Q1 2020 Earnings Call
Earnings release Conference call.
The call will begin with prepared comments by management.
Question answer session.
Last quick question during the session you want me to press Star one on your telephone.
Before we get started on behalf of Ross stores.
Comments made on this call may contain forward looking statements regarding expectations about future operations and financial results, including store openings in reopening and other matters that are based on the company's current forecast about sex of its future business.
Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those statements.
From historical performance work hard expectations.
Additional information about related risk factors is included in today's press release, you Didnt companies' fiscal 2019 form 10-K.
Fiscal 2024 cadence on file with the FCC.
I would like to turn the call Overachieved, Barbara Rentler, Chief Executive Officer.
Good afternoon.
Joining me on our call today, or Michael Hartshorn Group, President Chief operating officer.
Travis Mark had groups senior Vice President and Chief Financial Officer at Cagny Cow, Vice President Investor Relations.
Well begin our call today with an update on the current status of the company's operations.
Excluding our store reopening plan followed by a review of our first quarter performance and details of our financial position entering the second quarter.
Afterwards, we'll be happy to respond to any questions you might have.
As a reminder, all store and distribution center locations for close to from March Twentyth.
For the quarter end to help prevent the ongoing spread of the Corona virus.
Further our corporate and buying offices were also close with most associates continuing to work remotely.
With the closure of our retail operation, we made the difficult but necessary decision to temporarily for allow the majority of our store and distribution center associates as well as some other employees across the business effective April 5th.
More recently I may 14th we began a phased process every opening stores on a market by market basis.
This follows a careful review of current guidance from health officials and advisors as well as federal state and local governments.
Approximately 700 stores have reopened.
Since with the remaining store is expected to be reopened over the coming weeks.
Our top priority will always be the health and wellbeing of our associates and customers and we will only reopened stores when it's safe to do so.
Further the stated the pandemic remains a very dynamic and these plants could change materially as we cautiously move forward.
As we restart operations, we are implementing a variety of met or measures with the goal of keeping our associates customers and the communities we serve say.
These measures will include additional cleaning and fabrication of stores and work spaces.
Providing associates with personal protective equipment based on T.D.C. or other health guidelines and implementing physical dispensing practices.
We will also be reopening and ramping up our distribution center network in the coming week.
In addition, we expect to reopened our corporate and buying offices in the coming month.
As with our stores, we are putting in place additional health and safety measures across all areas of these facilities.
Turning now to our financials as noted in today's press release, our first quarter results reflect the unprecedented impact. The cobot 19 pandemic has had on our business, which led to the closure of all stores from March 20th through the end of the quarter.
End of our first quarterly loss in more than 30 years.
Total sales for the quarter for $1.8 billion down from $3.8 billion in the prior year.
Given that stores for open for less than seven weeks of the 13 week period, the comparable store sales metric is not meaningful for the quarter.
Well. The 13 weeks ended may 2nd 2020, we incurred a loss per share of 87 cents.
Versus earnings per share of $1.15 cents for the same period last year.
The net loss for the period was $306 million versus net income of 421 million last year.
In addition to the significant negative impact due to the lack of revenue from the closure of all stores beginning March twentyth.
Operating loss also includes a onetime noncash inventory valuation charge relating to the portion of the inventory that we now expect to sell below our original cost.
As we ended the quarter total consolidated inventories net of this valuation charge were down 3% over the prior year with packaway levels at 42% of the total compared to last year's 44%.
Average in store inventories were up 1% at quarter end versus the same periods last year.
Turning to store growth, we opened 20, Ross and 70 these discount locations in the first quarter and ended the period with 1800 32 total stores.
Given the significant uncertainty of consumer behavior and shopping patterns. The stores reopened we will not open new stores in the current quarter and now expect opened about 39 stores. This fall for a total of 66 new stores for the full year.
Now Travis more cat will provide further color on our first quarter results and details on our financial position entering the second quarter.
Thank you Barbara.
As Barbara mentioned earlier, we reported a net loss of $306 million.87 per share for the first quarter.
Operating margin for the period reflects the impact of the significant revenue decline from our store closures as well as a onetime noncash inventory valuation charge of $313 million or 58 cents per share.
As a reminder, we're on the lower of cost for net realizable value method of accounting for inventory, which provides the most markdowns are recognized when inventories sold unless the markdown takes the items value below cost.
The one time valuation charge in the first quarter reflect our estimate of inventory that we expect to sell below cost in the coming months.
This first quarter reserve therefore reflects only a small portion of the total markdowns, we believe will be necessary to sell through the existing spring inventory.
We expect that the vast majority of markdown activity will occur in the second quarter.
It's important to note that the ultimate impact of these markdowns will depend on the pace of sell through as we move through the quarter.
Now, let's discuss our current financial position and balance sheet.
As noted in our press release in response to the severe economic disruption created by the Cobot 19 pandemic. We quickly took decisive actions to increase our liquidity and financial flexibility.
These included drawing down $800 million under our existing revolving credit facility.
Completing a $2 billion senior unsecured public bond offering.
In obtaining a new Undrawn 500 million dollar revolving credit facility.
As previously announced we suspended or stock repurchase program on merchandising team.
Before doing so we repurchased 1.2 million shares of common stock for a total purchase price of about $132 million.
We have no plans to repurchase shares for the remainder of the year.
In addition, we also announced today the suspension of our quarterly dividend payments.
We're also aggressively cutting costs throughout the company by minimizing non business critical operating expenses Rightsizing, our merchandise receipt and inventory plans and reducing capital expenditures to further enhance our liquidity.
Capital expenditures for this year are now projected to be approximately $420 million down from our initial guidance of $730 million.
We ended the quarter and a strong financial position with over $3 billion on liquidity, which includes an ending unrestricted cash balance of about 2.7 billion and the new 500 million dollar revolver.
As Barbara mentioned earlier, we are in the early stages of resuming operations by reopening groups of stores as it becomes seems to do so over the coming weeks. However, we have no visibility on how quickly consumer demand will recover and the impact this will have on store traffic.
Given these unknowns, we're not providing second quarter sales and earnings guidance or an updated annual fiscal 2020 outlook at this time.
Now I'll turn the call back to Bourbon for closing comments.
Thank you Travis.
To reiterate the given the extraordinary global health crisis created by Cobot 19.
Safety and well being of our associates and customers will always be of the utmost importance to us.
Considering the uncertainty on how this health crisis could impact consumers.
We believe it is prudent to take a conservative approach to managing our business.
Looking ahead I want to emphasize that we have a deep bench of proven and experienced leaders throughout the business and as Travis noted a very strong financial foundation.
We also see significant opportunities and marketplace to acquire some of the best friends ever.
Bargains ever.
Longer term, we remain well positioned in the off price sector and believe consumers will continue to favor retailers focused on delivering both value and convenience.
All this makes us confident and our ability to successfully navigate through these challenging times.
At this point, we'd like to open up the call him respond to any questions you may have.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
In order to allow everyone time for questions. We ask that you. Please limit yourselves to one question each.
Your first question comes from Lorraine Hutchinson from Bank of America.
Thanks, Good afternoon, I know, it's early days on the store openings, but was wondering if you could just provide some performance details for for those stores that have been cope and how they're trending.
Hi, Lorraine, it's Michael Hartshorn stores for us have been reopened less than a week. So we wouldn't provide commentary at this point.
Beyond the initial openings, though is traveling Travis talked about in his commentary.
There was a number of factors that will impact consumer demand post opening including the economy on the back side of commerce reopening.
Changes to customer behaviors impact of social distancing and certainly the competitive environment among among others.
So at this point, we can't predict.
Predict.
What's going to happen after we reopened the stores for the remainder of the year. We do believe though there will be a negative impact on consumer demand throughout the remainder of the yes.
Your next question comes from alcohol trigger from Baird.
Good afternoon. Thanks for taking my question was hoping you could talk a bit more about the process of realigning inventory, obviously took a write down here in the quarter. How long do you think it will take two clear through some of the seasonally inappropriate goods and make room for for fresh inventory and then just any context and how aggressive you are being with purchases in the.
Marketplace today. Thank you.
[noise] yeah in terms of in terms of inventory again, given the fact that our stores were closed.
For two months, we do have a substantial amount of age seasonal goods.
Again with the abrupt closure of the stores and the significant broad base decline and trends leading immediately immediately preceding stores again inventories were missile line.
So in that in that light, we reviewed our inventory position and assess the markdown risk that we had and have recorded in the first quarter.
The portion of Merck has that we believe will be below cost.
In terms of ultimately what the sell through and how long it will take to move through those again it really depends you.
No. We don't have a crystal ball, we don't know how quickly the consumable returns to our stores as Michael mentioned, there's a lot of economic factors that will influence that.
And ultimately is as I mentioned the impact of the markdowns will depend on what that ready to sell through is just going through the course.
And in terms of fresh inventory in the stores I'm. Obviously, we're just first opening our stores now and tried to liquidate the goods that are in the stores and also the goods that work in process outside the de season and in the Dcs. So we need to first worked or that the markets have not been actively buying in the March.
And place they've been staying very close to their vendors and after we understand a little bit more about what sales and health or is can look like we will go back into the market I would say.
With a very you know surgical lens of what what it is we need and what we can understand what we think the customer along.
Thanks for the color.
Your next question comes from the line of cheap.
From RBC capital markets.
Yes, hi, Thank you very much for taking my question I guess, you know and extension of the last question. It's just you know when you are finally, you know willing to go back into the marketplace and by how are you evaluating category opportunities on the other side that.
We've heard from some peers about you know home outperforming maybe more than fashion apparel. So just curious to maybe how industry trends could be dictating, how you will be buying out its again, thank you very much.
Oh.
Sure category opportunities.
First I think we have to see as we sell through our through our inventory you know what the customers voting for whether its apparel or home.
The home business overall.
To trend for a long period of time fall, but expect that Oh go forward would still be a good category, especially if people are kind of home.
Nesting and you know buying things that perhaps I'm normally my pie, but with that you know it will really depend on what the opportunities are out there in both apparel and home right. You know, we see a lot of goods out there, we're anticipating that there'll be a lot of great closeouts and branded bargained for the customer. So I don't want to put sides around thing, it's one business versus the.
Rather I think in this environment.
A lot of the deals may dictate where the where the a sell frisco come from.
Your next question comes from Paul mostly from Citigroup.
Thanks, its Tracy Kogan filling in for Paul I was wondering if you guys can talk about how you're thinking about packaway in this environment and maybe if you might be packing things the way for less time than normally would and then as a corollary to that how quickly could you flow things into stores. Thanks.
Oh sure on the speed.
Thank you on the speed weekend, Hello inventory from Packaway very quickly matter days through the DC and a matter of a weekly to a into the stores.
And just in terms of just the thought process around buying packaway.
I'm, assuming you mean packaway that I could release earlier than pathway that might not recently released till March of next year that really you're quite honestly I think I think it depends on what the product is right. So in some classifications of product they'll be.
Goods that would be appropriate sooner than later and then some products, but some classifications you would really have to hold it until the spring season, if it's truly spring product.
So it varies based off of the classification and.
Agenda or the timing the whole thing, but there's a lot of there's a lot of product out there in total so I would say, there's a lot of choices some of which probably could flow a little sooner.
Great. Thank you.
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Great. Thank you so much I.
I wanted to understand if you excluded pack away from your inventory how many weeks of inventory would you typically have on hand is it you know sort of eight weeks or 10 weeks at normal sales volumes, and then secondarily or all of your distribution centers also reopening at this time.
And as your stores or reopening or are you in a position.
Be able to actively cool.
Hello inventory to stores now that that you've got some of them.
Opening thanks.
Kimberly on the distribution centers, we have management teams and all of our distribution centers and are ramping or preparing to ramp up production.
And that includes California, The Carolina and.
Also in Carlisle, Pennsylvania, So we're ready to start to be sees in South Carolina, We've already started production.
And prepared to start backfilling stores as they need as they need.
In terms of in store inventory turns again, if you just focus on in store only or turns are quite quick.
I don't think we've we've quantified that specifically in the past, but it would be significantly faster than if you're just trying to look at the total inventory metrics on the balance sheet.
Okay, Great and lastly, I'm wondering if if you have any comments on just how business was trending pre co bed for either of them until February or some of the February in the first week of March just any way to understand Directionally how.
The business with movie before we went into this I'm very very unusual time, yes.
Sure as we said we talked about previously sales trends were above plan in February.
And we felt good about sales up until early March when I think as we talked about there was a very rapid deceleration just prior to when we closed our stores on March 20.
Okay, Great and lastly is there any way for us to think about where you would expect second quarter inventory to land and would you.
Do you feel like you would be able to work through the aged inventory that you are sitting with today is it your expectation that you will have cleared through went live through that aged inventory by the end of the second quarter.
Kimberly on a on pace.
Our goal is to move through its in the second quarter and we're going to operate the business very very cautiously both inventory sales expenses capital and we're going to put ourselves in a position of strength. So that we can chase the business leverage expenses. So we would expect inventory to be down.
Honestly ins.
Okay. Thanks, Michael.
As a reminder to ask a question press star one on your telephone keypad.
In order to about every one time for questions. We ask that you. Please limit yourselves to one question.
Your next question comes from Adrian from Barclays.
Hi, Yes, good afternoon, Barbara I was wondering if you can.
Talk to us about.
Comparisons to the post 2008, the 2009 and 10 recovery period, and what opportunity you see from potential bankruptcies Ela JC Penney and then for Michael or Travis.
You can quickly talk about when you're opening the stores. Just curious how are you layering in payroll hours. How are you Mani metering throughput and then what's happening to the basket size. Thank you.
Sure we wouldn't comment on basket size again, the stores have been only open a week, obviously, there's local regulations on how to meter in and out of the stores. We have security at the front of each store that's metering based on those pre determined occupancy limits in most cases were below.
Or even below metering than what the restrictions required to make sure we keep customers and associates safe.
We have included payroll to make sure that we're keeping safe distances and trying to move people through the registers as appropriate.
And then in her and then in terms of comparison to 2008 I think the current retail environment is is a different you know obviously this crisis as much worse.
We're expecting the recovery to be much lower during the financial crisis Ah we didn't have to close stores, we didn't have to navigate through health and safety mandate.
Shelter in place social different thing. So so we think this is is very different and we think you know it'll be a.
Hello recovery on her way back.
In terms of pennies and and bankruptcies you know there's been a lot of bankruptcies I think long term the way for us to think about is that there's an opportunity for market share, particularly in the moderate portion of the business.
Well. Thank you very much best of luck and stay safe.
Thank you.
Your next question comes from Mike Baker from them or Huh.
Thank you [laughter] excuse me. Thank you could you maybe I'll discuss your fixed versus variable costs.
Including cost that fall into your cost of goods sold.
And how might that changed your well costs due to ramp up with some of those things you need to do to operate stores now in terms of cleanliness and other safety precautions. Thank you.
Yeah sure. If you think about our total operating costs, which would include both cost of goods as well as DNA.
The vast majority of those are our variable costs. If you pull out the merchandise margin line and just look at the remaining cost it's roughly about two thirds six and one third variable.
In terms of in terms of costs that will will be at the as Michael listen we've talked about the definitely will be additional costs that we will be working into the into the business, particularly around managing social distancing additional cleaning tasks.
As well as no significant cost the personal protective equipment. So so those will be added.
The business as we move forward and we'll we'll do well work as aggressively as we can to try to find offsets.
Taking a number of actions.
To identify cost savings already and many of those will carry forward, but I wouldn't expect cost will be a will be that elevated relating to those effect and I would just add that those safety investments are absolutely necessary as we prioritize health and safety for these as its income and customers. So we would expect the new protocol.
As to be in place for the foreseeable future.
No no doubt I certainly appreciate that thanks for the color.
Your next question comes from Matthew Boss from JP Morgan.
Great. Thanks on on merchandise margins as we think about the cadence of the headwind this year anyway to size up or think about the magnitude of second quarter merchandise margin pressure relative to the back half of the year and maybe just as importantly, what what's your confidence in returning 2019 gross margin levels is that.
Thats 2021 event or over what timeframe is that a reasonable assumption to get back to where we were pretty pandemic.
Hey, it's a it's Michael on the getting back to pre pandemic, there's just not enough visibility to give you a.
That's a good answer on that at this point of the second quarter margin is gonna be it's going to be based on the sell through in these early days as we reopened the stores so.
We'll see how that plays out and have more to report at the end of Q2.
Great Best of luck.
Your next question comes from Charles Grom from Gordon Haskett.
Hi, Thanks, and good afternoon.
I will talk out there that's being steam one of the best Fiagon opportunities and a long time Barbie spoke to that during your prepared remarks, but there's also some talk in a channel by vendors starting to packaway their own inventory. So I guess Im just curious if this is changing the opportunity set for you or do you think it's more of the near term loan.
Let me start with there there is a lot of merchandise and <unk> in the market and it's very broad based in terms of vendors, saying that they're gonna packaway. Good I think the majority of the vendors aren't really in the position to do that but they really wouldn't have the cat being the cash position to do it I think maybe the large vendors can do it.
But if you take the market in total.
I think that's not the majority of people.
Your next question comes from GE solely from U.P.S.
Great. Thanks, so much kind of question.
The stores have been open for very long so it's hard to get a read probably on how much traffic is going to return and how quickly but have you done any market research over the last few weeks trying to figure out how consumers may feel about the off price shopping experience and the trade her experience in this world of social distant second did if you think that they'll feel justice comfortable in your stores went.
Things are open as they were before the pandemic started thank you.
Jay 'em, we we have seen a customer research won't make maybe more generally.
But it's really hard to read when you have customers sitting at home versus returning.
Returning leaving their homes I think their perspectives are gonna be very different overtime, and I think they're going to evolve very very quickly. So it's really hard to rely on that data to make make any decisions I think.
No the country opening very quickly I think everything is evolving a very fast so it's hard to put a rent a lot of reliance on the data.
Okay. Thanks, so much.
Your next question comes from Bob <unk> from Guggenheim.
Hi, Good afternoon, I'm just a couple of questions for me. The first one is can you just update us on store opening plans for this year, just sort of how you're thinking about that both the Ross entities and and I'd just be curious if this situation has changed your thought process at all or through.
Is there any sort of way forward for an E commerce business jet Ross. Thanks.
Sure on a store openings. So as we said in the commentary in the first quarter, we did add 20, Ross seven Dts locations.
For the balance of the year, we're not going opens doors.
In the second quarter based on where we are in the pandemic and based on the uncertainty and then based on a lease obligations and the opportunities. We have in fall, we're going to opened 39 stores. So that's 66, new stores for the year and that.
Compares to our previous guidance of about 100 stores I'd say beyond that at this time, we wouldn't comment beyond this year, but we still believe we have the opportunity to grow to 3000 stores and then on E Commerce.
[noise] I'd say, our view has not changed at this point, our focus and efforts are going to be on safely and profitably reopening our bricks and mortar stores this year.
Got it and if I could just ask one more in terms of like the vendors and your vendor partners.
You know do you think that ones that are talking about Packaway. You know do you think they'll be able there'll be good at it do you think that they they are qualified to make good judgment is on track where don't know if you just maybe give us some perspective on that part where that would be helpful. Thanks.
On when the on the vendors packing away they were all good.
Yeah, yes, trying to make sure.
Listen just because they haven't done it before doesn't mean, they won't do it well I would imagine that they go through and would assess the way we would assess what the mix of their inventory is and what they think can go forward into the next year and depending upon.
What type of manufacturer I am if I have basics I'm I think I could carry those forward, but I might not want to carry forward my fashion. Good Guy I would think theres. The a lot of pieces of it that would be.
Somewhat similar to the so our thinking in terms of just understanding what you think you can sell when you get to that period I guess on your holding good it's critical to understand when I go to sell in hit their can sell at a restaurant leases.
You know, it's the right goods at the right time, so I would imagine there putting together a process of how they feel about their assortments and then making a judgment call.
But again I'm not a vendor [laughter].
Okay. Thank you very much for your perspective.
Your next question comes from Ike Boruchow from Wells Fargo.
Hey, Good afternoon, you all are staying safe.
Yes, just on me on the margins I think you guys.
But the way do it when I started breaking down the gross margin line I mean at very least could you help us on merchandise margin versus a store occupancy merch margin, either including or excluding the write down and then Travis. The I think you said merch margin pressure should be worse in Q2, and I guess I'm trying to understand should merch margins be worse should gross margins the worst.
Just I know you're not giving guidance this little bit color on the margins will just to make sure we know how to model. The so thanks.
Yeah in terms of total operating margin again, the biggest impact for the quarter were the biggest impact was just the low level of sales you know that combined with the valuation charge really what drove the overall results given the significant de leveraged related to sales the details in the components of that really just aren't right.
Meaningful.
And so we don't forget it's really relevant to provide that provide that breakdown.
Your second question I'm, sorry, the money of your second question, just I guess merchandise margin trajectory Q2 relatively.
Yeah relatively could you I guess, it's going to completely dependent on on what the ultimate sell throughs of the product as we move through the quarter.
As I mentioned, you know what the the.
Hit to the impact that we took in Q1 really just related to the below cost portion of those of those markdowns and so the rest of the markdowns will be recognized as we sell the product in Q2, depending on how quickly that product sells is going to determine sort of what the ultimate value of the markdowns that we need to take and and what what gross margin looks like.
But there is absolutely a risk that said it could be.
Depressed further in Q2.
Hi, so what in our in our markdown approach will obviously take a first markdown.
And then based on sales and second markdown and then we will be very very aggressive.
To liquidate the spring merchandise, so it's going to be highly dependent on how quickly we sell through the month.
Thanks, Michael Thanks.
Your next question comes from more Champagne probably capital.
Hi, I'm curious when you'll start to when you will have to start buying for fall in back to school and Barbara How will you. What are the metrics are the factors that you'll use to decide how did that buys the.
Hello.
How big the by will be or just how exactly exactly how how big.
Well I think you know whenever you're buying your you're not necessarily bind to the size of the by your vying to what you think you need and door in our case if it was a huge deal we my packet away.
You know, we're going to go into into fall with very Conservative plan.
And so we're going to buy I'm going to control our speed of spending and the rate at which we buy goods because there's so much uncertainty out. There. However, if there was a great deal that we wanted to happen we thought the value was unbelievable and office a cost from our great branded bargain it wouldn't stop us.
From from you know, making a large deal.
But I, but I think it depends but in terms of the approach to the store it.
We're going to go it's conservative planning, we're going to control you know what we spend how much we spend again unless something is incredible alone. We want it we want to buy in which case part of it might turn out to be a packaway deal or not but.
Each deal is different.
And how much can you delay that pie for this fall I mean, when will you have to make your your initial decisions on what the carry for back to school what to buy back to school.
Well first of all we could.
We could challenge what back to school is going to look like right I mean, right now I'm not sure we even know.
When schools are going back if schools are going back if there's going to be you know.
Children learning remotely. So I think that's the first question of Ah you know whether there is a true back to school the way we know it a traditional back to school, we're going to buy it as close as we can can by the way we normally do because again, we still have this inventory in front of us that we have to liquidate their plan.
Okay on liquidating, we're planning on on getting through its if I take the continuum, we have to open the stores get through those goods and then come out and by new good for that July August September period based on trend line would determine how how much we would buy.
So there's a lot of factors in there, but we're going into it.
Thinking it's a very conservative plant because we're not sure.
Now how the customer's going to respond once all the stores or our open and she can I wish you willing to shop and come back after we get through this huge liquidation period.
Across the whole country, but I think it's a remains to be seen.
Got it thank you.
Your next question comes from Alexander Wellness from Goldman Sachs.
Good evening. Thanks, so much for taking the question have my question was on negotiations with landlords can you talk about any rent deferrals that you achieved so april and into the second quarter and permanent reductions perhaps be achieved.
So anything you can share that would be would be very helpful.
Alexander's Michael or.
Our real estate relationships are obviously critical to the long long term success of the business like many other retailers we are engaging with.
With our landlord partners to negotiate.
Either abatement or deferment of occupancy cost during the period of closure.
At this point, we wouldn't get into the specifics at this point because of the negotiations are ongoing across a fleet of landlords.
Great. Thank you.
Your next question comes from Michael Binetti from Credit Suisse.
Hey, guys. Thanks for taking my questions first I just wanted to try to clarify I'm sort of language you had on gross margins earlier. So in this quarter you took a charge of.
Well was 300 million it looks like it's 16 1700 basis points when impacts gross is in the quarter that was really just the component you refer to that as a small part of it.
Michael I wanted to see.
That's the that's the inventory you estimate you'll be something below cost. Many looking next quarter, we're not talking about.
Inventory reserve, we're talking about having to put inventory markdowns.
Sell it but you did you did you mean that though that that impact of that could be.
Similar to the order of magnitude of the charge in the first quarter and I'm not really trying to get you to commit to guidance for the company, but put to compare that to some of the mainline stores. The department stores, who I think that that component will be as big as <unk> as the reserve in the first quarter.
Is that is that what you're saying it could be too close to that size.
Yes, so again the portion that we recognized let me just kind of take a step back again, we are on the cost method of accounting so typically.
Markdowns are only recognized in earnings.
When the product to so.
If the markdown takes the item below cost than that portion that is below cost gets recognized immediately so as we assess their inventory position at the end of the quarter. The portion that we recognized as of the end of Q1 is just a portion of markdowns that pick the product although its original cost.
To be clear, it's what we expect.
Happened during the second quarter is not necessarily markdowns, we burn.
Hello.
Correct correct.
Again, ultimately the markdowns that will recognize in Q2 relate to as the product is sold.
No it depends on what the markdown is as it as it goes out the door and so that's going to depend on the rate of sales. Obviously, we have first markdowns on that product now depending on rid of sales will take second markdowns and or third markdowns and depending on how deep those go that will determine the ultimate mark that impacts.
But to answer the short answer to your question, yes, it could be more than that.
In the second quarters.
Good day relative to the dollar okay.
Okay, and then you mentioned some of the new costs related to two.
Standardization and things like that in stores Cobiz related costs, but also I'm wondering what are some of the other puts and takes you see from here.
As we back up and just.
Take the aperture out a little bit you've had a lot of pressure from wage gross that one would argue that was 20% of the country. Currently unemployed don't know, where that's going but perhaps that's a little easier going forward.
Things like freight and energy has been a pressure obviously you have a very intense supply chain those looked like they could be easier is there I mean, so those are those big enough to too.
Those those seem like didnt more than enough to offset anything related to coded as we roll through the year and the final question just love to know how you are if you could help us think alongside you a little bit on how you will look at reinstating the dividend as you go what are some remarks, you look for along the way.
Let me start was let me just cover a couple of does in terms of cost savings.
Let me go through a couple of things you make in terms of wage rates. So yes, obviously the economic situation is very different but it's important to remember that a lot of the wage rate pressure that we would be experiencing going forward relates to statutorily mandated minimum wage increases and leased as of now there's been no no change in those particularly telephone.
But there's some other places.
You know again, it's hard to say, what's going to happen in the freight markets.
Asleep fuel rates are down that you know that could be helpful. But you know, it's really hard to speculate exactly what's going to happen in terms of capacity and overall freight rates.
So so again there are puts and takes in its you know we'll have to see how it plays out there's a lot of uncertainty.
So we don't we don't exactly no in terms of in terms of reinstating a dividend again I think what's what's critical is that you know we're gonna have to have a much greater visibility on sort of what the sales trend is what the sustainability of those trends are you know and factor that in relation to the needs of the business over both the short in the long term you know and so there.
A number of factors that went from look out before we would consider reinstating the dividend.
Since August.
Your next question comes from Marni Shapiro from retail tracker.
Hey, guys. It's good to hear everybody's places I'm glad you're all sound okay.
Could you just talk a little bit about the store openings.
Clearly you have slowed them for this year I'm curious if you sign those leases that you intended and we're pushing them to next year or are those leases that were in signed yet and so there's opportunity if you want there to be.
Maybe a better prices maybe you don't open as many next year I'm, just curious where your thoughts or whatnot and and how easy it was to push those push that number down to the 66.
Sure on the oney openings. This year, we made the decision not only on the lease obligations, but the big cash to open the store many of those will get pushed into next year and then as we get a better view of what the post trend opening.
Is as we move through the year.
Well certainly make make calls on new leases that will sign for next year.
I wouldn't comment.
Further on how many stores that could be for next year at this 0.1.
Yeah that makes sense and then just one follow up on Barbara you talked about somebody asked about Packaways and how the big how companies would do this and I guess my follow up there as you do work with a lot of small and medium vendor is the ones that supply all the department stores and we don't they're not publicly traded and then not everybody knows of them.
Are you how I guess how are you working with these guys you know they've been partners with you for very long time, I'm curious how your relationship with with those vendors are because some of them to be im very tenuous shape given all the cancellations not just from you guys, but across all up retail.
Good morning, I mean, you know obviously, we're working with all our vendors they see virus haven't been buying they've been keeping close relationships and we go back out into the marketplace, well, obviously shop all those same people, we've been shopping and doing business with for years.
And then see what opportunities are out there.
I mean.
But yeah, I guess, what else is there to do unless you're going to buy them and make them part tourist stores [laughter].
[laughter] best of luck of doping everything.
Yes.
Thank you.
Sure.
Your next question comes from Dana Telsey from Telsey Advisory group.
Good afternoon, everyone. As you think of the measure of fixed and variable expenses with the thought of reopening and whether it's more limited hours are obviously, the the extra sanitation and treatment that's needed within us within a store to operate how do you think about some of the expenses coming back into the fold do you need as much stores.
Staff as you had before and with the combination of what you may be able to do on rents is there an opportunity for a lower expense structure going forward in terms of how you're thinking about it. Thank you.
Hi, Dan I think if it's gonna be difficult to at least as is the world looks today to drive expenses significantly lower obviously as we pull we are pulling back where we can if I think about the store environment. So we do have shorter hours.
Reduces cost to some extent, but we've always managed our stores.
Pretty specifically to this sort of payroll demand by the stores. So there's there's not a lot of just blanket hours that we have now and so as we are reopening and we need to take into account additional labor to manage social distancing to complete cleaning tasks and other things again, that's going to have a.
And impact on sort of overall cost for the sort of stores. So.
Really though we are continuing to evaluate our total.
You know and we are continuing to look even though we've taken a number of actions already to reduce cost we continue to and we'll continue to evaluate where we can find savings across the field.
And then is there any difference on the de side in terms of getting operations back up and running as compared to the Ross stores side, whether in terms of payroll occupancy and is there more occupancy and duties to manage rent costs and there isn't ross or just.
Dependent on thank you.
Yeah, Hi, Dana it's very similar across both change there I wouldn't say there were significant differences.
Thank you.
Your next question comes from John Kim from Cowen.
Hey, good afternoon, Thanks for taking my question.
Most of it would been answered just curious can you tell us what percent of your store base you expect to have open.
By the end of May and then what you.
We're anticipating that open.
By the end of the quarter in July.
Sure on on on openings I wouldn't tell you specifically may but we're ready to open stores when the state of the pandemic allows us to do so and when the government.
Allows us to do so so that's out of our control of when that okay.
When the openings will actually happen our expectation, though based on what we're monitoring that could change.
Is that we'd have the chain opened by the end of June.
Got it thank you.
There are last question comes from a line of GGR I'm from Bernstein.
Thanks, very much and my question find right. It's just on the vendor B and whether you see that as an opportunity to.
Grow the vendor be sent and whether you know I understand that the buyers are currently buying in the market, but if they're pursuing.
New relationships new opportunities on that front on and then a you know.
Just with your existing vendor and you know whether orders needed to be cancelled and more payments extended during the quarter. Thanks.
Oh sure it in terms of a growing the vendor base.
There is [noise].
An opportunity for us to continue to open new resources.
No, especially now some some people are little bit more flexible as that business has gotten a little bit more difficult and and the merchants are always trying to open new resources, so whether we're buying or not still calling people still sale I'm trying to build relationships still trying to move the business forward.
Justin just say the second part of your question again about existing vendors.
Well, there and you had to cancel orders an extended payment terms during the quarter just from a liquidity perspective.
Initially we did cancel some orders in the beginning of a quarter when we first.
Took action on on what was going on when the pandemic started but that's very somewhat or what other retailers did so we took the actions that we thought when necessary at that time to position us.
And then after that we feel that we'll continue to remain engaged with the vendors we have relationships with now as we come back, but we definitely took actions somebody other retailers took actions to get ourselves you know position in a better position. So we can manage our way through this very unprecedented situation. So.
As we come back into the market, the coming back and working with vendors again.
Great. Thanks very much.
And I will now turn the call back over to Barbara for closing remarks.
Thank you for joining us today.
Let's go out to all of you and your families for your continued health and safety.
Ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.
[noise].