Q1 2020 Earnings Call
Please standby we're about to begin.
Good day, and welcome to the Abercrombie and Fitch first quarter fiscal year 2020 earnings call. This conference is being recorded if you have a question that anytime during today's conference you may signal is by pressing star one on your Touchtone phone.
We will open the call to take your questions at the end of the presentation wish that you. Please limit yourself to one question during the question and answer session. Thank.
Thank you at this time and like from the conference over to Pam Quintiliano. Please go ahead.
Thank you good morning, and welcome to our first quarter 2020 earnings call. Joining me today on the call or Fran Horowitz, Chief Executive Officer, and Scotland, Pesky, Chief Financial Officer.
Earlier. This morning, we issued our first quarter earnings release, which is available on our website at corporate thought Abercrombie dotcom under the Investor section also available on our website isn't investor presentation.
Please keep in mind that any forward looking statements made on the call are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions. We mention today a detailed discussion of these factors and uncertainties is contained in the company's filings within the Securities and Exchange Commission.
And we'll be referring to certain non-GAAP financial measures during the call additional details in a reconciliation of GAAP to adjusted non-GAAP financial measures are included in the release issued earlier this morning.
With that I will turn the call over to Fran.
Thank you Pam.
Good morning, everyone and thank you for joining us today.
During this unprecedented time I hope that you and your loved ones are healthy and see.
What is different screen month makes a great deal has happened since we last spoke.
At the time of our fourth quarter earnings call early March the majority of our China Stuart's adjust reopened we were pleased with the start of our global spring selling season across brands.
Since then we've all been tested in ways that we could never imagined both personally and professionally.
I always talk every member of our company to team up until that.
This quarter that proved more important than ever as our teams pushed boundaries streamline processes and found new ways to be effective.
I've been impressed with the strength perseverance humility and creativity of our global teams I would like to thank you for your efforts and your resiliency extra thanks to our distribution center and store employees.
I believe that we've been able to successfully navigate during this challenging periods due to our solid foundation, which is four to five over the past several years through our transformation initiative.
These include optimizing our global store network square footage.
Nothing in our digital omni channel capabilities.
Christmas speed and efficiency of our concept to customer lifecycle and improving our customer engagement.
These initiatives along with our strong balance sheet southern power gossipy strategic with our business decisions, while keeping on the long term to ensure that we emerge from this crisis stronger and better position.
As a reminder, we began 2020 with.
$671 million in cash and cash equivalent than our balance sheet.
Digital sales over $1 billion in 2019 accounted for roughly a third of our annual revenue base and our 10th consecutive year of digital growth.
66% of a revenue based Rodney U.S. and three for 34% internationally.
850 stores globally with over 90% of our domestic locations in N.V. centers, roughly 50% of our leases up for renewal on a rolling to your basis.
And another successful year, a global store network optimization, reducing global square footage by 4%, including the closure for underperforming flagship.
That's starting to mid March such hobby close or North American at any stores, we are ready experience the impact of cobot 19, our consumer employees and partners in China.
Well, China only represented about 5% of our global revenues in 2019, we weren't able to apply key cobot related learnings in the region to make informed decisions regarding reduction in demand door closures and opening and work from home strategies among others.
As we transition to our new reality, we became hyper focused on developing policies that pushed our previous comfort zones.
We adjusted to the different needs of our global customer base.
Regarding our marketing message and tactics across channels to stock, we addressed or new normal while staying authentic I continuing to be there for them whenever wherever and however, they chose to engage with us.
At stores close we leveraged our digital business.
Quickly implemented necessary safety protocols for global distribution centers and redirected product destined for stores, where do you see all of which remains open and operational.
Our teams a great job finding ways to optimize existing fulfillment capacity and the revised operating procedures.
Roughly 90% of our orders typically filled through our de sees our actions enabled us to having inventory expertise to keep up with the increased customer demand.
Ultimately, we achieved 25% year over year digital sales growth in first quarter to roughly $275 million.
[laughter] responding to our work at home play at home stay at home messaging and products.
Well digital growth was already in a double digit range from February to mid March trends accelerated across brands. Following the store closures and has further accelerated in may.
As we laid into our robust digital channel, we simultaneously embarks on a series of precautionary actions to further fortify our strong liquidity position.
In March we borrowed $210 million under our senior secured acetate revolving credit facility.
Through the majority of excess funds more Rabbi trust, providing an additional $50 million with cash and suspended our share repurchase program.
In April we furloughed, Oliver U.S. and portions of our young age store associates and funded 100%. It does eligible employees health insurance premiums.
An accident temporary base production for B piece.
And above and a temporary reduction the board cash retainer and temporarily reduce the work schedule for approximately 15% of our corporate associates.
Beyond those publicly stated actions, we weren't and continued focus on managing inventory extending payment terms and reducing our operating and capital expense structure.
The positive impact of these actions will extend beyond Q1 to the remainder of the year.
For inventories, we closed our U.S. than any eight stores were fully bought through Q1 any portion of Q2.
Having ended the fourth quarter with inventory current indoor product was predominantly beginning of like spring assortment that could be sold through summer.
Subsequently would do certain orders that were not already in production delayed and weak havens deliveries reduced skew count and implemented pack and hold strategies.
Towards the end of Q1, we also we started to ship from store in select locations to unlock in store inventory.
Regarding payment terms I would like to start by saying our vendors for their partnership and support.
Since March our cross functional teams of tirelessly works with our merchandise and non merchandise vendors to find term extensions are acceptable for all parties involved already cognizant that these are challenging times for everyone.
Finally on expenses rest assured that we're leaving no stone unturned, we've mobilized our entire organization challenging every leader to take their budgeting process the lowest level.
Valuated thousands of operating spend line items constantly questioning the definition of fixed versus variable cost.
Through this process, we've removed roughly $200 million and expense structure that we originally built for 2020, a portion of which will likely be permanent going forward.
Capital expenditures, but we had carried over from last year and some spend in flight already immediately plaza majority or real estate projects, while protecting certain key technology investments.
As a result, we now expect capital expenditures to be down roughly 50% from last year to approximately $100 million for the year.
Some of this work helped to dramatically reduce our cash burn despite the widespread store closures and they constrained global consumer landscape.
While total sales were down 34%, we were able to maintaining solid liquidity position ending the quarter was $763 million liquidity, including $704 million of cash cash equivalents.
No $1 million available under our ABL credit facility.
Now turning to brand specific performance.
At Hollister girls slightly outperformed guys.
I would grow responded well to loungewear, including sleeves and it bottoms knit tops rocket well received we believe this speaks to our renewed focus on our proven playbook with an emphasis on assortment architecture, you breath top 30 distortion with increase in doing this year over year.
The critical eye on and you see investment.
On the Guy side at least tops sweaters, what's happened after Schwartz with top performers.
Our intimates growth vehicle Gilly Hicks also experienced very strong digital growth.
Softened cozy lounge wear could especially popular acid or seamless collection.
The highlight of the quarter it would be amazing launch of Gilly active in the second week of April.
We sold out of key styles within a few days had to pull forward future deliveries to keep up with demand.
Those hollister and get like benefited from our marketing, which is laser focused on the global High school student.
Well changed in March we leaned into our connection with our customer.
Immediately launched the country wide gene panel to better understand their mindset has impacted the virus unfolded.
We also rolled out a series of customer centric strategy is to ensure that our broader community continues to feel conducted engaged during the pandemic.
This include virtual prom, our first virtual only event, we're over 70000 teams around the country, including our ultimate Prom contest Winter Eagle Rock High school celebrated together from home.
In addition, we also ramped up or tick tock content with current trends in light hearted suppose to make our team smile and further tap into our brand age and program document you know outfitting and how they hadn't spending their time.
Turning to the problem were above expectations and performance across social continues to grow each week exceeding goals and benchmark.
At Abercrombie and Hollister, and Gilly, Sopping cozy products, such as fleece and that resonated.
And adult women's continued outperformance, but those are responding well to the soft at collection, which isn't a sweet spot the comfortable dressing trend <unk>.
Corn team she shopped at an activity updating for work from home wardrobe with body suits and curve looked at them well shut off well also buying dresses in anticipation of the corn team lift.
It's worth noting that despite the store closures womens had several positive coffee category for the quarter, including knit tops genes and skirt.
And then side, we had very strong jogger business, which aligns with our customers company mindset.
For kids, probably successes run categories that support their new stay at home lifestyle, including Cozy Atlantic's, that's categories, such as squeeze top what pants, and sleepwear as well as summer central's, including shorts and swim.
That's a in adults and kids lives quickly shifted our marketing team shifted with them meaningfully reducing lead time for content creation and like a customer campaigns well try to new marketing that closely aligned with their current situation.
For adult we offered multiple social first content series, including in the living them with Abercrombie curated Spotify platelets and campaigns and showing our employees navigating or new social distancing normal.
In addition, we work with a powerful Influencer network to create amplify updated content and are continuing to apply learning smart employee sounding board, which provides real time insights and 20 post corporate life resonate and they look like.
I Kid, we're talking to both our kid and their parent and create a continent story, telling to help navigate unique challenges at home schooling any positive optimistic light that aligns with our play its life motto.
Throughout the quarter. We also continued are important U.S.G. work to ongoing care support empathy for global employees and partners.
In April we announced a partnership with spread up the world's largest fashion reseller.
This partnership allows customers to set in clothing for any retailer for E gift card fewer games across our brands.
It also reduces waste and supports our commitment to you and global contact.
We've continued our yes, you have expect further diversifying our board senior members.
So that gives you an idea where we've been and what we've been up to in the first quarter, let's move onto where we are going.
As stores opened our customers have begun to reengage in person.
As of yesterday, we had 409 locations operation globally with a customer can cross the threshold and shop, representing 48% of our base.
By region. The U.S., we have 285 stores opened or 45% of the base.
In the any a region, we had 79 stores or 56% of the base and an eight pack, we have 40 stores open or 82% of the base.
We continue to fall government mandates regarding the timing of openings and necessary in store precautions with the health and safety of our customers store associates in the broader communities I mean, a top priority.
We hope to have to large majority of our store base open by the end of June.
Similar to what we experienced in China in the first quarter, you're seeing steady improvements as our U.S. again, a customers become more comfortable shopping in stores.
Although we are earlier in the opening cycling both region in stores are largely operating under limited hours. We are encouraged by recent results with a customer return store it didnt, even quicker pace than in China.
Store traffic has been steadily building week over week.
Experiencing a broad range results in stores are open some experiencing sales trends are above last years levels and others below.
As of Monday, since reopening stored in the U.S. and any region, which are two apart largest markets sales productivity is 80% and 60% of last year levels respectfully.
We opened stores with Hollister out happened to higher digitally penetrated abercrombie.
As our store business continues to register daily improvements our quarter to date digital business has further accelerated from April levels with the U.S. and EMEA region experiencing similar growth trends.
Across stores and digital our customers responding well to our warm weather assortments, particularly girls shorts and their top at Hollister and women's curve love shorts, and up and short for guys across brands.
Looking ahead as we've done since cobot, 19th burst emerge we will continue to excessively gather information to ensure we are making well informed decisions we feel great about the positioning of each of our brands as we entered this next phase.
However, we are mindful of the unpredictable nature of the current situation and have taken a cautious approach to managing our business and conserving our cash position.
We'll continue to tightly manage inventory, while maximizing our ability to chase as we learn more about the trend each day.
We will stay flexible on promotions, South and grant health inventory sell through any competitive environment.
We will continue to drive expense savings and flexibility so business can thrive differing levels of sales.
Before I turn it over to Scott I would like and my view with my view on a consumer landscape.
I spent my entire career focused on apparel retail I've been through many cycles and what we're experiencing now is truly unprecedented.
While there is no road map, there's one thing I know for sure.
Prices has away accelerating change.
The retail landscape look dramatically different by the end of this year the significant rationalization as players exit the market.
Our recent strategic and process driven pivot had accelerated new ways of approaching our business, both inside or four walls and with our customer try to near term results and long term benefits.
Throughout all our customer names highly social and highly engaged which is a testament to our brand positioning into our collective efforts.
As I reflect on this and how quickly are teams pulled together and adapted I'm confident that we're well positioned not only survive, but to drive and with that I will turn it over to Scott.
That's right.
For the circumstances surrounding cope with my team it will not be providing comparable store sales metrics for a forward outlook.
Now on the first quarter results net sales were 485 million were down 34% to last year, primarily driven by store closures in the U.S. and a mail from mid March through the end to the quarter.
This was partially offset by digital growth of 25% with similar growth rates across brands.
Sales results included a $7 million adverse impact from FX.
Hi, Brad net sales were down 36 for Hollister and 30% for Abercrombie.
The disparity between the two reflects the higher digital penetration of the Abercrombie brand.
By region net sales were down 31% U.S., 35% in the mail.
51% made pack.
Well most of our China stores, we opened by early March traffic and sales were below prior year levels across the rest of your APAC region, we saw intermittent closures and Japan, Singapore in Korea.
Our gross profit rate of 54.4% was down 610 basis points as compared to last year, we had approximately $15 million or 300 basis points of charges to address down the carrying value of inventory, which now aligned seasonally with last year.
And a 30 basis point adverse impact from FX. The remainder of the decline was primarily due to strategic and targeted promotions.
I'll now cover the rest of our results on an adjusted non-GAAP basis.
Excluded from our non-GAAP results, this year or 30 or $43 million asset impairment charges that we believe are principally attributable to cope with 19.
Charges adversely impacted results by 62 cents.
There were no exclusions last year.
Adjusted operating expenses, excluding other operating income was $430 million as compared to 472 million last year with significant de leverage due to the impact of Cowen 19, and lost sales from temporary store closures.
Store can distribution expense decreased on a dollar basis, driven by a decline in store payroll in store occupancy, partially offset by increased shipping and handling expenses related to higher digital sales.
Marketing general and administrative expense was down on a dollar basis, driven primarily by reductions in certain expenses related to the company's transformation initiatives and lower marketing expense.
Regarding store occupancy, we continue to hold conversations with our landlords to find a mutually beneficial and agreeable path forward.
As we looked at year end, we have a couple of hundred leases coming due.
Every year as part of our global store network optimization optimization initiative.
We closed a group of stores this year should be no differently.
As we've stated before we are willing to walk away from any location. If we cannot get terms that work for us.
The disruption we have seen from the pandemic only reinforces this perspective.
That's right I've said many times in stores matter.
We believe it delivering an amazing omnichannel brand experience as a winning formula for retail.
That said, we need our source of either right size.
In the right location at the right economics, what more share of real estate as we move through the year.
Adjusted operating loss was 166 million compared to 27 million last year included a $3 million adverse impact from FX.
Adjusted net loss per diluted share with $3.29 compared to 29 cents loss last year or 32 cents on a constant currency basis.
Adjusted net loss per share this year reflects adverse tax impacts of $91 million or $1.45 cents per diluted share related to valuation allowances of deferred tax assets another tax charges, including the establishment of valuation allowances in certain jurisdictions during the first quarter related to the significant adverse impact.
Of Cobot 19. This ultimately gave rise to income tax expense on a pre tax loss and adjusted effective tax of negative 21%.
We ended the quarter with total inventories down approximately 1% to last year.
Higher inventory on hand was offset by lower in transit inventory, reflecting mitigation actions taken in mid March but at the store closures as well as disruptions across the supply chain.
Today, all of our manufacturing partners are up and running although some at limited capacity.
Given our broad network, we've been able to pivot when necessary to mitigate on what is gaps in our assortments.
Our balance sheet remains strong we ended the quarter with cash and cash equivalents of 704 million and total liquidity of 763 million.
Prior to the store closures in mid March we repurchased approximately 1.4 million shares for roughly $15 million.
We also paid approximately $13 million in dividends during the quarter.
Share repurchases and dividends are currently suspended.
Given our strong liquidity position, we view the suspension of these programs is temporary and precautionary.
It continues to review both throughout the year.
We remain focused on managing inventory and expenses with the gold maximizing liquidity to give us flexibility for fall and holiday seasons.
We had a lot to learn about how the customer will respond to the gradual reopening of the countries we operate in.
We are with them on this journey, we're cautiously optimistic about the future while cognizant of the inherent uncertainty.
I would like to and by equity Fran with a big Thank you to our global teams and for those listening to the call I hope, you're all safe and healthy.
With that operator, we're ready for questions.
Thank you and ladies and gentlemen, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function has turned off trailer signal for each or equipment. As a reminder, we ask that you. Please limit yourself to one question again press star one to ask your question at this time.
And we'll take our first question from Susan Anderson with B. Riley FBR. Please go ahead.
Hi, good morning, Thanks for taking my question.
I'm sorry, if maybe you could give some more color on Asia and what have the ramp up that you saw their in store to open and I guess are all before soak in there right now and then how did the online business performed during that time and then also it sounded like you said that maybe dresses had started to increase.
Are you starting to see those fashion items now come back as things start to open. Thanks.
Yes, it's I'm going to answer your questions in reverse so let's start with on some of the categories are that are performing.
So as we all know who's been it's a challenging couple of months and I believed that our team has done a terrific job, helping us manage through that we saw some very significant things in our business, especially our digital business. During this period of time, so let's start with the trends.
In Abercrombie, we did mentioned, we actually had some positive categories those being jeans, knits and skirts, which is very interesting while the stores are close it really shows the strength of that branded momentum we had coming out at the fourth quarter dress conversation is interesting as we stayed very close to our customer.
We're hearing from her is that she is shopping and getting ready for her post corn Keane opportunities in order to dress up and in fact, they were even dressing up while they were on there's even calls and being social with their with their friends. That's a really speaks to who that that customer is so yes, we are seeing fashion happening across all brands engendered.
Having backup to the top of your questions I'll kick it off and I'll I'll hand, it over to Scott. So regarding the APAC region, we had to ebb and flow through the quarter with ATAC. So as most of the stores in China were open we experienced some closings in other parts of apacs, such as Japan, Singapore.
So with that I'll hand over to Scott, Yes, It's just a just a reminder, APAC was about 10% of our business and 29 team half of that was China half that was the rest of the eight countries. So well try to came back online and started to ramp throughout the quarter. Yeah. We did see sequential improvement as we move throughout the quarter and continue to see that into May now.
The other side of the APAC region would you think about Japan, Singapore or those countries have been closed since I think late March into early April and remain close today. So it's a little bit of a tale of two world today pack. The exciting part is if we think about the other 90% of our business and as Fred mentioned, turning our stores back on in the U.S. in America.
As a great achievement and a big step forward for us seeing the performance that we've seen for those stores that have been open.
In the U.S. at 80% of last year's productivity and in AMEA at 60% of last year's productivity is a good start you know slightly above our expectations coming in and based on what we saw in a packer, China whenever we reopen those doors. So a good step forward and all the while our digital business continues to perform very strongly so a good starts and optimistic for the rest of the summers.
Do you see more opens.
Great. That's sounds very positive if I could get follow up on just the inventory and that promotional environment in second quarter are you expecting it I guess to be worse versus first quarter is the stores have to clear the inventory and then also not sure. If you get it any color on just how much you are able to pull back on inventory.
In second quarter, and then also what you're thinking about for the back half. Thanks.
Yep, just like Fred I will answer these and reverse so let's start with Q2 and what we were able to do so whenever we pressed the button to close the stores back in mid March the day. After we rallied our teams across merchandising planning and sourcing to figure out the plan. It for going forward. So we made great strides in reducing orders, reducing SKU counts into the summer.
Our understanding which items are gonna live longer and how we re cadence floor sets. So made great progress on that's so to the point, we ended our quarter with our inventory down wants there was a bit of a charge in there for inventory as we had to write down the carrying value. Some some older inventory, but small piece of our inventory and the Grand scheme and it's off.
Domestic about where we are going forward in terms of the promotional environment. You know it's it was initially very promotional out there when people were leaning on the digital business. We are interested to see I don't think anyone really knows what's going to happen here as we go into Q2 in the stores reopens, we've been lucky enough to have a very strong digital business to keep our inventory.
Flowing from the minutes that we closed stores, so with our inventory down one coming into the quarter and are on order in a good place we feel good with our inventory position that said, we're going to tightly manage our inventory as we go into the summer into the back half the year and make sure that weren't chase mode.
Great. Thank you so much nice job managing the quarter and good luck, if he walked through second quarter and state seeking healthy.
Thanks, Susan you too.
Okay.
Thank you we'll next go to Dana Telsey with Telsey Advisory Group. Please go ahead.
Hi, good cost reduction and as you mentioned before stop all be call valuable now how do you think about store staffing go forward do you need the same number of employees going forward. If you have in the past what an opportunity so expense reduction when I believe that agencies were also and.
Opportunity.
But this year.
We'll continue to see that and just to lafollette DTC. What are you seeing me on the expense flights and clips floods pick up.
Yes. Thank you.
Alright data grab that for partner and let's start at the top service cost reduction and yeah. We were able to take about 200 million out of our Opex plans for the year.
Versus where we were coming into the year store staffing is an interesting. One you know we're I think we are learning across the industry for those brands like us that have reopened no trying to understand what the new normal is because it is certainly nothing like the old normal with reduced footfall into stores, whether it's from demand or limiting the amount of people in the store.
Worse, because that's something that would say hey, you know maybe you can maybe you can pull back on your store payroll, but you also have additional cleaning you have additional you know customer touch points that you need to bring a whole different experience. So.
No I don't have an answer for you today, but it's something that we are learning and we'll continue to learn with every store opening as we go through the country.
I'll take part to Dana So you see you asked whether or not we still see there's an opportunity and the answer to that question would be yes, most likely we do.
Entered the year with a really renewed focus on our assortment architecture as we've discussed a particularly in the Hollister brand and the AC benefit we saw throughout the first quarter. If they had to the back half as Scott mentioned, we are in Chase mode. We believe that there will be opportunities out there as we monitor the business literally on a daily and weekly basis when we like.
See some normalization of the demand out there on the we would expect that AC would still be an opportunity in the back half yeah. Just on one more thing I'd say you can think about the commodity situation out there you know, it's it's weak which is good for for the retailers with with cotton and oil where it is.
And then if supply demand imbalance that like France said, we hope to be in chase mode, and depending on performance across the space. If there's capacity out there hopefully that will equal a lower agencies for us.
And then moving off the last piece here did you see what expenses and the curbside. So curbside. We've been testing is that kind of came out of nowhere for us and not something that was a core competency for that for the company. So we're living in learning through that and trying to figure out the best way for us to operate it a little tougher whenever you're an internal mall such.
Duration versus having your kind of a standalone store.
So we're living through that and we'll have more to come as we move towards the back half on DTC, specifically, we did see.
Arise and shipping and handling expenses that came along with the sales we have tried to mitigate as much of the expense there as possible.
I don't think we've seen significant rate increases across the industry I think we've all read the articles you know from Fedex and your P.S. It just the sheer volumes that are out there. So we have seen some delays here and there at some capacity constraints, but I think the whole a retail environment in the U.S. is living through that right now.
Thank you and we'll move on to our next question from Keith It's Simmons with RBC capital markets.
Hi, everyone. A this is jerry on for Kate. Thanks, So much for taking my question I guess I was curious about Ah you mentioned productivity and you actually 80% versus 60% and you have yet I'm. Just curious if you could give a little more color on the delta there or is that just due to the cadence of the reopening maybe being a little.
Earlier in some regions and also if you could share some color like Grand that'd be great. Thanks.
Yes, or no I'll grab this one you know it's hard to say, we it's hard to say with how each city country County in the U.S. country or a piece of the country outside of U.S. is going to respond to these reopenings arb performance has been all over the math I would say you know we have some stores that are very strongly positive to last year.
And we have some stores that are down to last year. It on a strong way. So we our goal is to deliver a safe shopping environment and that's what we're focused on the great thing as we remain very engaged with our customers across these regions throughout the closures through our digital business as well as our social channels. So we're ready to take them back in you know each.
Person has an individual.
Mindsets when it comes to covert and how they're going to respond and how quickly there on a go back out there and so we are where there for them in a safe way whenever they are ready.
Just underscore to Joe I'm as he mentioned a little bit earlier today Youre digital business continues to be very strong we built a strong foundation in the past couple of years for digital and for our omni capabilities as we leaned into that we've seen a nice acceleration even with the stores opening we continue to seek an acceleration that digital business.
Thanks again shows.
Thank you we'll next go to Tiffany Kanaga with Deutsche Bank. Please go ahead.
Hi, Thanks for taking my call.
A follow up on some prior question.
And your favorably and 22 machines on the pit multi quarter to date in tomorrow.
Got you train Directionally.
Gross margin came sequential improvement the worst is behind us like more anticipate greater declines at home and promotional backdrop Albemarle sounds exciting.
Yeah, that'd be great question, and what we're trying to do is de risk future gross margin issues.
We want we took a bit of inventory charge to help clean this up coming out of Q1, we've taken out receipts, we re cadenced certain items, we actually put a pack and hold program in place at the minute. That's happened for some of the more basic longer lives items and the great thing as we've had to unpack some of those items back out of it the virtual boxes. So.
Well, we've made good progress on inventory, we're not giving out forward looking outlook on gross margin, but our expectation is that the inventory management process that we're going through will help de risk that and that gross margin in Pepsico forward. That's our goal.
Thank you and they just going once again that is star one to signal for question and as a reminder, we ask that you. Please limit yourself to one question well next door to Mark Altschwager with Baird. Please go ahead.
Hi, Good morning, Thanks for taking my question I hope everyone is doing well.
So you talked earlier your whole lot flexibility over the next two years curious how your views on the Pizza store closures has changed at all as result of the crisis and then you can bolzoni.
For addressing the flight ships curious if there's any update on that front, specifically and how those conversations.
Evolved over the last few months.
Yeah. Thanks for your sentiment I hope all is well with you and your family too.
As far as your first question goes on leases. So we started this journey as you know several years ago on them. We really are focused on optimizing our square footage. We've made nice progress in the past years I'm, particularly between 19, we reduced by an additional 4%.
As we go forward we are.
We thinking it but we're really still on the chain path that we've been on which is that our sales in the stores relative to our reduction in our square footage have to be commensurate. So today, it's hard to say right. We have reduced significantly reduced sales happening in the stores, we have to understand at some point when those come back to some level of nor.
We'll see and what that new normal level looks like but we have very strong guidelines and principles that we drive every year when we negotiate our lease stack and those principles. If they were under a microscope before they're probably under even a tighter microscope as we go forward.
With that said yeah. We are currently negotiating we are in a nice position because we have several hundred leases coming up at the end of this year and over the next rolling two years, we have 50% of our leases coming up.
And I will say, we believe in stores in stores matter you need stores in order to drive an Ami business, which is our goal, but those stores have to have the right size right location and write economics and that is exactly where we are focused.
Yeah on the flagship Mark no update there we remain connected with our landlords and having similar discussions with our flagship landlords as we are with or multi landlords. So nothing further to provide there we have our slide on the investor presentations that just summarizes the forward looking lease expiration cadence.
Thank you appreciate all the color.
Thank you we'll next go to Janine Stichter with Jefferies. Please go ahead your lunch.
Hi, good morning, I need to connect question and want to take all that might be expense structure. Thank you mentioned you kept your and getting out of the can cost fifth here in kind of that was can you elaborate a little bit more on the call to action. He took in what we should think about pulling back into the expense base and then just along the same lines in Q2, just any more thoughts you can get around.
Well the decline or how we should think about the beta decline given matching the expenses you choke.
Large patty and keeping us on it I come back into the base. Thank you.
I mean expense structure you know we.
You learn a lot whenever you come into a crisis. So like like Fred mentioned earlier, and we took our expense pointing down to the lowest level I mean looking at literally every penny that is going out the door in the business because that's what we needed to do.
You know it was a it was a quick pivot to cash and liquidity whenever the store closures happened and we quickly mobilized every leader across the organization to go through that process, we were able to pull about 200 million like like you mentioned the out of or beginning of your plans, it's really across the business you know their store payroll as we furloughed employees, we see.
Some store occupancy savings, but we've also seen savings.
Literally across every department in the business as we think about going forward.
This excites me and excites Fred because as the business comes back and we returned to hopefully some level above normal in the future. The goal is to shift anything that we've been saving that was more of that noncustomer facing spend and shift some of that spend likely not all of it to customer facing spend that we can kind of restart the growth engines. So I'm happy with the progress we made.
The search is not over a we're going to continue on this process and manage the expenses to the Penny we have a good DNA. There we've been on this path for years and you know I've outlined to do good processes across the company and have learned a lot about the expense structure.
Q2 level of declines and expenses.
Not giving forward looking outlooks for it for Q2, but the key is to take those expenses as low as possible continued to kinda rebuild that cash balance in the balance sheet and run the business as long as possible, but the goal of protecting digital marketing is one of the biggest things we want to protect here because we want to continue to engage with that customer.
Because those people like us that have some flexibility and strong liquidity and can invest through these periods and can engage with the customer through these periods should come out stronger on the other side. So while we play defense financially on the balance sheet, we want to play offense whenever it comes to being in front of the customer and that's our goal in our liquidity enables us to do that.
Thank you we'll move on to our next question from Marni Shapiro with retail trends.
Hey, guys, so, let's hear voices and with pleasure being the strongest month in July.
Although snow bike who'll talk stock here.
Can you just talk a little bit about the stories and how you're thinking about and usually actually I noticed the injuries were very cool, particularly in Abercrombie I know you've been shipping some stores.
Why don't you open the stores how will you balance is still shipping some stores, which I know, it's a little bit more costly.
When.
Well I guess, how are you going to start to shipping units into the stores because not all the stores in the malls with her opened to open end mutual I'm curious how you balance Hum all that would probably be on sale was given to the newness that she's going to craze.
You know I am glad to hear you were back in stores I actually found myself and our local law. This weekend into your point hit was certainly nice to be back into stores and for me. It would be my team in action and see you know how well they are doing through this whole crisis really appreciated everything that they did and arguing for.
Our eyes aspire shipping units into the stores you know we've already started to do that so Scott mentioned earlier that we had it really pretty impressive inventory management process that we go headfirst into when we closed our stores in mid March the teams were able to think about what they had in which fortunately for us.
Was actually knew very where now spring summer products that we had shorts and T shirts, and shoes and things of that type of categories and we looked at the on spot where you know the go forward I'm on order.
Without canceling anything that was in process, making it was on lines, we did not cancelled, but we could we cadence that future on order and understand how it worked with our with our current on order and the teams did a terrific job, but that that's why the stores look fresh to you and the newness isn't it's currently falling in.
On as far as balancing the ship from store I'll pass it went over to Scott on ship from store, we did start using ship from store a little bit later in the quarter I'll just start moving some of that in store inventory of before that we have inventory or do you see as we were ready to fulfill that demands we normally fulfill 90 ish percent of our digital.
Demand through our distribution center, so we were ready and able to fulfill that demand that we were saying.
So ship from store is a piece like you said it's expensive.
Only want to use it in certain situations you know tilting more towards that full price products. So we continue to kinda tune the dials there on how we're using ship from store, but it is a certainly they puzzle for all of us to figure out as we go through the second quarter to make sure that were were clean in stores, but also delivering newness I think you nailed it in a series of questioning and that's what we're working on.
Thanks, that's what's left.
Thank you.
Thank you we'll take our next question from doing card and with William Blair.
Please go ahead.
Thanks, very much yeah, just curious and the spirit of sort of things change coming out of the crisis. Your online business was already going well ahead of your retail just sort of what your thoughts are on you know how much of that coming out of this is more permanent.
As for sort of where their digital penetration ultimately Russ and what that means maybe for long term considerations around margin and product.
And then Scott also just curious if you're having any conversations this point about the term loan maturity next year. Thanks.
Okay, Let me kick it off with the DTC business, so it's pretty much a little bit earlier, but all kinda puts it a little bit differently. It's the formula we've talked about the past so for US digital penetration has been growing two or 300 basis points per year year after year, and we've been trying to take out that much or more in square footage in store occupancy so.
This year I mean, it's truly the question Bill in it and we have the same question where is that.
There is that digital business and that penetration going to end up at once we kind of settle into a new normal I don't think anyone really knows but we are able to react with our flexible lease stack. So if this is the year that spikes up you know 700 basis points or 1000 basis points, we have over 200 leases coming due at yearend and we'll have to take out more square footage.
A match that 700 basis points or that thousand basis points. So we're in a good place we have the flexibility to be able to adjust the new learning bought once we understand that towards the back half ultimate penetration again, we don't know a we have that flexibility and we're going to be there with our customers. They continue to take us online the math that's held them out works.
As how we think about it you have to take out that occupancy the funded that variable expense other shipping to the customers. So no change there a term loan conversations.
At this point, we have nothing nothing to talk about their you know with our liquidity position coming into.
The cobot situation at current we've been able to be measured you'll have more measured in this area than most a we were tracking the market. We understand what's happening out there are certainly been a lot of action in the debt markets and you know we at this point had been on the sidelines as we have a good capital structure and a good liquidity position.
Thank you just don't fall to that some companies you're talking about sort of that the percent of customers are seeing online that are new to brand.
No. If you have a way measure that maybe because the loyalty program are you seeing sort of somebody high volumes of newer customers, particularly considering everything you're doing with digital marketing.
Nothing should provide their with specifics we are seeing new customers come to the brands, though we'd like to think that that's there's more customers that are migrating out of store online and the fact that we've been protecting our digital marketing you know hopefully, they're finding us and coming to us, but it's something that you know as the dust settles here and we start to reopen stores, we have a pretty rich data set.
To understand store only shoppers how do they migrate a new new shoppers how did they find us they finding us on DTC and then do they turned into an omni channel customer so I'm pretty excited from but the data and analytic side of this that we're going to learn a lot over the next couple of months and understanding how these customers kind of ebb and flow with us through the closures.
Very good take care everyone.
Thank you we'll next go to Janet Kloppenburg with J. should exceed JJ Cade research. Please go ahead.
Oh, hi, everybody I'm glad you all doing while I'm just a couple of questions.
First of all I used to clearly that digital was accelerating April and May what's your thoughts there in terms of as the store productivity improves the more stores open should we think that that will continue because you know people shopping more online now or you know just maybe stuff.
Qualitative thoughts around the digital channel than what we should expect the trends are looking forward and what youre thinking about only plan in terms of Europe. You know you will and processes will jump in with Saltman for and I just wonder if you framed the the.
Oh, the tip of the long persisting United States might have something to do with that well. If you think it's all just macro and lastly, that's caught on X gene They had a nice reduction in the store distribution.
Expenses in the first quarter or should we expect more or you don't need. So I noticed that every controllable but is a little is a lot more opportunity before as we look forward. Thank you so much.
Yeah, It will kick off first with the DTC question.
Similar to what the theory that Scott just went for a we have seen nice acceleration listen on the foundation that we built going into this period. It was nice to have that digital business and the acceleration certainly with was very positive for us the answer to the question is candidly, we're really not sure at this point, we have seen additional acceleration in may.
Hey, even though we have almost 50% of our stores open.
So as we continue to really engage with this consumer as you know, we're very close to our customer as Scott mentioned, we've spent money on digital media that makes sure that we continue to stay engaged with them, they're going to take us on the journey, but that's the news is that we are flexible and we are able to ebb and flow depending upon how high that digital penetration gets and then we can work through our store.
Our base and make sure that our store base is commensurate with with that business. So more to come more to come on that.
Regarding the Assortments I would have I think that's a macro issue I think it's essentially we're reporting on stores that are open to date that we're seeing good wide variety even amongst you know North America is lost in the eight depending upon how hard that particular state country or region. You know got hit by the virus. So I would say that the assortments across the board.
Board are working similarly.
And the DTC business in Europe has been very strong just slightly stronger since we've closed the store. So it's it's a little bit a double edged sword here. So on the DTC side I would say assortments are working amazingly well and then on the endorsed I'd like France, I think it's just a reaction country by country or some of these countries like Italy.
Very different situation, but then it was here in parts of the U.S. with a lock down much more serious and then you know it was much more like New York I would say than it was in some parts of the U.S. So the reaction in the coming out of these locked down it's just going to be different across the world and we're living in learning each day.
The last piece on the S. DNA you know some of the big chunks that we saved in Q1, you had some occupancy saves you know for some of those stores that were on percentage rent. We saw some say since the stores were zero and then on the store payroll side, we had some nice savings there as we were able to furlough our employees.
So I'm hopeful that we don't see some of those days in Q2, because as we reopened the stores.
We want to bring these people back on on board its been a good reaction so far from our workforce to get back at it and we want to see some of that expense come back on because it's going to bring the topline with it so more to come in Q2, as we slowly or have these stores coming back on a rolling basis.
Thank you.
Thank you, ladies and gentlemen, once again that is star one on your telephone keypad to signal for question. We'll next go to David Buckley with Bank of America. Please go ahead.
Good morning, everyone. Thanks for taking my questions on the sales productivity levels that you shared for we opened stores just wanted to clarify does that include digital demand because it stores only and then on the packaway inventory or what categories are utilizing this for and what percentage of your total inventory heavy.
Packed away. Thank you.
Thanks, David on the productivity side. This is stores only so does not include any kind of digital demand that the halo around that and then army packaway inventory categories think about the more basic long lives item. So you think about some shorts. Some some more basic tees, that's the kind of stuff that we initially packed away.
It's a small piece of our inventory and Luckily getting smaller every day as we start to unpack some of those items based on eating it for demand so more to come there, but what kind of keep track of that as we go quarter after quarter, but the goal is to get rid of all that packaway and sell it to our customers now come in fresh next year, but this is just one of the many pieces that we have an art.
Tool kit to manage the inventory and make sure we kind of de risk that margin like we talked about earlier.
Oh.
Thanks, guys.
Thank you and it does appear we have no further questions in the queue. At this time, we'd like to turn the conference back over to Fran Horowitz for any additional for closing remarks.
Just want to say, thank you, everyone, who joined US today on the call and thank you once again to our global team for all of your hard work I hope, everyone stay safe and healthy and enjoy their center.
Thank you and again these and Jim on that does conclude today's call. We do thank you for your participation you may now disconnect.
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