Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Q1 2020, Steve Madden Limited earnings Conference call. At this time, all participants are going to listen only mode.
The speaker presentation, there will be a question and answer session to ask a question. During this session you will need to press Star then one on your telephone.
Please be advised of today's conference maybe recorded your acquire any further assistance. Please press Star then zero.
I'd like to hand, the conference over to your Speaker today, Ms., Danielle Mccoy director of corporate development in Investor Relations. Thank you. Please go ahead.
Thanks, Jamie and good morning, everyone. Thank you for joining our first quarter 2020 earnings call and webcast before we begin I'd like to remind you that during our call. We may make certain forward looking statements as defined in the federal securities laws regarding our expectations or predictions.
About the future.
Generally these statements relate to projections involving anticipated revenues earnings or other aspects of the company's operating results.
Because these statements are based on current assumptions and expectations. They involve known and unknown risks uncertainties and factors not within the company's control and as such our actual performance and results may differ materially from these statements.
Our annual report and other reports filed with the FCC from time to time include detailed discussions of the rest of the company faces and we urge you to refer to these.
Specifically the cold at 19 pandemic has had and is currently having a significant impact on the company's business operations and result.
Such forward looking statements with respect to the Cold 19 pandemic include without limitation Seitman Swift.
Statements with respect to the company's plans in response to this pandemic.
At this time, there are significant uncertainty about the duration and extend the impact of the cobot 19 pandemic.
Due to the dynamic nature of these circumstances statements made on this call regarding the company's response to the cobot 19 pandemic could change at any time.
Any forward looking statements represent our judgment as of the time of this call and cannot be relied upon as current after today's date.
We disclaim any intent or obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise, except as required under applicable law.
Financial results discussed on an adjusted basis, unless otherwise noted a reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.
Joining the call today is Ed Rosenfeld, this the chairman and CEO, Steve Madden with that I'll turn it over that Ed.
[music].
Thanks, Danielle and good morning, and thank you for joining us today. So all those listening I hope you and your loved ones are healthy and well.
The cobot 19 pandemic, it's obviously, having a profound impact on people and communities around the world.
And Steve Madden, our Hearts go out to all of those who have been affected whether as a patient family member or friend.
We also want to express our gratitude to the healthcare workers and first responders on the front line to the fight against over 19 as well as to all the other central workers.
Since the crisis began our top priority has been protecting the safety and well being of our employees and the broader community and I'm proud of both the steps we've taken to safeguard the health of our employees and our customers, including all our U.S. stores on March 15.
Including closing all U.S. stores on marketing and how we've supported our communities through donations of medical grade Master hospitals, nonmedical faced coverings to homeless shelters meals for healthcare workers financial assistance for organizations combating hunger and more.
Beyond that we had been laser focused on taking the right steps to ensure the long term viability and strength of our business, including maintaining and enhancing our strong financial position. So we can weather the storm as well as positioning the company to wind going forward in what is sure to be significantly changed retail landscape.
We entered this crisis with an exceptionally strong balance sheet with $228 million in cash and marketable securities and no debt as of March 10 2020.
Nevertheless, when the severe impact of Cobot 19 became clear we quickly took a number of precautionary, but significant measures to preserve liquidity and enhanced financial flexibility.
We suspended our quarterly cash dividend and our share repurchases, we significantly scaled back all non essential operating expenses capital expenditures and inventory receipts.
We made difficult decisions with respect to our people, including Furloughing, a significant portion of our employees as well as temporarily reducing the salaries of all remaining employees with salaries greater than $100000.
Finally, we drew down the maximum $50 million from our existing credit facility and we began the process of securing new larger asset based revolving credit facility.
We are well down the path on that effort and hope to close on the new Abbey out within the second quarter.
These measures when combined with our already rock solid financial Foundation leave us well positioned not only to navigate this crisis, but also to play often when conditions normalize.
Now, let me turn to our first quarter results and current business trends.
After a strong 2019, we got off to a good start to 2020.
Too early March we were on track to exceed our earned internal forecast and analyst expectations for first quarter on both the top and bottom line.
And we were very optimistic about the balance of the season due to the outstanding early reads, we had on spring product, particularly in our Steve Madden Women's footwear business.
Then of course, everything changed stores closed and our business materially weakened.
For the quarter consolidated revenue declined 14% and diluted EPS decreased 62%.
Looking at our business by segment in wholesale as of March 10 revenue for the quarter was trending up low single digits on a percentage basis.
But with the vast majority of our customers halting almost all deliveries for the back half of March we ended the quarter with a 13% decline in wholesale revenue compared to the prior year.
Included in a 15% decrease in wholesale footwear, and a 5% decrease in wholesale accessories and apparel.
In retail revenue through the first two months the quarter was trending up mid single digits on a percentage basis, including a low single digit comparable store sales increase.
But after a sharp decline in March we ended the quarter with retail segment revenue down 16% versus the prior year period.
Turning to the current quarter in April and May wholesale revenue is trending down approximately 75%.
The majority of our shipments the last two months have been private label products to the mass merchants that it's kept their stores opened throughout the crisis.
Branded wholesale revenue has been modest.
We expect branded wholesale revenue to start to build slightly in June with more meaningful improvement beginning in July.
In our retail segment revenue quarter to date is down nearly 60%.
Virtually all our sales had been the ecommerce channel, which has been a real bright spot in the last three weeks in March we saw pressure on our E commerce revenue as customers pulled back their spending not fashion and focused on essentially.
But beginning in April we experienced a strong rebound and if since seen outstanding year over year growth.
Our E Commerce revenue was up approximately 75% quarter so far.
Bricks and mortar retail revenue quarter to date has been minimal as all our retail stores with the exception of one joint venture store in China had been close most or all of the quarter.
We opened our first 15 stores in the United States on May 20.
We plan to open another eight stores in the next couple of days, which will leave us with 23 stores open and 106 stores still close in the U.S.
Outside the U.S., we have 38 stores open and 49 stores remain closed.
Now, let's look to the future.
We cannot minimize the challenges we're facing clearly our organization is being tested like never before.
My confidence in our ability to get through this and emerge is strong and thriving company is unwavering and it's a function of our unique advantages as a company.
First and foremost we haven't extraordinarily strong balance sheet, which is important not only because it allows us to sleep at night, knowing we can endure or whatever comes at us until the crisis is elber.
But also because it positions us to play off and because we move ahead in contrast to some of our competitors, who may be constrained and how they can best or compete going forward.
Second we think brands will be increasingly important going forward, we have some of the strongest in our industry, particularly our flagship Steve Madden Brad.
Steve Madden had tremendous momentum coming into the crisis and we've continued to see strong demand for the brand and its products during the crisis in the channels that had been okay.
We're also encouraged I, how the brand performed during past economic shocks.
During the financial crisis in the years that followed Steve Madden was a significant outperformer and took meaningful market share as the brands strong price value proposition and its offering of designer styling accessible price points became even more compelling for consumers.
Speaking of value as we think about the retail landscape going forward, it's clear that mass merchants and other value price retailers, our position as likely share gainers.
Unlike many of our branded peers, we have significant access in exposure to the mass channel through our private label business.
2019, we had over $300 million in combined revenue with the two largest mass merchants and we're working closely with each of them to explore opportunities to further expand our relationship as they seek depressed their advantage and capturing additional market share going forward.
The other channel, that's a clear beneficiary and share gainer in the current environment is digital and we also like how were positioned there.
Prior to the crisis, we run a strong upward trajectory in our company operated ecommerce business with 2019 revenue increasing nearly 60%.
And profitability up about 170% versus the prior year.
And as I mentioned earlier that business has accelerated further during the crisis is currently running up approximately 75% for the quarter to date period.
We're leaning in aggressively to our ecommerce growth initiatives, including increased investments in digital marketing as well as tests of new features like try before you buy free one day delivery and same day delivery for $5.
Finally, we think our proven business model will help us to mitigate risk in this uncertain environment and serve as a key advantage relative to the competition.
Because the industry works through the fallout from the crisis, and the resulting <unk> inventory in the market our industry, leading inventory turns of approximately eight times a year should enable us to rightsize inventory ahead of our peers.
And history has shown us that when the large wholesale customers are seeking to manage their own inventories down they tend to rely on vendors. They can be nimble and work close to season, which plays to our core strike and speed to market.
So.
Well, we are clear eyed about the near term challenges we face we're confident that we are well positioned to navigate the crisis and to restore and momentum and return to profitable growth when conditions normalize.
Before I turn it over to Danielle to walk you through the financial performance in Q1 in more detail I want to take a moment to thank our employees for their extraordinary efforts during the crisis.
I'm inspired me with their dedication spirit and resilience in the face of University, they have making cheer gratitude.
Now I'll turn it over to Daniel.
Thanks, Ed for everyone joining the call today I hope that you and your families of staying safe and well during this challenging time.
And first quarter, our total revenue decreased 13.6% to 359.2 million compared to prior year total revenue of 415.8 million.
Our wholesale segment declined 13% to 302.7 million compared to 348.1 million in the prior year period, driven by significant order cancellations in the latter part of March due to the impact of the cobot 19 pandemic.
Wholesale footwear revenue declined 15% to 235.1 million.
And wholesale accessories, and apparel revenue declined 5.4% to 67.7 million.
As of March 10th prior to the impact of Cobot 19, each of those segments were trending up low single digits for the quarter compared to same period last year.
And our retail segment revenue decreased 15.8% to 52.9 million due to the closure of all of our brick and mortar stores for the back half of March.
Despite the downturn in our ecommerce business. The last three weeks of March as customers shifted spending from fashion to essentially our E. Commerce revenue was still up mid teens for the quarter.
And as I'd mentioned ecommerce bounce back strong beginning in April.
We ended the quarter was 224 company operated retail stores, including 62 outlets and E Commerce stores as well as 30 company operated concessions in international markets 155 stores remain closed at this time.
Turning to our licensing in first class segments.
Our licensing royalty revenue, which is now included in total revenue was 2.2 million in the quarter compared to 2.5 million in last years first quarter.
First class Commission income, which is also now included in total revenue.
It was 1.2 million in the first quarter of 2020 compared to 2.4 million last year.
Consolidated gross margin in the quarter was 37.2% compared to 38.9% in the prior year.
We took 11.7 million in inventory reserves as a result of the cobot 19, pandemic, which impacted consolidated gross margin by approximately 330 basis points.
Wholesale gross margin was 32.5 per cent compared to 34.5%.
Last year due to the cold at 19 inventory reserves.
Retail gross margin was 59.8%.
Compared to 58.5% in 2019 due to a benefit recognized in connection with the modification of the company's loyalty program.
Actually offset by the Colvin 19 inventory reserves.
Operating expenses for the quarter increased to 119.3 million or 33.2% of total revenue compared to operating expenses of 116.8 million or 28.1% of total revenue.
Excluding the newly acquired grades and Baby Dakota businesses operating expenses were down compared to the prior year.
It should also be noted that while we took significant action to reduce payroll and scaled back non essential operating expenses. Most of these actions did not go into effect until the second quarter of 2020.
Operating income for the quarter totaled 14.2 million or 4% of total revenue compared to last year's first quarter operating income of 45.1 million or 10.8% of total revenue.
Our effective tax rate for the quarter was 15.2%.
Paired to 22.6% and the same period last year.
Finally, net income attributable to Steve Madden limited for the quarter was 13 million or 16 cents per diluted share compared to 35.1 million were 42 cents per diluted share in the first quarter of 2019.
Moving to the balance sheet.
Our financial Foundation remains strong.
As of March 31st 2020, we had 245.4 million of cash and marketable securities and 29.1 million in debt.
Inventory totaled 102.3 million down 11.3% compared to the prior year figure of 115.3 million.
Our consolidated inventory turns for the last 12 months ended March 31st 2020 was eight times and our Capex in the quarter was 3.3 million.
During the quarter, we repurchased approximately 879000 shares for 21 29.1 million, which include shares acquired through the net settlement of employee stock Awards.
As mentioned in our 8-K released on March 30, Yes, we have seen suspended share repurchases as well as our quarterly cash dividend in order to maintain ample liquidity and financial flexibility. During this uncertain environment. However, we remain committed to returning cash to shareholders and expect to resume.
Share repurchases and the quarterly cash dividend once the environment normalizes.
Last given the significant uncertainty related to the covert 19 pandemic.
We withdrew our 2020 revenue and earnings guidance on March 18th and will not provide guidance at this time.
Now I'd like to turn it over to the operator for questions operator.
Okay.
Thank you as a reminder to ask the question you want me to press Star then one on your touched on telephone to withdraw your question from the Q. Please press the pound key please stand by what we compiled acumen a roster.
Our first question comes from Camilo Lyon with BTI G. Your line is now open.
Thanks, Good morning to yell at how are you guys hope you're saying.
And well morning.
Things should the detail and I was hoping you could give us an update on your current inventory position both owned and at retail.
And any common she could provide on overall channel inventory and a and then I've a follow up please.
Sure.
Well look that that [laughter] plain and simple answer is Oh, we have some excess inventory and there's some excess inventory in the channel and Ah Ah I think that goes for for every vendor and retailer in the industry right now anytime you have that season.
It's essentially stock in its tracks without warning.
You're going to end up at some excess inventory. The good news is I think that were.
Likely in a much better position than most vendors most brands or.
That's a function of our inventory turn.
As you know, we turn our inventory times, a year and the wholesale channel it's actually.
About 10 times, a year, where even faster than that so.
So I think that we're gonna be we're going have less excess inventory than our peers and we should be able to work through that and get that in line with sales trends.
Relatively quickly compared to most.
Great and then you know to that point, maybe can talk through how your fall orders or are unfolding and how you're positioned your inventory buys and then just following up on your comment on.
Working through your excess inventory.
It was there a change to your flow in your goods now and is there an impact to.
Or what the impact might that have on selling season in other words will your inventory continue to flow through maybe past point of wouldn't it typically would therefore, therefore extending the season this selling season.
Sure Yeah, maybe I'll take those in reverse order, yes, we are.
Flowing some spring summer goods in a little bit later than they would otherwise normally arrive.
And the fall season itself I think all the deliveries it couldn't be pushed back.
On average about a month.
So we will we and the retailers would be looking to extend the the the spring summer selling season, a little bit before before diving into fall.
In terms of fall.
I'm not going to.
Quantify it ER and but again, it's it's a big it's pretty widely understood that retailers are planning fall conservatively and open to buys are down.
Oh, we have gotten indications from our key retailers that we should do better than our competitors.
Uh huh.
Again that means I work plan decline is.
Smaller a than what they're seeing.
Whether planning overall, it's still a it's still a decline.
Great I guess just on that point, then I'll turn it over.
So if you're.
If orders are now starting to come in at a.
At a negative rate as you would expect because everyone is trying to work down to their inventory.
They have on handed there's no visibility into the demand picture for fall and holiday.
Hey.
What are the discussion that you're having with your factories are you staging inventory are you taking any sort of.
Steps to build to order or are you building spec inventory how are you positioning.
About its we use what's happened in March April and May as guide post with respect to.
Early cancellations and it sounds like you've got some of those cancellations that were reinstated for the spring season. So how do we think about.
Overall picture and what are your plenty to do with with with what looks like to be you know I guess pretty significantly down orders in the back half.
Yeah.
Look where we're buying a according to a according to those plans for fall. So so I think our fall inventory should be should be in line. The inventory issue is really the spring goods and we're obviously working a working through that with or forced winners factory.
Partners, but also.
You know working through that on an oriented as did the the plans for her disposing that inventory and our goal is to be through all that seasonal inventory by the ended the year. That's the plan.
Perfect. Thanks, guys. Good luck.
Thanks Bill.
Thank you. Our next question comes from Matthew to go live with Keybanc capital markets. Your line is now open.
Good morning, everyone. Thanks for having me on.
I hope everyone is saying what do you see so I view, Steve Madden as a very social event driven business.
Customer wants to look good on trend enriches for parents. These mines. So my question is what can Steve Madden due to to meet consumer needs and wants when they're very few social events on the calendar.
Any major shift some kinda categories or channels is what I'm getting us.
Yeah. It's a good question and look one of the things that that you've heard me say over the years.
And something that we think is the strength of our brand or is that we are not known for one.
Category or type of footwear were known as the on trend player and the player that provides whatever product is of the moment and we have the permission from the customer to play in all categories. So so we're not the standalone player or the boot player or the dress shoe player. We do whatever is.
Is trend right at the moment and and so we let the customer tell us where she wants to go and then we delivered to the right product in that category and and that's what we're going to continue to do going forward.
I think over the last few years, we've already been in a trend increase casualization and we responded very well to that and in fact, Steve Madden has grown throughout that period and the way. We did that was by taking fashion sneakers from low single digits as a percentage of sales to to about 30% or of our.
Of our sales over the course of a few years and so.
You know if that trend continues or if there are other changes in.
Consumer preferences, or you know will will evolve the proxy assortment accordingly.
Thanks, and one follow up so.
Is that a good strategy to to chase into these categories driven years quick supply chain or are you better served by being conservative across the board.
Well I don't think.
I think that chasing actually is a reflection of being.
Conservative because in my mind, when we use the word chase that means we don't make a big commitment upfront, we see what's working and then we quickly respond to it and we utilize our speed to market capability to to quote unquote chase into those trends. So so I think to your point no we're not going to make big bets on.
Categories upfront.
Big inventory purchase commitments, but we never do that and that's the benefit of our model.
Okay. Thanks.
Thank you and our next question comes from Erinn Murphy with Piper Sandler Your line is now open.
Great. Thanks, Good morning, and hope you both are doing well I guess my first question is just around the reopening and I know, it's very early days, but can you just talk about what youve seen in the last week from traffic conversion. Once you have opened pocket. It's worth you have any key geographic differences as well.
I sure Yeah, well as you said, it's on the in the U.S.. It's only been a week that we've been open ended sipping stores, you're talking about just a little bit more than 10% of our store base.
And so.
Not a lot of information to go on but but so far the stores are running down about 60% in sales.
Although the last two days have been considerably better. So the last two days, where we're down about 40%. So we do hope that we.
Continue to see a build their although had just caution everybody not to.
Not to put too much weighed on results from from one week in a in a little more than 10% to store base, where we're certainly two days.
In terms of traffic and conversion.
As you might expect traffic has been even weaker than the down 60, a that conversion has been up.
In terms of geography.
Gosh.
One call that is Oh, we opened a store in Orlando, that's a very big volume door for us a normal basis, that's been by far our weakest store ugly not surprising given there's a pretty significant traction in Orlando, that's not a operating currently.
Driving traffic.
Or best Star has been in Atlanta.
Got it that's helpful. Thank you and then I guess just ideally open stores can you just talk about.
How easy it's been pulled back your labor I know you for a load a significant p. thier labor are you having to compete with the unemployment benefit and then just what other expenses are you having to encourage you try to create the safest environment possible for consumers coming back to your stores.
That's a good question Oh, we have had some employees who elected not to come back.
For various reasons, but generally speaking we've been able to get the stores open and on time with our with our schedule and have the appropriate staffing levels.
In terms of expense, obviously, we're spending money on PT pp Oh, there's a there's training for the for the employees on the new safety measures and protocols.
We'd have to make sure that we had the appropriate oh staffing in the stores because we're asking more of the of the of the store employees. There you know we're cleaning and disinfecting. Every every two hours there are additional protocols around return product or products that are try Dod et cetera hobbies like monitoring the occupancy in the store so I'd say.
Typically if you were seeing this it kind of sales declines that we're seeing you might be able to scale back more on labor and the store.
But but that's not possible given all that we're asking the store associates.
Okay. That's helpful. And then just last question for me, it's just from the off price channel I'm just curious I.
I think that they've traditionally for you had been made for I'm curious what the appetite is for product. If you go into the back half from from the off price channel. Thank you.
Yeah, I think it's a little early.
To say there those those conversations are are very much ongoing.
So we don't know exactly what that's going to what that's going to look like going forward, but I think that youre or where you're going with your question is a is it reasonable hypothesis I think that the off price or certainly anticipate that they're going to have a lot of opportunity buys or closeouts, a available to them and Oh, we have.
Do you expect it that made depressed upfront orders for some period of time.
All right well, thank you and all the best.
Thanks Aaron.
Thank you and our next question comes from Sam Poser with Susquehanna. Your line is now open.
Good morning, I Hope you all are are doing well. Thank you for taking my question I have a handful of number one I mean, you guys have been historically grade. It you know finding the current fashion trends and so on after being able to shop markets and really see what's happening given that you can't really travel and Kurt.
Trends may be more elusive.
You know identifying those trends may be more elusive how're you.
What are you doing to identify sort of the future trends into the fall and so.
Yeah, well, we've really ramped up our testing, particularly on our own on our own website and so we're we're I would say the volume of classes is high if not higher than it's ever been and we're putting things on preorder, even before we have any production on them. So we can.
Start to get reads.
And ER and where and when we are in fact getting some very good reads on new products. So so that said.
You know thats going well.
Thanks, and then thank you and then you when you think about.
Like how you would it's looking like for fall potentially is there a big variance between let's say brands like we've been Steve Madden Blondo arguably the two hotter Brad hottest brand versus you know other brands in the portfolio good gold should be the.
Or and Claude and so on where.
That's what they're going to be a huge variance on what's going to lead to that whatever it's going to be down there might be down 40% one in flat and the other means that.
<unk> is that's sounds like an <unk>, how do you think that's going to work out from a general brand perspective.
Yeah with or without commenting on that.
The sample the lesser to numbers you.
You suggested I do a I agree again with your with your thought process that yes, I think that the retailers are going to really lean on the brands that had momentum going in and the brands that are really important to them in that and that drives sellthrough for them.
So we certainly anticipate as I mentioned earlier that Steve Madden is going to do better than whatever the company or department averages in terms of the plan decline.
Mean to see men brand.
You know we have.
Some smaller brands that may be more in line or with the overall or even weaker.
Thanks to them and then lastly can you know you can you give us an idea of.
You know what that you what your ecommerce penetration was.
Last year.
And you know Uh huh.
So what you anticipate that being sort of what where are you.
Focusing on a more normalized level.
And specifically, how you're moving marketing around what was a result, you've seen and how much more work you have to do with how much that may.
Generally costs to do.
Sure.
So our ecommerce penetration last year in in our wholesale business.
It was high teens as a percentage a in our retail segment. It was high twentys as a percentage.
So so were any around 20% ecommerce penetration for the overall company in 2019, it's going to be considerably higher than that this year or not can speculate about where exactly that's going to land, but but certainly it will be significantly higher and we think.
Yep.
Each of the changing in a.
The acceleration in E commerce will probably be sticky, we think some of the habits formed in the pandemic will or will be lasting and there will be permanent changes to consumer shopping behavior. So we're planning for for a higher level of ecommerce penetration.
You know in terms of investments.
One thing I want to point out.
While we've scaled back our overall marketing plans for the year relative to our original forecast marketing is still planned up for us This year and that's because we really do continue to lean into our our digital marketing initiatives and the marking that we're doing to support our ecommerce business and in fact, we.
Accelerated that marketing spend we have accelerated that marketing spend during the crisis.
We've seen some up some of our competitors a pull back there, but we've really we've really lean Dan and are seeing some very strong returns.
Just to clarify <unk>.
Just to make sure I got this you said, 20% does that mean last year, you did about $357 million and phone digital business.
No no I said, okay. So.
We have a wholesale segment into retail segment. So in the retail segment, which is 18% of our business.
Hi, 20, they think it's 28% to that business was was done on our own ecommerce channels, but our wholesale business accounts for 82% of our business and of those sales.
Nice of you know, it's a good high teens or at least 18%.
I went to <unk>.
Ecommerce, we feel like Amazon or when he comes out of servers.
Yeah, that's only for and also as Youre, leaving Dot com.
Okay include it includes some of that does that include a Macy's dotcom too or is it just you guys includes includes.
All product that we believe went out out the door.
Truly an E commerce channel.
Some of its estimated because some of them you don't have perfect information about.
What went to bricks and mortar and what went to E com.
So when you put out there.
Hi, good about 90 million an owned ecommerce.
That's that's that's about right.
Okay, I, just want to clear because and and Ah.
I mean do you think about 90 million last year, and you think about where you'd like to see that lets say in two to three years.
What do you think.
Because you're going to get some acceleration right now it's gonna be cuts it was considerably bigger but not not.
Going to put a number.
Thank you guys very much in stage two of them successfully think sense.
Thank you. Our next question comes from Susan Anderson with B. Riley FBR. Your line is now open.
Hi, Thanks for taking my question I was wondering if you could see its and more color on the private label business. During this time it sounds like they were the only one taking shipments I guess I was curious did this business perform better or worse or kind of inline with your.
Expectations. During this time, because I think a lot of the mass retailers also.
And noted that.
Apparel and footwear with also week.
Yeah. So it's a good question too in terms of the retail sell through err on the private label products with the mass retailers when that when the crisis first hit so sort of mid to end of March we were seeing a significant decrease in in our retail sales performance with those.
So our sell through is we're down about 50% there a again they were seeing very strong overall sales, but as you as you pointed out.
Really I think customers, who are flocking to those retailers for essentially and passing up the fashion, but as a as we got into April and May we've seen gradual improvement virtually every week.
And now were ER, we're right in line in terms of Sellthrough with where we were a year ago.
Great.
And then I guess, how are you working with your wholesale partner, I guess, particularly department stores and stuff to clear the inventory went to switch to open. It sounds like there were a number of cancellations. So are you expecting a ton of inventory to be clear again will you have to provide markdown money. Then I was also curious.
How your wholesale partners, particularly those doors that were close the online business. How that's done during that time period, I guess has it been able to sell through a lot of your product on their own website.
Yeah. So.
In terms of the performance online with the wholesale customers yes.
Almost every case, we've seen a very significant increase.
In their online business now we have to point out that has not been enough to offset the impact from the store closures. So on an overall basis, we've still been down but the but the increase is online with the key customers have been had been very significant.
In terms of how they're managing through their inventory look that they've been selling it online many of them have been more promotional than normal online.
Anticipate is gonna be an increased promotional activity in the stores as well as they as they're now reopening a at least for some period of time not going to get into the details of the markdown money.
Discussion.
But I think you can assume that that for the spring season.
You know when it when they canceled.
Massive amounts of good Donna [laughter], our willingness to provide markdown support is that it is different than normal.
Great. That's helpful. And then lastly, as consumers start to get out [laughter], especially younger consumer. This thing open are you seeing any of the fashion items started to pick up at all and you think there will be pent up demand at all there or you know I guess as consumers are still cost.
She is essentially you know still not going out in about a lot. Thanks.
Yeah, well, we definitely are seeing some some very strong demand.
For some of our products and as I pointed out it was ER.
You know definitely disappointing a that that we would you know had this crisis. This season, because it'd be a very strong early reads that we had on spring products, but but much of those products have continued to have very strong demand throughout the crisis online and now its doors or reopening.
So we've got some really strong products, particularly in the sandal category.
Some very strong flats sandals platforms wedges et cetera, we've got some good sneakers and good wedged sneakers. So we do have a number of products that are working.
And you know there are signs some signs of pent up demand.
Which.
What we're hopeful drafts of business.
Very helpful. Thanks, So much good luck next quarter in space, even helping.
Thank you.
Thank you. Our next question comes from Tom Nick with Wells Fargo. Your line is now open.
Hey, good morning, and.
Thanks for taking my questions and I Hope you are both thanks.
[laughter] I know that.
The cost saving measures that you implemented.
It probably wasn't enough to really affect Q1 is there any.
Indication or help you can give us as to how we should think about operating expenses for Q2 like I mean, maybe how.
How much would decline like we should be modeling or anything like that.
[laughter] well given the.
Given that we're not providing guidance I'm not going to give a specific operating.
<unk> expense number 40, but I can try to give you. Some some context that might be helpful or the first thing is you know we have variable expenses, which run three NAFTA for present themselves. So you can.
You know apply that to your.
Revenue assumption and a and there will obviously be some savings there in Q2, given the revenue will be down [noise].
For the year, we've taken we've also taken about $25 million out of our forecast in discretionary expenses.
So that things like bonus travel marketing, although I will remind you again that marketing is still up year over year. It's just not as much as we originally planned again because of the digital marketing initiatives that were that we're continuing.
Ah that's $25 million for that for the year, which is pretty much on the back nine months.
And then the last thing is that.
You know about 70% of our expenses are historically or what and what we call the fixed category.
But in an environment like this or even even expenses that you traditionally look at as fixed you have to [laughter]. They have to in some sense become variable and so for instance, salaries is something that that's normally fixed.
But.
We've already had about a $16 million savings in payroll in April and May due to the furloughs and the temporary salary reductions that that that we instituted and that number will grow because ah. Yes, we're not at this point, bringing back everybody from furlough or restoring.
Yes.
Okay. That's helpful.
That's helpful. Thank you I and then a follow up yeah sort of I just following up to Sam's question about E com.
Yes, you are.
E Com growth this year will probably be a pretty pretty strong and talking about 75% growth.
Growth quarter to date.
As far as like a infrastructure and Hmm, I guess logistics and fulfillment.
Perspective.
Do you feel like you have.
The capacity and capabilities that you need or do you think that there'll be some incremental investment.
[music].
Uh huh.
No I really feel good about how we're positioned there as you know this has been.
You know in initial key initiative for us for the last few years and we've been seeing very strong.
Growth in E Commerce.
And we've really made a lot of investment than we've been really positioned ourselves to continue growing.
You know as you know a couple of years ago.
Not quite two years ago, we we implemented the.
Free two day shipping.
And we've been able to do that because of the fulfillment network that we have which includes our multiple warehouses.
You know, California, New Jersey, Texas, et cetera, Florida, but also because we utilize our stores and fulfill product from our stores and in fact, a while this hasn't been the case recently due to the unusual environment, but but in normal times, we fulfilled the majority of our products or happened something regarding by products from our stores.
And that enables us.
To get product to folks quickly and ER and and cost effectively and so so I do feel good about how we're positioned there and think it's scalable.
Right.
Got it.
Thanks, Ed and.
Okay. So that's what Garcia.
Thank you.
Thank you. Our next question comes on Lora Champagne with loop capital. Your line is now open.
Thanks for taking my question that I really appreciate the information about how sales are tracking by segment and I know that on your own retail side, you've only got a handful stores opened but if we look at your wholesale doors what percentage of those stores do you think are opened today and what's your expectation for more above a full.
Opening.
Yeah. So if we put the the the mass merchants aside because they've obviously remained open throughout the.
Throughout the crisis.
I would say on average if you look at our wholesale customers right now it's about 50% the doors are open but that those numbers are climbing.
Each week and over the next month I would assume that we're going to have the vast majority of our wholesale customer doors open.
Got it and this is just a housekeeping thing, but on your retail segment. The gross margin benefited from a change in the loyalty program can you spell that out what it was.
And if you can quantify it that's helpful. Thank you.
Yeah sure. So we made a change to to the loyalty program moved away from a points based system or to a new system, where their tiers with with various benefits, including promo coax it that that folks get after they they purchased for their for their next purchase.
And so we had some points a point liability.
On the balance sheet.
And those points went on use when we change when we when we converted the program and so we recognized a benefit to gross margin that benefit was oh, such a they see here 310 basis points.
To the retail gross margin.
In Q1.
As we pointed out that we also took inventory reserves are in in Q1 related to covert 19 that offset some of that.
[noise] Uh huh.
Was that it was there a follow up there.
Is there how much.
Did the inventory reserves the impact gross margin for retail south of 310 than others. So much of that yes that.
Yeah hundred intend was the offset in retail.
Thank you so much.
Thank you.
[noise]. Thank you and our next question comes from Ross will Cerro with Telsey Advisory Group. Your line is now.
Yes. Good morning, Thanks for taking my questions I'm just wanted to see you said the.
The ecommerce channel was up 75% can you give any color on the profitability you're seeing in that channel right now.
[noise] ER.
No [laughter] pick again at this moment I will say we have been more.
We remain profitable there, but we have been more promotional.
Than normal and as you've seen out in the market.
With brands and retailers you know we have we have increased the level of discounting and promotional activity.
Given the excess inventory that we have and and frankly, just the competitive situation in the market, but we hope to return to more of a full price posture online you know later in the summer.
Okay, Great and then just regarding the store portfolio can you give a little color on the opportunities.
That you're seeing for refinements or whether it's too close stores or take advantage of some of the rents opportunities out there and our negotiations going with your landlords.
Yeah. So.
Look I think it it or you can assume that.
Yeah, we were already taking a hard look at our at our store portfolio and and evaluating whether or not we wanted to to get out of some of our underperforming locations and you can assume that that this environment only makes us a more inclined to ER to close stores, unless we can get a much more attractive.
Rent arrangement. So you will see us be a net store closer this year or at this moment I can't say, how many because it's a fluid situation in terms of our discussions around rent on the stores that remain open a look we're in.
In dialogue with our landlords.
Those discussions are ongoing because their ongoing I can't say too much about about the content of those discussions I think yeah.
Somebody said once said negotiations are like mushrooms, they grow in the dark and I think that applies here, so probably best not for me that to discuss them publicly but oh, we're hopeful that we'll be able to to to come to an arrangement with our landlords that will give us some relief.
Okay, great. Thanks.
[noise] question comes from Chris I thought.
What [noise].
No.
Hi, good morning, everyone. Thanks for taking my questions questions, well, just going back to the inventory for a moment or maybe just some more color about.
How you plan or how you're thinking about moving spring summer inventory.
Off price your own outlet stores, when they open and any thoughts you know holding something in the inventory potentially back.
Just because maybe its core items, except broad there's no point in putting about the marketplace just.
How should we think about that and it's really cute you the high watermark for Europe your inventory, how should we think about that.
Yeah, well look we're gonna have to use every tool in our tool kit to ER to move the inventory. So that means that means some promotional activity and our own website and in our stores as well as at our wholesale.
Customers.
Their stores and their websites.
And most means moving some to the off price channel.
Finally, moving some two or two or outlets.
You know, we're going to do all the things that that.
That that we can to move the inventory as I said I don't think we're in.
As a dire situation is as many given that the fast inventory turns and yes, we will carry it's likely that will carry some some core product and we make carries him some core product into into next year.
But as I mentioned you know we.
Our goal will be to move through the seasonal the seasonal product this year.
And when do you expect to have more and more stores opened its or any sort of thought process plan you thinking by July I believe the stores I'm just sort of what's your what's your thought process behind that.
Yeah.
Look again very fluid situation, where opening some more at the end of this week.
And I think from here provided of course that.
That.
Virus itself doesn't.
Start moving in the wrong direction or in terms of new new cases, a that that you will see stores opening pretty much every week from here on out.
And I'd like to think that.
Over the course of the next month, we'll get the majority of our stores open I certainly don't think that we'll have 100% of them open at the beginning of July.
Given that the store footprint that we have.
But ah, but you know it'll be a gradual.
Reopening each week from here.
Okay and just following up on my part of question just the inventory is really Q2, the high watermark for inventory year over year triptych rough cut there.
You know I, just I I don't I can't say that for sure I'd prefer not to get into forecasting quarterly inventory here.
Okay. A final thing just on your comment about.
June you expect from a branded perspective to start shipping more potash in July to be up more meaningfully just what's the patients behind I didn't know if you have your gross I'm just trying to understand it's not just product that was supposed to be shift we're.
Just a how how should I think about what drives that improvement in July.
Well that yeah, that's based on our discussions with our wholesale customers and and and and the orders that there that they're giving us so.
Keep in mind when that when the crisis first hit.
Most of these wholesale customers again, putting the.
The folks that remained open a side.
But but most of the wholesale customers essentially stopped everything and cancelled all their spring orders, but we worked with them too.
Then get orders reinstated and and all of them have reinstated some portion of their orders and that keep in mind for the most part or most customers. It's a fraction of the original now, but still they've all reinstating some orders and and.
You know.
That's that's the basis for Ah for how we're forecasting if I'm.
Okay and fight final thing I'm, sorry, just when you think about fall holiday. The majority you haven't books, a significant portion of that for your retail customer service, what I'm getting out as you haven't toward the on order exposure is really related to spring summer fall like how some fall holiday some core items.
The majority of that really had to be placed as of yet there for from an into our exposure perspective, you get that fall Korea, there really isn't it.
That's correct the inventory exposure is surrounded spring summer doubtful.
Got it okay. Thanks, very much all of us.
Thank you.
[noise]. Thank you and as a reminder to ask a question. Please press Star then one on your toughest telephone sorry question from the Q. Please press the pound tea, which will follow up from samples with Susquehanna. Your line is now open.
Thanks, Thanks for taking my follow up.
Can you talk to things can you talk about but sort of there's probably they loved promotional activity going on now and then once the stores Riocan, how long I mean.
You saw a drag on gross margin in the <unk>.
So you saw a decent growth more quarter, they weren't down a ton, but I mean, how should we think about Q2 into Q3.
Relative to Q1.
On on gross margin pressure, given the likelihood of promotional activity both.
On your wholesale business unlikely under retail business once you reopened as well.
Well again since we're not providing guidance I don't think I'm not going to provide.
Too much or not can provide specific.
Guidance around the gross margin.
But but look I think it is going to be a promotional environment and and there. There is pressure on gross margin that we should expect to see going forward do this due to some of that promotional activity. You know I will remind you that are that we did take the inventory reserves.
In Q1 of nearly $12 million.
So Ah that's you know.
We've accounted for what we believe we'll have to product that we believe we'll have to sell below cost.
And I should point out that that includes not only be inventory.
Was on our on our books at the end of Q1, but also inventory that was in the factories or products that were in the factories, both complete and ER and process that we thought we had exposure on a but but again that accounts for anything you think you're going to sell below cost you know there's still be an impact.
To the gross margin from products that will be going out at very no margin or very low margin.
Well, we should assume there's gonna be more gross margin pressure on Q twos on there wasn't Q1, just because of the fixed because it went into the heart of the crisis versus really three weeks or so.
In the crisis in the first quarter.
You've gotten all you're going to get out of me on this one so [laughter].
Alright, and then and then I mean.
There was there were a little last year uneven.
In February there were some little hints that.
That the ER.
There was signs of life.
In the dress shoe business.
Could we assume that that those signs of life.
So have a less the building.
At least for this time big.
Well, what I would say is we had very strong read on dress shoes or early in the season pre crisis or a lot of some very good reason opened up dress shoes, but also some.
I'm on pumps.
Closed the dress shoes.
As we went into the crisis with most of our wholesale customers. We did see that category slowdown as you as you might have expected.
Did you know everybody stay at home.
But we've still seen some pretty strong demand on our own website.
So I think you know, we clearly have products that that folks response, responding to and we do remain a destination for that product.
Well, thanks, again and stay well.
Makes sense.
Thank you I am showing no further questions in the queue at this time I'd like to turn the call have a sad rosenfeld for any closing remarks.
Great. Thank you very much for joining us on the call today, we look forward to speaking with you on the second quarter call and in the meantime, Ah stay safe and do well.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your programming you may now disconnect.
[noise].