Q1 2020 American Eagle Outfitters Inc Earnings Call
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Greetings and welcome to the American Eagle Outfitters first quarter 2020 earnings conference call. At this time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and.
A reminder, this conference is being recorded I'd now like to turn the conference over to your host Judy Meehan thinking you may begin.
Good morning, everyone. Joining me today for our prepared remarks, RJ Schottenstein, Chief Executive Officer, Michael ramp, how Chief operating Officer, and Mike Matthias Chief Financial Officer, and it isn't Chad Kessler AG Global brand, President and Jen Foyle Aerie Global brand President will be available during the question and answer session.
Before we begin today's call I need to remind you that we will make certain forward looking statements. These statements are based upon information that represents the company's current expectations or beliefs.
The results actually realize may differ materially based on a risk factors included in our FCC filings.
The company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law.
Also please note that during this call and in the accompanying press release certain financial metrics are presented on both a GAAP and non-GAAP adjusted basis.
Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www Dot E ink Dot com.
In the Investor Relations section.
Here you can also find the first quarter investor presentation.
And now I'd like to turn the call over to Jay.
Thanks, Judy and good morning.
Thank you for joining us today.
All the were well just changing.
So why should I just spoke to you could get Nike has dramatically changed the world and our business.
Like the sharp watching how incredibly proud I am.
Our entire eight you Sam.
The team has demonstrated extraordinary leadership.
Collaboration and you bad.
There could benefit in agility has enabled us to take quick decisive actions well fueling our business and strong online demand.
As we begin to manage through the crisis.
There are huge immediately shifted to.
Protecting our people and our business.
Focusing on liquidity and near term cash flow <unk>.
Repairing eight you for a new future.
Our number one priority has been a health and wellbeing over show shoes customers and communities in March we hired a medical could shoulder to advisors on health and safety.
To ensure we have the very best practices in all of our locations. We instituted a work from home in mid March hit up stay at home Board, which we close works towards shortly thereafter that taking steps to support our affected associates.
We were the industry by implementing best in class protective measures at or distribution centers. This includes were body mass clubs thermal temperature scanners staggered schedules, social distancing protocols and nurses onsite.
Prioritizing the health and safety of all associates or distribution centers, who continued to operate successfully supporting the acceleration of digital demand.
As stores have Riocan. We've also led with best in class protocols to provide safe and secure stores for both our customers energy.
This includes the sanitation station and that's for all customers, we have received incredible associates and customer feedback.
Reopen stores are performed extremely well and exceeding expectations. This has allowed us to be less promotional then plans to move through store inventory.
I already know to.
Protecting our financial strength.
We entered 2020 and excellent financial condition.
Yet wind up a damn it began we quickly prioritize bantering our business for the near term liquidity and cash flow.
We took a number of decisive measures the reserve financial strength, which include at raising over $400 million <unk> convertible bonds, we ended the quarter with almost $900 million in liquidity.
We're confident that this financial position will allow us to successfully navigate through this crisis and emerge with strength.
Before I talk about our third priority preparing for a new future I was provides insights into the first quarter.
Hi, My demand was very strong and accelerated with the closure of stores.
This speaks the strength of our brands strong customer loyalty and engagement.
Aries performances with nothing short of spectacular in fact, Aries total demand increased at a double digit rate in the core you heard that correctly.
Despite hadn't stores close for about seven weeks Aries experience with double digit demand inquiries for their total business more consumers are looking for exactly what Erie is a unique brand platform of positivity acceptance.
The team has done an outstanding job.
I cannot be more excited about what lies ahead for this rapidly growing brands in a sector ripe with opportunity.
American Eagle has a higher revenue contribution from stores, and so and more pronounced impact from closures in the first quarter.
Yes, the brand so nice growth in digital demand and gained share in key categories internal external insights to for their brand remains top of mind with our customers.
We have opportunities to improve our focus.
On outbidding strength in inventory management.
And raise bran profitability.
Which we had already began addressing even prior to the upside down that.
We continue to see a bright future for AG.
Gross profit margin in the quarter.
Impacted by store closures and aggressive liquidation and a spring and summer merchandise will enter the fall season strong and we'll sit new back to school merchandise in July we believe our commitment to offering new collections will be appointed differentiation in the market and a powerful can pay.
I did have event.
Our third near term priorities is preparing for a new future.
This is Ben has clearly it accelerates disruption there's been underway underway in the retail industry.
Bankruptcies and some store closures will continue.
Which we see as an opportunity to gain share we will use event as an inflection point the charted new and more profitable course for the property.
Michael will talk about the initiatives you had put in place and how we will further build on our already strong capabilities and maintain industry leadership.
There are many opportunities to continue to expand or brand.
Lit up by age dominance of the genes market.
And capitalize the lot Aries incredible momentum.
While doing so we're optimizing inventory management to drive stronger product margins and creating a leading supply chain network.
I strongly believe this mobile will change our company's future and we will not be satisfied by simply returning to our starting point.
In keeping with our culture and strong purpose.
I'm very proud of our efforts in giving back.
During the early phase of the Pandemics.
We quickly sourcing to donate over 1 billion mass healthcare workers across it community our communities, including New York City.
Through the a foundation other charitable initiatives, we gave over $1 billion across a number cobot 19 cautious.
Including partnership with America's food fun.
Good grief section.
You also establishing assistance funds were affected areas iOS issues.
Now a few closing were day I'm very pleased that Mike with ice join US his first earnings call. His CFO.
Well a member of the AOL family for many years I'm confident he will be a highly successful changes as we position our brand.
For the future.
The character of our company and people are shining through at this moment.
For the creativity of our genes developing product and marketing.
Tireless efforts of our store associates.
Innovations of our Dcs and supply chain.
We are moving quickly and taking decisive actions on a daily basis.
We have already believed the relationships and the importance of treating our associates customers communities and partners with compassion understanding in fairness.
That will pay dividends for us as as we all rebuilt together.
Hey, you entered this crisis with a strong balance sheet and two of the most recognized trusted and loved brands at retail.
For three 443 years, we have successfully navigated through both good and difficult times.
I'm confident we will emerge from this event, even stronger leaner more agile every parent take market share and grow profits.
Though these have been some of the most challenged days of my careers I truly believe they could be a catalyst for our company's best bonus.
With that I will pass over to Mike.
Thanks, Jay and good morning, everyone.
This crisis it certainly challenged all of us to work behave and think differently.
I'm incredibly proud of our entire organization.
Not only how well we have navigated through the past week, but also how we have used numerous front, we move rapidly to sustain the business and maintained.
Financial health.
Yes fish it is to transform our supply chain.
Build new digital capabilities strengthen inventory management reassess our store fleet and drive the company to a new future.
10 stores close we immediately leaned into our digital channel, which was a $1.3 billion business last year.
Quickly became the light flooded the company, we're all extremely grateful for their dedication of resiliency of our distribution center team.
They have been truly exceptional.
Thanks to their efforts throughout this crisis fulfillment remained operational as online demand surged.
Digital traffic conversion try and transactions rose significantly over last year.
Online orders accelerated throughout the quarter with April the strongest month.
This momentum has continued into may even in markets, where we have reopened stores.
The strength of our brands and product offerings has been clearly evident.
In the quarter Agios online demand or is 33%.
After stores closed demand accelerated to nearly 70% as new online customers more than doubled for both American Eagle and area.
In fact area increased its total new customer acquisitions across all channels at a double digit rate while stores were closed.
In addition, each brand benefited from previously store only customers engaging online for the first time.
Kind of comfortable softer paralleling.
And strong demand hyper included a is James Verizon Legging fleece problem.
Marketing efforts shifted to social media, where we had great success with a stay at home concert series and virtual problem and Aries Positivity challenge and Dan videos on tick Tock.
As Jay discussed the health and safety of our associates has always been our top priority.
Across our DC network, we implemented the very best in class measures early in the crisis.
As digital orders accelerated we also closed each DC for multiple days.
Is to allow for an and cleaning some sanitization.
This resulted in some temporary backlogs.
To help me strong online demand, we leveraged our ship from store capabilities in 250 stores to fulfill online orders.
We also accelerated strategic supply chain initiatives, including opening up third party logistics hubs in Boston in Atlanta.
Action to reduce backlogs, which are.
The opening of regional fulfillment hubs is part of our supply chain transformation strategy.
Designed to add needed capacity to to support future growth.
Optimize how we manage inventory.
Reduced delivery cost and we see this strategic work as a significant benefit to our customer service.
Much of our investment it focuses on customer facing initiatives to enables seamless shopping.
I never wherever and however, our customers choose.
Earlier this year, we successfully tested buy online pick up in store, which is rolling out in conjunction with store openings.
We've also recently introduced curbside pickup at stores reopened.
During the first quarter. We also launched after pay on argue as shopping sites.
Through the service have already grown very nicely and carry a notably higher average order value.
We will continue to invest in customer centric capabilities, which we believe will become even more relevant in a post cove and world.
As we reopened stores, we are very closely following state local guidelines and have opened 556 locations today.
We're extremely pleased with how these stores are performing.
On average reopen stores are achieving 95% of last year sales productivity as we think we are getting more than our fair share pent up demand. The team has done an incredible job recreating the customer experience for safety and social distancing, which includes industry, leading protocols as Jay reviewed.
It's also been very encouraging to see our digital channel remains strong even stores have opened.
Eric digital demand is up more than 100% on a quarter to date basis and Eightys has increased approximately 50 per cent compared to last year.
Now I'd like to quickly touch on sourcing we continue to leverage our abilities. In this area, which is one of the core strengths of our company.
The last year in during this crisis, we have continued to successfully diversify our sourcing exposure away from China.
Our vendor relationships are excellent and we had position chase capacity for the back half should we need it.
This has allowed us to cut our initial receipt significantly while still maintaining flexibility for potential upside.
We made the decision early on to pay our vendors on time.
And to be accountable for all of our finished goods in fabric liabilities.
We believe that these decisions demonstrated our character and will enable us to six flow of product as we move.
I work.
In addition, we.
We are expecting nice product cost benefits in the back half of the year and into 2021, primarily from lower input costs.
Lastly, the coven 19 crisis has accelerated changes that were already underway.
In our industry and in our business.
We have quickly responded area and are in the process of establishing updated long range plans.
Based on the expected new reality.
Our business will look different well results and overall profitability.
We also intend to provide additional transparency into the tremendous value creation opportunities at area.
The.
His plans take greater shape, we will share multiyear targets with.
Thanks, Michael Good morning, everyone.
Forward to meeting all of you soon.
I've been active to say the lease covert 19 pandemic forced us to pivot our 2020 plans from investing for growth.
Prioritizing liquidity above all else.
Our strong balance sheet and cash flow have allowed us to self fund our business for many years.
However, given the.
We access debt markets in April.
Hey, Good luck, we continue to invest for the future.
So near term cost savings and Kathy.
Hi, preservation, well also work, including inventory optimization and a review of our store fleet.
I'm really proud of what my team has accomplished in such a short period of time of long believed the talent hard work dedication of our people the competitive advantage in this challenging situation has validated that view.
Needless to say the first quarter did not play out as we anticipated.
Really March we were tracking to our plan and expected to have positive results.
However, the abrupt closure bookstores on March 17, led to significant revenue decline and had a material adverse effect on margins and earnings.
Consolidated revenue declined 30% year over year due to store closures.
With its larger store base American Eagle revenue decreased 45% to last year.
Aries performance was extraordinary.
Total brand demand increased 12% to last year, reinforcing Aries brand health.
Reported revenue declined 2% to last year due to the impact of district distribution center backlog that Michael discussed, which will shift sales into the second quarter.
There is first quarter results were also high quality with promotions well controlled.
We're totally Oh, we saw significant increase in digital demand after stores close, including an acceleration as the quarter progressed.
Digital demand as measured by ordered sales increased 33% to last year.
He was up 15% an area increased 75%.
With the impact of the DC backlog first quarter digital reported revenue increased 9%.
We recognize digital revenue for products that are both shipped and delivered so these delays pushed revenues associated with first quarter orders.
We ended the second quarter.
Our gross profit declined significantly primary primarily reflecting the reduction in store revenue as well as Mark Downs and promotions as we aggressively cleared through a spring and summer goods.
We also took $60 million of inventory provisions.
Due to the sales decline, we experienced buying occupancy and warehousing pressure as a breakthrough revenue.
Within BMW, we recognize the normal level of rent expense for the quarter. However, we did not pay the majority of our April cash rent.
As you know expense declined 18%, primarily due to lower store in field compensation as a result or furloughs starting in early April.
We continue to offer medical benefits and are paying health insurance premiums for a second associates.
We also aggressively reduced controllable expenses, one the impact of koby became apparent mid quarter.
We've executed 225 million, an operating expense reductions versus our plan primarily NFC DNA.
Going forward, we expected better alignment between Sq, ne and revenue than in the first quarter.
We reported an adjusted loss of 84 cents per share in the quarter. Our adjusted EBITDA was a loss of 163 million compared to income of 96 million last year.
You are clearly in extremely loss since 1997.
Excluded from these results is 156 million, an impairment and restructuring costs.
110 million of the impact reflected impairments to 272 stores based on lower ex based expectations due to cover 19.
The significant majority of the impaired stores have less than two years remaining on their lease terms.
The remainder of the impairment included certain corporate assets and other items and finally, there was approximately 2 million of restructuring charters in the quarter.
Since the extent of the Coven 19 impact on our business became apparent our top financial priority has been to protect and strengthen liquidity.
In addition to expense reductions and furloughs, we cut inventory receipts.
We suspended share repurchases and the deferred the payment of our first quarter dividend until 2021.
In addition, we suspect.
And that our second quarter cash dividend at this point did not anticipate declaring a dividend for the rest of this year.
We have meaningfully reduced our capital spending plan for the year and now expect total capex of 100 to 125 million down from 210 million last year.
This spend will prioritize Keith investments in customer centric capabilities and supply chain initiatives, which we expect to create significant near and long term value hundred $17 million in cash and short term investments and no debt.
During the first quarter, we grew 330 million on our line of credit raised 406 million and a convertible note offering ending the period with 886 million in liquidity.
Keep in mind that our first quarter is typically a cash burn period.
Furthermore, the abrupt nature and timing of the covered 19 impact meant that we'd alive, we had limited ability to reduce cash costs in response to the demand declined from store closures.
We should benefit more significantly from a cost savings actions starting in the second quarter.
Revenue from reopen stores has also exceeded our expectations quarter to date.
We therefore anticipate our use of cash in the second quarter will be significantly less than in the first quarter.
For the year, we're focused on cash preservation and our incentivizing our teams accordingly.
Our quarter end inventory declined 8%, primarily driven by reductions in American Eagle.
We are continuing to clear through AG spring and summer goods and expect to enter back to school clean across both brands.
Yes.
Inventory optimization is a major priority and an opportunity for improved profit and B, we have planned more narrow and focus assortments with significant reductions in choice counts and skews.
Across brands, we also intend to better align inventory investments with our sales plan and take greater advantage of our supply chain speed to chase into demand.
We ended the first quarter with 1093 wholly owned stores doors remains central to our go to market strategy, but we clearly intend to reassess the optimal physical footprint for each of our brands coming out of cobot.
In all likelihood our future store count in fixed cost base will be materially lower than in the past.
We have some significant flexibility in our lease portfolio to execute on this change.
At the end of the first quarter. Our average remaining lease tenure was under four years and almost half of our leases expire by the end in 2021, including three quarters of our C mall locations.
In addition to enabling closures, we expect this flexibility to strengthen our negotiating position for leases we decide to renew.
Although we're not providing forward guidance I consider some directional comments.
Uncertainty around the pandemic continues and as of today almost half of our stores remain closed.
Additionally, we continue to clear through inventory.
These factors will pressure second quarter sales and margins relative to last year.
However stores are reopening strong well momentum in our digital business also continues.
As a result, we expect significant top and bottom line improvement compared to the first quarter.
Our business is well positioned when both during the crisis and as conditions normalize.
Our recently fortified balance sheet provides a near term safety in that and enable us to invest in our business.
Strategic advantage in the disrupted retail landscape.
Brands remains strong and highly relevant and our customer facing and supply chain capabilities allow us to provide a best in class experience across channels.
Finally, as Jay and Michael I've discussed we see this point in time as a national opportunity to reset the organization and reignite profit flow through.
We are accelerating and amplifying new strategies and goals based on the expected postcode good reality.
That's the plan takes form who will share a long term strategic strategic priorities multi year financial targets and value creation road map with the investment community.
You can expect to hear more on this topic later in the year.
With that we will open it up for questions.
[noise] thinking at this time of the conducting a question and answer session. If he'd like to ask the question. Please press Star. One then you telephone keypad confirmation total indicate your line is in the question Q.
You mean for start to if you think you remove your question from the Q for participants using speakers you may be necessary to pick up your handset before pressing the star Keith.
To allow for as many questions as possible we request that you each ask one question. Thank you.
My first question comes from the line Oliver Chen with Cowen. Please proceed with your question.
Hi, Thank you good morning that 95% productivity is very impressive.
How did you plan inventories and staffing relative to that and was where there are differences by region and how does that help inform what you're doing for planning and this dynamic situation. Thank you.
Ah Hey, Oliver it's a it this is Michael rental.
Yeah, but what I would say is where we're thrilled obviously with the 95% we feel like.
Our teams did a an incredible job preparing to open Oh, we worked very quickly very aggressively to.
Because the Assortments create welcome stations.
Remove fixtures and a and have a thoughtful plan around fitting rooms, and how we handle returns.
We had planned we had expected stores to open.
So terribly worse than that.
And Ah and I would say that the.
The sales productivity, we've seen is pretty consistent across markets.
We haven't we haven't really noticed a major.
Major difference by market. They have all open strong stable or you know remained pretty strong we are selling down inventory.
And there was a lot of stimulus there was pent up demand.
We had competitor is close to their reasons why it opened strong, but clearly were the strongest storing them all and a and our customers are continuing to come to us.
Okay, Mike on the follow up.
You've been proactive and inventory and planning ahead I'm the environment.
Isn't going to be easy so should we assume merchandise margin pressure as we look forward on a year over year basis, and also average unit retail pressure. Thanks best regards.
Yeah. Thanks Oliver.
Well look we're not planning merchandise margin pressure or average.
Unit retail pressure, we took a pretty aggressive actions as you can see.
In the first quarter.
To get our inventory clean we're going to continue cleaning that inventory in the second quarter.
So there might be there might be some additional markdown pressure in the second quarter, but really our our focus has been planning inventory conservatively getting clean fresh assortments coming in for back to school fall and holiday.
And positioning the business to chase. So we've been very focused on how we can drive merchant margin increases that are greater than our sales increases.
The agenda and all their teams have done an amazing job positioning us that way and the work we did in sourcing.
Taking care of our vendors during this crisis.
Making sure we paid our bills, we owned or liabilities.
I really made us the customer choice. So we feel like we can position inventory conservatively and we could respond in a very strong went in the back half. So we're not expecting pressure were expecting.
Very positive results.
We're expecting <unk>, where we are we are expecting to be the best looking story. The mall when it comes July I think where the best looking store right now the mall, but but when it comes at the back to school, but the big <unk>.
The big difference between Arsenal.
And our competitors.
I'm, sorry, Jay and I I should add Oliver the other thing we are seeing is.
Mark up benefit in the back half. So we see you know due to lower commodity costs.
Energy cotton et cetera, we're seeing a markup benefit in back to school and increasing benefit as we move into holiday.
[noise]. Thank you very much very encouraging.
Oh.
Thank you I next question comes on line of diesel GBM. Please proceed with your question.
Great. Thank you. So much you mentioned you talk little bit more about aerie long term goals, but can you give us an idea of what the air store opening plan looks like for this year I mean, how much is the pandemic change that and then maybe sort of what you're thinking about for early next year at this point.
Yeah, Hi.
I hope everyone things and help.
Hi, Thanks, so much going on out there I look at as up to this win for our company for Harry in particular, I think the team.
I mean, our February really try and what's so exciting we were you know really.
Basically where we were in Q4, just an amazing trend line, then obviously with the epidemic in the current crisis.
Most retailers would slow things down we actually accelerated we have a hole.
I mean coming out of this cove it.
There's so much and so many learning that have made a smarter wiser more cost efficient.
We just have so many great ideas and you know this teams not slowing down in fact, we're accelerating with ideas and munis I'll speak to that in the second we are still planning on opening up around 25 stores in area.
And inside of that there's a couple of new ideas that we're working through obviously with the current conditions.
We have to make sure that those can come to life, but theres one in the near in that we're pretty excited about an it couldn't be more relevant for these times that's about to launch in June if everything goes well its a small store concept I cant chair at right now because its special and they will when we really.
He brings to life, but obviously, a you know like I said with the current conditions [laughter], but that said you know I.
How did the gate.
We re flowed our merchandise, but we also brought in units our customer was demanding nineth outside of February and because of the way our receipt I mean are cadence wasn't our inventory position, we are able to keep newness, which I think is what set us apart from our competition.
[laughter] and creatively, we still you know built all of our lines, we have a spectacular back to school delivering its coming.
And the teams worked diligently to rightsize the merchandising what we were seeing out of the gate with co badge and what the customer demand wise and I'm, telling you. It's right intact as we get into back to school as far as what businesses, we're gonna really penetrate.
But that said outside of that.
Devotee, we had two incredible marketing.
Campaign tucked inside of this we always do our swim campaign, we had especially one this year dedicated to just how we deal with swim and these environments and Michael said it we had great swim result, and our big one must Charlie Demilio on tick tock.
She is just an amazing influencer I, we saw almost 2 billion impressions.
With that tick tock and it wasn't average Typtap, we created our own song and I think this is the time when.
The team certainly did we didn't stop at anything from design merchandising marketing planning and I'm, just really proud of the result.
Jim that sounds you know all really fantastic you know I think heading into before the pandemic. There was a path to improving EBITDA margins for the brand given the the scaling the business and opening stores in kind of leveraging while the investments that have been made over the last three years, you know given the pandemic it sort of maybe distorting some of the margins that we can see can you just tell us.
Where are you see the margins trending based on what you know about the business you know today, what he has he actually over the last I think <unk>.
Sure.
I'll, let Mike I'm add onto this but I will tell you are merch margin was up two last year.
Sure our markdown rates were lower than last year and it was a healthy margin last year. So variations, we got really creative because of that man. We saw in mind, we were able to pull back on strategic merchandise categories and make sure that we were being as profitable as pleased to be accretive to the total company and.
You'll see more down the road, we're going to share more insight to aerie as we built this brand out and now would make joining us and he's very excited to get these results out. So nice I don't know if you have anything to add on.
Yeah. Thanks, Denny can add on day, Yeah, I think looking for areas and business as usual, which is amazing I think.
Digital penetration definitely help them stem the tide of the pandemic impact.
12% demand in total in the quarters Amazing and you think about EBIT.
And revenue point, now really an inflection point, where from a operating levers perspective as we continue to see this amazing sales growth. It will drive additional profitability for the company and that's what we're excited about you'll hear more about that in our longer term plans definitely that are coming.
But if it's approaching $1 billion <unk> definitely ita levers inflection point.
Got it thank you so much.
Thinking our next question comes on line of Paul Lashway with Citi. Please proceed with your question.
Hi, Thanks, guys want to go back to the comedy made about looking at the store fleet, maybe just give initial thoughts about what you think that ultimate store footprint might look like for the American Eagle brand and I'm related to that I think I wanted to understand the store impairment charge on the 272 stores is.
Is that are you, saying that.
That number of stores has had a permanent.
Impact material, yeah, I've been materially impacted by closing these stores are due to co but in terms of their cash generating power and should we think about that number has a kind of number that you have on your radar screen that might ultimately.
Close thanks.
Thanks, Paul It's Mike if I, if I can take that look I think our.
That's a building in our lease terms right now to handle the real estate question first our average lease life is less than four years half our fleet is expiring over the next two as we've talked about her opening remarks.
I think we do overtime here, especially again every part of our three year plan that will double outlined in more detail, but we do expect will have less stores overtime.
This digital acceleration or something you can't ignore I think if not we don't think it's going to go away.
So its can be combination we believe a smaller fleet and then favorable favorable renewal terms on the leases that we do renew.
As far as the impairment goes on a 272 stores its really about the projections I mean as impairment calculations are about future projections.
Half of a half of those have less than one year left on the lease term. So it's when you think about the.
Calculation of the impact of co bid and projected future cash flows plugs, we really don't know it's uncertain, but that's really the basis for that impairment <unk> from a risk perspective, we feel to it to immediate cash flow.
So it's really about projecting.
Thanks, Mike and how many of those stores or mall versus off mall.
If you could or could show.
We think off most of I would say most of them Paul I'm not exact numbers in front of mean.
So majority would be mall.
Thinking I know.
I got with Deutsche Bank. Please proceed with your question.
Hi, Thanks <unk>.
For more detail, how you are evolving your supply chain and fulfillment capabilities given the demand driven pressure in the first quarter and what might remain at more digitally driven business.
Yeah, Hey, Kitchenaid. This is Michael Yeah, it's a pleasure to take that question because we're really excited about the transformation that we're going through in supply chain.
At last year, we had hired a new head of supply chain and we Ah we laid out a multiyear plan to really a change our network. So the plan essentially a revolved around using our.
Primary Dcs, but then adding multiple layers to our network or to put it simpler simpler.
To put regional fulfillment centers near.
Major cities.
Okay. The idea there is to take inventory.
Centers.
And be able to be stores.
Same day or next.
Good day, and having a larger pool of inventory close to customers.
To be able to fill digitally.
And do that while managing costs.
It's interesting to me is it something that if you think about ordering from Amazon or other CPG companies people have been doing.
Products for many years, but no one really does that in a meaningful way in the fashion space you know in some ways. It reminds me of in 2012.
Hopefully built our.
Oh I couldn't find another example.
Single pool of inventory.
Surface their customers.
Oh.
Thing that we feel like there's an opportunity to set our company out there like it digitally native brand would to be able to put inventory close to cost.
Oh and improve service levels. So.
We're excited.
Over a few years the a pandemic in the crisis, we're going through actually forced us to can move much faster, but at the end of that day. That's a good thing it's going to drive more capacity or more capabilities that are service and old.
Probably lower costs for us.
That's it.
Thank you. Our next question comes on line of Matt Mcclintock.
Oh, yes.
Hi, good morning, everyone, a discrete market share opportunities in itself.
Sounds like you're thinking about this as well these opportunities in the pipeline.
Those opportunities, meaning is this something sooner rather than later or is it something up.
Maybe a 2021 story and after a long history in this industry can you think back to another time.
Where opportunities like this if.
Okay. That's helpful.
Okay. Sure you know a you know going back to going back in time that you had the time in the late night being seven days early eighties. When there is you where you know you know were like 40% of the different retailers look close you got the department store because you have left to right. There's opportunity there we will look at this disagree.
Advantageous aren't gross and it and we will look at the different opportunities, but the same time, we believed that we believe that within our own brands, we have great opportunity to grow between American Eagle between Erie <unk>, we see that opportunity, we believe the denim which has been but we're just.
On the basis of the American Eagle business that we can really captured bigger market share now and we plants in the very aggressive campaign to the next couple of months to start.
One thing with them most proud of.
He said 10 weeks ago when this crisis took place.
We did not make cuts.
In our key operation, we kept our design team all intact, we kept properly ablation seem intent or de she's worked at tighter time for you there.
Yeah. They ended there the inventory teams all all were over in tank cars or logistics are sourcing teams weren't there.
And at that time, we looked at as an opportunity how can we have as Mike was talking about how can we make things better certain things. We had planned opened nine months from now we opened in two weeks. The you know like who's been in what was you know there's been a being worry about it problem in there, but what happened was what we had to do with it was 73.
Regional warehouses and they were on are scheduled to eight months are down and they did in.
My question two weeks, so we've made things happen our design team so.
Their creativity during this period.
Oh, it was amazed even with it either with the <unk> with the fabrics, if he picked out and everything, but you know, which I agree amazing and.
And in the development, so I feel very I I'm very excited I think that the December.
We were really differentiate differentiate differentiate ourselves from the competition.
And at the same time, but look there will be opportunities you know you see what's happening in the marketplace. You see all these different company complete said the better in trouble.
The beauty is that our balance sheets are very clean balance sheet, we're spending about $900 million in cash so when the right opportunity comes a you know we check worried bass. So we're very excited.
[laughter] and then just as a quick follow up to 95% sounds like that came in above your own internal expectations is the delta between the 95% in your own expectations, maybe a way to measure market share gains or where did that come from without new customers or could you just kind of help us trying to think through where are the upside.
Thank you.
Look.
On the 90%, we think when things settle down here in this country it could get back to normal pretty fast.
You know this has been it's been a challenging times.
The talent for retailers know last year, we had to work our way through the tariffs the year before we had it worked the way through the border tax.
You know.
Yeah, the that was being put those.
We thought we had a blue blue skies Airbus Bakken back in March and hold set in the.
Coca came on so strong and then last week, we thought we had blue skies again, and unfortunately with the Turkey is going through right now Oh.
Oh, please everybody will pull together.
And things will get back to normal you know you know or whatever the new normal is and and and.
And I think that you know look to people.
People are.
This has been a tuck you see it you know as you know as Americans were not used to being corn team.
We're not used to be met and.
You know Americans like the ground they likely be free.
And hopefully I know everybody, we'll get that feeling back in the country work with Tom and the country will come together and do the right thing.
HM.
Okay I really appreciate the color. Thank you for acquisitions, both brands and channels have or just like our productivity have exceeded our expectations.
Yeah, we've seen an increase in new customer acquisition as well as customers migrating and shopping online with us for the first time.
During this crisis those numbers, where we're far above what we had planned them today.
Thinking our next question comes from line of keep it seems with RBC capital markets. Please proceed with your question.
Hi, Good morning, everyone. This is Jerry on for case, thanks for taking my questions.
I guess, just curious about kind of a with a new kind of layers of the film and services and those extra distribution centers and what's the right way to think about the as she may impact from that and then I guess bigger picture I stores reopen how do you think we should be kind of forecasting out that.
Yes, you need dollar growth, maybe you know in a in the interest like a longer term timeline. Thanks.
During its Mike I can take that the DC costs are they the cost more threepl, it's not expecting as those get up and running and ramped up at the transaction level cost will be that substantially different than.
Our own.
R&D season that is in our buying occupancy and warehousing costs not enough DNA, so bucket there as far as.
Stores reopening I mean, obviously IRS teenage stores being closed in the furlough of our says.
Yes, we're.
Really excited to get all.
But you know it as we said the only about half our stores for reopened as of today. So from a cost perspective, we're starting to see a benefit in the second quarter.
Does that continues the ramp up continued by in general.
We also in the second quarter and kinda pivoted on cash preservation mode.
Discretionary expenses for the balance of the year for the second quarters, where we so we'll see some of that other benefits of some of those costs that are even outside of stores.
Right now in our and our plans dollars are down.
<unk> for the year, and we expected to be down for the year I'm, even in the back half. Some that's got some variable you know nature to it as we see how sales materialize, which definitely still uncertain. So from a leverage or de leverage or just a ready to sell perspective, I think the topline is really going to dictate that but at the right now our plans have dollar.
As down for the year.
Thanks, Chris.
Thinking our next question comes online agenda copper where would you just can't research. Please proceed with your question.
Good morning, everyone and I'm glad some harmless unknown and all come forth.
Right.
I wanted to China, He can talk a little bit about email Nicholas <unk>, how do you worry a little concerned I mean, that's how about the top assortment and I'm just wondering what what you know changes and me if you asked about how much yeah Uh huh.
Yeah I came in the momentum on <unk> I was wondering if he would talk about your inventory levels and your ability to fulfill and the second quarter unless he just a journey as we look for them I can how what your view would be on the outlook from comp store productivity improvement.
And I know you know what might be a challenging macro environment. Thank you.
Hi, Jane and thanks for the cross tie up north.
We are you know, obviously I you know difficult time to redirect trend lines, but as I think you've heard through this whole call. We've been really pleased with the resiliency of our customer on the demand for the brands and we have seen even going into stores closing we started to really.
C.
The turnaround that I was looking for them in stocks.
And we continue to see strength in that category even in this time.
And I were starting to see some of that I'm also take shape and men. So we've really taken you've heard from this whole team Weve really taken the last 10 or 12 weeks to focus on our future strategies to make sure. The we have the best newness.
Selling into fall you send liquidating a lot of the seasonal merchandise with the attention of exciting our customers and clean new goods I'm heading into fall and I couldn't be more excited about the genes assortment as you know we work all year to make sure that we're gonna have the best genes every back to school and with the women's Dream Jean.
The man's airports, plus I'm I'm confident that the customer will respond positively there and then in comps we really worked hard to focus on you know what's right in this environment and making sure that we have the softest tops that we're focused on key items that those items outfit back perfectly back to our genes where demand has.
It remains strong.
And so those in mens and womens we feel like we're seeing.
Strong momentum in those categories component and the new units that were delivering for back to school. So you know there's still uncertainty as to.
How the business will play out through the fall, but as Michael said, our intention is to drive profitability above the fails line with focus assortments focused inventory and great minutes for customers.
Hi, Janet Chen I hope you're not the insane.
Our inventory.
You're right in line, where we should be considering some of our non comp stores as well in fact.
And as we open up some of our new stores. We have about 77 stores that are about to open today again, depending on what's happening out there, but in total we'll have about 77, you've been gradually opening up in non risk areas, but going back to the inventory when I say that even some of those doors, because they've been filling box demand as well.
Hmm, they're looking for more inventory so.
We have we're right in line or clearance levels are down our presentation levels are up.
Flow strategy I talked about it again and thinking about the non comp store.
We're right in line time, and we have been actually pulling in inventory for demand for direct.
Prior response, but we all have it some of the three delivery that's coming in that's phenomenal Mitch. It's it's an amazing delivery I'm I couldnt be more excited about it I'm direct needs it right now and.
And you're going to see on the go forward, we're gonna be right in line I mentioned I love what.
So mark down rates here, our margins came in higher than last year, which is obviously an indicator of the health of our business. So.
Yeah, and the only thing.
You know, we did push out some receipts and make sure we're being responsible we as we didn't know what the environment, What's gonna look like as we opened up stores.
Because of some of the business, it's been how well they are doing we actually have been using our liabilities up as well. So we've gone back out and purchase back into a lot of by receipts.
For the back to school have again in a very healthy and responsible way.
Yeah, Hi, Jana this is Jay.
You know you asked me a question.
You know, it's a personally I think our.
Merchandise for American Eagle ordinary look great.
We're back to school and for the holiday season that I'd seen so far I mean really looks outstanding.
Very optimistic.
Are you know my goal is that in our cash position. She gets it should get back to where it was last year.
[music].
Before we took on the additional.
Well, but the same time, you know I'm just.
And you know that there's cobot night.
The team doesn't that you know what does that in the country.
Should get back to a you know you know.
Were stable assuming all bad happens you know we are very optimistic.
But I learned the one thing in the last 10 weeks things change. That's it goes up it goes down you have to be agile, yet flexible and a and you have to be able to adjust the right way and one thing I'm proud is that my team and our team or company.
Did a josh right away.
So when the crisis took place.
We formed a task team right away I can't emphasize the attach team that we put together right away and how on a daily basis, we had updates and we were the first back in the malls the first week.
First thing, we did was to protect or social immediately.
How do we make it safe.
For everybody.
And then we knew we rearrange our stores and in that first week, we had teams out even when the malls were close.
Playing a rearrangement stores to figure out what does it take debate to make the <unk>.
To make our associates safe and the customer shape.
So we have yeah that flexibility so I learned one thing.
Whatever plans that make.
Yeah, I could change you're right away I think I'd be very flexible we have a great team, that's really a nimble and.
And here, we're having this call right now and we're in five six different places.
We haven't seen each other in person we see each other every day on the Zhou. Thank God, we have this great technology.
You know without this technology, we can operate the company that we are thank god for the technology and thank God for the team that we book that we do have this methodology. So Ah. So you know I'm very optimistic that we have the like T.
Thank you. Our next question comes online as Susan Anderson with B. Riley FBR. Please proceed with your question.
Hi, Good morning, Thanks for taking my question nice job managing the corner.
And I was curious have you seen any of that demand change in terms of the product categories as consumer it's kind of come back into the stores and things starting to open up are you seeing at all a shift into other products. Besides the lounge and comfy in active wear and then I'm curious if he's seen any of those new customers actually come into this.
The words, just yet and then make one question for you just on the gross margin. How we think how are you thinking about the second quarter are you expecting significantly worse promotions and the environment out there. Thanks.
Oh, Yeah in American Eagle I think it's important to realize that even while stores were closed we've seen terrific demand across a gene and shorts in some of the categories that you know when you read the articles out there they say people are.
Buying but they've been buying from us and with stores reopening and with across short so.
Demand across the full assortment, we did see.
Especially strong them.
Manned and some of the nets and sort of more.
Apparel and so we will make sure that we have a good balance going into back to school in fall, but we are seeing strong demand even across our constructed closed which I think just speaks definitely think of our genes in our shorts really speaks to the back and you have the most innovative most comfortable right.
Product out there you can lounge or beyond your webex, calling them apparel leggings or you can be done he's comfortable on a pair of dragons from American Eagle on I think that's something or customers recognize and something they'll still come to us for.
Okay.
I do you yeah, I can I can follow the drug the gross margin question. So Susan I think.
Really when the pandemic started we obviously went right to liquidation mode on our number one goal being clean as we get through summer into back to school. If he said so our season you know a assortments are seasonally appropriate.
As we've exceeded our plans and one with the digital acceleration and getting through units really through the first quarter in the next nude and may not have been able to increase our you ours would be less promotional so far in the second quarter.
We can't predict promotional environment in total for the remainder of these last couple of months in Q2, but right now we see our plans that are you know, we don't think gross margins going to be anywhere near the 5% that we reported in the first quarter. I mean, you can imagine that having a pivot in mid March combination of kinda liquidate goods.
Store revenue is exceeding the declined from last year exceeding over 300 million in the first quarter, then inventory provision of 60 million that we took in a quarter. It was really does all the result of resulted in a being anywhere near that low in the second quarter, but not the only thing. That's consistent is that we expanded our normal level of rent in the first quarter, we'll do that again in the second half.
Order, but both top line.
The topline growth we expect to.
Significantly exceed Q1, and then there's other components or any inventory provision. If there is one will be definitely lower than that 60 million and right now based on what we're seeing on a week to week plans done.
A lot of margin pressure right now in the second quarter.
Okay I'm, Melissa we have time for one more quick question.
Thank you I'm final question will come from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.
Great [noise] excuse me. Thank you so much I had a follow up question on inventory and I understand that there was a oh it very prudent write down in the dollars on the balance sheet, but if you could comment on the unit growth year over year at the end of Q1.
I'm not would be helpful. And then <unk> in terms of the he sort of.
As gene Ache Hot could you just help us understand what an annualized S genie savings might be.
In terms of the actions you've taken over the last three months, what a if you'd be permanent savings in s. Genie as opposed to those that are temporary unrelated to the store closures that will come back into the piano one stores reopened.
That would be helpful. Thanks.
Well I think I'll handle the I've seen a question first.
But in our opening remarks, we executed about $225 million of overall reductions to our.
Plans at this point majority of that was that's DNA and yes, it's a mix of.
Fixed and variable expenses, obviously store furloughs and continued savings in the second quarter.
Oh, we continue to open stores in the second quarter, so those pieces as.
Well were somewhat temporary but there are other areas you know when we can kick into cash preservation mode for the rest.
The year really starting to second quarter into the balance those efforts on other controllable and discretionary expenses are sort of things that.
We'll be permanent I'd say.
Yeah, I think theres a balance of whats.
Fixed and variable out there now, but really no no expenses sacred and our mindset. So I think as we look forward into the back half plans.
I don't want to percentage to it but there are definitely elements of that 225 million that will be will carry forward beyond beyond this year.
And from an inventory perspective.
A few the question if it was units at the ended the quarter I guess, what the way it maybe I'll answer that is inventory was down. If you ended the quarter were down 8% on a cost basis. Our plans go forward have us down into double digits low double digits from here.
Definitely that's our projection for the end of the second quarter right now and then as we set up plans for the back half we are going to begin chase mode, just because of the uncertainty of our topline results right now and everybody out there, saying the same thing about not having a crystal ball and predicting what that's going to look like but we're setting up cost receipt to be down in that same low double digit range with the up.
With the ability to chase. So I think we're setting up thing or something up intelligently and strategically to chase the business as we see it come in the back half and not being overly bullish but as James said, we do believe there's some market share opportunity out there we're looking at advantageous Lee.
And we're setting up the flow of our inventory to chase it versus setting up in that setting ourselves up in a risk situation.
Okay.
Alright, thank everybody that concludes our call today I will be around for follow up throughout the day. Thanks Bye bye.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.