large in person meetings and communicated constantly among the teams.

Regarding our business, we first focus on our inventory planning on supply chain management.

We are strategically reducing our inventory commitments considering that demand deceleration. This is clearly a dynamic process and it will require a daily monitoring and active communication with our teams and vendor partners.

Next we focus in our expenses our goal was to reduce our costs rapidly, but responsibly to mitigate the business deceleration that we are experiencing now and into the future.

We have reduced or canceled discretionary spending and aggressively lower variable expenses to adjust to that revenue decrease.

Regarding capital expenditures, we have cancelled or postpone capital projects that we don't consider mission critical today.

Next year, we will celebrate the 40th anniversary or power company and the guest Brent.

We're very proud of what our founders on our entire team have built over the years were very proud of our strong culture.

This is a culture of never giving up a culture, where people matter most on one where if we fall 10 times, we get up 10 times.

We're very proud off I would resilience and our capacity to respond swiftly, but strongly in times of crisis, an unprecedented circumstances like the person one.

In closing the results that we reported today highlight the benefits of our global reach our diversified business model and the strength of our brand.

Our proactive and disciplined approach to manage this crisis reflects the extraordinary commitment and dedication of our management team during a challenging time.

With that let me pass it to Katie to give you more details on the financial result, Katie. Thank you Carlos good afternoon.

This is my first earnings call since I joined the company into summer I think we're closing the year I too as excited about sharing our great results with you on this call now here, we are in the mess and an unprecedented global crisis.

I have to tell you I'm really grateful to be here a guy.

Normally takes years to get to know an organization and to fully understand and integrate with leadership team.

Body to this evolving situation I feel like those years have become weeks from here [noise].

It's an extreme circumstances that you learn about the true character of people and the culture of a company what I had experience with this team at the unique spirit of collaboration urgency and pride.

This is a deep culture with inherent tried to win at Carlsbad. We finished our fiscal year strong with a great fourth quarter, we bps expectation continued rightsizing inventory levels and generate substantial cash flow, resulting in a healthy balance sheet.

The strength of our business in Europe enabled us to more than offset softness in Americas retail in Asia and grow earnings in the quarter.

Current a virus and not significantly impact our business during the fourth quarter at the outbreak began towards the end of January. However, the situation has escalated rapidly since then and will no doubt have a significant negative impact on our Q1 and full year financial result.

We currently have a large portion of our stores close all over the world and cannot reasonably estimate the impact this will have on consumer demand our supply chain and our financial results in the future is for this reason that we are not in a position to issue guidance for the first quarter fiscal year 2025.

That said I still want to give you some additional insight into how we performed during the fourth quarter and fiscal year 2020.

Before I begin please keep in mind that during this conference call our comments reference certain non-GAAP adjusted measures GAAP reconciliations and descriptions of these measures can be found in today's earnings release.

Fourth quarter revenues were 842 million up 1% and U.S. dollars and 2% in constant currency.

Our European business delivered double digit top line growth more than offsetting declines in the Americas and continued softness in Asia.

Total revenue was slightly below our expectations driven by our performance in Asia every other segment either met or exceeded our guidance.

For the year, we grew revenue into $2.6 billion up 3% in U.S. dollars and 5% in constant currency.

Gross margin for the quarter expanded 360 basis points versus prior year, mainly benefiting from higher IMU is at the results of our supply chain initiatives and logistical efficiencies and you're right.

Adjusted operating margin in the fourth quarter, that's 12.1%, a 290 basis points on prior year and slightly above the high end of our guidance.

Adjusted operating earnings for the fourth quarter were 102 million and improvement up 25 million and over 30% versus last year.

Adjusted EPS DNA as a percentage of sales increased by 70 basis points, primarily driven by higher performance based compensation for the full year. Adjusted operating earnings were 150 million of 35 million dollar and 30% increase to prior year.

Our fourth quarter adjusted tax rate was 16.5% down from 22.7% last year driven by mix of statutory earnings.

Adjusted diluted earnings per share it with $1.22 10 cents above the high end of our guidance, mainly driven by lower than expected tax rate.

This represents a 74% increase to prior year EPS of 75.

For the full year adjusted EPS. The dollar 45, almost 50 for an almost 50% increase the prior year.

The increase in adjusted EPS includes the impact of accretion from the convertible debt transaction and share repurchases of 22 cents for the quarter and 14 fad for the year.

Now, let's move on to segment performance, starting with Americas retail.

Revenue for the quarter finished down 4% in both U.S. dollars in constant currency inline with our expectations concept for the quarter, including ecommerce were down 3% any less dollars and constant currency driven by negative traffic trends.

Operating margin for this segment was 6.4% for the quarter down 240 basis points on prior here at IMU improvement for more than offset by increased promotional activity at the end of the holiday season and de leverage on negative retail comp.

Moving on to Americans wholesale.

In Q4 revenues declined 3% in U.S. dollar and 4% in constant currently see primarily due to the timing of shipments. This was in line with our expectation.

Operating earnings were flat to last year, driven by higher gross margin offset by higher expenses and lower revenue.

This segment had a strong year with revenue growth for the full year of 9% in U.S. dollar and 10% in constant currency and operating margin expansion of 160 basis points, resulting in operating earnings growth of 19% versus the prior year.

Turning to Europe, we had an exceptionally strong quarter ANNR fourth quarter revenues grew 13% in U.S. dollar and 16% in constant currency, finishing above our expectations. This process driven by an increase in wholesale revenues newstar opening and positive sales comps, including ecommerce of 1% and U.S. dollars and 3%.

In constant currency, our business in Europe, we're showing great momentum coming into the new here.

We saw significant margin expansion and the segment.

Operating margin up 790 basis points over prior year, we've been very successful on improving I'm, you as well as Rightsizing logistics costs.

We also benefited from sales leverage and lower retail markdown.

For the year. This segment grew operating earnings by 130%.

Moving to Asia fourth quarter revenues were down 28% in U.S. dollars and 26% in constant currency comps, including ecommerce were down 26% and U.S. dollars and 25% in constant currency. This is the only region, but let's sales that fell below our expectations, we saw softness across all of our major markets in Asia.

Including China, Korea, and Japan.

Operating margin for the agent back my contracted 200 basis points for the quarter versus prior year.

It was the result of de leverage from negative same store sales, partially offset by lower markdowns at higher I am yes.

Let me talk about our Caslen balance.

Inventories were $393 million down, 16% or 76 million U.S. dollar and 14% in constant currency versus prior year. This was an improvement to our decrease of 5% in Q3 and in line with our expectation.

We made significant progress on inventory. This year, we ended the year in a clean possession and our ownership was in line with our expectation.

Free cash flow for the year with 133 million, an increase of 161 million versus a negative 28 million last year. If we exclude the impact of the 46 million dollar European Commission fine paid in the first quarter fiscal year 20, Twond. Our free cash has improved by over 200 million. This improvement was driven by better operating performance.

A decrease in capital expenditures and better management of inventory than working capital.

Total capital expenditures were 62 million first the hundred an 8 million in the prior year.

During the year, we redeploy capital and return incremental value to our shareholders through significant share repurchases, reducing our dividend by 50%.

In aggregate our total shares purchased during the fiscal year amounted to 16.7 million representing over 20% of our shares outstanding at the beginning up here.

We ended the year with cash and cash equivalents of 285 million compared to last years 210 million, we gain comfort and the fact that in addition to our strong cash position at yearend. We also had access to over 250 million an undrawn credit facility.

Well of course continue to monitor our cash position as we navigate through a situation.

In closing I have been in this role just over 100 days as I shared with you during the Investor Day in December I was looking for three main things and this job I wanted to work at a brand that I believe then with smart people, who want to win in a place where I can add value. During the last few weeks I'd become more aware of the power of the gas brand globally I've had the chance.

The work with a team of people they truly admire and this same team has demonstrated to me that I can certainly add value working with them I want to thank you offer welcomed me, though warmly and let you know that despite the current challenges we're facing I'm very excited to be part of this journey together.

With that I conclude the company's remarks, I will open up the call to your question.

Thank you well now begin the question and answer session. If he would like to ask a question. Please press Star then one on your touched on phone once again, if you'd like to ask your question. Please press Star then one.

On your Touchtone phone. Our first question comes from Susan Anderson from B. Riley FBR. Your line is now open.

Hi, Good evening. Thanks for taking my question nice job on the quarter I guess I wouldn't have 'cause it's a pretty.

Hey, Carlos I know, it's a very fluid situation, but I don't know if there's any color you can give on kind of the pattern that you saw in China. During the store closures and how that has involved now that things are opening up and I guess I'm curious to was you know the impact kind of consistent across the country are worse in the more.

Impacted areas.

Oh, yeah. Thank you Susan Yeah of course, a you're absolutely right. This is a very fluid situation and.

No just to tell a little bit off a up the history of for how we are in this position today you know just one advantage that we have as a company is that we are truly very global we have a big.

Our recent as soon as.

This started in China, we saw it very clearly well of course, we didn't have any idea of how significant this was gonna be globally, but but we saw very rapid series of events that impacted China.

We had to close about 127 stores.

It is a very significant number out of a about 170 that we own.

The government.

Most of those provinces and cities was very very forceful and really leading the people on the communities to really be very disciplined thin.

I mean in some areas, even when we didn't close stores.

We saw a significant deceleration in the business because people were not going to show a this doors that that remain open we too are only a few you know saw significant decline in traffic and and then when you know even if we had some business the business became only a fraction of what it usually.

He is overall all dad, resulting in revenues being down to also a fraction in general and that for the whole region.

We of course of the area of will happen was much more effective than others, but but the stop in a in revenues was pretty general across the country. We also saw similar trends in Hong Kong Macau noticed severe in Taiwan.

We have seen some improvements in terms of the transceivers in the last few weeks compared to the bottom but.

But of course, the you know those are only certain signs of improvement that nothing compared to what the kind of business that we used to do.

The we know we feel that the great thing about all this is that now people are back to more of a normal life is not put it in normal, but we see out about the subways are operating at full capacity, we feel that ive restaurants have a lot more traffic we feel that they are opening parts. They are opening is.

So of course, that's the way to begin and I'd say you got the important thing to me here too is that that fear factor that impacted how the business was a was.

Negatively hit.

<unk> is now much less severe people are much more confident that the government has this under control and as a result, they are acting with a lot more comfort in conducting their their lives.

In other markets in Asia, I like Japan Korea, you know just we so.

Somewhat different pattern you know, we definitely saw significant decline in revenues, but not as extreme the government's dealt with the situations in a different way I think Thats you know Korea is a great example, the there has been a very quick and Swift response from the government with testing being available in math.

I'm sure that everybody's reading the same reports, but but this was very effective.

There was no need for a lot down like what we saw in China and it I believe that they have the situation very much under control there are very well prepared an organized.

We started to experience some deceleration in comps you know after we saw this in China and the you know I'm going to kind of like take you all their way through what we see today so.

That deceleration in comps and in Europe on in Americas was very notable you know just we we saw a business that we close in Europe that was very healthy when we close the year and then all those on as we went into a new year in February you know this thesis.

Elaborated.

Relative to the trends that we had experienced even in January.

The same thing happening in the Americas, when we think that probably the lack of travel and tourism started to impact our businesses in other parts, where where the Chinese consumer probably had a pretty significant impact, especially considering the Chinese new year and all those people you know just going.

In through a different parts of the world and also as the news kits on growing around the outbreak. It you know we think that that may have created some of this initial fear factor for local consumers as well. So we saw a deceleration in business and the last couple of weeks that deceleration of comps in Europe.

On America's has increased further not to the degree that we saw in China, but but pretty significantly and I'm very notable.

Then of course, it came the Italy issue and on the locked down a first the northern part of the country and then extend into the entire country.

Then we saw it and in France, and Spain, Poland, Germany, Austria, I mean, the the list goes on and we ended up closing the majority of the stores in all this countries and regions.

And then as this what's happening you know we continue to see more deceleration traffic in U.S. in Canada and based on on that on based on a you know becoming being a good corporate citizens and being aware of what how important it was to minimize exposure.

We made the decision to close our stores into your wife and Kinda temporarily until March 27.

We want to protect our employees our communities, our our customers where we operate so we think are we operate today in a very volatile environment very difficult situation, but we feel that we are doing what we can to control what we can control and that's what we are focusing most of our.

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Great. That's very helpful. Thanks for all the details.

I guess, maybe if I could just follow up on the operating margin in Europe in fourth quarter, some very nice improvement there.

Obviously, everything's kind of off the table for now, but I guess can you maybe talk about that improvement that you saw on fourth quarter, how much it but was leverage at the new D.C., how much I am you and you know I guess, if we had it had this incident you know how much of that would be I guess repeatable as we kind of went through the next few quick.

Thanks.

Yeah, I do that Katy.

Yeah. So we had great success and operating margin in Europe. It was over EUR 790 basis points over prior year. So I'm most of that was IMU improvement and then right.

That said you know we had a lot of on issues logistics I'm in Europe in the past and we fix a lot of though then we continue to fix that we also had some sales leverage from our momentum and the topline there as well as lower markdowns in prior year.

And that was a big thing because own markdowns as you remember we had ended the year with a less done desirable inventory position. So at the time, we took some extra or you know.

Markdowns just to really level.

The inventory ownership that we had and we had this plan that we were going to reduce our inventory position, which we did I think very effectively and also we were able to avoid any.

Any extra charges that impacted margin the year before so we picked up a a brief nice no change in margin improvement.

Great. That's all very helpful. Thanks, So much you guys. Good luck with.

With everything seems to be safe.

Thanks, Thank you Susan.

Our next question comes from Janine Stichter from Jefferies and company. Your line is now open.

Hi, everyone. Good evening, so two questions around the expense structure hi.

And you mentioned pulling back on discretionary spending obviously Anthony environment that Ryan can you just given some sense or the potential magnitude of expense reduction and maybe what percent of your question is variable on how much you could pull back on if we're in the status quo for quite Awhile and then kind of same question on Capex and you mentioned pulling back on some non critical projects.

How should we be thinking about capex sitting here and then maybe just a sense of what your maintenance capex levels up like thank you.

Yeah. Thank you gentlemen, I'm going to start and then you know Katie I'm sure we'll have a lot to add here, but you know just.

I tell you just mentioned we are trying to focus on all those things that we can control the slow down of our business in China, China. The early on I think gave us a a great looking to and on an opportunity to learn about what we can do on the things that that.

Our impacting a crisis of this nature, how fast can Ah things escalate so quickly.

Really incredible so this knowledge I believe that really enabled us to react very quickly very early on when we saw the signs of the slowdown in other regions and Unfortunately, you know we have a great leadership on in China, or you know that team really was very proactive on.

Come up with a lot of innovative and creative ways to really deal with the crisis and so we are learning on applying a lot of that into the way we are managing the crisis and the other regions.

The first priority for US has been people I know, you're asking about expenses, but I just want to make sure that everybody understands you know we consider that our top priority as I'm sure most companies and we want to make sure that we protect them and that we protect their companies where we operate you know we have facility.

Working from home, we have band travel I mentioned that during my prepared remarks, we have closed stores, you know and and we feel that this is.

Primarily a human crisis that we are.

Just dealing with the second big priority has been to protect our balance sheet and on our financial position and we have been diligent in reviewing all types of costs and this goes to your question about what is that we're looking at of course store expenses is a major part of our cost structure and.

In many cases of the that PNM you know they are a lot of expenses that are somewhat viral and we have been looking at all those I'm trying to rightsize the.

The total expenses to really adjust to the the business or the traffic that we are seeing coming or anticipating a we are looking at back office expenses. That's also a relatively sizeable.

Number in our piano and cost structure.

Then on capital we're looking at many areas that are represent projects that are either new stores or remodels or even a capital projects inside that plan that we think that we can either postpone council or or reschedule or.

Yes.

Eliminate completely.

Another big area, where we are spending our time and I'm trying to look into his inventory buys US you know inventories them you know we're in a fashion business. So.

Having a good control of inventories a very important so the good thing we have here is that because we have several channels.

We can use inventory in a very synergistic way and that's where we are trying to plan.

What we do with inventories in the future we have of course anticipated cuts and and you know we're buying.

Six to nine months out and in many cases, we also have flexibility to council things that may or may already being in the in the works.

So a lot of time spent on that and then you know just sort of course, so there's a big we have 1700 stores worldwide about 12 founder of dose we operate.

Directly and so looking at the store portfolio is supercritical. We are somewhat fortunate here I think we've reviewed with you during investor day that we have a lot of the stores and leases that become.

Renew all within the next two three years, depending on the different regions, but the numbers are pretty big you know in U.S. I'm kinda that number it's like 75% within the next three years roughly about two thirds in Europe on about 90% of the leases that we haven't China become renewal during that time. So we have a lot of.

Flexibility here to either just terminate those leases or just looking at renegotiating terms.

Based on the potential business that we see for each of those locations. So we intend to use this flexibility to close underperforming stores of course on and negotiate a better terms, we believe that landlords have the responsibility to deliver spaces on environments for us to conduct.

Business, you know in a positive way with a with our consumers and customers and if that is not being deliver of course, we see that as a as an opportunity and as a situation to be able to re negotiate.

If conditions are impaired you know it gives us that opportunity.

We have used this type of approach in China, and we have been relatively successful with a with the negotiations with landlords.

So you know to conclude you know just to me. This ER. This crisis is a major proportions, but when you look back there was one big take away and that is I think that in order to be successful is you have to have a good people and you have to have people that really care and that are passionate and.

And I think that we're fighting a you know just everybody's using this term invisible enemy, but you know that is exactly what it is.

This is a threat to society and then I think that we are at war and that's the way. We're approaching this I strongly believes that the difference between winning and losing here would be about the people that are fighting the war.

I believe in leadership, good planning preparedness and execution and and this is why I think China is winning this war and so is south Korea. They have strong leadership with within their governments. They were prepared with testing on a clear strategy and they are executing those plans very well and I strongly believe that we.

Have exactly the same I guess, starting with Paul Marciano I you know he is not in this call, but you know he has been incredible during this time, so presence with us he had incredible vision and extraordinary leadership and we developed a plan with the team we set the strategy right away and we have been executing on adjusting very effectively.

And in addition, our teams all over the world have been phenomenal in China. I mentioned, you know our lead or there is a star and this has set the tone for the model, which we followed and other countries and regions. We did the same in South Korea, we are very strong team in Europe and in our headquarters, but also in key.

<unk> P.M. countries and this great leaders, you know are really helping us executing very well and our team in Los Angeles has been tremendous also Fabrizio has been tirelessly working in all this you know we have a we're just in the middle of Oh, developing plans and of course, those plans are changing by them.

In it.

I'm Kidding, you know she made a comment about being welcome here I want to give her a big credit because she has been very instrumental and this fight to and in only a few weeks being here. So.

And last I, just want to say that to me. This is also about communication, we have been communicating learning from each other's ideas and supporting each other nonstop both Paul and I have been doing videos, we would have been writing emails I'm personally connecting with the team members to keep our entire organization connected inspired.

Focus on the right priorities, which I think is everything that we can do to really continue to control. What we can control. So let me tell you something if I'm going to war I'm going with this team.

I think it's a it's a difficult time, but I'm very hopeful that we're going to see this in history.

And hopefully that will have been very soon.

So and Janine I'll go back to your go back to ask DNA as well you know, it's it's hard to it it's hard to.

Estimate exactly exactly how much we're going to Jeff that's been S. You know given the situation and as Carlo said, we're looking at everything we're looking at supply chain and distribution costs were looking at marketing, we're looking at corporate expenses consulting meetings and I'm in a situation like that even what you would normally consider fixed cost or maybe not fixed Carlos mentioned rent.

Let the landlord can't provide us with an environment that we can do business and we're gonna have to talk about that so we're considering everything to try to reduce a DNA and we're taking a very seriously and we want to protect the long term of our company and Capex is the same you know our maintenance Capex is I'm pretty small, but everything's on the table at this point.

Hi, Thank you that's really helpful color and best of luck, that's about two guys with everything and stay healthy.

Thank you just due to thank you.

Our next question comes from John Kernan from Cowen and company. Your line is now open.

Good afternoon, and Carlos and Katie.

Congrats on Hi, John.

So yeah inventories the situation I think a lot of people are also concerned on just the modeling.

Gross margin across the retail ecosystem. There is obviously going to be a lot of spring and summer inventory in the channel when things do you normalize how do we think about the ability to clear this and what's gonna be last you know.

Competitors and and and also within.

Your own stores in wholesale partners, just just any detail on how to think about inventory buying in the markdown structure, that's going to go into getting.

Back to lower levels inventory throughout the channel. Thank you.

Yeah. Thank you John Yes, So let me start with with the yearend because you know just so we worked very hard last year to really clear inventories and unless you know we closed the third quarter with a inventory is down about 5%.

And at the time, we were hoping that we were we were gonna be able to close the year with a inventory and down and they ended up double digits.

And I'm frankly with that I think the team did a great job, we ended up with a inventories down 16% I represent a $75 million, so AFFO or fad reduction in inventories with business that had grown. So so we felt very good about that and and and this is up fortunate event because.

Queued up known and this was going to come up but you know two to start this year with a clean inventory position I think is a super critical.

With respect to the question you're actually so.

What we are doing is looking at our ownership today, you know like I mentioned before if we see things that are not being delivered on time or you know test we would be very very careful with not taken the orders that we don't think that should be taken.

So that should help us to alleviate the inventory situation in light of the decelerating demand.

But then we have opportunities now to really move the development cycle.

Two into the future. So then it releases pressure from all the inventory that is supposed to be coming through in the next weeks and months.

And and and that is a one of the big things that we're doing so something that we were going to develop in a in the amounts of ER June may now be developed a a few weeks later and that creates like a month of open to buy a under normal circumstances and in addition to that.

We are cutting the quantities based on what we think a could be the impact of something like this though this is a very fluid process. I mean, we're looking moving out looking at this every single day.

And also we are reducing the assortments, because we think that.

That is the best way to really you know limit the risk and and put our inventory dollars within less programs. So that's kind of like the way we are approaching it.

It's a as you know we not only have a retail business that is very significant we also have a wholesale business.

Wholesale business, especially in Europe, you know have been just growing and ER and again, we had a very strong backlog and and now we're looking at and trying to anticipate because obviously that business is also going again, you know just impacted by all this so we're trying to anticipate okay. You know how would.

We think that we could service all those clients without you know just creating on a potential excess inventory on our end or are there.

Excellent that's helpful.

Oh, Yeah, just liquidity.

Questions and.

As soon as concerns we can all see that in the markets with where the valuations are.

How long can the industry withstand no revenue in some regions. That's what is.

The liquidity situation of your wholesale partners and your own liquidity position like what.

What gives you the confidence that you can withstand.

Say three months of almost no revenue in North America in Europe, It could it get to that obviously, there's E commerce, but.

Much of your business is still down in stores and in your wholesale partners. So just the confidence level on liquidity going forward, what I think would be helpful to everyone of them and.

On the call and investors as well.

Yeah. Thanks, Saket, here's what I can tell you. So we ended the year with $285 million in cash.

And access to over $250 million available borrowing on and we actually have since then drawn down over $200 million of that just that the precautionary measure given the circumstances. So we have a lot of money in the bank.

Are we have you know a decent money in the bank on the expense side. We mentioned, we're aggressively managing expenses kind of as much as we can capital really controlling costs on as you saw in the press release, we posted on the decision to declare a dividend.

And you know, we're considering and everything is on the table event, taking advantage of government funding programs that are helping companies impacted by this crisis. We're looking at everything to help us manage our liquidity I'm. You know this is a fluid situation, we have a temporary but I assure you are reacting swiftly and appropriately and you know we consider.

That's very seriously.

And I would add to that but you know you asked about our wholesale accounts I mean in many cases, you know those receivables have a insurance behind them.

So you know in terms of what we are always you know we feel that there is a a certain level of security there.

But also you know just we're gonna be watching a you know what we do a with each and every one of those accounts we value them a tremendously a you know just the same kind of faxes do governmental programs.

We may have that they will have us well and on this are becoming very prominent by the way.

You know so so we feel I mean, obviously, we're not taking this lightly and please don't take that bad, but I would say that we're going to look at each and every one of those.

Relationships and be very careful with or how we manage.

I think that.

I'd like to go back to the China example, because I think at the key thing here is for people to really start.

Going back to normal I'll see you know just feeling that there is a normal life in front of us and and you know effect country like China with so many people was able to control days and I'm put everybody back into a more normal routine.

We believe that that most countries are going to have an opportunity to do the same and if that happens then you know just the length of the crisis will be significantly shorter answer which is what we need for for the customer to start thinking. Okay. You know just a life is going back to normal now I can go by.

Back to the way I used to live my life. So.

That's how we're hope obviously it is hopeful thinking, but but we think based on what we have experienced in China.

That this is a realistic expectation in the and the next few weeks and when you look at our position you notice.

Like Katy just said you know we definitely have ample.

Flexibility here from a financial standpoint, I'm, we're doing everything we can to really reduce any exposure or risk.

That's very helpful. Carlson Katie. Thank you best of luck and stay healthy I'd say.

Yeah. Thank you to John Thank you.

Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.

Good afternoon, everyone Carlos.

Yeah, Hi, Hi, Katie Carlos is going through these times that.

Not even be imaginable, even a year ago, when you think about it.

Occupancy in payroll being so important tight you're managing them Where's the bigger opportunity is there more opportunity to reduce occupancy occupancy.

Hey, Rob how do you see it and it's also an opportunity to further optimize the store fleet in your mind.

Yeah. So I'll start with that you know I have to say Dana we are not discriminating here at all we're looking at every single piece.

Of the expense structure and ER and those two buckets that you mentioned are huge for US you know both payroll and occupancy. So we're looking at everything I'm trying to minimize as much as we can we also you know just think that this this may be an opportunity to to figure out how to do things more efficiently too.

No just ER. So we're looking at everything and really a there is no stone that we are living on term here.

With respect to the store portfolio I think I mentioned, but you know just we do see this as a great opportunity to really challenge ourselves on every decision on stores that that we have leases that we have that may be war marginal before and now with this deterioration and consumer traffic you know our.

Even more than marginal. So then we will definitely don't hesitate and take a decision to to close those locations as well and <unk> and then I'm sure that this obviously there is impacting everyone that is in retail so I'm sure that landlords are gonna be more open.

To really provide different terms, if they want to keep a a healthy tenants like we are so so we think that there was a lot of work to be down here in front of us about two we are working diligently and looking at every opportunity on those two are are huge opportunities, but they are.

And many others too. So we're looking at every single we have a complex business and Oh, we have many locations and we have different headquarters and groups and so forth and ER and this doesn't stop in the U.S. by the way. We're looking at every single organization and every single operation on line.

One item in all over the world.

Thank you stay healthy.

Yeah. Thank you Dana you too.

Our next question comes from Janet Kloppenburg from JJ K Research Associates. Your line is now open.

Hi, everybody.

Hi, Jonathan.

Hi, congrats on good.

You guys are.

I.

Asked the question because we are hearing Carlos.

Business as you've indicated is getting back to normal in China, obviously, not you know, it's not a bone, but better and given you a disappointing numbers there in the fourth quarter. I was just wondering you know maybe if you could talk a little bit about that I know it was a difficult year on Asia, China, maybe you could talk about.

The outlook for China, and why the fourth quarter was disappointing.

And I also wonder if you could just address the licensing revenues, which had a nice quarter I thought that was encouraging.

And as far as Europe goes given you know the popularity of your plan there I'm just wondering.

What you digital capacity is there how much business you see transferring to that channel and if you foresee any disruptions on the digital fulfillment side, which some companies all experiencing right now thank you.

Okay. Thank you Jennifer well, so starting with China, you're absolutely right. We were disappointed with our performance in the fourth quarter. You know just in fact I was the only you know they said that that where we didn't make a the numbers and our our guidance.

You know us as we went when we got it back in at the end of the third quarter for the fourth quarter and you know we had a we had a tough fourth quarter I think got a lot of it.

Was driven by some of our own issues I think we've discussed date, we work together.

Before on even when we released third quarter numbers that that we thought that we had an opportunity with product, especially just being a lot more kind of like a.

Surgical with a with the design and fit and the direction that we have with product. So at the same thing impacted us in the fourth quarter I think that part of the issue too was that because we started the year I'm talking about last year with a lot of excess inventory I think a we we try to use.

Some of that excess to continue to see our demand throughout the year and and then the you're in a better place on I'm frankly in some cases you know those.

Designs were probably somewhat they did the customer had already seen them and I was not that interested in buying them.

So all that impacted us and as a result talk where we had a tough online business with the team all which had been a big driver of our business in the fourth quarter the year before both double 11, and double 12, a were somewhat disappointing double 11, much more than we learn some things and we did some things better but.

A double 12 was still disappointing relative to our initial expectations.

In terms of Ah the outlook is very difficult to say I mean, we are we already not very very <unk> is.

Completely strain situation right now and I couldn't even begin to tell you a you know what to think about next month or you know let alone you know three months from now hopefully things are going up again continue to to correct, but but I want to say that you know maybe others are seeing things going back to normal I think.

I I just want to make sure that everybody understands that for us they are very far from being normal I mean, jessa yep better than five weeks ago, but but very far from being normal. So don't don't think that are that we are now back to a healthy business there at all.

With respect to licensing we were very very happy because you know we have a couple of a new.

Licenses that have done really well lately, a one is fragrance performed really well and and over all the year. You know just I mean, we were up about 3% I think in total licensing and you know you you a lot of this business world because it wasn't new business impacted our fourth quarter.

And then with respect to digital you know we continued to be Super excited about this you know just.

We did cut a lot of projects, but one that we did not caught is the salesforce implementation, because we see a big opportunity, especially with what's happening.

To really continue to grow our ecommerce business, which is very underdeveloped compared to others in the industry. So so we think that there is a big opportunity here, obviously, all the things that are impacting customer behavior.

You know should eventually help the ecommerce business, we haven't seen that yet.

Definitely the deceleration in business was not nearly as severe as dramatic as what we saw with stores.

In our digital channels, but.

But we are not seeing a significant increase by we hope that overtime. This business continues to be a lot more promising and so we expect to take full advantage of that opportunity. So we continue to to see that you notice I think we showed some numbers with you know I think got our our.

Ecommerce business represents only like a 10% of the total business and and we can see you know doubling that penetration very easily.

And one on business before.

Before we talk about changes in consumer demand.

Okay, sorry, one doing.

No I'm, sorry forgive me.

I was wondering if you okay, we could talk about your visibility on yours.

I would wholesale orders and you know what typically of risk you have there as the wholesalers.

You know, both Europe and America try that would change their inventory flows. Thank you.

Yeah. So so I'll start you know just.

It is this is kind of early I think.

To be completely honest with you obviously a retail is the is the best a leading indicator for us I mean, we have that that advantage that we can see what happens in retail, but because normally.

The wholesale business will follow what happens at retail right and so.

So it's early for us to even start speculating what what could happen I mean, obviously, we are closed a in Italy, we have been close for over a week you know so our our clients you know our customers. So so definitely you'd have died is going to impact their business.

As I mentioned before our backlog was incredible I mean, just we were up double digits again, you know just this has been over three years now with a with an incredible business season. After season after season, but this is this game over in many ways. We are going back to I could be different set of our paradigm. So.

So I think we have to think very differently and I will be impossible for us to even attempt to give you a number on this is partly why are we didn't think that we would be in a position to give provide guidance today for both at first quarter and for the full year.

And in terms of they are yeah. We have good color. It's nothing that we have good insurance coverage.

Going forward, so we can comfort in that as well.

And and Katy you talked a little bit about government assistance I've been following that pretty pretty closely.

There's some assistance programs out there that you would be able to tap into he's talking about what it looks like from the stimulus Bill.

Oh, well you know we're following across the world is already taking their some there are some programs and you're out for example that were already taking advantage I, but these are kind of coming out real time. So we're all over and making sure that we can take advantage on weekends.

And you know we hit we had some opportunities in China as well.

And in some cases, you know this benefits may or may have different forms on come in different flavors, you know I could be a deferral of Texas it could be the elimination of taxes could be.

Social costs at that could be absorbed by the government and so forth.

Okay. Thanks, so much and really lost a lot.

Yeah. Thank you think agenda.

Okay, that's fine.

Once again, if you'd like to ask your question. Please press Star then one on your Touchtone phone.

And our next question comes from Omar Saad from Evercore ISI. Your line is now open.

Good afternoon. Thanks for taking my question and thanks for all the information I know, it's really challenging kind of environment to forecast and predict.

Thank you all are maybe you could talk if course and couldn't great ended the year by the way nice quarter.

Frankly, it kind of gets lost and with everything else going on.

Can you talk about maybe talk a little bit more about the curve you saw that you've seen in China. The dot the decline and then kind of stabilization and obviously it sounds like things aren't anywhere near getting back to normal there, but there's been some uptick towards returned to normal and then maybe.

Kind of compare and contrast that to what we've seen in other markets, whether its korea, or Japan, or Italy, North America. Other parts of Europe do they seem to be following a similar curves.

Okay, I guess were eight or nine weeks and China now as we try to do our best job Triangulating in formulating our rationale for how long this might last kind of any any kind of compare dresses were encouraged to be helpful. Thanks.

Yeah, Yeah. Thank you Omar well you know just this is a a moving target here, but but let me tell you what we have been able to see a you know the case of China I think is a somewhat oh fun and extreme in terms of how quickly the government jumped in.

And also nobody knew anything until all the song we knew on the on the country was stopped the kind of thing. So during the first few weeks of that process. You know just we saw a very very extreme drop in our revenues were closing most of the stores.

And.

Then just things, yes people were in their homes. So you know there was no activity I mean I'm sure. We all saw those pictures and videos of of Shanghai with nobody in the street right. So.

All that you know is exactly what we saw on the on the commercial activities on our and.

Then at some point.

You know China became more kind of like Okay. Now people are you know the cases slowed down new cases, or you know just the government felt that there were more in control of the crisis and and then there was an opportunity for people to really consider going back.

There are cities you know remember that this is Chinese new year, they extend that the Chinese new year. So a lot of people couldn't even get back to work.

You know until they could trouble to those cities and and I think that they did it in a very orderly way, but when that started happening. Then we started seeing you know just they read but rather to decision of of those of you know cities and and markets and.

But that has been slow and.

So I think that a that is somewhat on the extreme case, but but you know maybe there are some other examples like that you know just I don't know maybe Italy could look like that you know, Italy definitely went into a very similar situation, where the whole country stopped and still stopped.

But then you have an example, as Korea and Japan in those cases, you know just and I think I mentioned this before.

They they did not close the country on the engine.

Definitely we saw the impact in our numbers of a deceleration of customer traffic, but was not nearly as severe you know I would say like half as severe so it and unless you know we continue to see something similar in that pattern. So it's very difficult to to pick the model and say Oh. This is.

Going to apply to the U.S. and this one this other marlow is going to apply to France. I mean, it's just a very difficult to see the one thing that we know now is that a lot of the countries in Europe. For example have I've taken that Italy route and and we think that that may be a very good ways.

To deal with the situation because the key is to stop people from interacting.

And you know a keeping people in their homes. So then the risk of contagion and an exposure is minimized so and I think everybody in the world now is aware of that and they're doing it and I think at that is applying to America as well.

That's helpful. Thank you can you talk a little bit about the role ecommerce played in China and some of these markets through this.

Period has it been there has it I would probably say problems in the same level of declines, but did you see a big fall off did that come back before some of the store spending came back maybe help us think about how consumers may or may not be using ecommerce given this scenario around.

Yeah, No I think at a I think at the deceleration in E. Commerce was also noticeable everywhere. So it's not that people go home and they start shopping you know for four handbags and jeans. So I think that's and we have seen that kind of like across the board. Even you know you mentioned, China you know we have.

Good connections with some of the big companies like Alibaba and we show that this has been kind of like across the board other than for essentially you know and and basic.

James.

We.

Since then you know we continue to see some one off type of business not nearly as severe you know you take a a region like Europe in all our businesses still you know just a kind of like a much healthier business than what we saw in some of the countries were things had too.

The locked down so you know overall less of an impact, but but very significant until you know that since.

You mentioned E. Com you know I just realized I would never answer Janets question about the disruption in facility. So so far our business has been service fully or you know we we have a proceed in Italy that services our E commerce business in Europe.

And that has been operational for all the time and of course, we are making it up her already that we can service our customers.

Within the guidelines that we expect for that business and and that has worked out well now we are.

Dealing with more or fund this skeleton type of team, but that still being able to service the business as we would expect and our business here in the U.S. and Canada has not suffered any disruption with respect to service in that business as well.

Thanks for all the color good luck best of luck.

Yeah. Thank you Omar.

[noise] and we have no further questions at this time and I would like to turn the call back over to Carlos for closing comments.

Yeah. Thank you I just want to thank you all again for taking time.

To really join US on this call you know as a so very special time and and we appreciate your interest in our story in our points of view, we will continue to lead our organization through this challenging times with a relentless commitment on determination you have our promise on that we're very confident that we'll see.

This through we're in a good position as a company and we have the resources and the great great team with the experience on the passion that I think I've necessary to win this kind of challenging times. So we hope this crisis, we will be history. Soon I said it before and we look forward to keeping you informed about our progress. Thank you so much.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.

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