Q1 2020 Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to foot locker first quarter 2020 financial results Conference call.
Hi, all participants are any listen only mode. Later, we will conduct a question and answer session.
They contain forward looking statements that reflect management's current views about future events and financial performance.
Management undertakes no obligation to update these forward looking statements, which are based on many assumptions and factors, including the impact of cope with my team effects of currency fluctuations customer preferences, economic and market conditions worldwide and other risks and uncertainties described more fully.
The company's press release.
Reports filed with the FCC, including most recently filed form 10-K and form 10-Q I.
Any changes inside.
Options or factors could pretty significantly different results and actual results may differ materially from those contained in the forward looking statements.
Please note that this conference call is being recorded I will now turn the call over to your host for today, Jim Lance Vice President corporate Finance and Investor Relations Mr. Lance you may begin.
Thanks, operator.
Welcome everyone to Footlocker, Inc.'s first quarter earnings conference call.
As reported in todays earnings release, the company reported a first quarter net loss, so $98 million compared to net income of $172 million.
For the first quarter last year.
On a per share basis, but lost in the first quarter was 93 cents.
Compared to earnings per share of $1.52 cents last year.
This years quarter includes 827 million dollar tax charge related to a periodic revaluation of certain intellectual property rights pursuant to a non U.S. advanced pricing agreement and a 1 billion dollar charge related to the pension matter. We have previously discussed.
Last year. The Q1 results included an incremental 1 million dollar charge related to the same pension matter.
Excluding these items on a non-GAAP basis. The first quarter loss was 67 cents per share compared to earnings per share of $1.53 cents last year.
Unless otherwise noted the figure some rates mentioned during our call today will be based on non-GAAP results.
A reconciliation of GAAP to non-GAAP results is included in this mornings press release.
The flow today's call will be that different than usual.
Coal is being hosted remotely in order to uphold shelter in place orders since social distancing protocols.
Presenters, calling in from different locations.
Well begin our prepared remarks, with Dick Johnson, Chairman and Chief Executive Officer, who will provide an update on how foot lockers navigating the koeppen might see pandemic.
Staying connected with our customers and working to best position the business operationally and financially in the months ahead.
As part of this Elizabeth Norbert.
Senior Vice President and Chief Human Resources Officer will highlight steps, we're taking to protect the health and safety of our team members and customers as we continue to reopen our global store fleet.
Lauren Peters Executive Vice President and Chief Financial Officer will then review our first quarter results.
And discuss the steps we've taken to maximize liquidity.
Control costs and best positioned the business for the near and longer term.
Following our prepared remarks, Dick and Lauren will respond to your questions.
With that I'll now turn it over two decades.
Thank you Jim good morning, everyone.
I Hope you are all healthy unsafe.
I would like to start by acknowledging what an unprecedented time, we're living in the severe impact of covert 19, and all of our communities.
From the devastating loss was felt by so many families around the world to the economic challenges facing our team members customers the retail industry and the broader world.
Like so many of our peers across retail our business has been significantly disrupted by the pandemic and our response to it starting with the extraordinary step of closing our stores.
Normally we would use this call to review what we saw during the quarter.
Instead, we will use most of our prepared remarks today to update you on the actions we have taken any additional measures we are considering against this backdrop.
Control the factors that weekend in our business and the guide the business forward.
Moving.
Protecting the health of our team members and customers.
Fully leveraging the investments we've made in technology and our digital capabilities over the past several years to ensure business continuity, which enables us to stay connected with our customers and serve them online.
Protecting our financial position and flexibility.
And ensuring we are well positioned to safely reopened our stores and operate in the coming month.
With that said I would like to thank her team members around the globe for their efforts to support our business and our customers. During this time.
Thanks to their dedication we were able to continue serving our sneaker obsessed and youth culture communities and keep our business operating during this critical time.
Today, we are in the early stages, where road to recovery.
Our plan is to build.
Good back and do better than before.
Whereas we like to refer to it build back better.
As of today, we have already reopened over 1400 stores approximately 45% of our fleet around the world with more scheduled to reopen as we aligned with local state government guidelines.
But also as we ensure that all additional store openings you know the internal framework we have created.
We are putting safety first making sure we are doing the right thing for our team members and customers.
The good news is that our customers clearly want to shop with us and thanks to the investments we have made to elevate our digital logistics capabilities, we were able to ramp up our direct to customer in social media channels to drive sales.
This was evident when we processed nearly 200000 orders in a single day.
To put that into perspective, it was not that long ago Wood processing 25000 orders through our DTC channels was considered a pea.
We are grateful to those team members, who enabled us to fulfill those orders without any interruption.
Both at our distribution centers and that the select stores, we utilized to fulfill boss or buy online ship from store orders.
[laughter] digital only focus has accelerated our evolution as an omni channel retailer.
Against our customer connections and we'll continue to benefit us into the future.
From a financial point of view Lauren and her team have done a tremendous job to ensure the company is well positioned to not only survived this crisis, but to come back as we entered in a position of strength.
We ended the quarter with a strong cash position.
Manageable levels of debt.
In a rational inventory position given the store closures.
To support our communities and contribute to covert 19 relief efforts are Champs sports newspaper banners launched never not an athlete.
Social media based initiative that inspired student athletes to share how they use sport to stay prepared.
Prove their skills and be creative during this time.
The initiative invited our customers to share on social channels, the ways in which they are never not enough.
To support Kobin 19 relief classes and into the donations from Champs sports to athletes for relief and funds for high schools to purchase gear from the East Bay team sale store.
For the back to school season, we have committed to a global give back more than $1.5 million in footwear across our geographies to use communities most affected by the pandemic.
We all know how important it is to look and feel your best.
And that translates into giving students the confidence to do their best.
With that let me give you a good of a deeper dive into some of the specific actions. We took it continued to take to navigate through the crisis.
First and foremost our top priority has been it continues to be the health and safety of our customers team members and their families.
In March we closed all of our stores in North America in there and most of Asia Pacific.
We also transition to a work from home environment for the vast majority of our office team members and were able to manage the business successfully largely because of our technology investments.
Cross our distribution centers customer contact centers offices in stores, we established procedures to ensure a safe working environment.
At the same time, we implemented a number of measures to address the significant reduction in sales manage the near and long term financial impact and enhance our liquidity.
We drew down another credit facility.
Reduced our full year planned capital expenditures by 50%.
Temporarily halted our share repurchase program.
After thoughtful consideration by our board earlier today, we announced the suspension of our quarterly cash dividend.
While returning capital to our shareholders continues to be one of our capital allocation priorities.
Given the current environment. We believe this is the prudent responsible action to take at this time and one that will ultimately enable us to create more shareholder value over the long term.
Our board will continue to evaluate our dividend policy on a quarterly basis.
With malls closed and stay at home orders in place across most of our markets.
Did not make payments other April <unk>.
We continue to work with our landlords to come up with a longer terms resolution for April in the coming month as retail marketplace evolves.
Our strong financial position enabled us to limit the financial impact on our global team members through the first six weeks of the pandemic by paying salaries to our store team members. Despite the closures.
However, without clear insight into when our stores would reopened and return to more normal operations, we announced further cash preservation measures to limit the negative impact on the company.
In April we reduced compensation for myself its senior leaders for the second quarter.
And the board suspended the cash portion of the director's compensation until further notice.
We also made the difficult decision to begin a furlough program for a majority of our part time store team members in North America as well as certain store team members in Australia in supply chain team members in the U.S.
For a load team members continue to receive their health care and certain other benefits.
It's unclear how long the furlough program will need to be in place.
However, we are working towards getting her team members back to work as soon as its feasible with some already back in place and connecting with customers.
We believe our strategic decision to continue paying our associates for an extended period of time is helping to accelerate our recovery into retailers top store tail.
From an inventory perspective, we've been working very closely with our vendor partners to align on the best path forward between supply and demand.
This is included canceling or delaying orders.
Adjusting future orders and securing or assistance to help clear the channel.
We anticipate a more promotional environment in fiscal 2020.
However, we are working with our vendor partners to ensure that we end the year in an appropriate in healthy inventory position.
Another important action, we took was creating a special covert 19 task force early in the crisis before the shelter in place orders in store closures.
This task force consisting of numbers from all of the company's functional areas initially focused on managing through the crisis and then switch to planning, how we would get ready to reopen.
I was with Norbert our chief Human Resources Officer has been leaving this important body of work.
So we ask her to join us today to share with use of more details about our journey to build back better.
Uh huh.
Thank you Jack Good morning, I'll, let me begin by echoing deck sentiment about this extraordinary time, we could not be more proud of our 50000 team members and their dedication to our customers their community and each other.
Today, I would like to address how we dealt with the principal challenge a business continuity virus containment and how that works plays into our path forward for recovery.
We have spent time as a team developing a framework that helps us plan, our recovery together with our rallying cry to build back better.
From the very beginning of this crisis as Dick mentioned, we had four priority I'll speak to two of them today.
Protecting our team members and protecting our customers.
In March we established a global emergency operation Task force to help us address the pandemic.
Given the breadth and diversity of our business. This task force was made up a key leaders from all areas of the business in every part of the world.
We mobilized quickly to implement new health and safety measures across our organization that remain in place today.
One of the first decisions, we made with to close our corporate office is globally and almost overnight working remotely became our new normal.
Well our stores were closed we focused our efforts across our distribution centers and customer support center to protect the health and safety of our team member.
We already had a strong health and safety focus and culture and the teams quickly implemented a number of changes to execute physical just didn't think increased cleaning in sanitation.
And we provided critical supplies, including hand, sanitizer disinfectant anti bacterial lights and based covering.
We also implemented flexible work practices and staggered work scheduling and of course, followed all government guideline.
Our call Center Ickes service centers and other essential areas, we implemented similar protocol.
We also implemented new policies designed to promote staying healthy mentally and physically.
This included providing tele health benefits paid time off for those who need it to care for themselves well I loved ones.
And access to a variety of resources in their local communities worldwide.
And looking at our journey ahead to build back better we are strategizing, our recovery from all angles. We have adopted a can we should we decision logic framework to guide our reopening Kate.
In terms of our stores to protect our customers and our team members. We have developed a playbook of protocols and procedures that will guide our global reopening.
These standards incorporate a guidance of government and health officials and locations around the world elevated by our own standard.
Communication to our workforce remains a critical component of our success.
Our store team members, we leveraged our internal learning and communication platform called lace up.
Divide important information company update and health and safety tests.
Lace up is used to train and reinforce customer service behavior through micro learning and gamification.
Measures, we are taking as we reopened each location include installing plexiglas barrier at checkout areas where required.
Limiting the number of team members and customers in store enforced in physical destined thing, providing hand, sanitizer and implementing enhance cleaning protocols.
In compliance with regional and local guideline, we are encouraging team members and customers to where faced covering.
As we look forward with our phase reopening we will continue to evaluate these standards to ensure we protect the health and safety of our team members and customers as the situation evolve.
We are being thoughtful and working to ensure that our team members and our customers feel safe.
As the Chief Human Resources office, there I know I speak for all of our team members globally. When I say that we are excited about reconnecting in person with our customers and elevating our omni channel customer engagement now I will turn it back over to deck to speak more about our path forward.
Thanks Elizabeth.
With that as context in late April we began our phased reopening with a handful of stores at the time.
First in Austria, Germany, Norway in the Netherlands in AMEA.
As well as in South Carolina in Oklahoma in North America.
To provide some perspective at quarter end, we had 169 stores open cross a fleet.
We learned a tremendous amount in those initial markets that has helped her team because we began to reopen more stores. During the first few weeks the second quarter.
As of yesterday, North America, we reopened 900 stores and 31 U.S. States in Canada.
In AMEA 16 of the 20 countries have a total of 421 open stores.
And then the Asia Pacific Region, 102 stores have reopened across every country. We are located in except Singapore.
We're pleased with the progress, we're making and the response of our customers.
A few weeks in you're beginning to see some trends emerge.
Patients that serve local communities both street level mall based have seen strong results.
While results at stores that are more dependent on tourism have been more challenging.
Taken together, while traffic is down customers are excited to be back in our stores and their intent to purchase is high which has led the meaningful improvements in conversion.
In every place we reopened we learn we pass those learnings back to the task force so that with each store. We reopened we can provide an even better experience.
With that said I want to stress that this process remains fluid.
Our team continues to work with the various governments in health authorities to ensure that we have the appropriate precautions and place to operate safely for associates and our customers.
As we continue to navigate the challenges of covert 19 and evolving retail landscape. We also remain focused on how to best position foot locker inc. for long term growth and profitability through the lens of our strategic imperatives.
I want to take a few moments to update you want to such initiatives.
First after a comprehensive assessment of our operations in the competitive landscape in Germany.
In May we decided to consolidate the runners point group business into our other operations in Europe in compliance with local legislation.
As part of this plan select runners point stores will be converted to either sidestep per foot locker stores with the approximately 40 remaining runners point stores in certain sidestep stores are expected to close.
In addition, we plan to restructure and consolidate the runners point and sidestep support the logistics functions into foot locker Europe's headquarters in the Netherlands in compliance with local legislation.
We expect this transition to occur largely over the remainder of fiscal 2020 inch wind down the runners point business by yearend.
We look forward to continuing to serve our runners point customers through our new sidestep footlocker stores and our online channels.
Next I want to update you on the initiative to combine Champs sports and East Bay under a single leadership structure and broaden the appeal to the sport obsessed high school athlete.
As part of the next phase of this evolution, we're restructuring positions in aligning several functions across the brands and plan to consolidate select you stay operations from Wassa, Wisconsin.
For the Champs Sports headquarters in Britain and Florida.
I want to thank our dedicated runners point and East Bay teams for their contributions to the company and the passion they demonstrate for sneaker and youth culture.
We are making every effort to transition as much tailwinds as possible to open rules the broader footlocker organization.
While these were difficult decisions, we believe they will make the company more efficient and allow us to deliver better experiences for our customers.
In summary, the current global crisis presents an opportunity to emerge as an even stronger leader with significant learnings across digital and the team that is ready to inspire and empower customers as the markets reopened around the world.
Our company has a strong financial position strategic partnerships with the best friends in the world and deep connections with our customers that we believe will position us to succeed as we get passed this unprecedented moment in time.
With that I'll now turn it over to Lauren.
Thank you Dick and good morning, everyone.
These are indeed unprecedented times, the required disciplined and prudent financial management to navigate successfully and emerge even stronger.
I'm proud of the progress our team has made so far to maximize our liquidity and financial flexibility control costs.
Carefully planned to best path forward during our phase reopening.
Recap, where we stand from a financial point of view, let's start with our balance sheet.
We began the fiscal year and a strong financial position was $907 million in cash and just $122 million of long term debt outstanding.
That's the potential impact of the Cove at 19 pandemic became more evident.
Look steps to bolster our cash balance and increase our liquidity.
First we took immediate actions to minimize nonessential spending including reductions in marketing extending payment terms limiting rent payments, reducing merchandise purchases and deferring incentive compensation for senior executives and certain other team members.
It's a precautionary measure to increase our cash position, we borrowed $330 million under our 400 million dollar credit facility.
We immediately reduced capital expenditures to essential projects and lowered our full year Capex plan.
In the first quarter, we invested $52 million in the business.
Well below our initial plan for the period.
For the full year, we now expect to spend $138 million on capital expenditures.
50% from our prior projection.
Included in this new plan or 20, new stores and 47, Remodels relocations of existing stores.
Down from the 65, new stores and 125 Remodels relocations, we planned at the beginning of the year.
Furthermore, we temporarily halted our share repurchase program.
Did not repurchased any shares this quarter under our $1.2 billion share repurchase authorization.
As Dick mentioned, our board also suspended our quarterly dividend program, beginning with the second quarter.
As a reminder that dividend for the first quarter was declared by our board prior to the Cove at 19 pandemic.
I want to reiterate their board will continue to evaluate our dividend policy on a quarterly basis.
Taking all these actions together we ended the quarter in a strong position with over $1 billion of cash and cash equivalents.
Well this is a decrease of $114 million from the end of Q1 last year.
It reflects an increase of $105 million since the start of 2020.
Moving on to inventory.
We ended the first quarter.
Point $5 billion on hand.
Hey, 20.4% increase over last year's first quarter.
Sound result, when compared to the 43.4% decrease in total sales.
The current crisis in a healthy position.
Turning to the income statement.
We reported a comparable sales decline of 42.8%.
Double digit declines across every region and banner.
Given by our store channels and East Bay.
Breaking our sales down by channel our stores posted 853.4% clump decline.
R.D.T.C. channel strengthened as we progress through the quarter.
Posted they 14.3% gain.
I say per cent of sales D.T.C. rose to 30.8% of sales up from 15.4% last year.
With most of our stores close since March 17th or approximately half of the court or the covert 19 pandemic weighed heavily on our results as customers held back on nonessential items.
Trends in our business began to improve in early April.
When we saw significant ramp up in our digital channel in fact approaching triple digit comps driven by pent up demand for on trend styles and several high he launches.
Classic basketball styles remained the most sought after with air force ones and H.A. ones being the key drivers across men's women's and kids.
The Jordan retro business with strong and benefited from the Michael Jordan Dock you series the last dance.
Ramadi does easy continued to resonate with our customers with each release selling out.
Moving Downing income statement or gross margin decrease to 23 per cent of sales from 33.2% and the prior year first quarter.
The lower rate was driven by 850 basis points of d. leverage on or occupancy and buyers compensation expenses.
And 170 basis point decrease in our merchandise margin.
Looking at her occupancy and buyers compensation expenses.
While we did not make our April rent payments based on the accounting rules, we did not reduce occupancy expense as our rent negotiations with our landlords are still in process.
The lower merchandise margin was driven by the higher penetration of digital sales, which carry a lower margin rate.
As well as increased promotions.
We increased our promotional activity in response to the environment.
To drive traffic to our digital sites, both in the U.S. on abroad, and in order to clear product and work towards a healthy inventory position.
S G.N.A. expense dollars decreased 24% or $100 million compared to the prior year.
However, as they per cent of sales S.G.N.A. rose to 26.9% for 20 per cent last year.
That's the quarter progressed, we reduced our variable expenses, such as bonus accruals marketing and travel among a long list of expense categories to better aligned with sales. However, the magnitude of the sales slowdown led to the to leverage.
We believe cash preservation will remain of focus for the remainder of fiscal 2020.
That in mind, our team will continue to manage our expenses diligently as we navigate through the pandemic and the reopening of our stores.
Depreciation expense was $44 million in the quarter flat to last year.
We incurred $1 million of interest expense and the first quarter compared to $4 million of interest income in the prior year.
Which reflects or increase that following the draw down on her credit facility and a reduction in interest rates earned on our cash balances.
Our tax rate came in at 22%.
This is 440 basis points lower than last year due to the level and mix of losses in the various tax jurisdictions, where we operate.
But you think about the full year tax rate there may be significant quarterly shifts and the rate due to shifts in income.
And neither the initial outlook, nor the first quarter rate should be relied on it as a guide post for the full year.
We look at the first quarter from a cash flow perspective, we posted negative free cash flow of $174 million.
Comprised of negative cash flow from operations of $122 million.
$52 million of cap Alex.
As we look forward, we believe we can minimize the level of cash burn as we make progress reopening our stores and as customers continued to engage with us and become comfortable shopping in the new environment.
Well these actions reflect our commitment to pulling all the lovers, we can to protect the health of our business.
In light of the ongoing uncertainty and the global retail environment, we are not providing updated guidance for fiscal 2020.
Please note not included in today's results are impairment considerations. The company is evaluating approximately 70 stores with long lived tangible assets.
$50 million for potential impairment.
Approximately half of the locations relate to runners point and sidestepped stores, but the companies seeking to exit.
As part of the broader plan to restructure those operations.
Any impairment charges recorded will be excluded from our nongaap results consistent with our past practice.
Before we move onto your questions I want to reiterate their first priority is the health and safety of our team and our customers.
We believe we are taking all the necessary steps to make sure associates and customers feel safe coming into our stores.
These are challenging times, but our customers are resilient and passionate about sneakers and youth culture, and we remain focused on inspiring and empowering them.
We have a strong financial position strategic relationships with our vendor partners and deep connections with our customers. We believe we are well positioned to not only navigate through this crisis, but emerge even stronger.
But that operator, please open up the call for questions.
Thank you ladies and gentlemen, we will now begin to question and answer session it'd be would like to register question. Please press start then the number one on your telephone keypad.
If your question has been answered or you would like to withdraw your registration crestar than to you.
If you are using a speaker phone please pick up your handset before entering your request once again, if you would like to register question. Please press start then one on your telephone keypad.
The first question today comes from.
<unk> Oh Wells Fargo. Please go ahead.
Hey, good morning.
Questions, Yeah, I want to ask.
About 45% of your stores times.
Thus far.
Or any.
Color you can give around the performance of those stores, yes. They reopened you know how are they trendy.
Superior last year.
I sort of help around yeah, but the recovery are seeing webstore reopens would be.
But thanks, I Hope you and your family are all health and safety and strong through this lock, though period, but yeah. We've got about 45% of our stores open you know we've seen.
The Reopenings are fairly situational right. We're we're malls, you're screwed stores open and there are supported supporting a a local community and the the shelter in place orders have expired or been modified to allow retail <unk>. Good penetration are good presence of because.
Schumer coming into the doors, you know, we're not going to give the comparative you're on your just we don't get a quarter to date updates, but to say that there's pent up to me and then there's certainly some.
Stimulus money and tax refund money, that's been in People's pockets for a while so they they certainly are excited to get out in shop, you know, it's a it's a new normal what's the next normal for our store associates, you know everything that we've been grain level about dealing with customers you know exceptional customer service et cetera has to be done in the context.
Distancing, how do we how we treat those customers so.
Cases that are more driven by.
Yeah.
Vacationers and tourist traffic, obviously more difficult situations you know the traffic in those malls <unk> are down, but again, we see a high intentionality of the people that are coming to the store. So the conversion rate is high.
Hi, he product in their focus a marked on product quite honestly are sort of a tale of two cities, where the high heat really relevant product is is is blown up both digitally and in the stores that we reopen and then the places that are merchant team has been an aggressive with mark builds we're seeing.
The consumer respond to those as well so I think it bodes well for that's getting to a really healthy inventory position and each market. The we open each store we will we learn from so that the future stores you know the other half rubber 50% of the too well hope we have a.
Better opening cadence than even the the first group of source Yep.
Got it and just a quick.
Question.
I believe you gave the the revised store opening that'd be model plans for the <unk> tell us how many stores are expected to close permanently.
Yeah original guidance was 150 and.
<unk>.
Maybe some malls elect not to reopen and we've got the R.P.G. stores that were described 150 to 170, if I had to call. It today.
Got it thanks, and hope hope, you're all things I've unhealthy before.
<unk>.
The next question comes from <unk> Raymond James Please go ahead.
Oh, yes. Good morning, everyone. It's it's great to hear voices and I'm glad that you're doing well.
The first question I guess to follow the Palm question is just there's a one of the biggest concerns like you're from investors today.
You know some of your better stores Orange females interfere with that many of these malls won't reopened or real estate somebody's real estate locations could all be appeared meaningfully on the back to the best right. So I guess my bigger question is how how do you assessed that risk number one and the number two maybe given that you've been very adept at.
Relocating stores over the last 20 years closing stores or would that make sense opening source strip malls cross the across the road pretty maybe give us a sense of the lead time. It takes for you to take a store from one location moving to another in the <unk> recovery that you typically get in terms of sales when you do that next.
Yeah, we are too I think that does a great job of assessing the the risk involved with all of the malls from the the plus malls pretty off malls, yeah, and we certainly see that there were some risk coming out of this is the to evaluate each market part of the the solution is just what you talked about moving off more.
If necessary.
One of the things that we've learned over time is that when malls go away.
Somewhere in those neighborhoods doesn't go away, but the customers their wants to shop, and they're very engaged with us in the shopping <unk> product that we bring for them. So you know this maybe a bit of an accelerated put our team is certainly looking at places off more where we have the opportunity to pivot their evaluating you know what we believe the longevity.
The malls or it's it's an ongoing.
Body of work that are realistic team does but it certainly was quoted prices is put it in accelerants around it and some of them places, where we think that there is ruskin malls and you know the we've captured rate.
You know is a is a difficult thing to talk about sometimes we might have three stores in the mall, we choose to replace you know eight mile loaded in Detroit is a good example, where we had three doors in the mall, we chose to replace it with just a footlocker across the highway.
You know so the the recapture rate from the three we certainly don't get all of it but we expect to get a a good percentage of it part of it also depends on how quickly the competition that might be in the mall either decide makes their decision or leaves the mall or closes you know that those are all options. So it's it's it's similar.
<unk> strategy that we've had to to understand the strength and the ultimate malls and tried to do risk that part of the business.
No one thing that it's pretty clear as the consumers in a lot of those areas are not direct to consumer shoppers.
There are a higher propensity of cash they're not necessarily a willing to have product delivered to their their front door. So we've got a lot of opportunities as it relates to nomadic retail as it relates to pop up retail.
As it relates to to off more pivot pivots to to continue to take care about customer.
<unk> hugely helpful and then might might follow up questions. Just you know this business historically <unk> brand heat product to eat et cetera, and I'm just trying to get your thoughts about how he can exist in the back off of this year and a world were inventories elevated across most <unk>.
Animals, including all price and <unk>. Thank you.
Yeah, <unk>, there's a lot of great product coming down the pipeline you know across the second quarter and across the back yeah.
You know certainly there will be a.
A lot of inventory I guess is the best technical term I can use to describe it but but that bloody isn't against the high end product right. The high he product that we've launched that others have lunch you know 'cause clearly selling yeah. So the consumer our consumer has a a huge appetite you know we saw it as a as more and talked about there there were a couple.
Weeks of.
The consumers I think in the the world being a little bit shell shocked as.
The economy Brown to a halt in the middle March but his things started people started to understand what this lock don't felt like and what are they couldn't get their hands on through the digital channel. Yeah. We saw a tremendous uptake in the product and I fully expect that to to continue in the back yeah, nor merchant seem is.
Second to none nail balance the need to push through and Mark though product I thought long did a nice job explaining you know sort of the change that we expect to to see from you know the mix of Mark those in the high end product certainly.
<unk>, an ending the year, the really healthy productive inventory position.
Oh, thanks very much.
Which is very good about the work that those <unk> tying around fat content and end up looking quiet or the balance something here.
And I guess, so just add myth that you know, we're working really closely with our Bender partners.
They've got the same they've got the same concerning the that we get through the industry gets through this inventory and we we position strongly in well from the start of 2021.
As an industry.
<unk> wishing you the best.
<unk> stay healthy.
The next question come from Aaron Murphy Piper Sandler. Please go ahead.
Great. Thanks, Good morning, I follow up Lauren for you on inventory and just kind of the medication actions that you've been taking you guys talked about being more promotional it can you just talk about how you have approached back half cancellations return to vendors and then how is that he didn't that inventory and look for the balance the beer.
Yeah. So all of those factors have been worked on over the last many weeks between our workshops on our our event or partners.
I'm looking at the content looking at what's on the order what hadn't yet been produced all of these things to manage through both level.
And quality of the content to maximize that content quality.
For the balance of the period. So you know what actions you take on the inventory will be dependent upon I mean, how how the customers responding to them I I think a stick authority to scrap that quite well and and so.
That's last answered to not question.
So yeah, Okay huh.
Hmm you saw that with doors close for about half of the first quarter that we built in inventory possession up about 20%. Your every year and we're very focused on managing a follow up that product against the store we oh.
There are multiple scenarios that we plan against but I think we've demonstrated how bearing nimble we are and adjusting that.
Responding to how our customers responded to the products that we we feel good about the plants that we've got in place.
Managing three or two a healthy position to set a separately welfare 2021.
Yeah.
Did it really is connected to you know our team is is really connected with our vendor partners as we we make these decisions and.
Work through the options on what the what level of inventory, we can move through et cetera. So it's it's a two way street with our vendor partners and obviously, how the consumer reacts once they come back out we'll we'll be the the third factor there.
I guess I'm trying to understand it that kind of 20 per cent growth in Q1. If you think you wanted the peak heard his cute because the stores are now reopening and then you kind of work at down from there just trying to understand a little bit more on the new merits and then the by follow up question. If you'd be reopened story are you taking cash in store. Thank you.
Hmm.
Level of inventory very much affected by how the doors ramp up.
Yeah, and your assumption around whether or not there's any recurrent around the virus that would cause them to need to close it down to bring the period of time.
So we we've done multiple scenario of of modeling.
Hands will react accordingly, as we we read the market, but if you made an assumption that doors.
Continue to ramp up in there isn't a closure at some point then you would expect to ramp down O.B.N.'s and touring up at the balance of.
Near versus L.Y.
And yes, we're <unk>, we are taking cash in the summers yes, okay.
Thank you.
But that.
Thanks to stay healthy.
The next question is from Chris that's yeah, what such please go ahead.
Good morning, everyone thinks she took my questions and I'm I'm glad all well I guess, just first plus she's actually to first question for me just on the digital by the business how did how's the digital side of the business performing in May if you're gonna entity power about that in no you are called out.
Accelerated center <unk>, how about performed in May if you could I just on the lawn side of the product just as you talk to your benders or they eat the lang any potential launches product.
As you move through the balance of the on for back to school bank holding units back or they pushing things back further the holiday just how does that cadence on launching state and product look for the balance of the year.
Yeah of course, Oh answer the the second question first and then we'll get back to the digital me, but you know the the launch calendars always pretty flew would I I don't necessarily believe that things are being held back up and put the timing of launches you'll always influx. There there are no no issues with supply chain. So we expect.
The the launch calendar to stay fairly steady as we see it today, but I I know you follow the industry. So you know that launches do occasionally moved from quarter to quarter month to month weekend, the weekend and you know the.
Our teams, there's really close to to to the folks that the drive to launch cheap both of US under partners are all about vendor partners of the drug Lord sheet, and you're Gonna I don't think there's any holding back I think there could possibly be some quick strikes that find their way into the mix going forward, but you know think the the kittens looks I think really.
Strong as we worked through two two in the back chefs and you'll get it. This is all based on the premise that the world continues to to normalize in in this this next normal. So you know we don't give a quarter to big color going back to your question <unk> on the digital really but the energy the that we.
Gained in the the People's focus on digital in frankly, our teams ability to ramp up some of the digital efforts. When you only have one channel to deal with you you put a lot of energy into it. So I think we learned a lot throughout April may cause a better on the channel retail or it clearly.
He is we think about social distancing and how we utilize or digital presents to to launch she'd product et cetera, we expect or digital penetration to continue to expand so you know good it will be a balance as we learn what this next normal is in terms of digital versus physical presence, but so.
We we got some new consumers that are comfortable shopping digitally at the same time, we know the customers are really happy to be back in the stores. So we expect both channels to continue to accelerate.
Got it. Thank you and just one minor fall off if I could just on on margin born in any way you can think about this conceptually we think about gross profit the bigger oppressor really coming from d. leverage versus product margin related to promotional activity maximum just trying to maybe any point combine about the dynamics.
Of those as we move forward.
Yeah. So <unk>, we'll reiterate what we saw in Q1 that 10.2% decline in the rate came 815 from D. leverage on affects down in 170 out of.
Merchandise margin, which was driven largely by the penetration of the D.T.C. business.
Which has carried a lower margin rate.
Merchandise margin rate, but comparable.
Smart and raised on under normal conditions. So that that was balance we were a bit more promotional though in the early period of.
But the closer and a quarter and D.T.C.
So it was a balance.
I am go forward, we know we as we've described here a couple of time, we do expect that there won't be a level of promotionality in in the market folks are dealing with their inventory levels.
And some competitors will will be on a place where there really wanting to turn that inventory into cash quickly and that that's likely to not as fast and in some level of promotional activity that we need to take into consideration.
Oh, there's gonna be it dynamic until we find a new levels.
And next question comes from Michael Binetti credits. Please. Please go ahead.
You guys. Good morning, Thanks for taking a questions here.
I want to go back to your comment on the digital again that you know the trends, reaching triple digits near Triple digits in April very very good to hear that I know you don't Wanna talk to me, but you did say you expect is trends could continue maybe you could just give us an idea how digital trends are in the markets, where you know where the stores or opening.
I was guns in context from around the retail sector on that this week and be kind of interesting to hear what you guys fit and then could you give us an idea of what the digital trends looks like if you were to exclude East Bay I know you don't like to break up the change, but obviously that businesses focused on.
Things like High School and college team sports that are not exist and right now so I think it would help us to understand how much of that 14% total digital growth rate.
Was held back by those very obvious category disruptions versus the core of the business.
Yeah, you're right I don't like to break into poverty in in talk about specific banners you know clearly they use the business from a performance side of things. It has been a little bit more difficult than you know <unk> I'm a believer I think we're all believers the sports going to make a comeback in you know the big question is what that looks like.
So you know I appreciate the question, Michael but I won't break apart the the the east Big business for you and you think that you know our job is to figure out how to to drive that manner. It's part of the reason that were.
Accelerating our our effort to to get a closer to the the chip sports spread.
We know that the the the.
She target customer in both of those banners is the same Kid you know they are alpha athlete in you know the they really accelerate for excel on the field in the core to play but they also have a an incredible a casual lifestyle that they like to lead a and that's where the the.
Will generate some some really positive connectivity in I think the level not an athlete a campaign that the Champs newspaper work during the the second quarter is a great example of how both banners speak to that consumer.
Hmm <unk>, we're seeing the that are digital business continues to be strong even in markets, where we open stores.
So there's this belief that the the multi channel shoppers best possible shopper that you can have.
<unk> certainly people that are not comfortable yet yeah, we talked about traffic being though we're seeing people not necessarily comfortable being out in public and being out in the malls. So they they still are continuing to to take advantage of the strong digital offering them a strong digital president presence in social media presence that we've got.
To interact with us so again <unk>.
Really look at this you know and I I don't know that we'll ever find silver linings in the price is like this but one of the real positives for US is the strength, we've gained or will continue to gain as an army channel retailer, where you know we'll use our digital assets to drive people to the stores will use our store assets to make sure that were connecting with people is given.
Them to look at our digital in social content. So you know good I I think that the consumer has become more adaptive in more comfortable to shop across channels for us.
There are seen that in markets, where we have a stores opened in in still strong presence.
Gotcha.
<unk> learn if I could ask your file you know I know, you've got pretty clearly defined I.R.R. and R.Y. hurtle rates that you hold the stores too.
Do you need to review those frameworks in the in the post <unk>.
[noise] Oh, we we still like a restaurant return our investments in the business. So so hurdle I'm not looking to change, though but.
We we will be very thoughtful about how to invest to bask surface customer both physically and digitally modified our our top x.
We very much tick, though thoughts into consideration about where we traveled.
I'm wanting to make sure that we are putting our very best foot forward with our customer about digitally and physically.
Thank you.
And our last quite healthy, but you will come from.
Hi last question today will come from Susan Anderson F.B. Riley. Please go ahead.
[noise] Hi, good morning, Thanks for taking my question I was kind of curious it sounds like obviously the high heat products are performing while but are you seeing any other trends across your product category and then also maybe if you could talk a little bit about the performance of apparel on both the digital side and then as.
Doors open and then if you're seeing any variants in trends among men women and kids both online and then as dogs have reopened.
Yeah, the the trends in store, obviously, Susan Thanks for the question the trends in store are pretty quick to.
I wouldn't want to necessarily comment about what we're we're seeing and story up because it's it's you know we open up more and more stores everyday but turns were very similar online and then store out of the initial the earliest stores that we had opened you know the the thing that we've seen his his next their product continues to be huh.
Running silhouettes, you know certainly in the the European market running so let's are are really really strong I don't know if people are actually being more active or they're thinking about being more active in this sort of.
<unk> environment or or a shelter and place environment. So you know we've seen strength there certainly the ultra boost and then M.D. from commodity does long with the air mix product. The Pegasus 37, you know great product that just launched you know 37th year of a of a great shoes that.
No continues to sort of displaying the classic comfortable wonder apparel continued to you know in the corridor apparel continued to be a little bit difficult.
A little Pup in the parole in in positive Miss a round the all star game in Chicago apparel use more difficult online for our consumer. They really are are more focused on what we're.
We think about opening up the stores and some of the promotional activities that Laurent is talked about certainly making sure that we we get our Perl mix right will be will be critical in you know that's that's one of the the inventory challenges that will face that you're clearly.
As we started to lock down in in slow down through the stores. We've got a lot of the early spring.
Apparently I mean in those were opening stores were clue transitioning into some of which is a t. shirt in the short term for our consumer so making sure that we managed through that that spring inventory, while we expect a consumer with with new some of goods will be will be the challenge.
The the trends across men's women's and kids you know the the the vast majority of the high heat product comes in men's and kids. So that that is really been the accelerate their Susan a women's has had some he you know some of the the.
Real product and some of the the heritage basketball product is certainly a band appealing to her yes have similar running silhouettes on the footwear side, we've seen a pretty good up picks across all three of those families and business for men swimmers and kids. So yeah men's rooms, and kids, who have all had a pretty good run in yeah.
One of the interesting things that we're seeing is that the kids business has been really healthy as we've started to reopen below the stores that we reopened before the end of the corridor. There's people were getting healthy we're certainly taking care of their their kids, who you know maybe a few to grow and have a new treat for you know.
Six seven weeks whatever the the shelter and placed on them. So you know early days in the store business Yup, but you know that's how I'd sort of some of what we're seeing them from a men's women's and kids and then on the apparel front Susan.
[noise] great. That's very helpful. If I could just add one follow up maybe on just the F.D.A.R. costs kind of looking out you guys I've done a lot of work there I guess, particularly as a stores start to reopen and associates come back how can we think about just the cost structure S.T.A.F.C.N.N. second quarter in the back here.
You know or any of those lower costs, I guess, particularly look out to the back half going to the you know carrying threat. Thanks.
Well, well very carefully and are very carefully managing the expense side of the equation at stores re ran out.
So we're very carefully managing labor hours that go back into the store.
And you know every other variable expenses, we will turn that that far set on very.
Very cost effective way, we we we won't that turn the tap on full bore so things like travel marketing.
Any variable.
Is really being looked at quite closely.
Great. Thanks, so much help everyone stayed eight unhealthy.
Q as well Susan Thank you.
But that can create our question and answer session I would like to turn the conference back over to Mr. Then burning closing remarks.
Thank you for joining us today.
He's doing this again for next earn each call, which we use dissipate will take place at nine am on Friday August 21st.
The call will follow the release of our second quarter results earlier that morning.
Thanks, again and be well.
Thank you ladies and gentlemen, that's concludes today's conference to thank you for participating you may not disconnect.