Q1 2021 Guess? Inc Earnings Call
Good day, everyone and welcome back first quarter fiscal 2021 earnings conference call.
On the call our Carlos <unk>, Chief Executive Officer, MKT, <unk>, Chief Financial Officer.
During todays call the company will be making forward looking statements.
Coding comments regarding future plans.
But he didn't miss pets capital allocation and short and long term outlook, including potential technical virus outbreak.
The company's actual results may differ materially from current expectations based on respected included in todays press release, and the company's quarterly and annual reports filed with the FCC.
Well I'll focus on certain non-GAAP aren't that's my first.
GAAP reconciliations or descriptions of the measures can be found in today's earnings release.
Now I'll turn the call Carlos Thank you operator, good morning, and thank you all for joining US today I think that what we all have expressed in the last few weeks, it's not only unprecedented but extraordinary multiple ways impacting our babies <unk> president and most definitely into the future.
In addition to depend they make the recent events an outbreak caused by the killing of George ROI and what it means in terms of racism in our country is tremendously painful for all class, but it also brings hope for change.
As Martin Luther King said injustice anywhere, it's a threat to justice everywhere, we condemn racism I'm, we pray for more justice everywhere in the world.
I strongly believe that we all have our part to make that a reality.
I guess, we're partnering with the national and double H CP and our local chapter in Los Angeles to help fund on support their empowerment programs.
I would guess foundation committed $1 million to this call.
In connection with the Cobot 19 crisis, we launched hours hash tag team. This together campaign protect give uninspired, which was set in motion in April I was featured in our website worldwide.
Social media I'm flagship stores.
We tend to get foundation contributed more than $1 million to buy protective equipment and made product donations for people I need.
I will first the dry how we approach the health and basis issues related to the covert 19 crisis and where we are now I will then briefly touch on our first quarter results and lastly, I will update you on our strategy on how the crisis has impacted our thinking.
Kt will then review our financials in more detail our actions and our outlook and after Kt will open the call for your question.
I strongly believe done in times like this the true character of an organization and its people show most clearly.
I couldn't be more proud of our teams around the world as we accomplished be unimaginable in a short time.
They demonstrate a live or commitment leadership and empathy that is unparalleled I'm very inspiring to all of us.
I want to thank every associate and our company today in our stores, our distribution centers and corporate headquarters for their extraordinary attitude and relentless commitment to our company on each other.
I hope that you on your family's Harold safe and well.
I guess throughout all this we have made people safety our top priority.
Our focus has been on our associates our customers on the community. So we serve.
We can tend to be very careful with our actions and follow screen protocols as we reopened our stores showrooms headquarter operations and distribution capacity and we're excited to see the light at the end of the panel when we've become fully operational as we plan to have all our stores reopened by the end of June.
We can all sit here on reflect on how challenging this crisis has been to our operations on our financial results.
To cut costs and protect our liquidity. We can also look at the opportunities that he cannot at least four hour basis on our organization and built I mean tire new model.
We are doing both.
Fortunately, we came into the crisis with a strong financial position not sufficient liquidity, a clean inventory position and most importantly, a great team capable and ready to proactively charts the crisis hit on.
Acting decisively quickly and strongly on everything that was in our control big or small we challenged everything from expenses to capital projects inventory purchases payment terms product nine development store closings and bank facility due to renewals just to name a few we.
Also looked at how our customers like some priorities are being impacted by the current events and to stay at home practices and we carefully reassessed our strategic planning initiatives in light of the significant changes that we are serving.
The great news here is that those changes are completely aligned with the priorities that we set a few months ago I, we now plan to aggressively accelerate the execution of those initiatives.
I will review this further in a few minutes.
As you will know our company has an extensive global reach with cycle basis in the Americas, Europe and Asia.
That's the virus outbreak impacted our business in China first our initial experience there presented us with a significant opportunity to learn about what to expect I'd have to mitigate the risk to our team and our business.
Being a headwind to cycle by about 10 weeks from the other regions, where our business is much bigger proved highly valuable.
When you have a situation like this accurately forecasting the demand cycle is critical for success. They should guide the inventory strategy cost structure and liquidity requirements.
Based on this thought we analyze the demand curve that we were experiencing in China and apply that to Europe on the Americas to determine the expected inventory ownership and flow that we were going to need to satisfy the new demand for the remainder of the year.
Of course, this we'd be open access of product availability compare to our regional class.
We then work intensely to adjust our assortments and we eliminated several product programs adjusted purchase order quantities and extend that certain seasons to optimize selling at full price uncapped yourself opportunities for each business.
We worked side by side with our merchant teams and our wholesale partners to accurately anticipate the needs by product category.
This exercise require tremendous effort globally from our cross functional teams as well as how about your vendors wholesale customers on licensees.
In spite of all the changes today, our supply chain remains intact and its operating very well, we are well positioned to fulfill the expected demand and have put in place past truck processes to react to increase business needs.
I want to thank all our valued partners, including our vendor licensees, who stood by us during this challenging times to see this through and went together.
I believe that we architected up very strategic inventory plan with the opportunity to optimize margins and the flexibility to cut yourself as demand improved.
And the execution of this strategy starting to pay off as we finished the quarter with a clean inventory position down 18% from last year inspite of the effects of the pandemic.
Regarding our first quarter results, we entered the quarter with the majority of our stores closed and Asia.
In April as we've begun to reopen dislocations, we experienced a significant dropping customer traffic, but a meaningful improvement in conversion rate, resulting in a materially lower sales productivity compared to last year.
But since then we have gained momentum and same store sales in Asia for Q2 today are running at 75% of last year sales productivity a significant improvement.
Regarding North American Europe by mid March we decided to temporarily close most of our stores in both regions.
Crescent, we have reopened over 400 stores in Europe and over 180 stores in the U.S. on Canada with operations resuming over the course of mid April to June.
As we experienced in China and this tours, we have seen slow customer traffic, partially offset by improved conversion rate.
I'm thrilled to report that most reopen stores are performing better than we anticipated, resulting in a quarter to date sales productivity of roughly 75% in the U.S. and Canada and 70% in Europe as compared to last years levels.
As you would expect stores that depend on local customer demand have performed better than those that depend on tourism as nobody's traveling out.
In connection with our online business in the U.S. and Canada and in Europe, we experienced that deceleration in performance in the first quarter compared to the trends that we experienced in the fourth quarter last year as we believe customers what exclusively focused on essential products that we do not provide however, starting in.
April so part of the second quarter trend up materially improved and our online business is now trending up double digits in the second quarter today.
Our wholesale and licensing business has behaved similarly to our retail businesses.
All in all we had a very challenging quarter as we reported sales decrease of 52% and an operating loss of 100, a $9 million.
I believed that the negative results what exclusively due to four says that we could not control and we were very proactive managing what we could control, including reducing costs aggressively controlling inventories well I'm protecting our liquidity.
While we expect sales and profitability to be impacted in the second quarter due to the same courses.
We have great product coming for back to school that capitalizes on the current trends and the holiday collection is also very strong.
We expect our outlook for the second half of the year to improve significantly.
For our liquidity to continue to be strong.
Kt will spend more time on this issues and the specific actions that we have taken.
Let me touch on the customers lifestyles in connection with the crisis I believed that the recent events are impacting profoundly customer lifestyles and their priorities.
I believe that the companies that adapt their business models to actively embraced those changes on the new consumer preferences will be the winners and the new environment.
Fortunately this isn't a departure from where we were heading before the crisis.
And obsession for customer Centricity inclusivity on celebrating customer diversity has been up her big priority for us.
I also think that I'm on centric focus on sustainability on a true drive for quality and durability will be kind of not just desirable but critical factors to win in this new world.
I strongly believe that our product lines rooted in comfortable apparel and accessories will serve the new customer lifestyle swell and a seamless experience between stores and digital channels would contribute to stronger customer engagement for our brand.
All of this factors are the building blocks of our long term strategy and we now plan to accelerate the execution of each of our initiatives to capitalize on this opportunities faster than originally planned.
I strongly believe that on the other side of this crisis.
We'll see a much cleaner competitive environment with less promotions and fewer trusted brands offering similar products.
I guess is a strong brand with a broad multi channel global reach an enviable distribution, we expect to capitalize on this and gain market share.
As you May recall, the primary financial drivers of our plan to expand operating margin by 500 basis points consisted of cost savings operating efficiencies on gross margin improvements.
As we further challenged our cost structure in light of the crisis and a new normal model, we have identified new opportunities for additional efficiencies by eliminating redundancies across the organizations and simplifying our global model. We believe we can also accelerate the execution of these initiatives.
Positioning our business were further profit improvement that we had planned.
I'm on the strategic initiatives that will be emphasize our our customer centricity initiatives, which include our global ecommerce strategy, the salesforce implementation and omni channel experience redesign projects that we previously discussed.
In addition, we'll be launching a new customer Threesixty project to optimize customer data integration personalization journey engagement and result palaces.
Customer Centricity, it's on the initiative that we decided to continue to find and accelerate its implementation due to its created caliente.
We now believe we can increase our E commerce business penetration by an extra five points in next three years as a result of this initiative.
We also plan to focus on elevating our brand and continue to leverage brand partnerships as part of this effort will continue to focus on global product excellence and have identified key product categories that will bring the gas roots back including high standards of quality simplicity focus on us.
Thanks, Charles and lower promotions.
This key categories include active wear denim knits outerwear and handbags.
In addition, we plan to accelerate the global consolidation of functional capabilities to achieve new efficiencies global consistency in performance and increased accountability.
As part of this initiative, we are working a redesign organizational structure worldwide.
Last but not least the recent stock performance unexpected demand under our new normal model made very clear that our store portfolios around the world could be optimize to increase profitability.
This is particularly true in North America, and China, and we have passed to close over 100 stores in those territories within the next 18 months.
Fortunately, we have significant flexibility with lease terms in every region with about 70% of all our leases globally expiring within a three year timeframe, which also gives us significant negotiation power for future renewals.
In closing the process, we went through rebuilt great opportunities for eliminating duplication of efforts worldwide.
Gaining efficiencies across our operations rationalizing our store portfolios on simplifying our product development on supply chain functions I.
I fully expect to be on the other side of this crisis with a more efficient business model I'm more focused and consistent global brand strategy and a more nimble an agile organization.
Guess is a very strong brand there was built over the last 40 years with a unique and consistent point of view.
And it has become an icon all over the world.
This company has been relevant and thriving for 40 years because of its strong business sense on incredible foresight into the future of not only consumer preferences, but also dynamic business models.
I strongly believe that gas will once again capitalized on the new customer preferences and gain market share in a world to more focus on quality simplicity, and sustainability and less on quantity and price.
We have a great business model and global distribution that can scale very rapidly and we're well positioned to do so.
During the last few weeks, we have all been tested in waste we couldn't have imagined prior to this crisis I'm very proud of everything our team has accomplished I'm confident in our future and couldn't be more excited about what we will accomplish next.
With that let me pass it to Katie.
Thank you Karla good morning, everyone.
I'd like to start by echoing piloted comments express how thank my answer the gas leadership team and our associates around the world.
And we spoken mid March we closed our stores in North America, I guess two days prior and TD later, we were all suddenly working from our house.
The team did not net that be and came together with determination and a sharp focus on navigating gas thirtyth really time.
All of our actions reflected an undeniable adverse effect on a long term health inability of our brand.
We work seamlessly with each other profit.
Sharing ideas and solution in order to optimize both our plan and our execution.
15 spirit agility, XL Catlin humbling to say that returns.
On that last call. We told you we were implementing flipped and strong measures to appropriately react to the crisis, we get that and even though we couldn't control the massive drop in demand as paralyzed our industry. During the height of this level pandemic, we have controlled our cost and cash burn and limit the impact to the bottom line for therapy.
Cash and strain and liquidity.
And our Q1 results reflect that.
We've removed more than $60 million, an operating expenses from the didn't affect corridor, we significantly decreased capital expenditures spending only one third of what we sat in Q1 last year and first on the decision to pay our debt.
We ended the quarter with $419 million and cash, including 194 million of borrowings on our credit facility.
Let me take a couple of minutes that gave you. Some additional details on these matters and their impact.
Let's start with our cost savings.
In the beginning of April we followed 100% of our field and 50% of our corporate office employees and the Western Canada in conjunction with our stores Carping.
We recently restructured our headquarters in Los Angeles to permanently reduce about 150 at these additions.
We implemented temporary salary reductions ranging from 15% to 70% and deferred all merit increases.
We optimize government funding programs, particularly for storing corporate payroll in Europe, we evaluated every cost in our organization in a very deep and granular lane.
We continue to assess all aspects of our business to reduce any reduction fees that we have across regions and operate in a leaner more efficient and more agile model with the cost structure that makes sense as we enter a new Norma.
A large portion of the positive impact that these actions will extend to the remainder of the year and beyond.
We're also in negotiations with our landlord to appropriately adjust our rental expenses in line with store closures and declines and traffic at the industry is experiencing.
We're making progress at multiple landlords and are optimistic about what we can achieve here, it's worth noting that we suspended rent payments beginning in April our rental expect as happened accrued until final agreement are in place at which time to proper adjustment, while we made.
Outside of operating expenses, we cancelled all capital expenditures that were not mission critical reducing capex for 18 million in Q1 last year to 6 million in Q1 next year.
Carlos mentioned, the one area that we protected and terms that discretionary spending and our digital platform.
We believe this investment will have a very high and rapid return.
We expect this level of capex spending could be pretty consistently throughout the year.
We've also adjusted our payment terms to help manage cash flow.
Our teams have worked with our vendors and licensees the bank term extension lava, meaning conscious that these are challenging time for every line.
We are postponing the decision to pay our dividend again this quarter at the proactive measure to preserve cash our board well revisit that that removes data pandemic.
Lastly to maximize liquidity, we renewed our $120 million asset backed loan facility for three years drew down on our credit facilities and raise additional funding where it made sense.
Our $419 million and cash compares to $113 million. This time last year, and we have access to another $51 million and available filing.
Let me give you some additional insight into our first quarter results down.
First quarter revenues were $260 million down 52% in us dollars and 50% in constant currency.
Revenues were negatively impacted by store closures in all regions and lower productivity efforts towards that were open both at the result of the calls at 19 Craig.
Question, our wholesale order cancellations increased and our royalties decreased as our wholesale and licensee partners, we're experiencing similar decreases in demand.
Gross margin for the quarter with 13.2%, 20.7% lower than the prior year. Most of the margin pressure came from occupancy deleverage, but we also recorded reserves of roughly $17 million for inventory obsolescence as well as additional reserve for returns and Mark down at the result at the crisis.
Adjusted EPS DNA for the quarter with $143 million compared to $204 million in the prior year, a decrease of $62 million as a result at the cost savings measurements and head count traveling professional fees advertising and other discretionary spending.
Adjusted operating loss for the quarter with $109 million versus a loss of $22 million last year.
Our first quarter adjusted tax rate was 6.6% down from 10.5% last year driven by the Maxit statutory earnings.
Inventories were 392 million down, 18% or 86 million in us dollars and 15% in constant currency versus last year.
Free cash flow for the quarter with negative $68 million, an increase of $46 million versus the negative 115 million last year.
If we exclude the impact at the 46 million dollar European Commission fine paid in the first quarter last year. Our free cash flows were relatively flat. This is a great accomplishment considering the circumstances and was achieved through a combination of both significant cost and spend reduction and adjusted payment terms.
At least on the release, we're not going to provide formal guidance given the high level of uncertainty in the current environment.
However, I want to share with you how we're thinking about our business over the course at the year in the second quarter, we expect our level of revenue declined versus last year to be similar to Q1 with store closures for about the same portion of the quarter affecting our retail partner as well as the businesses of our wholesale and licensee partner.
We believe ecommerce will continue its strong momentum at won't be enough to compensate for the decline in our other business as.
We anticipate normalization over the back half of the year and as Carlos mentioned, we are encouraged by our recovery curve so far.
Lastly, and importantly, we are confident that we have sufficient liquidity to support this company through the crisis.
In closing I'm really proud of what our team has accomplished amongst the unprecedented situation.
To be honest the last quarter was not easy the nature of this crisis put a lot of pressure on the financial action and we worked tirelessly to manage the company there that's in the right way.
Our passion to win from our leadership that people on the finance team across the organization and the tangible results that we are able to achieve made at some of them now fulfilling work of my career I know the gas will emerge from this period stronger and when we came into right.
With that let's open up the call for your question.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one and you touched on.
It'd be the speaker phone you may need to pick up the handset burst before customer numbers.
Once again I'd be happy question. Please press Star then one.
And that brings question comes from Susan Anderson from B. Riley FBR.
Hi, good morning, Thanks for taking my question.
On the productivity in the story. Thanks for the color. There I was curious why do you think the U.S. has been a bit better than Europe. And then also are you seeing that build over the week that the stores have been opened so I guess the longer. The store opened are you seeing that increase and then also maybe if you could talk about that conversion that.
We're seeing in the stores.
Yes, sure how are uses and good morning.
Good morning I.
Yes.
Really let me start by saying that when you look at the productivity.
Because we have been opening store gradually and we didn't necessarily choose the stores that we wanted to to open in every case that it was more a function of.
[music].
Locations that could be open or landlords that decided to open the malls and so forth.
What we have is not necessarily representative of the entire fleet and you know on this at this comment applies to both the U.S. kinda that but also in Europe that being said.
Many of these stores that were open in North America.
Were opened in an area that were probably less impacted by things like tourism and while we have seen as that.
The stores that were impacted by tourism did not do as well as those that were more dependent on on the local.
Traffic or local customer.
The productivity I think it's a it's a function of two big things that I think we mentioned we are seeing.
Lower customer traffic.
Dan significantly lower but somewhat compensated by improved conversion rate and of course of we'd like that we think that this phenomenon phenomena is.
Applicable to almost every single area, where we reopened stores up which suggests that the customer is is coming with a purpose and we see a lot more of that in a in big conversion rate. So we see less people, but they are buying more and and I think that.
The view, what we did see especially in Europe is that after a couple of weeks of stores being open.
We see that the customers are behaving with a more.
Comfortable attitude and.
Im being more kind of like open to going back to certain of the always of shopping and I'm less concerned about the virus and and all the things that come with that.
So I think at overall, we are we were very pleased we apply the curve that we were expecting based on our experiencing in China, which were very difficult at the beginning.
Significantly better now and based on those curves you know we were.
Very pleased with a with how both regions, which are a lot more significant for us in terms of both sales on.
Profitability, how they behave as we reopened those new markets and of course, you notice that there are several countries that are doing better than others.
That that will be as expected and again some of those countries are more dependent on on tourism than others. So.
Again that the tourism factories impacting us in both regions.
In the U.S. and in Europe as well.
Great. That's very helpful. And then assuming that maybe you could talk little bit about marketing and just in terms of how much you pulled back and then also.
How much have you continued that digital or social media marketing and how are your sponsors connecting with consumers. During this time.
Yeah, I'll just I'll, just say a couple of things and then probably Kt will jump in with a little bit more texture on the numbers, but overall charges, we did pull back on on marketing in general.
Because you notice realizing that people were not going to be.
Yes, very very open and I'm very exposed so.
Most of what we kept is more related to the things that people would see from from the homes. So we did continue to support social we did continue to support while we needed to market, our online business and and but but overall.
The the dollars were significantly less.
Katy.
Yes, if we pull back on marketing in the quarter, but there's a little bit of a lag on to that so we were able to achieve a lot of that in Q1, and then going forward.
Well make the right decision.
When the environment.
Great. Thanks, so much help everyone safe and healthy and good luck in the next quarter. Thank you Susan Thank you. Thanks.
Our following question comes from to means that you're from Jefferies.
Hi, good morning.
Hi, DNA.
Morning.
After that about Europe.
I think it quite a bit more fragmented Avenue.
Anything you're seeing out of your costs like there that would suggest.
The number of Dorothy South Georgia.
The overall health.
Bob.
Yes.
So.
You are absolutely right the to wholesale businesses have very different than in Europe than the iron in the U.S and Canada.
The the European customer base is a lot more fragmented we sell to thousands of accounts.
But the interesting thing there is that when you think about the top customers.
Just the if you took off the top 10 customers in each of the countries on markets, where we do business.
They represent more than half of our business.
So there is a big.
Opportunity really.
Continue to really grow our share with those customers.
They are in very strong situations and and we have a very.
Close relationship with them in fact, we we did quite a bit and work with Europe insecticide.
And and it has been very very helpful.
We are seeing very healthy trends in the way they are thinking about our business, which leads us to believe that.
That they believe very strongly in the brands and they think that we can play even a bigger role as part of their business.
With respect to the other I mean, obviously, we are anticipating that there is going to be.
A significant impact as a result of the crisis in our customer base and we're being very careful with how we think about the future. We have caught our production pretty significantly just to anticipate or reflecting how we anticipate that the demand is going to being.
Impact in terms of a future delivery.
Also we are very.
Please with the fact that we have a pretty good size of our receivables in short. So we are we think that.
That there is going to be a significant impact on we're going to watch it.
Every day I think that the team in this business in Europe.
A lot of experience in managing through similar situations as we experienced something similar.
For years back and then with respect to our business in North America.
Yes, the there was a very instead.
Hello.
Change in the way they were looking at receipts and there were a lot of Ah cancellations very early on.
And which forced us to go back and work with our vendors to a really readjust our purchases and shipments to us.
And Fortunately year, we have amazing partnerships, and we were able to relieve reallocate and cancer, where we could and so forth and we're in a very good position and we think that that some of those cancellations will probably come back in and the way of a new demand.
So we want to be prepare to be able to fulfill those.
Those new orders.
When they come and so we feel that we're in a very good position.
Great. That's helpful. And then just maybe I think you mentioned.
Closure.
Thank you Mike.
American China.
You can give there either.
Any context on the profitability of the sorry.
Thank you.
Yes, sure Dineen, well, so you know we have I.
I think I, what I mentioned is that we our plan is to to close about 100 stores globally over the next 18 months and they are primarily in North America and the in China.
Just to give you an idea you know between February of May we have closed 42 stores in China. So there is a there is a significant opportunity for us to really.
Optimizing our portfolio there and we have a few more to go between now and the next few months.
And in the case of.
North America, we have a lot of lease expirations to that gives us a lot of flexibility.
In fact, but one third of the fleet is coming up.
Yes.
In a very short horizon here so.
No. It doesn't mean that we're going to close all those stores. There are a lot of stores that are very very healthy and even with a new normal number each year, we think that.
We can continue to maintain a very strong presence on on the store side.
And that in terms of a Europe, we have about over 15% of our stores are also coming up for renewal within the next year and we feel very strongly about our business here and how important stores are and we feel that in that particular case, we're not gonna.
Go through many closure.
And overall, we think that having all this.
Exploration opportunities, we think that is not just an opportunity to to close stores, but also to renegotiate the lease terms and considering that there may be a an impact that may be more medium term.
As a result of the crisis and what we have just experience.
But you know just I want to make sure I make this point very strongly because we believe in stores and we think that that is an important piece of our success.
We think that there is no better way to represented the brand than.
A with a great well position and ER and well merchandise store and.
This has always been part of our big representation of the brand and we also think that you know stores are the number one customer acquisition vehicle that we have so overall, we will continue to to support.
Having a very strong presence in stores.
Okay. Thank you.
Thank you to name.
Our next question comes from John Turner from Cowen and company.
Good and early good morning, you Carlos and Kt Congrats on navigating the company through.
All the uncertainty of this and.
I'm very confident about where things are headed south congrats on that.
Thank you John Thank you very much.
Got it costs in your prepared remarks, you talked about.
On the consumer was going to move towards quality and simplicity and sustainability and how you thought that gas brand did play a role and what else.
What do you think.
What's the best way to pivot the business model towards that.
In your view of the future now how is it reinforced by what has gone on.
During this recent pandemic.
Yeah, I think at up I think at it starts with the brand for me.
Yes, I think at the brand has.
Very strong legacy heritage and.
And I think of the brand.
I was always to for quality and also I think that.
Just looking at being less promotional and and.
Leveraging our brand partnerships and collaborations as we have just started up a couple of years ago.
I think is is a big opportunity for us.
And then you know just after you you think about the granting of product I mean product is everything starts and ends with product in terms of what what the customers looking for Oh, we have a we see an opportunity as a result of this changes in consumer lifestyle too.
The focus on on essential products.
We want to ensure the high standards of quality are present in everything that we do.
As it relates to product, including details and everything fabrics that we pick.
We believe that they are major opportunities in key product categories for us I did make this comment in prior calls.
But I think that now this becomes even more and more importantly, denim as a category has always been a dominant.
Piece of our assortment for us and brings the customer Bakken, we think that this can be.
The even much bigger part of our key opportunities here, we have gained significant traction during the last few months on denim and we think there is more to come.
Handbags I think that we are just incredibly well positioned with handbags and is that is a big business on a can continue to gain share.
Outerwear as another big category, where I think that our product and when you think about the quality the styling and how incredibly well positioned the market plays out over our outerwear is a great price I think at big opportunity for us to continue to gain market share on.
There is also a big opportunity with that because of the high price points in as an item.
Activewear, just we always had a meaningful activewear business, but now with the changes in lifestyle. We think that this has.
They're not bigger opportunity net where we'll continue to be a this impacts both men and women as you know we have a very meaningful and and sizable men's business. In addition to our women's business.
So you notice you put it all together and it's like Wow, how many opportunities we have just.
There is very little of the line that is very dressy. So the changes we think that are very positive for us.
We're very excited we were able to impact some of the of the product that is going to be delivered and we already going in that direction with a with some of the activewear lines and so forth and and I think that we can capitalize on this new trends and and we're very happy with what's coming for quality.
As well so.
So that you know just a big part of the of the entire strategy here that we think that we can accelerate and then you think about.
What we always talked about customer centricity.
Improving the customer experience, we think that is key we have been working on the implementation of Salesforce and actually we already have.
Something that went live this past week in France and.
And we are going to be rolling this out for all the countries and we think that is absolutely the right priority for us as a company.
And so much so that we decided to really expand that make another a big project here that we are launching as we speak for his core customers. Threesixty is also a big application that has been built by Salesforce, where you can bring all the data and them.
All the a big customer of knowledge into one application that is completely integrated to be able to do the customer data integration better to do personalization better.
Jordan engagement I mentioned, the and also analyzing results, which is something that right. Now we don't have anything close to this to be able to analyze.
Our customer database, we have a lot of customers, we have a lot of data but.
We don't have a great application to the oil to analyze it effectively.
Understood. Thanks, all that detail there can be could you talk about.
The gross margin environment going forward we've heard.
Some updated commentary from some of the retailers we use.
And some of the brands out what the second quarter and maybe the rest of the year might look like from a Mark Count perspective, do you think.
Do you feel like Youre, where you need to be inventory reserve perspective.
Certainly done a good job reducing inventory balance sheet.
Just curious in terms of how we should think about.
The overall gross margin environment really cute here with us the year. He can give any detail. Thank you.
Yes, sure, though as you know we came into the year.
Into the first quarter with clean inventory.
And now and we feel pretty good about our plans Carla talked about all our plan for inventory over the course of the year any adjustments that we've made.
Really the bigger inventory adjustment that we made within China and annual total reserve, we talk about 17 million, but really the biggest people that were coming in from China, where we have you know with the price that we have an opportunity for product assortment there.
So we think that we have really guide, we get really got strategy and inventory on a go forward and feel good about where we are.
Yeah, and I want to add on.
You know the significance here is that we start instead of starting with okay. How much inventory, we have and will be a good number we started with demand and we kind of like.
Then a re architected, while inventories needed to look like to be able to have a very desirable outcome and a healthy margin. So we feel that going into the rest of the year, our margins should be absolutely aligned with.
What we have seen in the path.
And if anything we may see some product margin improvement because of not being has promotional so we're planning to be very very tied with inventories and.
If anything we would rather walk away from an extra.
Dollar sale.
But in order to protect our inventory position on our margins and the ban.
The brand.
Most importantly.
Excellent just maybe one final question.
When you go back in 2019 Investor day.
Much of the margin improvement for the consolidated business was.
Forecasted a couple of gross margin you seemed really confident that was that there wasn't.
Much reduction SGN a rate bedded in that plan do you think now having identified a few store closures.
Talked about some of the reductions you've made it headquarters.
And we think about the DNA opportunity over the next year over a longer period of time.
2025 timeline.
Yeah, Let me just start with that and I'm sure. There Kt will have additional comments, but in order.
Going back to that Investor day, we had identified 500 basis points of operating margin increase.
And and when you look at what was underneath that you know the key drivers.
That supported that improvement there were two big categories. One was around operational efficiencies and that was worth about 350 basis points over the 500 and the remaining was a more aligned with a top line expansion. So let me touch on the first one.
We had about four buckets, one was a the logistics or opportunities that we had identified.
The second was a supply chain efficiencies. The third one was about the store portfolio you just touched on it and on the fourth on worth about expense streamlining and.
Really I think that you look at all those and they are.
Tremendous opportunities here to continue to really Taco, although some of those savings and we are kind of like a again accelerating some of this we have.
Consolidated our our vendor base, if I told you that about a year ago, we had about 527 vendors today, where operating with less than 200. This is what this team has done.
Fabric platforming, another big opportunity and we are doing quite a bit of that we are we launched the project to digitalize our supply chain processes.
We have eliminated all agent. So we'll now we are going whole vendor director that also has contributed to savings and and then just when you look at our.
Teams supply chain and design, we are streamlining those functions as well between regions. So we see a big opportunity for.
Ongoing.
Head count.
Opportunities for reduction so so there was a big opportunities on their old there. We continue to work on the logistics network optimization is primarily a project that is hurting Europe for the most part, but we also see opportunities in Canada. I think we mentioned that went up to this season, we were planning to go to one.
And then the store portfolio, you just mentioned I think that.
When we met we yes, we thought that we had opportunities to optimize the portfolio, but we weren't plant planning on closing so many stores so quickly and so if anything in this is going to help us to accelerate.
The the savings that we were seeing as a result of of the optimization of the store portfolio and with respect to the topline expansion. Obviously this is sending us back deeper and you know on top line.
But we hope that this is not going to be something that.
We'll be a permanent reduction we think that we can start gaining share and that can happen very quickly I believe.
And ER and then just looking at the store expansion, even I think there are going to be the store expansion opportunities and in many areas as landlords, Washington incredible brand to be representative in there and there are centers and I'm sure that they're going to be very good opportunities to growing.
Into a new real estate for us and then improving sales productivity of now.
The biggest top line expansion opportunity as we talked about in Investor day was more about digital it was about what we were going to do on on E com and and in fact, we see that opportunity to be bigger than what we thought with.
With even to increase our penetration at the time I think we mentioned that we were doing about 13% of our sales on E. Com, you know and and we had a plan to get to about 18% penetration by fiscal year 2025.
And we think that now that number could be 22% and and we think that this is part of where the consumers going and I'm very glad that we are so advance with implementation of our new platform because that is desperately.
One thing that we needed to be able to execute to this plan.
So overall I think that we're in a very good place and and I think that we look back at that SBB and and ER and the opportunities that we have I covered on the cost side.
There are significant to it than not talk about all the details here, but to ignore the IP infrastructure is a big opportunity the consolidating functions globally is another big opportunity.
And and I think that.
Most of these is underway for us.
Thanks, Charles Raul detailing best of luck going into the second quarter.
Yeah, I think you so much John.
Our next question comes from Omar Saad Evercore ISI.
Good morning, Thanks for taking my question. Thanks for all the information guys.
Couple of quite high and or you think hey, Carlos I Katie.
Couple of questions I wanted to start on China, you're closing stores. If my closing stores are closing more stores you know, it's a big market and that's big opportunity market for lot of kind of fashion.
Designer brand companies, we follow.
Maybe kind of put the store closures in the context, what's the overall kind of update there and strategy, while medium and long term strategy.
Is it shrinks to grow is that shrink to harvest and aim for profitability.
Any more color around that would be really helpful. Then I've a follow up thanks.
Sure.
You know we believe in China Omar you know frankly, there has been a a challenging road for us.
Because you know I feel that we have had a fair share of issues or that are you know internal too and and we are addressing those I think are we talked in previous calls about our opportunities on the product side and and we are now.
Working with the team that we have there in addition to.
We are putting our best merchants from the American the team to really help with assortment and.
And really helping with how to position the product stories, so I'm very confident that we're on our.
Road here to success and.
And I feel that yes.
It's interesting yes, we are closing stores by we're closing stores that were not desirable location. So I don't feel that this is a in anyway, a representation that we don't believe and the market or in the story to a territory or in the opportunity. In fact, we the stores that were going to be left with.
After this closures that I have mentioned to you know, we're still going to have presence in 37 cities. This our tier one tier three.
Cities. So it's not that we are walking away from the from the store opportunity here.
Now I am happy that we're closing where we're closing because these are not stores that were making a significant contribution in terms of presence over the brand in that territory or in terms of profitability. So now we are in the meantime, we think that we have to shrink to be able to grow.
To use your work and we have done quite a bit to cut our costs in India.
Market. So we have reduced our corporate cost and investment and I think at US also a very good move and we are taking up a pretty aggressive.
Approach to really clean the inventory that we had and really start over and I think you should see a significant improvement as we go into the second half of this year.
We still believe in that territory, and then and there is a huge market and more importantly, the the brand is very well proceed. So is we think that we have a big opportunity, but we want to.
Apply the same kind of principles I, just mentioned about the brands and going after quality and making a big representation for this brand in a.
Market that offers that much opportunity so.
We think that they are also opportunities are on sizing and fifth and and we are going to be addressing all that as well.
That's super helpful color Carlos Thank you for that explanation.
Yeah I also wanted to ask about digital it's great to see the stores coming back and the digital business building double digits split strong, but we're hearing some crazy positive digital E commerce growth numbers out of some of the company's recover.
We know E commerce, the big opportunity for you know things like BOPUS and ship from store, maybe put in to contact some of the.
Drivers behind it you know maybe somewhat slower growth of ecommerce site as well as the opportunities as you do more omnichannel. Thanks.
Yeah, Yeah. Thank you Yeah, you know I.
I think at at the beginning of the quarter first quarter, we had a tougher time with E commerce and.
We believe that it was more about the customer to us looking in a in the into more essential.
And frankly overtime, we are seeing that our businesses reacting in a much more positive way.
I did hear about some some companies doing significantly bigger numbers, especially as their stores were closed.
Im not sure that we have a similar type of product.
Those companies have.
I think that.
Our trends continue to improve very significantly and I am looking forward to once we have the right tools in place in order to many of those capabilities. We don't have in Europe. For example, so even when our business has been healthy and growing.
Just as we don't have the capabilities to be able to capitalize on the changes that workforce by the crisis and on the outbreak here and in the U.S., while we are capitalizing on those.
The business took a little bit longer to.
Really start gaining traction.
We are still having challenges with customer traffic, but we have.
Just looked at the product assortment and we're seeing that.
There was a big opportunity with product and we are.
Funding a lot more on on the inventory side to be able to feed into that demands and we're very happy with the results. So I think that as a as we continue to to navigate through the year here youre going to see that our numbers were continuing to improve and when I I said double digits.
In double digits can be a big number right. So.
Depends the answer but you know is somewhat early for us and how we want to be realistic in the way we are where.
Modeling our numbers.
Understood, yes, double digits going to be I guess anywhere from 10 to 99, Thanks, Carlos [laughter] exactly.
Okay.
[laughter].
And just a reminder.
Please press Star then one and you touched telephone and once again that star one.
Our next question comes from Dana Telsey.
Right.
Good morning, Carlos and Katie hope everyone safe.
Hi, Yes, hi, as you think about the second quarter, which you mentioned should have a sales decline similar to the first quarter can you put any qualitative commentary behind that is stores reopened what you're expecting either by region by channel.
In terms of what you expect to see thank you.
Yes, sure TD I'll take that yet and so.
We have as as we said, we think that second quarter will be in line in terms of revenue with the first quarter end and really when you think about retail we're starting to reopen our stores in phase that started really mostly in may going into June. We think we'll have all the stores opened in June so that store closure period in Q2, it pretty much in line with Q.
Line, which is why we're thinking about revenue versus prior year about the same in terms of wholesale.
The wholesale partner there under the same store closure issues that we're having an end demand on deceleration. So we think the shipments will be under pressure in the second quarter. Some shift into later part of the year some cancellation.
But again in line with our retail business and the same goes for licensing.
So thats why were thinking that after Q2 will start to normalize.
Got it and then how do you think about inventories from this perspective, and then Carlos you mention simplifying the product development and supply chain process. What are you seeing there and does it does it impact inventory to go forward in terms of faster turns and how you develop the product.
Yes, well, so with respect to inventory.
The process that I described is exactly the one that impacted.
Our inventory plan so.
The Katy just told you how we're thinking about the demand will behave and then we took that demand, including wholesale and every one of our channels and and then we modeled what kind of inventories we needed to really have fulfilled that demand in the most effective way.
So when you look into the third quarter or the second quarter, even for that matter. Just we had to adjust some of the numbers, we work with our vendors canceling some orders.
And then a place some new orders in some cases in non Ben.
I did mention that.
We because we had to really continue to fulfill orders on many of our wholesale customer didn't have room basically because obviously there were sitting on the product that they couldn't sell during the spring season has all the stores. Their stores were closed then just we have to give them. Some some time.
To be able to sell the proximity to what we did with our own stores and and as a result of that we thought that the best way to deal with this situation was to extend their for winter season to give them more time to digest and to give our our customers or even in the stores more time to do.
Yes, you notice.
Of course, we did this.
With full knowledge of what was right for the season and.
Whether included and everything else.
But that's a result, we were able to balance that whole equation between demand and supply and and we are.
We we we don't want to walk away from the opportunity to really capture more demand. So we put in place fast tracking not processes. So then we could be ready and in many cases, we're working with vendors to to hold fabric or whatever we need to do to really be ready and EMEA.
Well to turn the product very quickly and we think we are in a good place in both for both.
Regions.
Including.
The opportunities that we see in a in the U.S and Canada.
Thank you.
Thank you Dan.
We have no further questions at this time I will now turn the call back over to Mr. Carlos Hibernia.
Thanks.
Well. Thank you I just want to thank you all again for taking part in this call today I'm really honor to lead the this passionate and talented team that we have here I guess.
And and I'm honored and grateful to partner with Paul Marciano, who has been incredible through this entire time on I'm very grateful to have him and his support on his guidance next to us.
We will continue to navigate through this and and I believed that we have a relentless commitment here on determination the entire team shares that and I'm confident that we have the brand the business model on the people to emerge from this crisis stronger than ever and.
Very very hopeful and please I hope you all stay safe and well and I look forward to talking to you next time. Thank you again for your time.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.