Q1 2020 Earnings Call

This significant cash position also reflect actions that we took in April after our recent financing to begin to catch up on a portion of our accounts payable.

We completed that process after quarter in in May and at this point we are completely current on our accounts payable.

I would not like to provide an update on our store real things.

We began reopening stores on May eleventh and so far. We have reopened 332 stores as of tomorrow that number increased to approximately 400.

As you would expect the situation is dynamic, but we are anticipating that we will reopen most of the balance of the Chain by the middle of June.

For the stores. We have we open today. We have been surprised and pleased with the traffic and sales that we have seen.

These stores are experiencing sales levels that are ahead of the comparable period last year.

There is clearly pent-up demand and we do not know how long this sales Trend will continue also as we reopen. We are marking down the merchandise in the stores and offering very compelling values.

You would expect the sales Trends to motivate as we sell through this merchandise.

With that said let me make two points.

First as an off-price retailer, we are pleased with what we have seen. We are excited by the chance to turn our inventory and to pursue great opportunistic buys and what we expect will be a very strong of price by an environment.

Secondly be all this initial rebooting. We recognize that there is considerable uncertainty ahead. But we are current on payables. We have like inventories and we have ample liquidity. So we are well-positioned to chase the sales Trend or to pull back based on whatever situation we face.

The most important priority as we have reopened stores has been to ensure very high standards for safety and social distancing.

During the second. Hand and his team is some terrific to develop a detailed safety and social distancing program for our stores. This includes a combination of signage personal protection equipment and new operating procedures for stores.

When it comes to social distancing, we are somewhat helped by the fact that our stores are typically off more and in most cases are much larger than many of our peers.

As we have we open stores we have continued to look for ways to make adjustments to improve their safety and social distancing program.

The safety of our Associates and customers will continue to be the overriding priority for us.

In his remarks later in the school film will provide more detail on the first quarter.

But I would like to move on now to look a little further ahead to talk about what the retail world might look like in the next six twelve or eighteen months off. This means for our full potential strategy and what actions we are taking the position ourselves.

Is only have already mentioned we expect the next few months to be extremely promotional as retailers attempt to rebuild traffic to their stores and to turn their inventory.

This is likely to be exacerbated by some struggling retailers closing large numbers of stores and liquidating their merchandise.

We believe that the inventory Reserve we set up at the end of the first quarter will enable us to aggressively compete in this environment.

Beyond this initial. It is very difficult to predict what will happen.

It is possible even likely that the aftermath of the pandemic will lead to conditions that are very favorable to off-price a weak economy. He's with a customer looking for Great Value a weakened competitive set especially in the department and Specialty Store channels and a very attractive opportunistic off of price by environment.

We are optimistic about the opportunities ahead of us. But we recognize that it is important to be patient and appropriately cautious. We know that our long-term substance will not be defined by this quarter or even the rest of this year rather. It will depend on a steady March towards our full potential this means getting a bad being patient and taking advantage of the opportunities as they come.

During a fourth-quarter call in March. I described in some detail are off price for potential strategy. The essence of this strategy is to offer our customers back even stronger merchandising value by becoming more of price meaning more flexible leaner and more opportunistic.

In the environment we are headed into it is clear that this strategy will be more important than ever.

In this cool. I am not going to revisit all of the details of our offer price full potential strategy, but you should expect that over the next twelve to eighteen months. We will pass to the key elements of this strategy with even greater focus and bigger than we had previously planned.

The key message is that in this situation where we are likely to be faced with significant opportunity but also considerable uncertainty the actual application for us to be even more off price more flexible leaner and more opportunistic.

Let me give you a few specific examples first example, the guy described in March we intend to build more faith into the business office means planning our sales conservatively then being ready to Chase Sales if the trend is there or to pull back the trend is week.

As we emerge from the pandemic there should be plenty of availability. So we will plan our sales even more conservatively knowing that we should be able to support life ahead of time sales with great opportunistic buys.

Check an example.

As I described earlier, we started the year with inventory levels down 19% This is a key element of our full potential strategy to run off with Lena inventories.

Given the level of uncertainty in the months ahead. We now plan to operate with even leaner inventory levels.

This will not only provide more flexibility to respond to the sales Trend but it should also try a faster terms and lower markdowns on any ahead of plan sales rep.

For example in March we talked about the need to increase operational flexibility including the need to get merchandise to the sales floor faster wage before the pandemic. We were thinking that this might take us a couple of years to accomplish, but now given the impact of the economic slowdown on the transportation industry. I think you may be able to get that much more rapidly.

We will have more to say about these topics and about our specific plans for the back half of the year when we report our second quarter results in August.

But for now, let me reiterate the key message in this environment where there is likely to be significant opportunity, but also considerable uncertainty the core principle of our price full potential strategy are going to be more important than ever.

With that I would now like to turn the call over to John to provide more detail on our financials.

Thanks, Michael and good morning everyone. Let me start with the review of the income statement with the first quarter total sales decreased 51% off sales through the first week of pistol fiscal March increased about 3% is Michael mentioned earlier in the call our decision to close all of our stores on March 22nd due to the covid-19 pandemic drove the sales decrease.

Gross margin rate was 2.0% versus last year's rate of 41.0% The gross margin decrease was driven primarily by a $272 million-dollar inventory charge taken in the first quarter. This charge was taken to account for an increase in inventory agent, which was caused by your extended store closures and in anticipation of a very promotional environment in the coming weeks and months under the retail method of accounting. We have adjusted our inventory valuation to reflect our best estimate of the markdowns that we plan to take to liquidate aged inventory. We expect most of these markdowns wage taken in the second quarter the inventory charge creates a reserve to provide for the anticipated markdowns. So at this point we do not expect any additional birth.

an expense on the

This aged inventory in the second quarter.

Product sourcing costs which include the cost of processing Goods through our supply chain and buying cost were $76 million in the first quarter of 2020 versus $79 million jobs here.

Adjusted sg&a, excluding management transition cost was $390 million versus $428 Million last year. The dollar decrease was primarily due to a reduction in store payroll.

Adjusted ebit excluding management transition costs decreased by 617 million to a negative $499 million driven primarily by the $272 inventory charge and the decrease in sales.

Depreciation and amortization excluding favorable lease costs increased for a million to 54 million interest expense, excluding the one point four million in non-cash interest on convertible notes remain flat versus last year's first-quarter at thirteen million.

The adjusted effective tax rate was 39% for the first quarter versus last year's first quarter adjusted effective tax rate of 18% off.

The increase in the tax rate is due primarily to the increased benefit from federal tax operating losses being carried back to offset income and previous years when the federal tax rate was 35% versus the current rate of 21% the benefit from this carry-back increase the tax rate by about 12% in the quarter, which was offset slightly by a decline in hiring credits.

Combined this resulted in an adjusted net loss excluding management transition cost of $312 million versus last year's adjusted. Net income of $85 million during the quarter in order to preserve our liquidity position during this period of store closures. We suspended our share repurchase program prior to this suspension. We repurchased approximately 244000 shares of stock for $50 off of $348 remaining on our share repurchase program, which remains suspended.

All this resulted in a diluted earnings per share loss of $5.09 versus income of $1 and fifteen cents last year adjusted diluted earnings per share was a loss of $4.76 versus a profit of a dollar $26 per share of last year's excluding the $0.04 of management transition costs.

Turning to our balance sheet at quarter-end. We had approximately 1.5 billion in cash $400 billion in borrowings on our abl and had unused credit availability of approximately $150 million during the quarter. We issued $805 million in five-year convertible unsecured notes with a 2.25% coupon and 32.5% conversion ratio as well as 300 million and 5 years senior secured notes with a 6.25% coupon off we ended the period with total debt of approximately 2.3 billion.

Merchandise inventories were $626 million versus $896 Million last year a 30% decrease. The decrease was made possible by aggressive actions to reduce inventory receipts during this period of extended store closures and was driven by the $272 mark down Reserve that we took off at the end of the quarter to cover future markdowns back and hold inventory was 22% of total inventory at the end of the first quarter of fiscal 2019 compared to twenty eight thousand at the end of the first quarter last year.

During the quarter. We open 12:00 new stores relocated 10 stores and close 3 stores for a total of 9 net new stores month. We ended the quarter with 736 stores in the second quarter. We expect to open 3 new stores with no expected closings for relocations dead in fiscal 2020. We now expect to open 64 new stores in close or relocate 26 stores. This would translate to $38 a month plan to be open in fiscal 2020. This is a reduction from our original store opening plan a 54 net new stores for fiscal 2020.

It's stores shifted from Spring 2022 fall 2020 and 16 stores shifted from Fall 2022 the spring of 2021.

We decided during the first quarter to delay these stores the capital expenditures associated with them in order to preserve our liquidity due to the impact of the covid-19 pandemic month. We continue to believe in our long-term store potential of at least 1,000 stores. And this shift should not be viewed as a change in a long-term outlook for store growth.

Cash flow provided by operations decreased by $326 million views of 272 million for the first quarter driven by lower. Net income due to our extended store closures, which more than offset the cash flow benefits of accounts payable and ripped deferrals that Capital expenditures were $57 for the first quarter of fiscal 28th, 29th. Capital expenditures are now planned to be approximately 260 million for fiscal 2020 versus our original plan of four hundred million this Thursday Kris, which was part of our strategy to preserve liquidity was primarily the result of deferrals of store openings remodels maintenance capex projects in corporate renovation projects.

Well, we are.

Not prepared to give sales and earnings guidance due to the uncertainty of the current environment. We can update you on certain fiscal 2020 cash flow and expensive items may be useful for your modeling purposes. As I just mentioned Capital expenditures net of landlord allowances are now expected to be approximately $2,060 million versus our previous Outlook of four hundred million, and we now expect to open 64 new stores while relocating or closing 26th or Thursday for a total of 38 new stores in fiscal 2020. This compares to our original plan of 18 new stores, if 54 net new stores and reflects the shift of 16 new stores from the fall of 2022 the spring of 2021.

Also depreciation and amortization expense exclusive affable. These costs is now expected to be approximately 230 million versus our previous guidance of $235 million and interest expense excluding 24 a million and non-cash interest on the convertible notes is now planned to be approximately eighty million choices previous guidance of $45 million. This increase in interest expense is due to the recent one point 1 billion high-yield and convertible note offerings in addition to the four thousand million a new borrowings on our abl

With that I will turn it over to Michael for closing remarks.

Thank you, Tom.

As I wrap up these remarks, I would like to thank the entire organization of Burlington.

Because of their hard work and commitment we are emerging from this pandemic stronger than ever before.

There was a lot of uncertainty ahead.

We are very well positioned to absorb the risks and take advantage of the great opportunities that lie ahead of us.

With that I will turn it over to the operator for your questions operator.

As a reminder to ask a question, you will need a press star one on your telephone to withdraw your question. Press the pound key. Please stand by while we can pile the Q&A roster.

Our first question comes from Matthew boss with JPMorgan your line is now

Matthew please. Check your mute button your line is open.

Thanks and congrats on a nice pace of initial reopening.

Michael could could you share any color on sales levels that you're seeing with the initial stores that you've reopened and any thoughts on the potential implications for the sales Trend going forward.

Good morning. Matt. Great to hear from you. Thank you for the for the question my answer by saying that the data set off we have is is very limited and covers a short period of time. In fact the way to think about this data set is that there are about 250 stores that have been open for approximately two weeks and there are about another 80 stores that have been open for just a week. So that's the data set that we have.

As I said in my remarks the sales levels in these stores have been strong running ahead of the comparable. Last year. We've seen this strong sales performance in every Market where we reopen and all our major businesses in these stores apparel accessories Footwear and home have experienced sales trends that are above the comfortable. Last year. I am moving on to the the second part of your question. What are the potential implications for the trend going forward? I have to say that at this point at this point. We just don't know but but there are a few reasons to be to be cautious firstly there's clearly sent up to the customer has been cooped up for the past eight weeks. Finally. She has a chance to get out. It's difficult to know how long this pent-up demand will last.

A second reason for caution, is that as we reopen stores? We're marking down our aged inventory. So we're offering very compelling values as we sell through Thursday clearance. The trend should naturally moderate. The final point I would make is that the promotional environment is only just warming up even after we've solved our clearance other retailers will still be promoting. I imagine so the next several months especially retailers that are closing stores and liquidating liquidating stock. This is likely to be a significant headwind for us for some time.

Look if I said in my remarks, we are surprised and pleased with Trend we're very happy to be turning our inventory and creating open to buy but we're being careful not to read too much into this early Trend. It's great, but we do not know how long it will last. So the action application for us is to remain Nimble flexible a merchant snow down. There was plenty of much nice available. So if it turns out it turns out that the sales Trend in the coming months is very strong. There will be ready to chase it and if not, we will go back.

That's great color John as a follow-up. You ended the first quarter with roughly 1.5 billion in cash and over 1.6 billion and liquidity. What's the best way to think about your cash burn rate as well as your ability to generate positive cash flow as stores reopen and hopefully begin to ramp up in incremental volume.

Thanks for your question. You have cash burn is is kind of a tricky question to answer just because our operating environment is so Dynamic and under these conditions as the environment changes the way we think about preserving. We're using our cash continues to change. So if back when our store is were closed off putting our new financing deal together, we shared a few things that are probably worth revisiting now at that time. We said with the four hundred million dollar drawdown that we had done plus our year-end cash balance about four hundred million that gave us the ability to operate for several months without Revenue given the steps that we take in to preserve liquidity. We also said that program after the transaction that was going to give us enough cash to last us Beyond it the end of fiscal 2020 without revenues.

Thankfully the operating environment looks quite different now. Our stores are reopening that's giving us some positive cash flow. And as that happens, we're also stepping up our store payroll epayroll bringing furloughed Associates back as we need them in addition. If our stores continue to reopen and stay open generating enough positive cash flow monthly plan of bringing back are furloughed corporate Associates and would also restore some of the temporary pay reductions. We put in place it over the last several weeks. We had been catching up on our temporary temporarily deferred accounts payable, and we're now fully current with our accounts payable.

With the uncertainty around the future, we're going to continue to manage cash very prudently referred Michael described how we plan to manage our inventory in this environment. We're going to continue to manage every element of our cash flow flow through the same filter looking to leverage our cash for great opportunities, but being careful not to get too far ahead of ourselves what we learn just what the new number is going to look like.

Great congrats again on the strong reopening and best of luck.

Thank you our next question cuz I'm like for a child with Wells Fargo your line is nope. Hey, good morning. Michael Jordan David. Hope you all are doing well, I guess Michael on first first one for you. I mean, I think we talked a lot about 9 and the off-price channel being able to take advantage of really strong buying environment. I'm gaining a lot of share. I guess. I'm curious your thoughts of the current situation. How does it compare to do you think things could play out the same way or their puts and takes kind of just kind of curious some your high-level thoughts sir.

Oh, good morning. Hi. Thank you for the question the underlying circumstances in 2008/2009. We're quite different but I I do think it's a valid comparison the Optima of the pandemic May well create many of the same conditions that followed thousand eight. Specifically, I think there's likely to be a huge availability of our price merchandising but great values competitive weakness in the department and National T store channels and a strong consumer need for Value over the next couple of years.

those conditions

Should be very good for all tries, but for the next several months, there's a lot of uncertainty and some major risks and challenges, you know, the rest of the year is going to be very tricky to navigate. There's one other point to keep in mind, you know, when comparing, uh, our current situation with 2008/2009. I think the the pivotal moment in the financial crisis was really when Lehman Brothers declared bankruptcy and after that the economy and retail sales and fall apart off the third and fourth quarters of 2008 as I recall were very difficult for all retailers including off price.

And the spring of 2009 wasn't wasn't great either. It wasn't until the back half of 2009. So whole year later that the off-price retailers really started off very strong High single-digit. Even low double-digit comes to our sales growth numbers from that point onwards really began to take market share. If you apply that same timing to the currency, it takes us too late spring or even summer of 2021. So so yes, I I actually agree. I think it's about a comparison. I think this could turn into a big opportunity for us price. But you know, one of the lessons from 2008 I think is important is it could take some time before the opportunity really materializes?

Thanks, Michael. It's super helpful, then follow up on pack and hold. Just curious how you're thinking about how your packet whole business going forward the off-price value environment over the next several months is going to be strong. Is there any opportunity to buy up more merchandise now to send the stores next year just overall your pack away strategy would be helpful.

Sure, actually, it's it's a it's a very timely question, you know at Burlington pack and hold historically has been a relatively small I would say being a relatively small part of our business office certainly compared with with some of our peers. But but even before the pandemic we've been looking at strategically increasing our go-forward level active or making me to pick up on a minute. We're actually planning to gradually do this to gradually grow a pack an old balance over the next few years. But but we now think we should accelerate this increase if if the price buying environment is as attractive as we expect it to be then the next couple of months could be the perfect time to strategically increase our package levels have to be clear. We would only pack away the very very best deals the very very best values. So yes, we do think there's a significant factor in all the opportunity.

We're working on the details of the specifics how to go up. I would expect that. We will have more to say on this topic in the second quarter call in or

next Bachelor

Thank you. Our next question comes from John Kernan with Colin your line is no open.

Hey, good morning, Michael John David get to see the excitement from your customers with the stores reopen.

Michael in your remarks you talked about the inventory Reserve at the end of the quarter. I know you put quite a bit of emphasis since you joined on the full potential strategy plan and then operating with leaner inventories for store was obviously a big part of that strategy. Just can you provide more details on the strategy behind the markdown Reserve now and then what that sets you up for the second half of the Year strategically and financially

Great. Yeah, well, good morning Sean. Thank you. Actually, like how you bring the question cuz the reserves as I'll explain the reserve does tie directly to our home but let me start by describing what the reserve is and then I'll talk about our current strategy underlying rationale for that strategy and how it links to full potential. Most of all the reserve we've taken isn't cover the cost of the markdowns that we expect to take on our existing inventory in the second quarter as John mentioned in his remarks. We're on the retail method of accounting. So this Reserve is expected to cover the entire cost of those future markdowns.

This is an important point when comparing with other retailers, you know, some retailers just reserved for a portion of the future Market in contrast our inventory Reserve covers the full cost of the towns that we expect to take in Q2.

Let me take a step back and talk about our clearance attitude. Let me start with the obvious Point. There's any inventory whether it's been a real school tax away had a warehouse or a Defender Warehouse is worth less now than it was in March. There are two reasons for this firstly and the easy to understand is that seasonal merchandise is now end of season and in the case of Easter merchandise, it's now out of season and secondly and this is frankly, the more important of the two is that there is a glut of all merchandise types. They were good that were made long before the pandemic that were scheduled to be delivered to retailers in March April May and even June

He's orders were cancelled. And and now he's Goods have no home every category not just seasonal but basic merchandise as well. This class of merchants line will force down the value of all infantry. The next several months. Every retailer has to recognize that the issue I have is worth less now than it was in March if they don't recognize that and if the market down then that sounds odd department and Specialty Store retail. It makes sense to try to minimize the impact of this by starting out which channel markdowns and then eventually taking steeper discounts to clear the goods. For us. There are two reasons. I would say much more aggressive.

Firstly is no.

Price retailer if you can turn your inventory you get the chance to go into the market and take advantage of great opportunist advised. It is only really the authorized retailers who can do this month. We can then slow these Goods to stores to generate sales that are over and above the sales generated from our existing inventory the full economics of of taking this approach and much more active and holding on to age merchandise watching it turns slowly and then reluctantly taking a sleeper mark down later on.

The second reason to be aggressive is that we recognize that the promotional environment is only going to get more intense as more and more retailers open back up and try to drive traffic to their stores and this promotional environment. They said it is going to be exacerbated in the coming months by store closures. In fact, he's so I guess if I put all that together and and sum it up I would say our current strategy is to turn our existing inventory as rapidly as possible and to use the liquidity that that will create to take advantage of optimistic buys and thereby driving from mental sales rep shaft. As I said earlier the inventory Reserve we've taken is expected to pay the for the full cost of the markdowns that we expect in the second quarter to support this this current strategy game.

That's out for Michael. I think logical follow-up would be just how long do you think it'll be before you start buying press merchandise so you can flow to the stores and you know, what should we expect for back to school and Holiday?

Sure, you know it's a good follow-up, of course, you know, it depends on frames, but for those stores that we for those stores that we will have reopened in May that would be about 400 stores. We anticipate that we were sold through the majority of that appearance by the second half of June. So three to four weeks from now wage for the remaining stores. In other words for Words that will open in June. It's obviously a little harder to stick or an active we open but if if these stores follow a similar path earlier openings. Then we we sell through the majority of expierence second. So in terms of buying fresh merchandising, we we are in the market we have opened home, but I would say, you know, Jennifer and her team of being and Surgical.

We're only going to be buying the very best deals, but we know our vendors know and the off-price customer certainly know that all the previous reference points for value pack need to be thrown out whatever value the merchandise at the beginning of March is not the values. It has now that principle is going to be top-of-mind around Merchants to go back into the off the market.

Great, that's helpful. Thanks and best of luck to everybody.

Thank you our next question cuz Lorraine Hutchinson with Bank of America. Your line is now open. Thanks. Good morning, John. Can you just spend a minute walking us through the first quarter p&l with with the focus on what these results mean if anything for your future performance.

Yep. Thanks Lorraine. That's a good question. It really was a crazy quarter and yet it is difficult, you know kind of get some context around our home the results that we report today. I think might be helpful. If just if I can walk through how they compared to how we had planned the quarter, you know, our guidance was based on how we had planned. It may be things came out quite different from the way we expected lots of puts and takes but I think there's a high level way of kind of putting the appropriate context around it. So $5 for the quarter or about six hundred million dollars below what we had originally planned and there were some big pieces sitting in both directions. We start with sales are total sales were down about 51% from our plan, which is you know about a billion dollars you take kind of a normal gross margin.

Flow-through rate that hurt or Ebay by about four hundred and thirty million dollars. We also took a $272 hit for our markdown Reserve which we took to the value of our inventory and as we've explained that charge is based on the estimated markdowns, we expect to take over the next few months to liquidate our aged inventory. So the combination of the same business and the gross margin impact from our store closures is about seven hundred million dollars negative of the event dollars offsetting to see a bit reduction. We had about a thousand ten million dollars an expense savings more than half of the expense savings were from the furloughs and the salary reductions that affected our store DC and corporate office. So she has remainder of the same came from managing the other components of sg&a expenses and from some covid-19 tax credits.

These savings were partially offset by about ten million dollars of incremental. Has costs of personal protective equipment additional cleaning and some assistance. We provided to furloughed Associates. So to do a quick recap, we lost about $430 from sales 270 million dollars from the inventory aging Reserve. We had extensive Savings of $110 incremental expenses of $10 reducing the net expense saved two hundred million that gets you to the e but impact of six hundred million dollars that we saw in the quarter negative impact as far as future performance. There's just so much uncertainty. There's not a lot I can say about that long as our sales rebuild it certainly are tend to get back to our previous performance levels as quickly as we can and I I really don't think the first quarter results would be much of an indicator of future.

I certainly hope that

Will be but I can say that by recording are aged inventory Reserve in the first quarter. We don't expect to incur additional markdowns in the future to clear that inventory. I hope that's helpful it is thanks and and I just wanted to follow up on John's question. It sounds like you'll be buying fresh goods for the majority of the fleet by you in time for them to school. How would you expect the mix of your business to change to reflect this new post covid-19 buyer meant

Sure, so you'd expect we're looking very closely at these books that we're seeing in the stores that we've reopened and she said she would actually seems Grandpa businesses. But as you'd expect when you dig below the surface, you see specific styles that they've type specific specific categories that are growing faster than others. And those are the things that are Merchants are really focusing off. But as we as we go back into the market for reasons to get into a lot of detail there, but but they both died same battles data that we're seeing the figure out which categories to go after

Thanks.

Thank you. Our next question comes from Kimberly greenberger with Morgan Stanley. Your line is now open great. Thank you so much. And thank you for the very comprehensive comments and thoughts Michael and John I thought they were very helpful. I wanted to ask about your distribution centres and day for second off price full potential strategy the increase in the operational flexibility, you know, getting merchandise on sales floor is faster speeds are all of the fees open and operational this point and are they able to replenish store inventory as it's selling down and then I have a follow-up to that song.

Sure Kimberly. Thank you for your question. Good morning. The question is the distribution centers are open Thursday. They all float from device to the stores that have reopened. Now, there are there are handfuls, you know, actually 4,000 stores stores that we bought it started. So strongly out of the block their sales Prem was so strong as we reopen them. They're they're running very low on inventory and it's taking a little bit of time just for those couple of dozen stores to back up. But but the answer your question is, yes, we all know right to our schools.

Okay, great. That sounds like the high-class problem Michael in terms of the follow-up. I'm wondering if you could just expand a little bit on the timing that you had initially planned with being able to pursue the end-to-end strategy of getting the merchandise to the sales floor faster wage. Obviously talked about the economic slowdown as in Packy impacting the freight industry and you might be able to get to this goal faster than you thought. So, I'm just wondering if you can talk about the the blocks the building blocks of executing this strategy and if you have if you think you might be able to see any sort of early it's later on in 2020. Thanks so much.

Sure.

So yeah, as you as you said we back back in the call and Mark, we have identified more flexibility operational as a key, a full potential strike. Obviously, a lot of that is this a distribution centers Transit time doors, et cetera being a sort of flashback actually moved because wage that kind of thing now, we we actually a couple of Pilots that we were going to be doing in twenty twenty that we're going to be testing a number of different ways to speed up the supply chain makes it make it more flexible. We were looking at a number of a number of things that we were going to test as part of those Pilots wage is still going to pursue pretty much everything that was in those pilot programs, but we're now thinking in more ambitious this year, you know, one of the things holding us back before birth.

With just the cost of attention specifically the cost of speeding up, you know a couple of years. We and other retailers have talked to the capacity issues whether it's in Braille or Trucking or whatever and how the the costs of transportation is going on. Now, you know as a result of the current economic sort of report, we were expecting that costs everything we're seeing tells the cost of light and we think I'm going to provide us with the opportunity to make much more progress than we proved. So that's what that's what we're looking at right now the details of that but for the key point is that we're as we've really been thinking about this is something we're going to Pilot and discover, you know walk different paths to do for us this year. We're actually now being much more ambitious in terms of trying to help it.

Great. Thank you.

Thank you. Our next question comes from Michael binetti with Credit Suisse your line is now open. Hey guys, I got something on the reopen here and thanks for all the details a very helpful. I guess just maybe a little help with the near-term first, you know, you you mentioned a couple of times the inventory Reserve you've taken should largely cover the cost of the inventory that you had on hand at the end of the quarter. We've heard from some of the other retailers. You can't take reserves get into my inbound or anything that might have been coming in after you know the cut off of the corridor. So I'm just I'm curious you like you seem to compartmentalize that pretty well for us. So what are the major puts and takes you see that influence the accounting on the gross margin in the second quarter now that you have that I guess I'm called the bottom bucket of the inventory and isolate it in already accounted for what do you what do you anticipate will be the major major puts and takes broad brushstrokes. Sure Michael. Let me let me see what I can do with that.

Yeah, so as you mentioned from a merch margin perspective We believe We recognize the Aged inventory markdown liability that was caused by the store closing.

You know, we'd experienced. So go forward March margins will largely be driven by our ability to properly balance our inventory levels with demand, you know, just like any other quarter really dead a but much more volatile. So a lot trickier to do it. So, you know, we're going to try and manage the way we always do but you can expect the results to be able to just because we don't have a clear signal are bias, of course is going to be to manage inventory conservatively and Chase Sales, you know, if demand exceeds our expectations we expect as Michael described is going to be tremendous values out there to buy so overall we would expect our merch margins to not be materially impacted if we buy the Prius level of inventory, you know, it's easier said than done but we're going to manage it conservatively even margin is a little bit of a a different story. It's a little harder question.

Answer is our margins going forward are going to be driven by our sales levels and you know, it's really hard to forecast that right now as as I'm sure you can imagine so given the lack of press sales levels. We would expect the leverage on expenses to potentially more than offsets the gross margin that we're going to generate. Yeah how much the way the extensity leverage will impact our profitability beyond the second quarter? Yeah that's dependent on our ability to get back closer to last year's sales levels. It's really difficult to put numbers are ranges around to any of this just because of the uncertainty I guess the the only other thing I'd add is yeah. We're we we typically do a really good job of managing or kind of our store payroll to our sales levels that's going to be you particularly challenging in the second quarter partly because of the the, you know, volatility around wage.

And and uncertainty around what this our sales forecast our what our actual sales are going to be but also because there are going to be some incremental expenses at the stores. Um, you know, we've talked about safety and uh the comfort of our first our Associates and also our customers of being the most important thing and there are some costs incremental costs money doing that particularly during the store opening. That were going to incur to ensure that customers as they come into our store or comfortable shopping our stores. Let me thank you for that Michael. Let me ask you, you know, usually the you know, the off-price industries to find it very fast terms. Normally you wouldn't have much visibility very far out. Like I don't think at this point you'd really know what to pack for Holiday yet, but I'm sure you're thirsty for visibility of any and based on the comments you've made on inventory availability being a step-change higher than normal here what you know, yep.

We heard from some of the major vendors that are public companies and the the levels of inventory cancellations. They're planning for the back half can go from aggressive too staggering in some cases. So I'm just I'm curious what gives you some disability a little further out than what would be the normal fairly short term. For off price. There's going to be a duration of of good inventory availability and and then it will follow up giving you your tenure in a space at at you know, one of your competitors and before that I think you know as a as a consultant to off price of the Kinsey, there's thousands and thousands more off-price stores in the world and there was and the obvious source of market share has been going backwards for for ten years here. So with you know with more of you at the trough trying to feed on the inventory available in the space relative to the last recession. I can't golf price merchandise margins went up to three hundred basis points in 07209 or the economics of the buys as good today given how competitive it is on what you would consider the best phone number.

out there have distressed inventory that needs

To come out during periods like this.

Yeah, good question. Let me ask you a question two pieces in terms of visibility of merchandise availability. I guess I would go back to them and I I made a little bit earlier. You know, this situation is is actually completely operating. I I do think as a worthwhile comparison paper mm. The fact that retail store is not closed that then you did not have merchandise deliveries that would be delivered to walk over that to 3 months. At what happens or what you really had was with some softening in the trend and cancellations and that's what drove merchandise availability. So I you know, you have a situation this much more significant in terms of available. You said you basically, you know, two to three months worth of merchandise wage.

It's available but selfless and that's that's unprecedented. Now, you know, how long will that passed? I think I think it's likely the last for a while because it's such such a huge amount. So I think the first part of your question the second part of your question competition within the reference point that I think is a useful when you about competition where they don't price log if we're on our normal price is it if you look at if you look at the sales or the three major off-price retailers month and you just pick public data, you know, I think the public kind of data you get to a and this is all three of us combined. We have a market wage. Oh that's been 10% of your peril batteries and Footwear in the United States. Now, we sell other stuff department apparel accessories and football, but if you just wage

With that market for a minute. We have a we have a bullet 10% easy. That means that 90% or volume of sales noise goes through an on-off price channel. So I think all price still has a huge amount of opportunity left and you know given weakness in in a number of other retail formats. I think I think there's it's clear faith in alternative market share.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Michael O'Sullivan CEO for any closing remarks.

I'd like to thank everyone for joining us on the call today. We appreciate your questions. We look forward to speaking with you again at the end of August to discuss our own second quarter results. Thank you and have a good day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect dead dead dead dead.