Q1 2020 Earnings Call

Greetings and welcome to the Skechers first quarter acute 20 earnings conference call.

Hi, all participants are they listen only mode. A brief question and answer session with all the oral presentation. If anyone should require operator system. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I will now turn the call over to Skechers. Thank you you may begin. Thank you everyone for joining us on Skechers conference call today.

Well now read the Safe Harbor statement.

Certain statements contained herein, including without limitation statements addressing the beliefs plans objectives estimates or expectations of the company future results worried that may constitute forward looking statements involve risks and uncertainties.

Specifically the Cobot 19 pandemic has had and is currently having significant impact on the company's business financial condition cash flow and results of operations.

Such forward looking statements with respect to the Cobot 19 pandemic include without limitation the company's plant response to this pandemic.

At this time, there were significant uncertainty about the duration and extent of impacted the cobot 19 pandemic.

The dynamic nature of these circumstances means that what is that on this call it could change or any time and as a result actual results could differ materially from those contemplated by such forward looking statements.

Additional forward looking statements involve known and unknown risks, including but not limited to global national and local economic and market conditions in general and specifically the apply to the retail industry and the company.

There could be no assurance that the actual future results performance or achievements expressed or implied by any of our forward looking statements will occur.

Users are forward looking statements are encouraged to review the company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on form 10-K quarterly reports on form 10-Q current reports on form 8-K, and all other reports filed with the as easy as required by federal Securities laws for <unk>.

Scripture all other significant risk factors that may affect the company's business financial conditions cash flows and results of operations.

Thank you for joining us today on what is certainly the most unusual earning call and our 21 years of being a public company.

Our Manhattan Beach corporate office is normally bustling with a team of talented individuals is empty.

We are adhering to the work at home guidelines with very positive results.

I'd like to start by saying that the top priority of our leadership team as always is the health and wellbeing of our employees and partners around the world.

We are an unprecedented times as the cobot 19 pandemic has impacted the entire world.

While we have limited visibility as to when most markets will reopen and what business atmosphere will be like when they do we see some positive indicators, including are extremely strong E commerce business the positive sales trajectory up our China business.

Reopening of several markets, most notably, Germany, Scandinavia and Austria.

For this call we will primarily focus on the current environment and the action Skechers has and is taking to navigate this crisis.

However, we will also cover off first quarter results as well is the strength of our brand reflected in those results.

We first of all the impact of the virus on our business in China in January where our local management team took aggressive action to protect our employees partners and customers as well as our business.

As the impacted the virus spread globally, we began implementing travel restrictions and work from home policies and all our offices closed nearly all skechers stores worldwide establish the senior management like crisis Committee and began actively adjusting operating expenses to preserve cash.

We also drew on our senior unsecured credit facility to enhance our liquidity.

We are confident that these actions and many others will enable us to successfully navigate these turbulent waters.

In addition, we had been actively reviewing inventory balances and production commitment across the globe.

Making decisions to bring both in line with forecast demand, we believed that our speed of decision, making and operational agility will provide us with the tools necessary to maintain the healthy momentum on the Skechers brand we experienced throughout 2019.

[noise] sketches fourth quarter sales growth exceeded 23% as consumer demand for our product was an all time high.

We ended 2019 with fourth quarter being our second highest quarterly sales in the company's history and record annual sales of 5.22 billion.

That momentum continued into the first quarter with strong performance is that resulted in a 9% increase in our domestic wholesale business and a 9.4% increase in our subsidiary wholesale business.

Total first quarter sales were 1.24 billion a decrease of 2.7% over the same period last year.

Primarily because of the significantly reduced activity in China for the month of February and March as well is the shutdown of most global markets by mid March.

Our international wholesale business was down 8.4% in the quarter, but excluding China. It would have increased 6.2%.

While there was growth across many markets. The highest increases came from our subsidiaries in Germany, Central Eastern Europe, and Japan, and our distributors in Australia, Scandinavia and Turkey.

Further worldwide comparable same store sales in our company owned direct to consumer business increased 9.8% for the first too much of the quarter, reflecting the strength of our brand our north American and European distribution centers, both experienced record shipping month for this same period, we build.

Leave these key indicators confirm that the global acceptance of our brand was extremely strong as consumers continue to demand confer style innovation and quality at a reasonable price.

Five key attributes offered throughout the Skechers product line.

We are learning that during the crisis consumers still want comfort quality and value and a brand. They trust. We are seeing this accelerated sales in our company owned ecommerce platforms, which grew over 70% in the first quarter, but have increased in excess of 250% month to date.

For several of Rocky International markets, Our April online sales already above their entire first quarter online sales and we anticipate that the balance we'll get there by the ended a month.

We're also seeing sales of Skechers and our wholesale partners with ecommerce site among the top three if not at the top of their footwear brand now being purchased.

We are learning from the reopening of the market in China, and a highly encouraged by our own results both in retail and online and those of our franchise partners. Our online business grew low double digits in January and has returned to mid single digit growth in April.

Today, nearly all of our stores in China are open and honest steady rising growth trajectory. In fact last week, we opened our first new stores since the pandemic occurred a 9000 square foot outlet store in the northeast of China, and it performed extremely well.

Along with the strength of our brand and product. We believe there are several inherent factors that are proving beneficial during the pandemic and helping to ensure both our stability and success. Once it ends the diversity of our product and distribution channels, the solid relationships with our factories in wholesale partners and our exceptionally strong.

Balance sheet and ample liquidity.

Before I turn the call over to John I would like to reiterate that we're confident in our ability to navigate this crisis.

No one was prepared for the challenges of this new normal we believe we acted and reacted with speed, we believe that our quarterly performance prior to the disruption is a testament to the strength of our product and brand all of which leads us to believe that when markets reopening people return to work and customers get back to shopping.

Skechers will continue and its position as a leading forward footwear brand.

Now to John.

Thank you David.

First I hope you are all safe and healthy.

Before I discuss our first quarter 2020 results I would like to elaborate on the steps we have taken to navigate through the unprecedented challenges of covered 19.

Last month, we drew 490 million from our senior unsecured credit facility, which gives us over 1.3 billion in immediately available liquidity.

Addition, we have 250 million of additional liquidity available through an accordion feature of that facility.

We have also taken a hard look at all operating expenses and have actively reduced all non essential discretionary spending.

This includes curtailing business travel, reducing non digital global marketing spend and reassessing our store rollout plans.

We have also implemented reduced staffing, including Furloughing select employees as well, it's freezing head count and compensation levels.

Further we have reprioritized, our capital expenditures to focus only on business critical in highly strategic projects.

Some projects will continue apace, while others will be either delayed or placed on hold.

We believe that we have adapted quickly to the current market dynamics and are well positioned to manage through these challenging times.

Now turning to our first quarter results I will not be detailing all the impacts we have experienced from the cobot 19 pandemic, but it should be clear that there were impacts throughout our entire global operations and we expect a continuing impact on our business going forward.

Sales in the quarter totaled 1.24 billion, a decrease of 34.4 million or 2.7% from the prior year quarter on a constant currency basis sales decreased 14.9 million or 1.2%.

Domestic wholesale sales grew 9% or 31.3 million due primarily to the strength in our women's and men's go.

Men's and women's USA and our work in street categories.

This despite the fact that we lost about two weeks of shipping in the quarter as operations at many of our wholesale customers came to a sudden stop.

International wholesale sales decreased 8.4% in the quarter as a 9.4% increase from our wholly owned subsidiaries was offset by a 38.9% decrease in our joint ventures, primarily from China, which was down 47% and impacted by.

A significant sales return reserve to keep our franchisee inventories clean with seasonally appropriate merchandise.

Our distributor business increased by 1%.

Direct to consumer sales decreased 4.2%. The result of an 8% decrease domestically and a 2.5% increase internationally.

Outside of China. This is clearly where we saw the most significant impact from the pandemic as nearly all company owned stores ceased operations in mid March.

However, illustrating the strength of the spreads are skechers brand preceding the closures our year to date direct to consumer comparable store sales through February were up 9.8%.

Gross profit was 547.7 million down 4.28 million compared to the prior year and gross margin decreased by approximately 220 basis points to 44.1%.

The lower gross margins were attributable to international results.

There was also a negative impact to gross profit in the quarter related to the acquisition of our interest in our joint venture in Mexico last year in the court, we recorded a onetime noncash purchase price adjustment in gross profit of approximately 8 million associated with a step up in the value of the.

Choir inventory.

Total operating expenses increased by 78.3 million or 18.2% to 508.1 million in the quarter, primarily driven by an increase in labor expenses, the inclusion of Mexico operations and a sizable prior year tax rebate in China.

Selling expenses increased by $3.8 million were 5.5% to 74.1 million, primarily due to higher digital advertising expenses domestically.

General and administrative expenses increased by 74.4 million or 20.7% to 434.1 million.

The increase included 28.1 million associated with our direct to consumer business and a net increase of 54, New company owned stores, including 16 that opened in the quarter.

16.2 million related to the inclusion of operations in Mexico, including noncash charges of approximately 7.8 million related to the acquisition.

7.3 million in China, primarily related to the absence of a rebate comparable to prior year, and 9 million related to higher compensation and outside services costs.

Earnings from operations decreased 73% to 44.8 million versus the prior year and our operating margin was 3.6% compared with 13% the prior year.

Net income decreased 54.9% to 48.9 million or 32 cents per diluted share on 154.7 million diluted shares outstanding compared to net income of 108.8 million were 71 cents per diluted share on 154.1 million diluted shares outstanding.

In the prior year.

However, adjusted net earnings and adjusted diluting or diluted earnings per share were 59.9 million and 39 cents, respectively and reflect the impact of negative foreign currency rates and certain purchase price adjustments related to our acquisition of our joint venture in Mexico.

Our effective income tax rate for the quarter decreased to 15.3% from 19.5% in the prior year.

Now turning to our balance sheet at March 30, Onest 2020, we had over 1.37 billion in cash cash equivalents and investments, which was an increase of 335.3 million or 32.5% from December 30, Onest 2019.

The increase primarily reflects the drawdown on our senior unsecured credit facility in March of which $250 million remains available through an existing existing accordion feature.

Our cash and investments represented approximately $8, an 89 cents per diluted share outstanding at March 30, Onest 2020.

Trade accounts receivable at quarter end were 796.2 million, an increase of 23.4% or 150.9 million from December 30, Onest 2019, and an increase of 8.1% or 59.6 million from March 30, Onest 2019, the increase.

In accounts receivable was primarily due to higher wholesale sales, both domestically and internationally as well as deferred collections from certain franchise customers in China. Following the impact of the cobot 19 pandemic.

Total inventory was 985.7 million a decrease of 7.9% or 84.2 million from December 30, Onest 2019, but an increase of 33% or 244.8 million from March 30, Onest 2019.

While this level of inventory is clearly higher than we had originally planned before we ceased shipments to our wholesale customers and close our retail stores. We believe the actions we have taken and we'll be taking to adjust future factory orders will allow us to malice manage these balances with an eye toward emerging from the current climate with clean.

Inventory levels.

Total debt, including both current and long term portions was 699.8 million compared to 110.4 million at March 30, Onest 2019, the increase primarily reflects the drawdown of our senior unsecured credit facility.

Working capital increased 137.7 million to approximately 1.7 billion versus 1.56 billion at March 31 2019.

This was due to our drawdown on the senior unsecured credit facility and increased inventory levels globally, partially offset by lower accounts payable balances.

Capital expenditures for the first quarter were 61.3 million.

All of which 34.4 million was related to the acquisition of an office building in Shanghai, and new retail stores in China.

10.9 million related to direct to consumer stores and E Commerce investments worldwide, and 10.8 million related to our distribution capabilities around the world as well as general corporate investments.

We have thoughtfully reevaluated, our capital expenditures for the remainder of the year and are prioritizing only essential and strategic projects.

Given the current retail climate, we have dramatically slowed our new store opening plans at least until we have better visibility into business conditions.

We now expect capital expenditures over the remainder of the year to be between 100, and 125 million, primarily reflecting the completion of our first company owned distribution center in China.

This excludes investments in the expansion of our domestic distribution center, which will continue but which will also be financed separately through the joint venture we operate for that location.

We will also continue to strategically invest in our ecommerce business. As this is a critical channel for us to evolve and expand our connection with our consumers, including the rolled out of a new Pos system, New website mobile application and loyalty program.

We will not be providing revenue, earning guidance at this time as the current environment is simply to dynamic from which to plan results with a reasonable surety of success.

As David said, while the near term is uncertain. We are confident that we're taking the necessary actions to ensure that skechers will successfully navigate this crisis.

Given the strength of our brand are compelling value proposition and our healthy balance sheet. We believe we are well positioned to continue growing once the situation normalizes.

And now I'll turn the call over to David for closing remarks.

Thank you John.

Hi, I'm struck by how unusual this year is and although we have been operating in this new normal very efficiently. It is still not normal.

We are appreciative that we have a dynamic and strong team working remotely both here in the United States as well as around the world all with the goal of staying healthy and ensuring that continued success of skechers.

The sales trajectory in China, and several other markets in Asia with stores now open is positive.

We're also pleased to report that several international markets are now also starting to open, including Germany, Austria, Scandinavia and the Netherlands.

We're also optimistic in the strength, we are experiencing in our E commerce business worldwide.

We believe that when consumers returned to work into shopping they will be looking for comfort and value and they know sketches has been delivering on this front for nearly three decades.

Pre crisis brand and online strength was extremely strong as evidenced by our results are ample liquidity prudent cash management and inventory supply and demand measures taken since mid March are proving to be solid foundation, as we evolve and adapt.

We believe skechers will emerge more efficient focused and stronger than ever before.

We look forward to reopening our stores globally and to see Skechers product on the shelves at point of sale around the world.

Now I'd like to turn the call over to the operator for questions.

Thank you will now be conducting a question and answer session in order to allow as many questions as time permits we actually you. Please limit yourself to one question and one follow up.

If you would like to ask your question. Please press star one on your telephone keypad confirmation telling blend to keep your line is in a question Q you may prestart too if you'd like to move your question from the Q.

Do you think speaker equipment, maybe necessary to pick up your handset before passing the Sarkies one moment. Please pull for your question.

Our first question comes from the line of Jay sole with DBS. Please proceed with your question.

Great. Thank you Wendy just want to say hope everyone associated with Skechers all the world is is doing well.

Unhealthy my question is about.

Thanks, Dan questions about the online business.

250% growth month to date on Skechers Dot com, it's a really big number you just tell us what the sizes of the company's total digital business today across all web sites, both retail partners in your own.

And what is that growing right now.

Difficult to say with the retail partners, obviously because.

We don't get complete details, especially on folks like Amazon and third party.

Sellers on Amazon, while we do get some from our own obviously customers here Europe and everyplace else.

It's fair to say I believe if you take China and what we have on our own online what we know about people like Amazon and some European end and domestic that we must be pushing somewhere in the neighborhood of 500 million a year I believe it the running rates were going through April.

Significant and it's growing dramatically I think it shows the demand for the brand.

It's always been big in China, as we said it made up a significant portion of the volume even the C or in the year before but the fact that we can lap.

The first quarter its entire online sales in five groups that we have around that we own ourselves, where we have our own stores around Europe here in South America is pretty significant regardless of size and it is starting to scale quite nicely and it does and can continue to increase.

So we have plans to continue growing the site, we will be an all countries that we operate a subsidiaries hopefully in the next year to 18 months. So this only has the possibility to continuing to grow and continuing to compound.

Even in the current environment. So were very positive about it we think it's great and would continue to push forward and bring it out around the world.

Okay, great. So if I can follow up on that when we just think about the brick and mortar business. You have an idea of can you mentioned, Germany, Austria scan, maybe a bunch of places stores are reopening backup in addition to Asia.

What percentage of the brick and mortar footprint of the company's total distribution model is closed right now and maybe what percentage open do you think.

Outside of China, It's still all closed our brick and mortar we had not opened anything we have some third parties opening in Germany, and we've gotten quite good results even for Skechers sales.

We are in the planning states, we're bringing them out we think it won't be too much longer before we start to bring some out in Germany, where they starting to open and.

Austria, well, we have so I think actually one did open in Austria, but that the percentages to your question are still.

Tiny.

And even in the U.S. and those places where.

It will be allowed and we can set everything up as far as safety is concerned we're planning on coming back. So all these great results are still with very little brick and mortar.

Jay in China, we are close to honor for 100% at this point in time most stores are open there, they're not all full productivity, but but most if not all stores were opened at this point in time, which is incredibly good sign to see.

Got it and then one last one for me.

Just talk about how you're thinking about managing estimate for the year on the John talked about travel marketing staffing compensation.

Already taken measures to adjust that but maybe just sort of give us arranged for mobile maybe like the.

How much estimate micro or not grow this year ballpark range.

Jay don't you understand that the big pieces, our brick and mortar you got to tell me when they're going to open if you really want to know how much I'm going to spend I mean, that's a significant undertaking as they start to come back and the more months. They don't the more fallow. It is and there is certainly a lot of projects outstanding. So I think it's fair to say that from.

The SDN eight perspective as far as address all things that we have in our control we're limiting as much as possible keeping an eye for when we reopened and certainly investing in our online business, but until we know on a worldwide basis, when we're coming back to business, where people will be back in the office is when furloughs will end, it's very difficult to give you a ballpark number.

But gionee, it's going to be.

Got it alright, thanks, so much.

Thank you.

Thank you. Our next question comes from the line of Omar Saad with Evercore ISI. Please proceed with your question.

Thanks for taking my question. Thanks for all the information guys I just wanted to actually clarify your comment on the online that 500 million dollar number you're throughout their David is that at the April run rate. It's a 500 million dollar because that's what should be 10% of sales.

Or are you alluded to a different framework there.

No we're talking about the running rate that we're building into through April now and what exists in China.

Fourth somewhat longer period of time, obviously were up 275%, we didnt have that running rate in the first quarter, but we are growing into it now and also that add remember.

We're taking a little.

Poetic license here, because we know what we sell to Amazon and what we sell to other people that are big customers that sell online and have ballpark numbers for what it is when you put them altogether.

It's certainly should have a run rate today with everything else being close in excess of 500 million I think that that might actually be a small number given the size of Amazon and some of our other customers. Both in Europe. The here and South America, and then you add our own site here and our site in China, and you start to get pretty significant numbers.

Gotcha Gotcha. So maybe you could talk it to talk to that a little bit more like what are you guys doing other logistics or investments you need to make to kind of really gear the business more towards digital even accelerate that side of it as the demand ramps up there I mean, it's got to be a pretty different business, then kind of mass wholesale shipment orders I imagine and kind of reconfiguring, yes.

Operations around that is that something you can do in the short timeframe.

Well, we've already started so if you go back to the old conference calls, we've already broken ground bulldozers around and our Moreno Valley facility.

That new building will be specifically for online business. We've taken an additional 700000 square feet in Belgium, which is our other big facility that will also be predominantly for online on the growth. That's there I would go back and tell you one thing from the beginning maybe a question that you use that that you said the focus is shifting and we'll be moving that way.

We were planning on moving this way for quite some time. That's in addition to keeping focused on what we continue to do we don't believe that we won't come back strong in our brick and mortar and our wholesale business. As we continue to go down we're not sacrificing are moving away from any of that stuff. This is just something we had seen in the past we've always believed and we want to get to walk.

Tumors, any which way they want us to get to them and online was obviously growing factor I guess that we added to do over again, we would have been a year ahead, and maybe even and 10 more countries and have even a higher number.

As far but we are in the process, we have our systems in place we have our systems in place to upgrade our Pos in our retail stores for a more significant omnichannel presence as well as our online and the distribution capacity to do that in all our big places in the world and that will be the model for other countries in a world as we roll it out to our subsidiary base.

Yes.

Got it anything operationally like you're seeing in China as you build that business back up again, and then kind of return this that you're learning there that you are in Europe that you're going to apply in Europe and apply in North America, how the how the consumer behavior, how they're shopping and how you.

Matched that logistically operationally on your side.

It hasn't changed.

Considerably from logistics point of view, we've always been expanding we're still continuing to build our distribution center in China right now we use a multiple third parties and even in Europe as it opens we've always been moving that way and we have the capacity as you've seen the way we've grown the business in these different.

Methods, both brick and mortar wholesale.

With our subsidiaries joint ventures, and franchisees around the world that we have the capacity to move quickly when I really burdened by slow moving decision, making at which we constantly going through the fulfillment and and the front end, where we take the order it hasnt changed considerably and we continue to modify it and continue to grow we're actually going to do a new launch for.

Our own online probably in may or June depending on how things develop which has obviously been plant for more than a year. So all we're doing is putting a foot on the accelerator in those places that are.

More heavily growing and concentrated right. This minute, but we have the capacity to turn it on everywhere and we plan on doing that hopefully before this year ends.

Got it congrats on all the brand momentum.

Thank you.

Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

Okay, great. Thank you so much and thanks for all the detail on the call today, we really appreciate it I wanted to follow up on China and ask in aggregate. So far here in the second quarter to date is your total revenue in China.

Back to positive gross.

Or is it that some pockets like ecommerce are positive growth pet stores are still negative. If you could just help us understand that and then also just remind us what percentage of revenue what percentage of total Skechers revenue does China represents.

And then I had a follow up on gross margin, but let's start with that one.

Okay, well youre right. The first time and that our ecommerce business is comping positively.

Most weeks now, especially the stores are open and while some may be comping positive in the aggregate they're back to about 70, 75% I believe of what they wore a year ago.

And getting certainly growing and you see consistently throughout.

The month as it goes forward, so they're not quite there and last year, if I remember correctly and John probably jump and we did about 850 million give or take in China proper of the 5 billion plus that we did as.

As a company.

The Kimberly assets, it's right there was memory as usual is spot on.

Yes. It's also we're seeing different behavior patterns in different channels. So E. Com actually is doing extraordinarily well it actually weathered the pressures from the pandemic better than the other channels, both but what we're seeing this extraordinarily encouraging as both he comes on an upward trajectory retail and the stores that we own and operate.

Is on an upward trajectory in the sell through at our franchise partners is also on a positive trajectory. So although not fully back from up from a consumer standpoint.

China is actually showing lot of really good signs that we hope our replicated across the globe as other markets reopened.

Absolutely great color. Thank you for that Sean and then my follow up is just on the gross margin.

You indicated a 220 basis point decline.

In the first quarter was what's do it so it sounded like largely to international.

Is that all in China or is it sort of spread international anything you could just.

Unpack that a little bit and talk about the drivers and there is that margin margin court cost inflation. What's what are the elements that are driving that gross margin declined in the first quarter is that would be helpful. Thank you so much.

Yes, So first let me elaborate a bit that is entirely international if you actually look at the domestic margins. They are they're very good this quarter, we were seeing very good trajectory.

The domestic wholesale business was doing very well some positive mix shifts there as it was improved pricing direct to consumer prior to the shutdown. We're seeing some improved pricing. So the domestic gross margins were actually doing very very well in the quarter. So it's it's entirely attributable to to two things really yes, the China impact in China and.

The recovery certainly has been there on a unit level its trailing a little bit on the revenue side in particular as many retailers are offering discounts to get consumers back into the store.

It's also attributable to the purchase price accounting that we called out in in Mexico, which is again, it's a noncash charge, it's rolling through related to the stepped up value of some inventory that was there at acquisition. So no no actual cash outflow, but the more of an accounting charge than anything else.

Absent that you saw a little bit of weakness in gross margins in some European markets in particular as the pandemic began I mean, it started a little bit earlier in several European markets.

And that caused a little bit weakness in March.

Overall, though I would attribute most of it to pandemic related outcomes in China, and the purchase price accounting and then again would highlight that the domestic margins were really good in the in the quarter.

Great color. Thank you so much.

Thank you. Our next question comes from the line of Tom Neck with Wells Fargo. Please proceed with your question.

Hey, David Hey, Josh Thanks for taking my question.

I wanted to.

I wanted to ask about expenses.

No it's.

So difficult to.

Yes, yes, yes through this and that have all the stores close but.

You mentioned some select.

Furloughs.

Is that just the store employees the gene furlough.

Ladies and the.

Corporate offices are bdcs or anything like that and can you just let us know when the furloughs began.

Well Furloughs began I believe at the retail level two weeks after we close the stores and we had the two we guarantee and then some of them. We've kept the number of people. We began furloughs I think it's important to note. This is a worldwide issue. So some of it or bigger big piece of it has to do with our foreign where governments or have had different tax.

And what they've done as far as furlough and personnel is concerned in Europe, we have more of a.

Contribution from the government to keep people on payroll and they contribute to it rather than in the United States, where they rather that we furlough them and they get.

Unemployment to the point that they may not.

Pay for them to come back to quickly. So we have two different scenarios there.

It's safe to say that.

They've been going steadily as we've seen what we need what we don't need who is working we have a lot of people that are working very hard so it's been.

Consistent and consistent with the demands of the business probably since we closed the stores both from the office and for the retail.

Tom I would just double emphasize the notion that none of that really appears in the first quarter results because as David mentioned that the stores close we for the first two weeks of our closure kept everybody on payroll so much of what you're describing which I think as you as you take a step back is that really we're looking at every expense there's nothing that were.

Not going to consider curtailing or holding back if it's if it's feasible.

Most of that started in Q2 and it takes different formats in different countries.

Well, what we are doing those were continuing to pay benefits of people who are on furlough. We've we've handled business in a manner that allows them to tap into the resources that have been made available through the government in the United States and other programs internationally and I would just add that really no. No line of expense is being left on examined that.

This point in time, so we're looking at everything it's it's with an eye towards maximizing our cash on hand.

And you'll see over the course of Q2 will be making adjustments do that depending upon how the business conditions unfold.

Got it.

Thanks for taking my question, yes, that's a lot navigating this unprecedented scenario.

Thanks.

Thank you. Our next question comes from the line of John Kernan with Cowen. Please proceed with your question.

Good afternoon, everyone. Thanks for taking my question.

Hi, Asia.

Hey, David John can you just talk about that the ability to get back up and running outside of China, and what the new normal books like both with your wholesale partners your directly operated.

Warm as well as all your within the wholesale Calvin distributors JV franchisees and licensees.

Well I mean, the one thing I'd point out there there's still a core operation capability that we retain right. Now in addition to the online business in China were still receiving goods, we need to keep the ports clear. So we're taking in goods were also very actively managing the production commitments that we have to bring.

Those plus our existing inventory into line with demand. That's that's a key activity that we undertook really right away and have been working on diligently ever sense on the wholesale channel we're waiting to hear about March our major wholesale customers and when they will begin taking in goods we have seen some.

Positive energy in that area recently as many begin to contemplate reopening their retail base. So that's been a very good sign it's consistent with what we're considering in our own retail line.

But it's also clear that other markets in some instances are as different point in the curve. So what we're starting to see developed as a fairly consistent approach where retail has halted and then it starts to get back up and running and orders need to be readjusted. So that hopefully most countries end up on a trajectory similar to China.

So again at this point is very encouraging given given the trends we've seen so I would say, we're perfectly poised to be able to handle all of that in our and are ready to but it needs to be on a case by case almost country by country basis, and that's and that's how we're addressing it right now.

No I would add theres still some customers were shipping to actively lot of the online players even some of our wholesale accounts, who have online business as David mentioned, we're doing fantastic business through those partners as well. So there still is some core shipping going on although it's clearly not at the levels that would be the case normally yeah I'd just reiterate that nothing is.

Close so it's a matter of scale.

In most parts of the World. We do have a couple of distribution centers that are running very minimally just to receive goods that had already left or been made.

So that take a receive them and backlog supports the is the only issue will be getting people back quickly enough.

Fully automated in our big facility, so that will be somewhat easier and obviously.

We have to work around safety measures, because we do a practice social distancing and protective gear, both gloves and.

Face masks.

In all our distribution centers as well, so thats going to be to scale piece and the learning curve to get there, but everything is working so we will be shipping soon as everybody is ready and we'll be able to scale.

Along the way.

Got it maybe a quick follow up to a point John made just on the inventory ended up.

33% on the balance sheet, obviously, there is tremendous dislocation in the market inventories up everywhere now, but just.

The freshness of that inventory and the ability to get it through the channels.

When things do get back up and running.

Well that would depend on how you define the channels and what their capacity is physically we have no issues and we can we think theres a demand for it given what we've done before and whats coming through we don't have anything we havent been selling well and there is some new stuff coming in so as our stores open and that's our online continues to grow in wholesale.

Business continues we will make those decisions as we go forward I think the benefit we have is like John said, we have.

Different starts in different parts of the world, we have the capacity to move the inventory we have.

Even if it was originally purchased for someone to another part of the world where its demand is coming earlier and replace it later so we're very.

Agile when it comes for that so we will take our inventory our inventory that exists worldwide and start to move it on a worldwide basis at this needed first so we think we're going to be in pretty good shape overtime as everything breaks loose.

John I would also add given the benefit of what we're seeing online many of our products certainly hit the sweet spot of what consumers are looking for right now everything from the athletic category to the work category many lines of which actually provide work footwear for those who are on the front lines of battling this this pandemic.

All the way through to the comfort and value orientation. We spoke about this this is going to position, we think the benefit of having that online business position as well understand what consumers are looking for when the broader retail environment open up opens up but we have the benefit now of our online our partners online seeing what sells.

Ewing, what's happening in China, and it's given US a lot of Intel into how we should manage inventory and again I would credit Dave and his team our team here on the supply chain side. This is something we got after immediately when when we started to witness the effects of the pandemic globally. We started to work very very closely and quickly with our factories with our customer.

First to bring the order flow into line given the inventory we had.

Thats really helpful. Thank God that best of luck.

Thanks, John.

Thank you. Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.

Good afternoon, Thanks for taking my questions.

Just for the.

What are your baseline Mike based on what you're seeing right. Now I mean are you presuming you are shut down through may on as far as retail in the U.S. and I mean, how are you thinking about it and if so in the second quarter alone how much.

Are you are right now for Q2, honest DNA where Alex.

Help us a little bit there were in Q2.

You know what does the ranges, we should be will kick out.

[laughter].

And there's a reason reason, we we're not providing guidance at this point in time and it largely relates to our inability to precisely forecast when the data points out that retail business comes back online because that will have.

Two impacts to us obviously, it will impact our own retail business, but will also begin to impact that of our wholesale customer. So quite frankly, we don't have a plan. We have multiple plans right now and quite frankly all of them are in a bit of suspension until we know those retail environments begin to reopen in <unk>.

I think it's going to be different pacings for different countries, which makes it makes an exceedingly difficult to give you a number or a range because it depends on so many factors in so many different countries. So as so at to not be reliable what I can't emphasize though is what we've already said.

Looking at everything on the on the on the spend side, we're going to prioritize only that which is essential and critical at this point in time.

We want to continue to take advantage of what we're doing online, but after that it's going to be contingent upon what both the governments and the environment allows us to to open.

Well I'm going to beat the horse one more time here.

Can you give us some idea of sort of what you what you've already shop like could you give us an idea of okay. We do know 25, I mean did you find a certain amount of money that just isn't going to get spent right now in the cutting in the second quarter with everything else sort of up for grabs alright, Sam I will tell you.

You only course I'd like you.

And but the question is are.

The one thing you know all of and everybody has been up two is advertising has been cut significantly at least for April and May what there is nothing happening. So if you start there you see it's very serious and that is one of our larger expenses. So why we do continue to advertise online and push for.

Online sales.

Through a number away. So we obviously don't have as big a presence on TV and print and that will be significant so.

You know if your point is to find out we've taken a serious I can assure you with serious and there is no expense certainly from a cash basis. When remember, we're managing expenses as well as cash that we're not taking advantage of.

I would also just say on reminds you that theres a significant portion of that DNA based remember that is variable right. The warehousing distribution the labor associated with that the labor associated with the stores. So theres a lot in that DNA base and we talk about all the time that is related to two variable operations and since a lot of those operations have been suspended.

There is theres, obviously some opportunity there.

Thank you ive to I'd like two or three more questions number one.

You mentioned that the shipping set some wholesale customers and their online businesses you've started to see people get hungry for does that mean like big read Big family retailers are thinking about buying things, but aren't and if so our most those folks going from their stores. So I I mean or is this just like you have been talking about them of how they're going to do things.

Once.

Let's get started or are you seeing replenishment orders from like online retailers outside of retailers.

Online arch re goes with outside of retailers.

Well, it's probably safe to say that we have anecdotal evidence for those people that are shipping out of their own inventory satfi of skechers goods that are out there, but we do still have some customers that are predominantly online that continue to take product.

Both.

Domestically and around the world. So we are still delivering some we're delivering obviously all our own which grows consistently.

Throughout since since the beginning of the year, even more so now so that's pretty consistent and those that are predominantly online we continue to fulfill and as they request we continue to ship them.

Not the biggest piece I don't want to get to too carried away on on order of magnitude and scope, but we do have the facilities up and running we continue like John said before received good ship goods for the online community and ship our own online in most places in the world.

Thank you and then lastly.

You talked about some of the safety measures you're taking within your distribution centers, what about safety measures as you reopen stores.

No.

Have you do it I mean, there's a pretty spread out generally but.

Are you going to are you going to require a place where face masks are you going to move some seating around to make sure that you have.

Appropriate spacing or have you started to work on on on those issues for.

When stores really start to reopen in a bigger we or we've been working on those issues almost since they closed. So obviously, we have when we do follow the CDC, we do follow best practices and I can assure you we will be among the leaders and best practices for safety in the stores when we get open.

And then lastly, with that with the potential for store openings and so on how much of it is it going to be driven in especially the U.S., but we're going in other countries as well by what the municipality or state tells you versus sort of.

What you know sort of like in California would you Nobody told you could open stores today would you be doing it or would you be waiting gibbons situation there.

Well given the situation it fits very difficult to answer Hypotheticals, Let me, saying that California, We'll let you opened doesn't tell you where you can open what else would be opened in that neighborhood. What you can give consumers. How you test that how many stores are in there I mean, Sam to so many questions I would go back to the beginning and tell you we are certainly.

Guarded guided by municipalities governments way, we're certainly follow all guidelines rules and anything that pertains to safety as far as our.

Own personnel or concern and we will evaluate every potential opening on its merits when we see that it's done we allow looking obviously every place where it's.

Not.

Recommended to be close or that don't.

Ask you to be close and see if it's in our best interest to open and when we start to open them I'm sure you'll be aware.

Thank you very much and stay safe and good luck in August due to thank you. Thanks.

Thank you. Our next question comes from the line of Susan Anderson with B. Riley FBR. Please proceed with your question.

Hi, Good evening, Thanks for taking my question help everyone to allow.

I was just wanted to follow up on the inventory I think that you said you were looking to cut some of the orders it sounded like it was more back half I was wondering if you give some more color around kind of the magnitude of what you were looking to <unk> and if there was anything also for say second quarter.

Yeah, we've already we've already made dramatic reductions to our production commitments. That's something we started almost immediately as we foresaw the impacts of the pandemic escalating across the globe.

I want I don't want to quantify but I would certainly stated as a sizeable.

And what we're trying to do obviously like everybody else offering what we have an inventory as long as the commitments that we were already in production that we are working with our factories to to honor.

With with forecast demand so.

The lot of activities a lot of orders, but but we've been very aggressive with that because we certainly want to make sure that we're poised with clean appropriate inventory levels when the stores reopen when our customers reopened. So we can we can continue growing I'd like to add that we do build a lot of flexibility into our.

Dealings with our factories, we've been doing business with most of them certainly the largest amount for quite a bit of time and weve building in some flexibility to scale either up or down as we see things develop so we don't have to outguess. The situation at all times. So it's a day to day, so as John said.

Whatever answer he would give you today will not be the same answer he would have to give you tomorrow. So we like to just give everybody. The thought process that we are building and flexibility. We can continue from this point to scale upscale down or move things out of a longer production cycle or to a shorter production cycle, depending on when and how.

And how well they scale when they open.

Great that's helpful and and then I guess I'm the promotional friend and how are you thinking about promotions are thinking about handling promotions. In this environment is that a tool that you think you will need to get more aggressive on to clear inventory or something that you do you think you'll be able to manage.

And then maybe just talk a little about what you're seeing from a competitive standpoint. Thanks.

Well you are just so definitely seeing that in the evolution of China.

What we've tended to see is that it's been a little aggressive early it's starting to taper off a bit.

In the United States I wouldn't describe our level of promotion activity at the moment online or or what were advocating for with our partners as out of a norm we've not materially. So it's certainly likely that as markets begin to open that similar levels of promotional activity will be.

Required to at least spur customers back into the store, but that is entirely dependent upon how each market reopens, what I would emphasize though is you certainly seen some of that in China, but it's tapering off as the market begins to return to normal and as we see that happen gives us confidence that while.

There may be some near term requirements or advisable promotions to put into place it doesn't in any way diminish the value of the product or the pricing that we had before the pandemic hit and I think that for US is the most encouraging sign yeah. I think this just like most of the other questions Weve answer today is one of the about up for US It's building and.

Flexibility. So we don't want to go in with a.

Sort of an idea in stone of what is going to take we'll have to see what the marketplaces see how much inventory is available not available, which part of the world's opens first and what the competitive nature is there before we decide so we try to be very flexible and very into into the marketplace.

Great Thats very helpful. Thanks, So much good luck with the rest at quarter end stay safe.

Thank you. Thank you.

Thank you. Our next question comes from the line, Chris Svezia with Wedbush. Please proceed with your question.

Good afternoon, gentlemen, I'm glad you're right now.

Saagar bunch, sorry first.

Just a point of clarification E Commerce, David when you mentioned roughly $500 million run rate as that Youre skechers.

Dot com and those markets, that's your own plus Amazon Dot coms apples dot com or is that just strictly.

Skechers Dot com.

It was all of the above.

When we set out just to give a a scope a numbers, but I think it could be a conservative Adam while we don't have all the details I would think thats, that's pretty much a minimum because the question was specifically as I remembered for online sales in all venues, whether it's US third party and I'm sure. There's a lot more third parties that I'm not even aware off that are selling skechers online around the world.

Okay got it.

You also David mentioned early in your prepared remarks about April and China, and I think you said something about being up mid singles that Youre, China E commerce or what was that reference to.

I think that was China in the aggregate it was all the brick and mortar the biggest piece was online and obviously.

Carries the bulk of it the stores as we said.

Our not catching up as fast obviously on E commerce as far as just like it will be here and everyplace else saw ecommerce is already broken into the positive and its carried.

Most into the positive positive territory now.

So just to be clear, so you're saying that youre your China business in totality as up mid single for the month of April.

I think we said low to mid yes.

Okay. So it's entirely turn positive in part driven by E commerce stores still still negative year over year correct.

Store sell through I mean, it's very difficult first because we record the sale on the franchise basis for when.

We ship it to them and that's created a positive I don't know that sell throughs have started that we filled the pipeline as John mentioned, we gave we took back some goods and we took a big credit in February we're making some of that up in April in sales. So it flows through a different way I don't want to get too carried away with what it is I think if you go online direct to the consumer whether it's a free.

Anti virus are.

Slightly positive with the big carrier, the big push coming from online and the stores in that 70 or 80% comp to last year.

On average.

Regardless of what we shifted franchises and recorded sale.

Okay.

I want to just go to I'm just not on the.

On the DNA for one second you mentioned a lot of it is variable anyway, you can discuss or categorize how much is variable versus fixed in that and that DNA line.

Well I mean look the reality is there's there's cost in there that we can't do anything about like depreciation and amortization right. That's but those are those are noncash so with our primary focus on cash expenditures at this point in time to ensure ample liquidity for the company we're not as.

Concerned with items like that.

After that you guys should be able to derive some some best estimates of what.

Variable and what's not but I would also point out that.

There is some cost categories that we probably would have normally described as fixed that may not be fixed for a variety of reasons. So.

We're looking at everything and I think thats, probably the emphasis we make David gave examples I can in advertising that obviously, we're going to cut back significantly.

But there is other categories that would normally have been fix that we're looking at and if theres a viable path to adjusting those will take that as well.

Okay can you describe what those are John furniture.

Yeah I guess.

One of them one of them is certainly looking at things like rents and things like.

You know.

Those those cost categories.

Okay got it.

Lastly from me just I'm not keeping.

Capex side, what about the headquarters.

In Manhattan Beach, what's going on with that and stores I think was 100 2100, Fortys what you expected to open up globally.

What are we looking at now when you think about stores.

We're not prepared to give us stores number, but but obviously, it's going to be significantly curtailed. So part of it depends on how the environment unfolds part of it quite frankly depends upon what type of environment, we emerge into.

There may be some really attractive opportunities at some point in time. So we don't want to give a commitment number what I would tell you is we need to wait until we have better visibility into the retail environment before we make those decisions David mentioned, a point, though that I think is incredibly important it doesn't in any way disabuse us at the appetite to continue to grow grow at.

The store level.

I think in addition to the ecommerce growth, we're seeing we believe that combination of online and physical solutions for consumers is what works best.

I think it's also because we had the unique ability to grow our brand better than most.

As the retail environment continues to shake out from here, there there will probably be incremental opportunity and market share up for grabs that will want to take advantage of.

Corporate headquarters were making a decision on we're still evaluating that's a phase projects that we have the ability to throttle in some areas and not in others.

But we're exercising all that judgment on a case by case basis.

Okay got it okay.

Okay. Thank you very much and all the best stay healthy.

Thanks, Chris.

Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Thank you good afternoon few questions from me guys. Thanks, Thanks for the time.

First a follow up on the inventories and then one on merchandising strategies.

Two sizable reduction to production orders of receipts over the balance of the year, John this or any way to think about the trajectory of inventory balances for the year.

Well you doesn't have the sale side, yes.

Hey, I don't want to I'd like to put them on the spot as well, but you know inventory management and so what we said has been building and flexibility and we could scale at upper scale it down.

Depending on what the sales cycle turns out to the equation. It's just you know without guidance is very difficult to tell you, where we are where we stand.

What's common what's making and at what timeframe until we really get things moving and I don't believe it's something that we would.

Additive reasons, just give out on.

Open to the public is what all our plans are to to be in each.

Territory.

Jim I would add to that because thats all completely accurate that you certainly we're certainly not going to want to be in a risk posture on inventory. So that the actions. We've taken thus far have been as David pointed out the built in flexibility, but if anything to make sure that we're not we're not taking any risks that we don't need to on the inventory set at the moment.

Great. That's helpful. Then David hopefully this isn't.

Going a directional competitive sensitive information, but.

Can you also talk about how you're steering merchandise assortments trying to balance risk management with newness in the marketplace, which categories, where you go deeper and which categories, we choose to minimize risk hey thoughts there would be helpful. Thanks.

Well, we think we came into this with a very strong.

Merchandising mix and nothing has really changed we're just carrying it out and we're going to see what seasons, we opened up I think.

One thing we've proven over the number of years, we've been in businesses that merchandising.

Building it building the correct products that have correct time as part of our core competency we continue to develop even in those.

Even though these times are difficult so like John said, we're being risk averse of as part of that we've got a lot potentially in the pipeline and will be from will deal with that on the market back.

Point of view, just like we always do to see what sells and what we have to put to a quick of production cycle and what we have to take down so as with everything else. We're building flexibility. We think we have plenty of great product in the pipeline that will sell well, we'll show well that our customers are looking forward to getting and we will change that production cycle as we move forward.

And as as necessary.

Great I'll leave it at that thank you guys.

Thank you. Our final question comes from the line of Jim Chartier with Moness Crespi Hardt. Please proceed with your question.

Good afternoon, Thanks for taking my question.

You mentioned the significant reserve.

To take back inventory for the franchisee in China can you size that for us in terms of the sales and gross margin impact.

I'd, rather not side other than to say you with you is meaningful we made again aggressive decision in February that we want to make sure that our franchise partners are clean, especially as they emerge from kind of.

Late winter early spring environment.

So it was it was a meaningful amount the margin impact is not that significant simply because there is the sale side and the Cogs side, you take out simultaneously so.

It wasn't.

A significant gross margin impact overall, but suffice it to stay with you with the big number for China, It's certainly contributed to there they're down quarter.

But we felt it was absolutely critical to ensuring that the brand came out in the strongest possible position as the doors opened in China and I think we're seeing the benefit of that in the trended sales, we mentioned and that's that's been very encouraging for us.

Okay, and then can you just talked about where the profitability of your own E commerce businesses today relative to the rest of the business and where do you think overtime.

Yes, so it's still relatively relatively strong we're in early stages of E. Com. So obviously it will continue to grow and we do expect overtime. Some of the accretion that we actually have any operating margin today will come down a little bit but right now, it's an accretive business for us and continues to be.

At the moment, it's doing very very well so the accretion is pretty high.

But.

Again over time, Mike many we expect there to be some downward pressure on it but but we don't actually expected to get dilutive.

At least not for the foreseeable future.

Great. Thank you.

Thank you we have reached the end of our question and answer session and the conclusion of todays call. You may now disconnect. Your lines. Thank you for your participation and have a wonderful day.