Q1 2020 Designer Brands Inc Earnings Call
Good morning, and welcome to the designer brands Inc. first quarter 2020, <unk> earnings Conference call. All participants will be in listen only know should you need assistance Clay said No conference specialist I Pester Starkey followed by T. Rowe.
Today's presentation, there will be an opportunity to ask questions.
Ask a question I Press Star then one on your touched on South to withdraw your question. Please press Star then too. Please note. This event is being recorded.
I'd now like to turn the conference over to Stacy turn off. Please go ahead.
Good morning earlier today, the company issued a press release comparing results of operations, but a 13 week 52 week periods, a big banks that 2020, just 13 week 52 week, Carrie Ann Inc. fourth 2018.
Please note that the remarks made about future expectations plans and prospects of the company constitute forward looking statement results may differ materially due to various factors listed in todays press release and the company's public filings.
The company assumes no obligation to update any forward looking statements is joining us today, our Roger Rawlins, Chief Executive Officer, and Jerk-off, Chief Financial Officer, now, let me turn over the culture Roger.
Good morning, and thank you for joining us to discuss our results for the first quarter of fiscal 2020, I'm going to start off the call by thanking our team for their diligence and taking Swift an effective action to ensure the safety of associates customers in our communities. During this difficult time, our industry has been heavily impacted by the Coca 19th.
Demick and we have acted strategically to preserve the long term viability of our business.
Despite short term challenges, we're adapting to the environment and refining our near term focus based on learning so far.
We will also continue to execute against our three strategic pillars in innovative ways to deliver differentiated products and offer differentiated experiences and focused on new growth opportunities to increase market share.
The strategic pillars, coupled with our priority of keeping employees and customers safe and healthy guide or decisions as we navigate the cope at 19 pandemic.
Preserving liquidity and financial flexibility, it's been a top priority for designer brands as discussed previously we reacted swiftly upon seemed to resist risk of cobot 19 by significantly constraining, our cash burn we notified vendors and landlords that we were suspending payments until there was better visibility massive.
Lee, reducing spring receipts and implemented significant cost cutting and capital preservation measures.
We drew down on our 400 million credit facility and immediately focused attention on amending dot facility to ensure we would remain within covenant compliance and improve our access to liquidity.
Moving forward along with the success, we've had reopening the majority of our retail locations. We've reached alignment with nearly all of our major vendors in landlords on past due a mouse and have extended go forward payment terms, which gives us more flexibility from a liquidity perspective.
We're continuing to evaluate our liquidity options with a focus on ensuring a from financial foundation for the company.
We've also needed to make some difficult decisions to manage the business more efficiently and develop a cost structure that will enable us to operate as a leaner organization, we announced cost cutting initiatives in March and April that included furloughs reduction in compensation for nearly all employees not placed on temporary leave as well as the ball.
Sure and the freezing of hiring and merit raises for 2020.
We're deferring capex, where we can and have delayed new store opening plans across North America, where possible. We are actively negotiating with vendors to strengthen relationships as we rationalize our brand portfolio in order to focus our business on the largest footwear brands and our own exclusive brands.
Finally, we like many other businesses are undertaking a review of our fleet and are working to streamline and optimize our retail footprint.
Lastly, before turning to our results we want to take a moment to recognize the importance of giving back to the community. During this time of need.
We have teamed up with Reebok and long term partner sold for sold to provide over 100000 pairs of new footwear to cope with 19 frontline workers and their families. Additionally in early May we kicked off our donation campaign on giving Tuesday.
This gave our customers a chance to engage and helped their local communities.
DSW locations across the country accepted new and generally you shoot donations and customers who gave two or more pairs received an instant 10 dollar reward I'm proud to announce that since 2018, we have donated over 3 million pairs of shoes through cycles for soles.
Turning to Q1 results.
We were pleased with the trajectory of our business through March that and we're on track to achieve growth and 2020.
Fact comps were up in the low single digits, even with less promotional activity driven by structural changes in our business model.
As the Cobot 19 pandemic began we faced a number of challenges during the first quarter as a result, a store closures decreased consumer demand and disruption to our wholesale business as committed as largest customers canceled a substantial number of orders.
We began seeing a meaningful deterioration in store traffic beginning on March six and the trajectory materially worse than by the time, all North American stores were closed on March 18.
This directly overlapped Marple, our second most significant selling period of the year for the quarter total sales were down 45% in comparable sales were down 42%.
During the time that our North American stores remain closed we served our customers through our ecommerce operations at an accelerated pace over the past several years, we have made substantial investments in our digital infrastructure, which enabled us to pivot quickly and meet our customers' needs and this unique such.
Duration.
This was supported by our ability to utilize our stores. This fulfillment centers a competitive advantage has reached retailer shifted the digital only sales beginning the second half of March we've seen unprecedented E commerce demand and we were well prepared to fill orders in a timely manner as we optimize shipping across 500 pointed.
Fusion.
Other key investments over the past few years included redesigning our website launching the DSW app rolling out ship from store and adding clearance product to our online product.
Assortment all of which proved essential during store closures and our shift to a digital only model.
We continue to evolve our capabilities with the recent rollout of curbside pickup in contact list self checkout.
Ultimately, we were able to generate strong E commerce growth, while our stores were closed with digital demand up 25% at DSW U.S. during the first quarter and representing 50% of total demand versus 22% last year.
Our digital strength in Canada was even more robust with E commerce net sales up 348% during the first quarter versus last year.
Well, we do not expect growth in digital to continue at this pace, we believe that our accelerated work in digital will serve us well moving forward.
We are taking a phased approach since we started to reopen our stores on may Onest and hope to have nearly all our north American stores open by the end of June.
We're excited that approximately 90% of our total store base is now open we've continued to monitor state government and local mandates and have been carefully reopening stores in areas that we believed to be safe for our associates and customers as of today, we have welcomed roughly half of our team back as we execute these plans.
It is important to note that the majority of our northeast locations, which represent nearly 20% of our in store business and or some of our highest volume stores remain closed at this time due to continued cobot 19 concerns and local restrictions.
We're looking for the best ways to make the store experience safe for our associates and customers. We made several cobot 19 related investments to assess the situation at hand, and attain appropriate supplies, we partnered with Johns Hopkins and conducted testing on the longevity of the virus across multiple surface and material.
All types Weve taken these results along with recommendations for governmental health organizations and implemented a number of changes to our store operating model. These include mandated employee use a personal protective equipment, making P.E. available to customers improving cleaning measures at checkout enforcing.
Social distancing, reducing capacity in higher risk locations sanitizing try on areas updating returned procedures and implementing frequent full store cleanings.
As we begin to reopen stores, we're seeing an acceleration in traffic and sales trends as compared to Q1.
Although it's still early we currently see a relatively consistent store traffic maturity curve once the store reopens.
We believe that this is also being driven by our investment in broadcast advertising that helps us reach a large portion of our core audience. So this then we anchored our integrated marketing programming on a recent national television campaign, we launched aimed at making our customers aware that we are reopening and highlighting the safety changes we have.
Okay, and we've seen a strong improvement in traffic in these markets. We've also restarted the use of direct mail, our most effective marketing vehicle, specifically aimed at geographies, where we have reopened.
Quarter to date comp trends are improving week over week and in stores opened over a month sales are now trending to 80% of the volume they were doing last year.
This trend has improved significantly by eight to 12 percentage point each week as the customer is informed the stores open and they become comfortable with our cobot procedures.
Despite the sales weakness we experienced this past quarter, our team quickly adapted to the environment to rightsize, our merchandise receipts and inventory plans. So that we can improve our financial flexibility.
Furthermore, we were more aggressive with promotional activity to drive sales given the seasonal nature of our assortment.
As a result, we were successfully able to manage our inventory levels and ended the ended the quarter with flat inventory units on hand versus last year.
We expect that our cancellations and liquidation efforts will lead to inventory being down substantially in the fall as we navigate an unknown season of consumer demand.
The impact of this virus will not be short term in nature, especially it and its effect on consumer behavior.
As such we have taken a close look at how we need to evolve our near term areas of focus.
We have shifted to a digital first model in recent months utilizing our strong E Commerce framework and we expect to continue with this strategy going forward.
We have analyzed our learnings from the beginning of the pandemic and are prioritizing two initiatives in the near term that fits squarely into our existing long term strategic pillars.
First delivery everyday value a focused supported by our recent acquisition of Komodo.
And second prioritizing the top 50 brands in footwear.
During the pandemic our customers' needs have evolved we have seen an influx of younger digital only customers drawn in by our online offerings marketing investment and their desire to participate in our donation campaign.
On the opposite side of the spectrum, we have are more mature store only customers, who haven't been able to meaningfully shop with us for quite some time due to store closures and ongoing cobot 19 concerns regardless of demographics, we know that everyday value is critical to customers footwear purchase decisions.
We are looking carefully at how did provide attractive everyday value through pricing assortment and convenience in recent months, we've taken certain pricing actions that allow us to demonstrate extreme value. While also clearing some seasonal and dress product. This is taking the form of hard price reductions as well as the acquisition.
I have some exciting branded clothes out opportunities.
We have the unique ability to provide value to our customers on their inline products.
Through our rewards program source branded special makeup product to offer a visibly differentiated pricing value and partner with brands on Premier close out deals the combination of offering top quality footwear brands at regular price special make up and Closeouts enables us to maintain one of the largest assortments.
In footwear.
This is further bolstered by our recent acquisition of Komodo.
Which gives us the ability to deliver our owned brands at a better value than ever before.
As we scale, our VIP program and build our loyalty customer base, we are able to offer compelling rewards and promotions supporting our everyday value offering.
Finally, our investments in providing a great online experience coupled with our new rollouts of curbside pickup in self checkout are redefining convenience at designer brands.
In addition to increased focus on value. We're also learning during this time the customers enjoy the comfort of familiar brands time and time again, we see our customers returning to their favorite labels to seek their next pair of shoes or latest accessory and we are accelerating our brand rationalization work to grow even deeper with.
The top 50 brands and footwear.
As points of distribution or rationalized, our vendors are excited to grow with a customer that is actually increasing share and we're excited to gain great access to product and find enhanced economics in partnerships with our flexible assortment scale and strong vendor relationships, we have the ability to adjusters.
Seats and impact our assortment when we see categories and brands performing particularly strong for example, during the pandemic two categories have seen relatively better results kids and athleisure parents have continued to shop for growing children's feet and athleisure has become a hot trend with people spend.
The more time at home and taking more opportunities to exercise.
As we all continue to get navigate this challenging time, there's still too much uncertainty to provide 2020 guidance the rapidly evolving nature of this pandemic, coupled with unpredictability of the supply chain impact in consumer buying behavior makes it difficult to accurately account for Howard business may be affected.
Presently we plan to continue to concentrate on near term areas of focus prioritizing the top 50 brands in footwear, emphasizing our everyday value proposition through value assortment and convenience bolstered by can move those capabilities and ensuring we have a from financial foundation and ample liquidity.
Finally, we would be remiss not to address the recent civil unrest in our country as a company we stand firmly against discrimination bigotry ended justice in all forms and I personally feel strongly about not stained silent in the face of recent horrific racist events. These are deep rooted issues that.
We as a society are required to confront and address changes desperately needed ended Dbi, our management team and board are committed to doing our part our company is always stood for self expression and I believe a diverse team is absolutely key to our success recently, we've taken time to listen.
And reflect on what we're doing internally to be the best company possible for our employees and our customers. We have a diverse customer base and it is important that our own team mirrored that diversity.
Currently 53% of our workforce is comprised of people of color and we have opportunities to expand the diversity in our leadership team, we will be intentional in our actions over the coming weeks, we will listen and we have.
I have had transparent often emotional and highly productive conversations over the last couple of weeks I want to personally. Thank our African American business Resource group, My soul of which I'm the executive sponsor for their invaluable honest and transparent Council, we stated publicly black lives.
Do matter, because they do and we needed our employees and our customers to here, we will partner with people and organizations, making a difference.
And we have from 3 million pairs of shoes donated the sold for soles through our former board member Hank Aaron and is 755 society focused on technical education.
Any changes required growth mindset embracing the challenge recognizing sustained effort is required and holding ourselves accountable.
The road ahead remains challenging, but we have invested in the right areas to position designer brands for long term success again, we want to emphasize that the health and safety of our employees and customers continues to be our priority. We're confident in the long term sustainability of the business and our ability to grow market share to create.
Long term value for our shareholders with that I will turn it over to Jerry Jared.
Thank you Roger and good morning, everyone.
Our first quarter was full of unprecedented challenges an unforeseen changes our team has come together and taken numerous actions in the near term to help manage our business through recent volatility and set us up for long term success.
First I would like to discuss the steps that we have taken from a liquidity and cost perspective, and then I will discuss our first quarter results. Please note the financial results that we will reference during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise.
These non-GAAP measures should be considered an addition to and not as a substitute for or an isolation from GAAP results.
Last month, we amended our 400 million dollar credit facility and as a result, we have suspended dividends and share buybacks.
Since February Onest, we have increased our borrowings by $203 million in place that liquidity and cash thus ending the quarter with $250.9 million in cash.
We remain comfortable with our liquidity and continue to assess our needs. While also working with our bank group to evaluate alternatives for incremental flexibility as we move forward.
Lastly, we also significantly lowered our capital expenditures for the year, we planned capital expenditures to be roughly $25 million to $35 million well below last year's $77.8 million as we have delayed our store openings non essential maintenance and distribution center projects as well as various business and it plans.
In terms of Rightsizing the cost structure, we have reduced expenses across our all areas of the company payroll expense declined significantly following our actions to furlough certain team members and reduce salaries across the rest of our employee base.
In total we reduced our operating expenses by $26.5 million in the first quarter over last year, and we expect to maintain a disciplined operating expense posture for the balance of the year.
We have also been working diligently with our vendors on landlords to renegotiate our payment terms, we anticipate a material benefit from the tax rule changes, which allow us to carry back this year as loss up to five years, including years in which the U.S. tax rate was 35% as opposed to the current rate of roughly 21%.
As such we are anticipating a meaningful cash tax benefit in 2021, as we receive a refund tied to the 20 Twentys cobot impacted performance.
Ensuring inventory levels are in line with current and future demand has always been an important priority for US first quarter is historically, a critical time for our retail segments with Marvel and September being our two biggest selling seasons together generating approximately 40% of our sales and over half of our operating income.
Having stores close to the public during the marble selling period significantly impacted our business.
To prevent high levels of aging seasonal inventory, we took proactive measures during the quarter to institute deeper markdowns and promotions, resulting an elevated mark downs of approximately $40 million on products sold.
In addition to these markdowns taken on products, we sold in the quarter, we've recorded inventory reserves against a large portion of our yet to be sold inventory totaling approximately $60 million.
This inventory this inventory reserve practice as required under the retail inventory method of accounting used by our U.S retail segment. This result than charges the cost of sales at the time the retail value of inventory is reduced by the markdown as opposed to when the product is sold to the customers.
As we look forward, we have meaning meaningfully curb future receipt and have taken necessary pricing actions in order to maintain a cleaner inventory position. Despite the decline in sales.
As Roger previously discussed we ended the quarter in good shape inventory on a unit basis was flat to last year and was down 17% and total including the impact of reserves based on selling thus far in Q2 and the cuts we have taken to receipts. We are anticipating our inventory balance entering fall to be substantially down compared to last year, but.
Visioning us well for the season.
Furthermore, if trends are stronger than anticipated, we have the potential to see upside because we have already taken these reserves and have the flexibility to chase into trends as they develop.
Now moving onto our income statement results for the first quarter net sales decreased 44.7% to $482.8 million, which included 19 for $19.4 million and intersegment sales that was eliminated upon consolidation.
For the first quarter total comps were down 42.3% first as a 3% increase and comp last year.
In the U.S retail segment comps were down 42.4% during the first quarter as stores were closed for nearly all of the highly critical Marvel selling season.
On a relative basis, both kids and the athleisure categories performed better comps for kids were only down 14.7% with parents always needing to replace product as kids grow.
We also saw consumers seeking comfort during this time and the athleisure category was only down 33.2%.
As you know kids in athleisure are both strong and growing categories for us and we believe we continue to have a sizable amount of runway to further develop our position in these categories.
Obviously as the customer pivoted, even more strongly towards casual and athleisure, the resulting opposite impact was to dress and seasonal historically very strong categories for us accordingly, with the flexibility inherent in our business model. We are following the customers directions, and we're building our fall assortments to lean into those trending categories, even more strongly.
Hi. This is Roger previously discussed the strength of our ecommerce business, partially offset our negative store sales trends, we saw the highest penetration of digital demand ever experience in the history of our company as we essentially became a dotcom only retailer starting on March 18.
In Canada comps were down 32.4% for the quarter driven by store closures. However results were slightly offset by a combination of our strong digital growth, which comped at 348% and represented over 55% of total comp sales for Canada, and an increase in loyalty members.
Similar to the U.S., Canada saw pressure across the board, but performed relatively better given their higher penetration of kids and athleisure product and there are much smaller digital base from which to grow.
Canada has been a point of strength for us as we applied our successful initiatives from the us at the new Canadian operations last year's relaunch of our online presence and rewards programs insured, Canada had a well developed infrastructure to lean on during this crisis.
Turning to come Muto, we saw notable disruptions in our wholesale business as our largest customers canceled a substantial number of orders just as DSW did with many of their vendors.
Total net sales for Komodo for the first quarter, including sales to DSW, where $82.1 million down 21.5% versus last year.
Wholesale sales were $67.3 million in the first quarter versus $91.8 million last year, including sales through our retail segments, which totaled approximately $17 million versus $10 million last year as I have commented before well not the primary strategic rationale for the Komodo acquisition, one benefit as commissioned income.
Which increased 39% in the quarter. This was primarily due to increased activity with our own retail segments on exclusive brand business.
Prior to the impact of Cobot 19, we were making good progress and increasing our penetration of exclusive brands throughout our assortment as well as moving to production of those exclusive brands to Komodo.
We have been very excited about the early sell throughs, we were seeing on the computer design product that hit the shelves at the start of the quarter.
One of the key benefits of the Camillo acquisition is our increased ability to build out exclusive brands within our own portfolio. We remain focused on increasing our printed penetration of these exclusive brands and our assortment and expect to continue to transfer more production from third parties to Komodo as we move forward in 2020.
Finally in the first quarter comps at EPG declined, 62% driven largely by temporary store closures by our retail partners.
Our adjusted consolidated gross profit decreased $285 million to a loss of $26 million for the first quarter versus a profit of $259.3 million in the prior year.
This decline was primarily due to increased markdown activity and reserves taken across all segments as well as increased shipping expense and significant deleverage and occupancy and fixed distribution costs, given the material cobot 19 related sales declines.
At our retail segments, we would expect merchandise margins to begin to improve in Q2 as the inventory with the Q1 reserves are sold through however, we anticipate additional markdowns will continue to be elevated as we liquidate our spring inventory.
Additionally, we expect the leverage on our fixed costs given year over year sales will continue to be depressed and shipping expenses will continued to be elevated as customers lean on digital sales in lieu of venturing out into a store.
Tomatoes gross margin was 16.9% in the first quarter 770 basis points below last years level of 24.6%, primarily due to the increase and inventory reserves as we expect to sell seasonal inventory below our costs due to the cancellation of orders.
However, as we accepted order cancellations, we managed our markdown allowances agreements with our retail partners to mitigate some of the gross margin deterioration on product that wasn't canceled.
We do anticipate much steeper actual markdowns beyond Q1, as we liquidate the inventory that was canceled.
We have significantly reduced fall production in order to better position ourselves for the season.
Moving to designer brands operating expenses in the first quarter adjusted consolidated SGN, a decreased 12.3% to $188.3 million versus the prior year as the company took decisive actions to cut cost across the organization as a result of temporary store closures given the significantly lower sales base our SGN.
Hey, as a percentage of net sales was 39 for 39% above last years level of 24.6%.
Depreciation expense was $22.6 million in the quarter compared to $21 million in the prior year.
Adjusted operating loss for designer brands was $212 million in the first quarter versus earnings of $46.8 million last year. This was driven primarily by the impact of cobot 19 on our gross margin, partially offset by mitigating reductions in operating expenses.
Interest expense for the first quarter was $2.2 million versus $1.8 million the prior year.
Moving on our adjusted effective tax rate was 38.4% in the first quarter versus 25.4% last year. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year, where the U.S tax rate was 35%.
Total weighted average diluted shares during the first quarter were 71.9 million compared to 78.3 million last year.
Reported EPS for the first quarter was a loss of $3 per share, which included net after tax adjustment of $84.1 million or $1.17 per diluted share primarily related to the impairment charges.
Excluding these charges, we had a loss of $1.83 per diluted share for the first quarter $84.9 million of the impairment charges were to write down fixed assets and leased assets at stores, where cobot 19 impacted cash flows did not have the time to recover within the remaining lease term. Additionally.
We wrote off $20 million of goodwill associated with our first cost business that komodo given the significantly reduced cash flows that business is expected to generate over the next few years as a result of cobot 19.
We also wrote down $7.6 million of intangibles.
During Q1, we opened one store and close one store in the U.S. ending the quarter with a total of 521 DSW stores in Canada, we did not open or close any stores ending the quarter with 145 stores.
As a reminder, we withdrew our guidance in March we will continue to refrain from providing guidance and look forward to sharing details when we have better visibility as we have run multiple scenarios using myriad different assumptions sets in nearly all scenarios. We continued to see pressure on our sales in our margins.
We expect to continue increased promotional activities going forward, which may pressure, our gross margin levels for the remainder of the year.
We have made substantial progress in reducing our inventory levels as well as cutting back our inventory receipt, but there is still notable uncertainty in the market as it relates to consumer demand.
Additionally, we have instituted new payment terms with our vendors, which better align payment plans with the sale of the inventory and we are an active dialogue with our landlords discussing go forward rent structures, which obviously pose various levels of challenge depending on various levels of NPAC to store traffic.
We no longer expect to move those operating profit to be positive in 2020, but we're confident that going forward Komodo will help drive overall consolidated profitability as they grow their production of our exclusive brands increased their DTC business and focus on growing a select number of national brands more thoughtfully with targeted distribution.
We anticipate that Komodo produced exclusive brands will be our biggest growth driver as we strive to reach our long term 30% penetration.
Our long term business strategy remains intact, we are a dominant player in the footwear space and where we are evolving to anticipate and meet changing consumer demand. We remain committed to keeping you updated on all factors as we move through 2020.
With that we will open the call for questions.
Operator.
Thank you we will now begin the question and answer session to ask a question.
Star then one on your touched downtown if you're using a speakerphone. Please pick up your handset before pressing the key to withdraw your question. Please press Star then Teo please limit yourself to one question and one follow up if you have further questions. You may agree answered the question Chad.
The first question today comes from Sam Poser Fast Mahannah. Please go ahead.
Good morning, Thank you for taking my question.
I would like to know first of all on communal group how do you.
Well, how is the mix of product going to change within immuno group.
Going forward, given the focus on kids and athleisure versus dress uneven.
Dress casual.
Yes, Sam this is Roger thanks, Thanks for question.
I think obviously you know the Koodo has historically been known as a as address house and when you look at actually across designer brands, we actually own about 12% of the womens non athletic footwear business across all of our business. I mean, we think we are the dominant market share player in that space, we see.
That as an asset and there will come a time when she's going to go out of our home and go to a restaurant or do something in the evenings or go back to work.
So we were happy about where we're positioned and and we think we will leverage that when their recovery does hit but in the interim window of time, what we've got to do as we get to figure out how do we get after the sneaker. This in a bigger way we brought in some resources that know that business better than frankly, we do ourselves we are working in.
A huge way.
Outside of Colorado, but with DSW and shoe company with our athletic partners because the beauty of our model is Weve 30 million consumers, 80% of them are female and guess what we do not have a huge portion of their wallet when it comes to athletic and given how those large athletic player.
These are looking for athletes and when I say athletes not the Olympic athletes, but the one that runs in front of the ones that run in front of my home every day as I've on these calls.
We have that customers. So we're excited actually about kind of conversations we've been having with the top athletic brands.
And I've given you a long winded answer here, but there's just there's so much opportunity in athletic for us to get after.
Or I should say Athleisure, both act Muto ended DSW and shoe company. So I think we're.
We're not going to back down from the fact that we are who we are we are address house. We are seasonal house, that's who are our businesses have been historically, but we havent a great opportunity to grow athletic share during this time period.
Thank you and then can can you talk about some of your can you talk about.
This focus on the top 50 vendors, maybe give us some examples.
Is this just taking the.
Reduction of what you called labels away or I mean to what degree is this a completely taking this whole thing to another level and with brands like Nike Adidas Skechers. The ones that are like even Steve Madden the habits have a big athletic portion of their business.
Again, how do you.
I know you want to grow your athletic trend with communal but I mean, how do you compete with the people that have already been it for so long that I left out a bunch new balance and so on.
That can really would you rather do it yourself and try to grab share at a price or or do just take advantage of these various that was brand in the space.
I think the that's exactly the point that.
Going after the relationships and a bigger way with these top brands.
We we had the conversation at dinner the one night about the seven or 800 labels that we carry.
But ultimately we help convert into brands, while we're not going to play that game anymore, we're going to invest our inventory dollars, meaning owned inventory.
Into these top 50 ish.
Kind of brands that are the ones that the consumer demands and I think this is the data point that through co but that is really stuck out for us is that.
85% of our sales as an organization our digitally demanded and I want you to understand what that means when I say, 85%.
20% to 25% of the time there on the website they decide to click to buy at that moment, but the research we've done in what we've seen is the influence it hasn't when they walk into the physical plant.
This significant so being able to have a broader assortment from these key brands, which when you look at the top 20 search terms on our website 18 roughly of those top 20 are these major brand names and yes, sandals will show up there or yes boots will show up there in winter, but.
Getting after these top brands in we're in the process of having these discussions with all of our top partners and people are shutting doors people are filing bankruptcy and we're going to be here and so they're looking for places for them to grow and we think we are that destination, both online and in the physical locations.
So I think thats it thats a great great point and then when you look at this is the best example of how important.
Athletic or athleisure can be for us in the month of May.
In stores that were opened in May our ath leisure and kids business combined was up 17%, we comped up 17.
That's fantastic. The challenge we have is we have a large chunk of our business that seasonal and dress and guess what that's not a copy so.
But we're really proud of the progress that we've made with athletic and as we go forward.
For the back half of this year and I think the foreseeable future going to see that penetration grows significantly.
Thanks, I got one more.
With the E Commerce business, you know you were up 25% for the for the quarter can you sort of talk about how that may have trended by month and can you give us any color into how that E. Commerce business has been doing since youve reopened stores. So can you walk us through.
February March April into into May and June.
On E commerce as a percent increase and can you provide us what the penetration of E. Com was in Q2, three and four last year.
So I'll.
I won't give you all of that but are you I think enough color to get you to understand how pleased I am with our with our performance. So.
First during the first five weeks of the quarter.
We had walked away from a significant amount of promotions that we had ran last year frankly, because we wanted to drive the customer into our warehouses to improve margins and actually our first five weeks, we were in the low single digit comps across the enterprise and dotcom comps were minimal.
It was the right thing to do and then we got hit with Covance.
And for the eight weeks that followed that our digital demand was up 49%.
During that window of time.
In the minute those stores closed we started to have we actually had three of the six biggest days in the history of our company happen after stores closed and when I say biggest days, meaning dotcom days, so like what black Friday, cyber Monday kind of days and we manage through that successfully.
Without any major site issues.
All these omni tools, we have invested in we were fulfilling 80, 90% of that demand out of our what we call warehouses, but where the stores and.
So I'm really proud of the work we did and then as it relates to Q2.
We're still in that 25, 26 ish range of dotcom demand. So as stores are starting to ramp back up and we're getting a bunch of them open now we're still seeing demand online as well.
Up around 25 or so per se.
Yes, okay. Thank you very much good luck.
Thanks.
The next question comes from Rick Patel with Needham and company. Please go ahead.
Thanks, Good morning, and hope everyone as well.
Thanks, Eric.
I had a two part question related to the productivity from your reopen store. So first can you provide some additional color on these reopen doors and productivity as we think about DSW versus Canada, and then second.
This ties into Sam's last question.
Can you talk about that trends that you're seeing in markets as a whole select when we think about a market stores plus E com for those areas where stores at reopened our debt.
I was the market revenue look versus last year.
Yes, the recall.
I think I'll answer the ended at first but.
We're seeing that.
Right now in stores that have been open for about a month.
We are at about 80% of the volume we were doing last year I think.
Good news is that is significant progress we really started opening stores April week three.
That first week, we were doing roughly 5% of the business in the first group, we had opened and now to see them be closer to 80%.
His significant improvement as we said it's been improving eight to 12 kind of top points. Each week. So I think I'm really really happy with that.
As it relates to us versus.
Versus Canada.
Canada, we have we've been much more aggressive with some of our with some of our markdowns that we've taken.
We didnt have the ability to get out of as much seasonal product up there as we were in the U.S. So the comp trends have been better but margins have been impacted in a bigger way.
But again overall, we we're beating our expectations that we had coming out of this as it relates to the doors that we have opened.
Got it and you talked about planning inventories down substantially in the back half any additional color. There does that mean down mid single digits are down double digits any relative contacts and then also can you provide color on how you're thinking about categories, just given the relative strength that you're seeing an active in kids.
Assuming.
There's category going to be planned lowers while ours and we actually expect an increase in inventory there.
You know we ended the quarter with inventories down roughly 16, 17% in dollars and I think that's sort of the directional plan as we head through the balance of the year.
But we're going to keep significant open to buy so what I would I keep going back to his 2008 and we have a playbook that worked in 2008 as it relates to turning on our marketing, which we've done hopefully you've seen the TV, we're doing at a level that weve never done in history of our company.
Any you'll hear us on.
All the different digital channels that you listen to so we're ramping up marketing in a in a significant way and we're going to manage inventories in the chase mode. So that when we see it we will get it and I think that leveraging the relationships. We have with these top brands is key.
To the approach that we take so I feel pretty good about that and then as it relates to categories. Obviously.
I've shared and I were in the office for the first time. This weekend I said I think it's a first time and 13 week seaborne appear pants, that's not a sweatpants so.
We're going to continue to figure out ways to get after this at leisure.
Kind of look and Sam had pointed out whether that be sneakers from some of the brands or sneakers that we can develop at koodo.
That is what Hansche are aware and right now and we've got to continue to get after that along with kids.
Thank you very much other banks.
Thanks, Rick.
The next question comes from Tom Nicotine with Wells Fargo. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
You said something in the prepared comments about rationalizing the.
The the brand portfolio and I think guarantee might have touched on it briefly.
As well.
Thanks.
I'm not sure.
We understand what's happening with the.
Business and the brand portfolio.
Elaborate on that.
Thanks.
Yes, thanks, Tom so.
When we acquired Komodo they were working on or managing upwards of 30, plus brands and so the the work that we've been doing is trying to.
Really identify who are the target customers for each of our brands, what's the the market.
Look like for each of those brands and then what investments are required to grow them and so thats. The work that we've been doing and it won't be 30 brands is what I could tell it's going to be something significantly less than that.
Where we will focus our attention.
And this isn't just because of covert or because the downturn. This has been our game plan from day one.
That's what we mean, so youre going to hear about.
US focusing our efforts on Vince unlucky on Jessica on J. Lo.
And on our exclusive brands those of the areas as a business that we see that there is there's growth potential and market opportunity. So.
That's where our core focus is going to be.
Got it.
Quick question on.
I guess the.
The store associate base.
Had to make the unfortunate decision to for low.
A large portion of your.
Employee base.
You had any sort of difficulty getting people back to work.
People find other jobs elsewhere.
That's paid any.
Your shoes, restaffing stores as things get back to normal.
We have.
Unfortunately, we we ended up having a for low about 88% of our entire workforce.
I'm happy that.
Because our stores are getting back up and we're getting sales. We've now called back roughly 60% of our of our organization, which I'm I'm excited by that.
And as we start to open the northeast and and some of these other larger markets that number is going to go up significantly in the next couple of weeks so.
But.
To date, we have not experienced any major hurdles as what I would say what I'm really proud of is the investments that we made.
Protecting the health and safety of our associates.
I think probably us in American Eagle, because we work together a lot on different projects, obviously because of Jay and his relationship between the two companies, but I think the to our two brands I think stood out when you go into see what the experiences like for a customer and we message that too.
Our associates. So I think we are very safe place for an associate to come back to work.
And we Havent really experienced any I would say major kind of challenges of getting folks back to work.
Got it.
Thanks for taking my questions hopefully, we can I'll get back to a somewhat normal normal situation sometime soon.
Yes.
Thanks, Tom.
And next question comes from Steve Marotta, C.L. King and Associates. Please go ahead.
Good morning, Roger injured.
In the prepared remarks.
I mentioned that the company's reached alignment with nearly all major vendors in landlords on past due amount and is extended go forward payments can you Peel the onion back a little later there is this just a matter of.
Lending terms and pushing back payments or are there Ben.
Net amount of reduction.
You would have otherwise been expected to pay that you are not also.
Right into you mentioned.
Essentially.
Future agreements that are are still.
Potential to save money on rent as what I heard and maybe you could elaborate a little bit. Thanks.
Yes, Steve this Jeremy Thanks for the question.
We approached so let me kind of take you back to when we first went into cobot. We first went into co, but we reached out to all of our vendors and all of our landlords and said until we have better clarity and visibility on our amending our current revolver and when our store is going to reopen we need assistance and.
You know not having to pay thanks as do and we received huge support across the board on that front. Once we had visibility on those two items, we actually started reaching out one on one with all of our top vendors and with every single one of our landlords to say okay of those items that we.
We didnt pay you for but were due.
So let's get on the payment plan for that and the vast vast vast majority.
Very cooperative and we are on a we are back and good graces and we are on good terms than we are not in default with with any of those major creditors.
And that is that is being paid off every every deal was different but as being paid off over the next few months. The next couple of years. If it if it was rent. It was added to the end of lease term those were not concessions those were deferrals and I think thats. What your question was getting too.
We then had a discussion and reached align that with with all of our vendors about our new go forward terms and those are for any orders that had been written for for future delivery that is going to be much more aligned with what our anticipated inventory turn is going to be so we should see some permanent working capital improvement come.
Out of that again with as Roger was talking about given the amount of growth, we're going to have with the top 50 vendors.
Having that part of the discussion it was a good time to have that with them and it's worked out very very favourably. There on the landlord front, we are working with LNG Realty consultants one of the largest leaves workout groups and we are we are now assessing how do we go back and have the discussion with the landlords on.
What what does the actual rent expense look like based on what's happening with traffic and to be perfectly honest right now as much as we don't know what the permanent impact of traffic as the landlord doesn't either but we all know that right now it's impacted pretty substantially and it's causing significant de leverage on our.
C line and that's not sustainable on the long term so with the help of an advisor who does this for a living and does it very very well. We are we are having those discussions about how do we get true actual relief in some way shape or form on that on that big expense line.
That's very helpful. Im actually another follow up or two on that but I'll take that offline.
Roger can you talk a little bit about you mentioned opportunistic buys and Closeouts can you talk about what you intend to utilize immediately what you intend to pack away how that will.
Positively impact your margins potentially in the short term and maybe what percent of the business you would anticipate.
Maybe.
So this year, maybe a little bit next year I assume it's going to be a little bit more than it has been maybe you could you talk about your strategy around biology close outs.
Yes, Steve Thanks.
Historically.
Those have become a significantly.
Decreasing portion of our assortment and.
What I'm excited about as we have had these conversations with our with our top brand partners is talking about how do we continue to sell their inline product, which is the same goods you can find another retail channels, but the beauty of that for us is be through our loyalty program, we're actually able to offer value proposition that you can't find out.
Swear so we're able to pass value to our consumer through that.
And then the second big chunk of our assortment is these special make ups that that allow us to show compare at value in the third bucket are the closeouts and that has fallen down to be 8% to 10% of our business and we're anticipating that we should double that or bigger as we move forward and then having these conversations with.
Our top brands being their first choice.
For for liquidating those kind of goods.
That's the approach that we're trying to take and so far this conversation gone really well we've had some really good close out the highs that some of them.
We will will show up in fall, we've tried not to do a ton of pack and hold of spring goods frankly because.
From a liquidity standpoint, right now I'm really not into buying a bunch of stuff and putting in a room somewhere and burning through cash with that.
So we are going to continue to get after the close of business in a big way.
It to be able to pass value under our customer and when you combine all three of those there really is no one else out there that you can go to from a brand perspective that has all three of those within the same brand portfolio. So that's the approach we're trying to take.
Very helpful. Thank you for the clarity.
Yep. Thanks.
Next question comes from Gabby Carbone with Deutsche Bank. Please go ahead.
Hi, good morning, Thanks for taking our question, we understand you aren't providing guidance, but on gross margin how should we be thinking about that trajectory through the year.
Does it.
Just to dig into the headwind, we should be considering that will continue and if there any offsets you see potentially thank you.
Yeah, Yeah Gabby.
So you're right, we're not providing guidance on what I would tell you is due to the fact, we did have to take.
Large reserves because we're on the retail method of accounting in Q1, we wouldn't expect the gross margin deterioration in Q2 to be as severe however, it certainly is going to be impacted as we continue to have to look at ways that we can liquidate out of this this inventory that we.
Obviously, we're intending to sell and didnt have the opportunity to do so.
As we get into fall, where we have right size the buy and as Roger mentioned, we're sitting on a lot of open to buy and we'll put that to work in a chase mode should we see the trend materialize, we would expect our margin rates to get much much much improved much closer to normal in the fall with one one caveat I mean, depending on the level.
The actual comp.
Sales our occupancy deleverage is.
If it's anything below about 1.5% positive. So yes that will probably continue to be a headwind, but from a merchandise margin fall should look much better.
Got it. Thank you Ben just a quick follow up you mentioned store optimization kind of going ahead kind of how you keep your store count in the U.S. is there anything you can tell us now here thinking about that.
Yes, Kevin This is Roger I think.
I'm.
I'm pretty certain and all of retail we have one of the better fleets from a way we've positioned the business as we exited last year. There was roughly five fiber so doors that were cash flow negative.
So that's pre code. So we were in a really really good place.
The conversations that we're having now with the landlords is that was pre coated and as the consumer behavior permanently shifts as a result of what we've all just gone through.
That that number is significantly higher and so what we're trying to do is to try to get to some level of let's just call. It a normalized a sense of how does the consumer come back to the physical store versus shop online and then we've got US a data have the tough conversations with our landlords that.
Are they going to work with this or not and the beauty of our model is and credit to build Jordan and our real estate team.
Our deals really every 20 every five years, we have the ability to open or closed store because the way our leases are structured so.
20% of our fleet each year, we have the ability to make some decisions on so.
That's the lens, we're using lets get let's get through Q3, let's see how things play out as things come back to normal and that sit down and have the real conversations with the landlord about the actions that we need their support on to ensure that we can that we can still stay open in all of these markets and as part of that it will also be a conversation about how.
Now we bring these services to life and part of the discussion can be we are a traffic driver and we have found a an incredible tool called W. nail bar that when we open those Neal bars, we can't get more traffic to our center, so helping to invest with us on.
In how we can retro some stores, we have a greater appetite to go after that once we once we get through this so those are all things that as we have the conversations with the landlords, we keep reminding them, but I really like the fact that we have the ability to to adjust our fleet roughly 20% a year.
Great. Thank you. Thank you so much rather color.
Yeah. Thanks, Kevin.
Again, if you have a question. Please press Star then one next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.
Good morning, everyone. As you think about the digital business and the penetration into digital business that you've had.
How do you see the cost structure aligning with that how do you see shipping costs going forward and how you're planning and the penetration rate.
Lastly on the expense structure, what doesn't come back or how much of the expenses that you. If we aligned what what doesn't come back and why do they wanted a categories, where there is opportunity. Thank you.
Well thanks, Dana for the question I think again as we talked about the digital demand.
Again think about 85% of all of our purchases really start with that digital with a digital sale Uh huh.
And as it relates to shipping costs.
Right now not frankly, a time to be able to negotiate rates with some of those carriers, what I like about our businesses.
During this this pandemic.
We have one carrier that we utilize today, we turned on the ability to use multiple carriers and we did that while only having roughly.
20% of our workforce in place we've turned on buy online pickup in store years ago, but we turned on curbside pickup during the pandemic.
We have some new things we've done around self checkout. So I think there are things we can do that can leverage the digital experience in a way that reduces the cost of shipping.
As as we run the business more efficiently. So so I feel like.
It's probably going to stay in the ballpark of where we are today and then obviously as that continues to grow will find ways to negotiate harder on on what those rates could look like.
As far as expense realignment I mean, obviously, the the largest expenses, we have our payroll and and our occupancy costs and the occupancy side as Jeremy mentioned, we're getting after that over.
Sort of a three staged approach so over the next next six months I think we're going to be able to answer that question more specifically for you as it relates to payroll as I shared earlier roughly 60% of our team is back to work and that's going to flex based on the kind of demand that we're able to generate and again.
Roughly 80% of the business, we were doing before in our stores. So expenses will have to model after how that sales Rick how those sales recover but our intent is to try and get as many people back to work within this organization as we possibly can.
You know Dan I want one thing I would add to that you may recall back in 2018, we went through a pretty big Labor force or a labor model redo, where we actually made our labor model in the stores much more flexible because we were finding at that time, there was a niche mismatch of when we had more coverage versus what the.
Traffic was but here as we have seen big impacts to traffic that gives us a lot more flexibility.
To to flex that up and down than what we've had before we did that that degree do.
Thank you.
All right.
Thanks, everybody.
[laughter].
This concludes that question and answer session I would now like to turn the conference over to Roger Rawlins for any closing remarks.
Thank you thanks, everybody for taking the time to call in and.
Look forward to hopefully someday getting to see all of you in person.
But thanks for your interest in our business have a great day.
This conference has now concluded. Thank you for attending today's presentation, you may now that.