Q1 2020 Earnings Call
[music].
Greetings and welcome to the called poor brands first quarter 2020 conference call. At this time, all participants are do listen only mode.
Sure that's recession will follow the formal presentation.
I did want to acquire public assistance during the conference. Please press Star Zero order telephone keypad. As a reminder, this conference is being recorded it's now my pleasure to introduce your host every Tracy Senior Director Investor Relations. Please go ahead Sir.
Thank you operator.
Good morning, everyone and welcome to contour brands first quarter 2020 earnings conference call.
Participants on today's call will make forward looking statements.
These statements are based on current expectations and are subject to uncertainties that could cause actual results may materially differ.
These uncertainties are detailed in documents filed with the FCC.
We urge you to read our risk factors cautionary language and other disclosures contained in those reports.
Amounts referred to on today's call will often be on an adjusted dollar basis, which we clearly define a news release that was issued earlier this morning.
China, where significant the man softening began at the end of January and continued throughout the first quarter of 2020 at the peak of the crisis approximately 90% of our own partner stores were closed currently the China recovery continues to gradually build momentum led by the digital channels and all brick and mortar store.
Re opened although the recovery process remains in the early stages. The sequential weekly improvement in recent brick and mortar cops, we have seen is encouraging.
The China recovery serves as a blueprint with some distinct nuances for us and European businesses in Europe significant demand declines began to accelerate in the middle of March as many key markets went under stay at home borders and largely remain so today or distribution network remains operational for digital and wholesale orders.
But offices and stores in the region are essentially closed in North America significant softening in demand began during March although demand remain soft today, many of our largest wholesale customers remain operational we continue to receive and ship orders from our distribution centers in the U.S. and while early days.
<unk> have accelerated meaningfully over the last few weeks.
Today, we have not experienced significant service disruptions with our customers given our global diversified supply chain network.
During the first quarter, we took several additional strategic actions regarding the wellbeing of our colleagues, which remains our top priority as coded 19 emerged in February it spread globally in March we pro actively implemented measures, including closing our own retail stores first in China, and then around the rest of the world.
Our internal covert task force been implemented contingency protocols for working remotely as governmental stay at home borders emerged.
Remote work policies will remain in effect until restrictions are lifted at which time a phased in conditional approach will be implemented.
Furthermore, across our corporate in regional offices retail stores manufacturing facilities and distribution centres deep cleaning unsanitary protocols have been implemented to support the safety company associates.
Given cobas 19 impacts accelerated we also took personnel decisions, including announcing temporary salary deductions for senior management and other key leaders. Unfortunately at the covert 19 crisis intensified these impacts extended to our global team as we made the very difficult decision to reduce headcount insert.
And areas implement temporary furloughed and additional salary reductions impacting many of our colleagues around the world in our own retail stores distribution centres in corporate and regional offices, we're grateful for the commitment of our extraordinary people and we look forward to welcoming or furloughed colleagues back.
Also during the first quarter, we took action to help our communities by producing level, one patient and disposable isolation gallons to assist hospitals that are dealing with the influx of patients as a result of coded 19. The gallons are being produced at our plants with fabric donated by several supplies and being donated to North Carolina based hospitals.
We are proud to support the effort of many across the country and fighting over 19, we continue to look for ways. We can help our communities and the people most affected by this crisis.
We've also proactively taking significant financial measures to both ensures near term financial flexibility and strengthen liquidity, but also position us for future success.
And this future doesn't assume a return to pre Corona virus normalcy, but one in which we assume a prolonged coping 19 operating environment for the balance of 2020.
Including our expectation of higher promotional levels and accelerated retail or foreclosures well. This crisis has undoubtedly impacted countless lives in disrupted businesses all over the world, including ours. We also believe we have an opportunity help lead our industry in shaping the new future and we are well prepared to do just that.
So let me provide an overview of the financial actions, we've taken to support other liquidity in greater financial flexibility.
Negotiated our credit facility, including amending covenants for the future period, and drawing down 475 million on a revolver in the first quarter prior to the amendment.
In conjunction with our amended credit facility, we have temporarily suspended payment of a dividend a topic I will spend more time on in a moment.
We've taken reductions across variable in discretionary expensive as well as select capital expenditures, let me be clear here, though we continue to invest behind long term hi, our lie areas, including defending in enhancing our core business and driving new business development opportunities.
Further evolution of our creative digital and international business.
As well as the implementation of our new global European.
Justin will provide greater detail and most of these actions a bit later, but I wanted to address one of these topics upfront and that is the dividend.
In conjunction with our recently amended credit facility, we have temporarily suspended the dividend key here is the word temporarily the decision to amend the credit facility and suspend the dividend was not taken lightly as we understand how foundational the dividend is to our long term story the payment of a dividend has been and we'll be essential.
<unk> of the contour investment theses in total shareholder return model and our management team in the company's board of directors are committed to re establishing a dividend as soon as appropriate in fact based on the terms of our new credit agreement. The <unk> Ford will have an opportunity to reevaluate the dividend as early as the.
Fourth quarter of 2020.
We and we think most in the investment community share. This view believe that caches came in the current unprecedented environment. So while we recognize the temporary dividend suspension steps away from our long term investment thesis the decision to mend our credit facility and drive enhanced financial flexibility is the right one party.
Securely as we've made the difficult decision to furloughed many of our colleagues.
Casinos take meaningful transformational action since our spent almost one year ago.
From restructuring to cost savings the quality of sales initiative.
All designed to create the foundation for long term success. We believe me strategic actions indecisive amplified measures. We've taken in response to cope in 19, not only help navigate the near term challenges, but set us up for success over the long term.
Which leads me to offer a reminder of why we believe the contour model is advantaged, both during and coming out of this crisis.
First our portfolio consists of two of the largest most iconic global denim brands that offer consumers and outstanding value proposition.
Second we maintain a long track record of delivering strong financial performance in cash flow during challenged economic cycles.
Third.
We are partnered with the best in class winning retailers.
The restructuring and quality of sales initiatives, we've implemented have driven operational improvement in distribution enhancement.
<unk> distorted growth to D.C. with a focus on owned a dot com and digital wholesale and international afford a creative diversification and finally, our supply chain.
Own manufacturing currently supports the position of strength and flexibility.
That'd be dimensionalized each of these competitive advantage is a bit further.
As always starts with the branch we are fortunate to own two of the most iconic global brands within apparel Wrangler and leave these brands have 200 plus years of collective authenticity between them from the great depression to the World Wars cotton inflation. He's brands have lived through challenging global crises before.
While this is current novel Corona virus pandemic is unprecedented.
We believe these brands histories authenticity and connection to consumers bolstered more recently by investments in demand creation and innovation physician or brands to indoor.
We believe now is the time to connect with our consumer like never before and with several initiatives. During the first quarter. We're doing just that I'll share just two examples.
First we recently launched new digital Wrangler campaign called long live Cowboys that we are really proud of and believe speaks to the pressure vigor et cetera organization through this difficult time and equally as important reaches our consumers in a highly authentic way. We encourage you to check out the campaign on many of the large social media plan.
Including Instagram.
Facebook anywhere.
Given most of the countries stay at home orders, we created that can't stop country Music series hosted every night at five P.M. on our regular network and Wrangler brand Facebook pages and on the artist Facebook pages as well with participation from country stars such as Cody Johnson and John Party, we were able to reach our consumers and highly unique way.
That provides a bit of an entertaining break from the challenges associated with the crisis.
Over 4 million viewers have already tuned into this really personal differentiated entertainment experience.
We will not go quite with our consumer even during these times, where it is important to stay apart and we will continue to invest in the highest return areas that elevator brands authenticity connection to our customers and consumers.
And just as our brands have maintained the long history to a fire variety of economic cycles. So too has our operating model just looking back over the last decade, or so long we've seen the great recession, but.
The cotton bubble key retailer bankruptcy's door closures and Destockings events.
Certainly not immune to these macro economic shocks, but our fundamentals are resilient, most notably our ability to generate consistent and strong cash flow.
Trust and we'll take you through more details later, but let me say that we have stress tested our model and we believe we are taking the appropriate actions in support of strengthening our liquidity driving enhanced financial flexibility and bolstering cashed generation through this uncertain environments.
And perhaps equally as important as the strength of our model is the strength of the retail customers with whom we park, we have and will continue to win with winning retailers.
Including our largest retail partners Walmart <unk>.
Amazon.
Target in Cold. These incredible partners are positioned as stable long term winters in their respective channels of distribution as demonstrated since the spin we have aggressively invested in defending the score and our well positioned continue highly productive collaboration with these incredible wholesalers into the future.
And there's a point that these investments are paying off we were excited to announce today that we have significant program wins and distribution games beginning in the second half of 2020.
You know over the last year, we've been implementing enhanced new business development strategies that are generating material new successes British or two examples.
First as I've mentioned the path.
Leibrand is under distributed in the U.S.
All we have one distribution programs with key North American partners, including a sizable program that launches in over 2000 doors during the third quarter second or Wrangler H.P.G. platform continues to build on it's early success in the U.S. leveraging its value oriented high performance innovation the scale.
Regions.
And the second half a 2020, you will be launching the program in more than 400 doors with a key European retailer.
We were extremely excited to share the second half wins, but rest assured we're just in the beginning stages and we expect to share more in upcoming earnings calls.
In addition to program went I also want to touch on the evolution of our digital business with our digital wholesale business, increasing 50% globally during the first quarter and 41% within the U.S., we have solid proof points that our investments in this channel are highly productive.
We have been and will continue to aggressively invest behind our digital business and while still early days the transformation of our own digital ecosystem is well underway. We're excited to announce that recent edition of our new V.P. of global digital who brings over 20 years progressively increasing your experience.
Rebuilding branded digital platforms.
Leadership will take a step change in developing a best in class Omni channel experience for consumers.
We also recently went live with our new digital type woman Europe, and we'll single life in the U.S. as well as you all know the implementation of our new global European system and infrastructure will be a key enabler our digital evolution.
And finally with respect to our model, let me speak to our supply chain currently a distinct competitive advantage, particularly when faced with demand and supply shocks like the apparel industry is experiencing now.
Own manufacturing allows us to tightly managed mandatory and positions us to most effectively we're act as conditions normalized.
Critical in supporting Whoso partners me to serve as consumers when market conditions improved or vertically integrated manufacturing located in the western hemisphere allows us to scale production.
Quarterly times as demand stabilized.
So how does this all come together.
Our advantage model, coupled with decisive actions taken during the first quarter to support the welfare of our global team and strengthen our financial flexibility highlight or adaptability as an organization and position us for future success no doubt on certain times from me, but we're confident in the strategies and actions we've taken since the.
And now amplified during the first quarter <unk> Nabel contour to emerge from this crisis well positioned.
The best serve the future needs of our stakeholders with that I turn it over to rust.
Thank you Scott and good morning, everyone. We have a lot to cover this morning, So let me outline the balance of the call.
I will walk through how our actions do address our financial resilience unfolded as the impacts of covert 19 accelerated across our business.
Typically we will cover our employee liquidity and financing actions and implications as we know these are top of mind issues.
Next we will review our first quarter results, where possible, we will highlight direct impacts from covert 19.
Finally, although we will not be providing guidance at this time given the uncertain operating environment, we will provide thoughts on shaping the balance of the year.
Outlined before our priority was to support the health and safety of our associates around the World and we began a response as covert 19 began to emerge with the actions Skop reviewed earlier.
After addressing employees, we quickly turned to liquidity and financing.
In March we announced that we had drawn down 475 million from our revolving credit facility.
We took this action as a precautionary measure increase financial flexibility strengthen our near term cash position and provide additional funding for working capital.
With near term liquidity secure we began immediately no regret actions to execute temporary operating and capital expense reductions and adjust near term production to better aligned supply and demand.
Next given the uncertain nature of the environment.
Under various demands scenarios for 2020, we modeled incredibly important to note we projected adequately acquitted eat to provide operating flexibility.
The strong cash generation aspects of our operating model, which we have discussed many times since a span.
Paramount importance in challenging times.
Or two iconic brands with over 200 years or history have weathered mini storms.
And we believe that compelling value of our trusted brands continued to offer or a critical are critical and then uncertain environment.
Based upon the scenarios, we also evaluated the covenants under our credit facility.
Under a prolonged coven 19 scenario in 2020.
Including accelerated door closures in a heightened promotional environment.
We did forecasts the potential for future period leverage ratio covenant challenges within our original credit facility.
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Well in advance of any potential issues, we began efforts to proactively amend our facility.
Announced the successful completion of these actions this morning.
Key elements of the amendment include.
One.
Covenant relief in future periods, where the focus on our net leverage ratio.
Too.
Minimum liquidity requirements through the end of the second quarter of 2021 or earlier, if certain criteria are met.
And three suspension of dividend payments for the second and third quarters of 2020.
With restrict it payments, including dividends permitted after the third quarter, if certain criteria are met.
<unk> eight K. was filed this morning with additional details on the amendment.
S got mentioned in conjunction with our amended credit facility or board of directors has temporarily suspended the payment of a dividend.
In addition to the flexibility the amendment affords we believe it was the appropriate action.
Scott walk through some of the operating and capital expenditure reductions.
Want to assure you that we continue to challenge all operating expenses.
From travel to non business critical meetings to samples in prototypes to outside services.
As part of this process, we have engaged and encouraged our associates around the world to repeat our traditional norms of doing business and share their thoughts on how we can streamlined and improve operations.
Let me share a couple of examples where we have leveraged technology and re imagined key business activities.
Burst in China, we held our first virtual meeting through we chat with our dealers that included online product assets.
Marketing highlights and 24 seven support.
Next globally, we shifted all sales meetings to a virtual format, where new products marketing campaigns and best practices are shared.
And finally in the U.S., we've conducted virtual design workshops and prototype sessions enabled by collaboration software.
In addition to rethinking how we work in this new reality. We are also continuing as we have done since the spin off.
To explore additional cost saving and streamlining opportunities.
Week, we are announcing the consolidation of our V.F. outlet headquarters from reading, Pennsylvania to our corporate headquarters in Greensboro, North Carolina.
This difficult decision was not taken lightly and we went to thank our reading associates for their dedication and commitment.
We anticipate the actions will be completed by the end of 2020.
And over the next few months, we will further define our future structure operations and transition plans.
Although we remain focused on streamlining our operations. We are committed to continued investment behind key strategic initiatives, including but not limited to our global E.R.P. implementation and the digital enhancements Scott mentioned earlier.
Finally, I'd like to address our supply chain as I know inventory is a topic of interest.
Power supply chain remains a competitive advantage, particularly with respect to inventory management.
We minimize demand and supply imbalances in this dynamic landscape.
Are vertically integrated manufacturing, which represents just over one third of our production allows us to reduce production in light of decreased volume requirements.
Avoid the creation of excess inventory.
Minimize cash flow ambacs, while providing the agility to meet demand and support new program wins as governmental restrictions permit.
We are also actively working with our supply partners around the globe to minimize inventory and service delays.
While select countries continued to have operating restrictions in place.
Diversified supply chain network of internally manufactured in source product reduces risk.
To date, we have not experienced material interruptions with our customers in our supply chain.
Now, let's get to our first quarter review.
Unless otherwise stated results will be on it and adjusted basis.
Given the unprecedented times, our revenue review will be modified to provide additional detail that we believe is important to give context as to how performance evolved during the quarter.
Although it is not possible that clearly delineate decoded 19 impact and we are not attempting to do so by sharing further breakdown within a quarter. We believe it is meaningful perspective in light of the environment and will therefore take this unusual step for this review.
Global revenue decrease 20 per cent on a reporter basis in the first quarter compared with adjusted revenues for the same quarter in 2019.
Headwinds from foreign currency represented one point of the decline.
As expected driven by restructuring and quality of sales initiatives February ear today global revenue declined images single digits compared to prior year.
Approximately one third of the decline from China, where the impact of covert 19 was most pronounced.
In March as pandemic efforts accelerated on a global basis revenue declined in the high 30% range compared to the prior year.
On our last call. We also talked about our ongoing quality of sales actions that began in 2019 as well as planned declines in select dilutive lines of business.
The quality or sales actions to improve our long term operating performance that began in 2019 were the right thing to do then and they are clearly proving to write moves in this environment.
These initiatives included business model changes and actions taken to exit and underperforming country and other global points of distribution, including select channels in India.
Coupled with planned declines in diluted business, such as redo sales of certain lower margin lines and lower distress sales.
These actions pressured first quarter revenue in the mid single digit range outside of the code it impact.
Assistants with our expectations.
On a regional basis for the quarter U.S. revenues were down 14%.
Through February revenue decline in the low single digit range as anticipated given quality of sales actions.
March revenue decline in the high 20% range.
These declined what partially offset by growth in digital.
With U.S. digital wholesale increasing 41%.
In our own <unk> dot com digital increasing 7%.
Today, most of our largest online and brick and mortar retail partners are open.
Are placing orders and are receiving shipments, albeit at lower volumes.
Despite lower sales volumes, we estimate that approximately 70% of our north American customers based upon 2019 sales volume remain open with at least reduced hours.
The U.S. represented 75% of our revenue in a quarter.
Outside of the U.S. International revenues declined 32% in constant currency.
Breaking down performance versus prior year by Monday January International revenue increase in the mid single digit range.
As effects from covert 19 were more fully realized in China February International revenue declined in the 30% range.
Finally, as the effects from the pandemic continued in China, and we're <unk> more fully realized in Europe and other international markets.
March revenue decline in the high 50 per cent range.
Ascot mentioned are China recovery has continued to make progress in April.
Digital continue still either way with positive growth in both March and April and all wholesale partner and own stores have reopened and having been experiencing weak on week improving com performance.
Bianco that 19 impacts the first quarter International decline was affected by planned exits and the business model changes quality of sales actions and foreign currency, which combined.
<unk> international revenue by a high single digits.
Turning briefly door channels.
Are reported revenue in our U.S. wholesale channel, which represented 66% of our revenue was down 13%.
Klein was primarily driven by covert 19 impacts.
As mentioned U.S. digital wholesale remains a bright spot increasing 41%.
Performance is a reflection of long standing partnerships with leading digital wholesale platforms and investment we've made into this important area.
Are branded direct to consumer channel, which represented 10 per cent of our revenues declined 17% due in large part owned brick and mortar store closures.
Are owned digital business increased 1%.
Driven by seven per cent growth in the U.S.
Well the impacts of covert 19 have been far reaching we continue to see positive results from our investments in our digital platform.
The implementation of our global E.R.P. system will be a significant enabler in developing our digital ecosystem.
Given the a creative under index nature of this channel, we will continue to distort investments to grow in this area.
Finally, let's turn to our brands.
Global revenue of our Wrangler brand declined 17%, including one point of head when from foreign currency.
Wrangler U.S. revenue declined 14% in the period.
Impacts from covert 19 planned lower distress sales and the plan exit or reduction of select noncore programs, where the primary drivers of the U.S. decline.
He's declines were partially offset by growth in digital both owned and wholesale.
Wrangler International revenue was down 27% reported.
During the quarter driven by Covin 19 impacts the actions taken in India and business model changes in Europe.
Lee brand global revenue declined 24%.
Including a point of headwind from foreign currency.
Lee U.S. revenue decrease 9% driven by the previously mentioned Cove at 19 impact and the transformational factors.
We remain encouraged by the underlying progress of the Lee U.S. business, including their previously mentioned do program wins.
Through February our lead us business was hi single digits.
Lee International revenue was down 30% with a point from F.X.
Nearly half the decline was driven by China as much as a country was placed on lockdown for the majority of February and March.
Now on the gross margin.
Total adjusted gross margin decreased 320 basis points to 38%.
The decline was primarily driven by the following factors.
First inventory provisions.
Based upon a higher levels of excess and distress goods and lower anticipated recovery rates represented at 340 basis point headwind in the corridor.
Next.
Lower international revenue led by China also adversely impacted geographic mix by 210 basis points.
Finally, the cost of downtime in our plans as we reduced production to align supply and demand and tightly manage inventory represented a 40 basis point headwind in the corridor.
Ease declines more than offset the underlying structurally accreted mix shifts and proactive measures. We have discussed as an important part of our business model N.T.S.R. drivers.
During the first quarter to favorable impacts of restructuring and quality of sales initiatives.
Pricing and product cost improvements.
As well as improving channel mix positively impacted gross margin by 270 basis points.
Adjusted S.G.N.A. as a present, a sales increased 310 basis points to 33.6%.
The year over year increase was driven primarily by increased allowances for credit losses, due to covert 19 and fixed costs the leverage due to revenue declines <unk>.
These increases were partially offset by tight expands control and restructuring benefits.
We delivered adjusted earnings per share of 27 cents in the first quarter.
Now turning to our balance sheet in cash flow.
We ended the quarter with 479 million in cash and cash equivalents.
Which was a 373 million dollar increase from your end.
As mentioned, we drew 475 million on a revolver during that period, which drove the increase.
Excluding the revolver cash decreased 102 million and a period driven by working capital global E.R.P. and I.T. infrastructure investments and our dividend payment on March 20th.
Approximately half of the decrease was due to working capital so I want to provide a little additional context here.
Our business has historically experienced seasonality and are working capital needs.
Physically we tend to have higher A.R. balances in our first and third quarter of the year due in part to elevated international shipments as product for new season are introduced.
Further inventory in the U.S. tends to Pete during the third quarter as we prepare for holidays shipments and moderates in the fourth quarter as shipments occur.
Does the first and third quarter tend to be the largest uses of working capital while the fourth quarter tends to be the largest source of working capital.
In the first quarter of 2020 are working capital use was 49 million.
Compared to use of 71 million in the first quarter of 2019.
Finally, I will close with some shaping for the balance of the year.
As we previously announced and as a result of the uncertainty and significant business impacts caused by covert 19. We have withdrawn are 2020 guidance provided on our fourth quarter call in March and will not be providing an updated outlook at this time.
While we're not providing formal guidance additional perspective and assumptions are as follows.
We believe we are continuing to take the necessary proactive steps to accommodate a prolonged covert 19 environment.
We anticipate negative impacts on revenue operating income and E.P.S. will be most pronounced in the second quarter of 2020.
As we think about the second half of 2020, we are not guiding the impact covert 19 will have on our results.
However, we do anticipate and would highlight that outside of covert 19.
Underlying revenue and gross margins in the second half are expected to benefit from.
From new programs and distribution gains.
Moderating top line headwinds his actions taken in 2019 our anniversary.
And increasing realization of a creative restructuring cost savings and quality of sales actions taken in 2019.
Finally.
Predictions of a prolonged economic downturn, we have performed stress testing for a variety of financial demand scenarios during 2020.
And believe the actions taken are expected to support liquidity requirements and provide operating flexibility.
Although it has only been a little over 60 days since our last earnings.
We had much to cover on today's call and appreciate the opportunity to walk through the many actions we have taken.
In closing I, just want to reinforce how confident we are that these are the right steps at this time to position contour for continued success in the new environment.
Concludes our prepared remarks, and I will now turn the call back to our operator operator.
Thank you went out became duck your question answer session.
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Question today is coming from Robert Dribble for Google have security July it is not alive.
Hey, guys good morning, Oh, because you're well.
Rainbow.
Oh, Bob how arias.
It's got good to morning give two questions. So you guys I guess the first one just on the dividend.
Can you maybe just to elaborate a bit more in terms of yeah. The the discussion around.
Resuming the dividend and and.
Sure there in the queue for like what does have to happen you know genius talk talk it's true that maybe a little bit more and I think the second question is on some of the new programs. You know that you do expect <unk> similar question, but you know <unk> usability in a confidence in some of those new programs just if you might just.
Walk through that a little bit more in depth I think those would be helpful. For us. Thanks, very much sure sure bubble I'll take those.
Small AD in some color as we go along but I think it's important to know when the dividend. This was temporary it's you know part of our Covenant Amendment and it's still absolutely foundational tour investment thesis R.T.S. arm up so that hasn't changed at all going forward and I think everybody's in the same situation that cash is really important right now in the business, but as we said work.
Emitted two at the appropriate time, reinstating that dividend and we can do it as early as Q4, and obviously I think the the thing that most want to see in this industry in in the world in the sector is continued improvement in for the world to migrate into a better place and just move forward past all going through right now, but I do think there's one.
Other component that's critically important to the whole dividend discussion and that is that you know we take our culture, you know real serious here at count toward brands and we Unfortunately and I made mention of it in my comments had to furlough, some folks and we don't take that lightly at all and.
Can give some pay reductions and do some really tough things to make sure that our businesses sound and moves forward and really construct way and we didn't feel as though it was right to go ahead and pay a dividend as we were taking some of those actions.
Plus than anything to add to that no I I think the only thing I would say Bob is you know we did file an AK. This morning with the amendment around the credit facility and to Scotch point, the board will have an opportunity to reevaluate that dividend.
Early as a fourth quarter of 2020 based upon performance in certain criteria and you certainly can in review that in the A.K. or we can discuss it later detail.
Around that release. Thanks, Thanks, but then in your second question you know about I think the one of the things that that has the C.E.O. that I'm. Most proud of is how the team has managed through this process, but also with like to step back in time to think about well, we transition to our business and spun off you know just a year ago. The date is coming up your real quickly in a couple of weeks.
You know we were a maintenance business for the company that and at that point in time, we had to start a lot of things from from fresh from start from scratch I guess and one of those things was putting together a comprehensive strategy for our business going for it you know, we thought really long and hard about how this world is going to change and what's gonna happen and obviously, we never thought that something like this was going to happen.
But when we sat back and talk a lot about our strategy here recently in when we thought about what we did as a team in developing that strategy and how it's played into a benefit for us to this period of time, we feel very fortunate and I'd like to talk about a couple of those things because I think the really important one of the things that we talked a lot about was winning with them.
If you think about going through this period that we've gone through we'd gone ahead and spent a lot of time with the investment community talking about quality sales and we really cleaned up our sales throughout the globe that looks like a really smart move right now because we wind ourselves as I mentioned did my script with Walmart Amazon.
Target colds and I could name several others, but the highest quality retailers in this world and we feel really good about that position right. Now in addition to that we talked a lot of at time that they'll category expansion.
In one of the categories that we extended was outdoor with our altering here and you don't like I did mentioned earlier that we just landed a significant new account Europe. Because this is going to be a global expansion force now, it's taking off really nicely as we talked about before in North America, but now it's going to expand globally and we've gone ahead and done that and had an.
Little program here for the second half a year, but one of the things that I talk a lot about earlier was new business development New business development is so important for us because again, we were a maintenance business spent a lot of time on that I think everybody knows that just because you talk about new business development on day, one it takes a long time to develop that with the customer create product.
You know gain trust and do all the things that you need to do build relationships.
One of the reasons that we needed to do that was because Lee was under penetrate here in the United States under distributed so Fortunately for US we've done a lot of work and I want to go ahead and send to shout out to the team. That's done all that work hopefully team and also the new business development team works on behalf, both contour brands, you've done outstanding job and in the second half of this year, we do.
Have a couple of programs coming in but one really big program coming in that we're pretty proud of so again a lot of work on there and I would tell you one other reasons why that's worked really well and in you hurt mention of this <unk>. This is really important for everybody to think about long term, we pulled Lee in Greensboro This past year.
And now we have a collective team working together lead developing strength they learned from wrangler wrangler developing strength that they learned from Lee collaborating together working as a team it's real in in in a competition to a healthy competition for a company, which we love and then Rustand mentioned earlier about us now bringing in our director.
Consumer tea, so all of our forward facing businesses now will be headquarter together, which we think is critical you port.
Well you two other things really are really important because this is playing out force a little bit with Lee in China too is the emphasis that we've had in our strategy on digital a long time ago and how that has to this situation. Obviously been critically important we talked a lot about and we have questions from people about why aren't to build more stores well you know we focused on.
Building out or digital and we think that has a really a creative part of our strategy and I'll leave you with.
At this point in time.
We have to really great Brant those brands also offer a great value and and you know I mentioned, a little bit in my script about how our business is pretty strong right. Now you know we started to see a strengthening in our business.
End of April and here, it's really picked up in the beginning of me and that has to do with our strategy strategy. We put in place strategy for implementing Milleson. Our strategy is going to evolve over time, and we're going to continue to do things that we need to do to go ahead and grow this business going for it but right now we're pleased with where we are we're going through a really difficult time with the rest of the world.
But we like how we are aligned our strategy and our people and we're really pleased with how the second half shape. So thanks for the question, Bob and I Hope you and your family or do well.
Sake or next question too is coming from Heaven Murphy from peppers failure wide is alive.
Great Thanksgiving morning, unhealthy are all healthy and safe a couple of questions for me as well maybe that falling at Scott on the laughing you were saying I curious you didn't get it <unk>.
<unk> typically it looks like accessing the quarter here in North America and then in April if you can comment on quarter to eight just getting you guys are any any <unk>. You know you've had channels are actually open and then the second question probably marker rock band on inventory can you just talk about which quarter you expect inventory peak and and then.
And maybe a little bit more apt me or inventory management action, how you're thinking about outlet can you liquidate you laugh inventory in China.
<unk>, yeah come at the action here thinking of taking going for like eight.
Sure. So Aaron let me start with China, you know very important market for us we've seen nice progression I would call. It moderate progression every week, which to me is the most important thing I don't think any of US thought that this thing was going to go back to normal in in 30, 60, 90 day period of time, but what's happened is and what we're monitoring in what we're pleased with his.
That we've seen week to week progression in the business. So at some point in time, we'll get back to normal and then we'll get back to growth, but for us not taking a step back has been really critical seeing the consumer comeback seeing or digital business come back in in the consumer we engaging with our brand having all of our stores open you know our partners stores are really critical import.
To our strategy over there so pleased with what's happening from a recovery in China, but again I'm I'm more pleased with the fact that it's been steady.
And and not something that's been you know spiking or anything like that so so pleased with that I'll take it through a little bit of how I've been thinking about in how we've been talking about the quarters. As we go hear things got really difficult for a lot of folks here at the end of March.
Last two weeks and and you know we work different than anybody, but we we're very fortunate in that some of our retailers world and we weren't a priority for them at that point in time, but what's happened over time is people have started to come back to apparel and people have started to think about you know, what's next and people have and holding off on some purchases and we've seen a nice progress.
Through the month month of April and then towards the end of April we saw some.
Increased you know or person in just started to see it pick up an indoor pleasantly surprised about the strength and I attribute that again to the health of our partners winning with winters and you know may have started off like I mentioned in my script, very well and we're pleased with how what's coming along and feel really good about how we're position to go.
Ford now what I would say and this is really important is one <unk>.
<unk> country is starting to open up so it's got a lot of states opening up this weekend a lot of states that have already opened up in many more coming in the in a very near future. So what's going to be really important to see how you know others do because you know not only a significant part of our businesses with current retailers that are already open, but we do have a significant part of our business or.
With people that are starting for you. So it'll be really important to watching we want to make sure. We do all the right things for associates and for all of our customers and continue this progression moving forward, but what's really important is we're continuing to invest in the brand we're investing in our digital space for investing you know in in both Wrangler and Lee you know, we're continuing invest in the E.
P., which is going to help position us going for it you know it helps us with our platform from a digital standpoint, so that a lot of good things going on in the business right now got a lot of good things that we've talked about the second half I think one of the things that I'm. Most proud of this team is hey, we went through a tough time, we've got some experience on this team if you come visit us and a lot of you folks know with a lot of us have been in the.
Industry for a long time, and we've been through some bad times before and I think the one thing is we all know we're going to come out of these bad times. That's just how it works, it's pretty tough when you're in it but for those of US who have been food before we can see you know the potential on the other side, we stuck for our strategy and it's paying off right now so please busted yep, Thanks Air and good morning.
I'll take the second half of their inventory question here you know, let me step back in my prepared remarks, I didn't mention a little bit about the the seasonality where you've seen in our working capital trends. So historically Q1 has kind of been a quarter, where we build inventory. So certainly the fourth quarter as holiday ships.
You know, we end the year and in pretty good inventory positions and we typically build in the first quarter. So our inventory in the first quarter of 2020 did increase about $30 million that was up about 7% from where we ended the year, but just for a little bit of perspective, as we look back to 19.
The first quarter, we went up about $45 million for about 10%. So we've been very focused on him and Tory management and his you'll recall from the last call. We highlighted that that was going to be a big focus at working capital improvement for us and 2020.
No in terms of trends you ask a little bit about trends and what you should see you know, we do project inventory, increasing and she had to and really P.H.U. three and that is very consistent with what we have historically seen in the business.
Oh. We're also note. The you know we'll peeking Q3 is we have some of the new programs that Scott mentioned earlier as well as holiday sales as we build the inventory for that you also talked a little bit about liquidation and how we're thinking about that so let me give me a little bit of color on that.
You know Fortunately in our business.
You know, we have a lotta core product and we have quite a bit of you know product that carries over season to season. We don't have a lot of fashion goods that are at risk. We do have seasonal I'll tell you that were in conversations with with retailers that at this point or open to sort of packing.
Old on seasonal and we're working on some of those commitment. So in some cases, we may hold him and tore it while we do expect higher levels of markdowns as reflected in some of the inventory provisions. We took in the first quarter really think right sizing our production and flexing supply chain to reduce the inventories and advantages we indicate.
It it in our prepared remarks.
The last thing all kinda mention on the liquidation side, we do have an an 80 store fleet approximately in the U.S.
M.N.V.F. outlets Lee Wrangler outlets Lee your anger clearance centres to to move X.S. goods at higher to recovery rate. So we are laser focused on managing inventory and will continue to be so over the next few porter's hopefully that provides a context.
I go next question today is coming from Alexandria, Walters from Goldman Sachs realizes that alive.
Good morning, and thanks, so much that taking a question here. Thank you will say folder color on the cold So far I I wanted to ask a question about digital sales. So it's very strong growth rate through the courts could you comment on the cadence of digital sales through the courts I'm most interested in whether accelerated.
As you know some a little partners stores close and indeed, you run stores.
And then any comment within that digital sales price of which wholesale digital particle performing particularly well I'm thinking has a distinction between math departmental dot com any other wholesale dot com.
And then my second question is on the gross margin and puts and takes of that going forward. It should we expect that to a basis point tail wind to continue through anything yet and the other hand, how they could be impacted.
Downtime manufacturing team the poet thank you so much.
Well, it's all start this Wisconsin <unk> share the answer with me. So we think of it as our own our partner in our <unk> and and we're really pleased with how our businesses you know transpired. There obviously, it's been a core tenant of our strategy and it's been a piece of business. During this time the consumer has migrated to we do think but that might.
<unk> going to continue and it's going to pick up a little bit as things go word and we've done some things to go ahead and make sure that we're going to be there for the consumer yeah. We recently just put a new platform in in Europe in in the next month will be putting a new platform in in North America. So we're really excited about that because it's going to make the experience all that much better in her own pace.
Or partner business is really good and then or wholesale digital you know consumer business is exceptionally strong too, but we've invested a lot of time and energy in that we saw that a long time ago and you know we've been very.
Very direct about the fact that we spend more time and the digital space and more money in the digital space that we have been in this building physical stores. We just think that's where where you know the consumers going a long term play out it's actually turned out to be a really good decision and then I think the last thing for me before I turn it over to Russian is is really thought long and hard about we need to.
Alright leadership, there too so we recently hired new leader do global leader for digital piece of someone with a tremendous amount of experience is coming in and making a very nice change immediately and how we think about it.
You know, we love to bring a new talent that can help us all think differently and that can be a game changer for school report so very very pleased with that.
And dealt with that alternative.
Yep. Thanks got just a a close with one other comment on the on the digital piece Alec sheet, you talked a little bit about the cadence of how it unfolded throughout the corridor. Obviously the the first couple of months prior to cover 19 impacts certainly we were seeing strengthen this channel as we had seen.
Over the prior quarters as well I would say March was was softer as it was really.
<unk> ER all markets and then certainly has picked up a little bit in April.
Shifting to your second question, Alex about gross margin puts and takes going forward.
I'm not going to guide specifically on gross margin, but but we did indicate in the outlook that we expected revenue in profit to be most pressured into two years to think about the pieces as it relates to gross margin and the second quarter downtime impact on our margins will increase.
We did take some downtime at the end the first quarter in our production and certainly have and so too again react to some of the demands signals early here and the second quarter. So I think the demand impact will will increase as a pressure on our margin and a geographic next pressure is is likely to continue as well.
But that will be offset impart again with the structural improvements that we talked about a scot indicated on his first remarks were really feel good about the actions. We took late last year and I've continued into this year to really focus on quality of sales I'm taking.
Some of those restructuring actions that that you know, we'll certainly help us from a gross margin perspective, and then just continued focus on on price and product cost as we have been in this business for a long time. So hopefully that gives you a little bit of context around gross margin. Thanks out.
Thank you we really should have our question answer session I like to trigger for about corporate a management pretty further closing comments.
One of the say thank you to everybody for participating today certainly appreciate your support of contour brands and all of her folks and wishing all of you safety and health and you and your extended families and rolling this together, we're gonna get through it together and we look forward to spending time with you want our next quarterly coal in talking to someone you folks between them. So.
Thank you everybody appreciate it please stay safe.
<unk> teleconference. You may disconnect realize this time and have a wonderful day, we thank you for your participation today.
[laughter].