Q2 2020 Steven Madden Ltd Earnings Call

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It is now my pleasure to critical or where do you have a speaker today.

Daniel Mccoy director of corporate development and Investor Relations.

Please go ahead.

Thanks rain and good morning, everyone. Thank you for joining our second quarter 2020 earnings call and webcast.

Before we begin I'd like to remind you that during our call. We may make certain forward looking statements as defined in the federal securities laws regarding our expectations or predictions about the future.

Generally these statements relate to projections involving anticipated revenues earnings or other aspects of the company's operating results.

Because these statements are based on current assumptions and expectations. They involve known and unknown risks uncertainties and factors not within the company's control and as such our actual performance and results may differ materially from these statements.

Our annual report and other reports filed with the FCC from time to time include detailed discussions of the rest of the company faces and we urge you to refer to these.

Specifically the Cobot 19 pandemic has had and is currently having a significant impact on the company's business operations and results.

Such forward looking statements with respect to the cold at 19 pandemic include without limitation statements with respect to the company's plans in response to this pandemic.

At this time, there are significant uncertainty about the duration and extends up the impact of the cobot 19 pandemic.

She was a dynamic nature of these circumstances statements made on this call regarding the company's response to the cobot 19 pandemic could change it anytime.

Any forward looking statements represent our judgment as of the time of this school and cannot be relied upon as current after today's date.

We disclaim any intent or obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise, except as required under applicable law.

The financial results discussed or on an adjusted basis, unless otherwise noted a reconciliation to the most directly comparable GAAP financial measure and other associate disclosures are contained in our earnings release.

Joining the call today as Ed Rosenfeld, the chairman and CEO of C met and with that I'll turn it over to Ed Ed.

Thanks, Danielle good morning, and thank you for joining us today.

All those listening I hope you and your loved ones are healthy and say.

The past few months had been challenging for all of US due to the Kogan 19 endemic and Steve Madden, We had prioritize the health and safety of our employees customers and communities well also moving quickly to adapt to the current retail environment mitigate the impact to our business preserve liquidity and position the company to win.

Going forward in a change to retail landscape.

I'm extraordinarily proud of what our team has been able to accomplish and the dedication and resilient demonstrated during this challenging period.

Since I last spoke to you on our first quarter earnings call. We've also seen the senseless and tragic death of George Floyd, which is spark demonstrations across the country.

Our Hearts go out to George Boys family into all people its color that experienced the systemic racism the plagues our country.

Steve Madden, we're committed to doing our part to create long term positive change for the black community.

Last year, we commissioned an outside consultant to do a diversity and inclusion GAAP assessment for the company and to assist us in preparing a strategic plan to strengthen our efforts in that area.

Recently formed a diversity equity and inclusion council to oversee the implementation that plan, which includes initiatives around talent acquisition talent development unconscious buys training, new employee resource groups and more.

We're also offering financial support organizations, making a difference we donated $100000 to black lives matter and $50000 to the NAACP and we're matching all employee donations to organizations I didn't racial injustice through the end 2020.

More broadly the devastating impact of the cold in 19 pandemic and the long overdue reckoning with racial injustice in the United States have only emphasize to us our responsibility to all our stakeholders and the opportunity we have to create positive change for our people and communities.

Well conducting business responsible he has been a defining part of our culture from the beginning recently, we've taken a number of steps to formalize, our corporate social responsibility and sustainability goals and processes in an effort to put us on a path of meaningful and measurable improvement in impacts we have.

As part of that effort. We recently published our first sustainability report, which outlines our CSR roadmap and how we intend to ensure that CSR and sustainability are embedded in everything we do going forward.

I invite you all to visit the Investor relations portion of our website <unk>.

With respect to the business our focus since the onset of the Cobot 19 crisis has been on ensuring the long term viability and strength of our company.

And a critical part of that effort is maintaining and enhancing our strong financial position.

On the last call we shared a number of the measures we've taken to preserve liquidity and enhanced financial flexibility.

Early in July we took the additional and painful stuff of letting go of approximately 250 corporate employees.

This is an extraordinarily difficult decision and we wanted to express our deepest gratitude to all the impacted employees for their service to the company.

And then last week, we closed on a new hundred 50 million dollar asset base revolving credit facility to further increase our liquidity and provide us with even more financial flexibility.

As we look ahead, we are well positioned to continue to navigate this crisis as well as capitalize on market opportunities as they arise.

Turning to our results for the quarter I have to say that Q2 was unlike any quarter, we've seen before and we hope we never see another one like.

Consolidated revenue declined 68% and we reported a loss of 19 cents per share.

In wholesale we experienced massive order cancellations as a result of covered 90.

The majority of our wholesale revenue in the quarter came from our private label business driven in large part by shipments to the mass merchants. They kept their stores opened throughout the crisis.

As we move through the quarter and our key wholesale customers began reopening their stores. We did see reinstatement of a portion of our orders with all major wholesale customers and we made strong progress in securing orders for the excess inventory, resulting from the inventory cancellations.

In July we've seen a significant uptick uptick in shifting the overall wholesale revenue remains under pressure compared to last year.

In third quarter, we expect wholesale footwear revenue to decline approximately 35% and wholesale accessories and apparel revenue to be down approximately 40% versus last year.

You know retail segment the vast majority of our stores were closed for most or all of the court.

In the U.S., we began reopening stores on May 20.

We had less than 20% of our U.S. stores opened at the end of May and just over 50% opened at the end of June.

Today, we have <unk>, we have reopened all but three of our stores in the U.S.. Although we've had to re close 14 stores in California due to reimpose government restrictions.

Outside the U.S. all stores have reopened with the exception of two stores in Mexico.

Hours of operation in our stores have been reduced by 25% to 30% on average.

Our E Commerce business has remained operational threw out and it has been a bright spot.

Revenue on Steve Madden Dot com increased 88% for the quarter on top of the 58% revenue increase in last year's second quarter.

Our increased digital marketing investments are generating strong returns and new initiatives like tried before you buy our resonated with consumers.

We've been pleased that so far our strong momentum in ecommerce has continued and stores have reopened.

And while we have planned for the growth in this business to moderate somewhat going forward, we expect ecommerce to make up the majority of our retail segment sales again in Q3.

Overall, we expect retail segment sales to be down approximately 25% in third quarter.

So as we look ahead, we know the path forward, we'll continue to be bumpy in the near term, but we remain steadfast in our confidence in the company's ability to successfully navigate this crisis and returned to profitable growth once conditions normalize a confidence rooted in the company unique advantages.

A strong portfolio of brands led by our flagship Steve Madden brand, the clear leader and its market.

A fortress balance sheet, which provides us the financial flexibility to whether any storm and continue to invest for the future.

A diversified distribution model, which positions us to win in the channels that are increasing in importance, including digital in value channels.

A proven business model built on the test and react strategy and industry, leading speed to market in inventory turns and most of all our exceptionally talented and dedicated employees.

With that I'll turn it over to Danielle to walk you through the details of our financial performance in the court.

Thanks, Ed to everyone. Joining today I hope that you and your family's remains safe and healthy during this challenging time.

And the second quarter, our total revenue decreased 68.2% to 142.8 million compared to prior year total revenue of 449.6 million.

Our wholesale segment declined 72.5% to 100 million compared to 363.5 million in the prior year period, driven by significant order cancellations due to the impact of the coal that 19 pandemic.

Wholesale footwear revenue declined 72.8% to 78 million and wholesale accessories and apparel revenue declined 71.5% to 22 million.

In our retail segment revenue decreased 49.2% to 41.4 million due to the closure of the vast majority of our bricks and mortar stores from most or all of the corridor.

Our ecommerce business remained a bright spot increasing 86% in the quarter, including 88% growth on Steve Madden Dotcom.

We ended the quarter with 225 company operated retail stores, including six feet outlet and E Commerce stores.

As well as 17 company operated concessions in international markets.

Turning to our licensing and first of all segments.

Our licensing royalty income, which is now included in total revenue was 1.2 million in the quarter compared to 3.1 million in last years second quarter.

First class Commission income, which is also now included in total revenue.

0.3 million in the second quarter of 2020 compared to 1.6 million last year.

Consolidated gross margin in the quarter was 39.1% compared to 37.8% in the prior year.

Wholesale gross margin was 26.6% compared to 32.1% last year due primarily to a shift in sales next to the lower margin private label business.

Retail gross margin was 67.4% compared to 59.7% in 2019 due primarily to a shift in sales next to the higher margin E Commerce business.

Operating expenses for the quarter decreased 36.4% to 79.6 million compared to 120.9 million in the prior year second quarter, reflecting the significant actions, we took to reduced payroll and scaled back on non essential operating expenses.

Operating loss for the quarter totaled 21 million compared to last years second quarter operating income of 49.1 million.

Our effective tax rate for the quarter was 26.9% compared to 22.4% in the same period last year.

Finally, net loss attributable to Steve Madden limited for the quarter was 14.7 million or 19 cents per diluted share compared to net income of 39.5 million a 47 cents per diluted share in the second quarter of 2019.

Moving to the balance sheet, our financial Foundation remains strong.

As of June 30 F. 2020, we had 300 in 56.9 million of cash and marketable securities and 42.7 million in debt.

Inventory totaled 103 point threemillion down 29.3% compare to the prior year figure of 146.1 million.

Capex in the quarter was 1 million.

Last given the significant uncertainty related to the cobot 19 pandemic, we're not providing full year revenue and EPS guidance at this time.

Now I'd like to turn it over to the operator for questions.

Operator.

As a reminder to ask the question you will need to press star one on your telephone do enjoy your question Rasta bounty. Please stand by a week on politicking Erosnow.

Your first question comes from falling.

From Citi Your line children.

Hey, Thanks, guys I'm, just curious within the direct consumer.

Well you mentioned the E. Com shift was helpful to your gross margins I was curious if that is sustainable over time as as E com grows faster.

I'd be a tailwind to margins.

Oh was there something more specific to this period, where maybe pull back on promotions I'm on a then second question just I'm curious about your wholesale order book, thus far in Threeq you do your orders corn. They tell you that your partners are clearing through inventory.

Three at a rate in line with or maybe a little faster little slower than what you would've expected. Thanks.

Sure.

Good morning, Paul So in terms of or the benefit that we got to gross margin from E. Commerce in the retail segment from E commerce, making up a larger percentage.

I think yes as E com grows its been as Anders themselves. We will continue to see a tailwind there certainly won't be nearly to the degree that we start in Q2 keep in mind that E. Com was he was 84% retail segment sales in Q2, which stores we opened we certainly.

I don't expect.

To see those levels again.

So you won't see the same levels impact, but there will still be and impact from that mix just the other thing I'll point out, though that so the majority of the increase in the retail gross margin was attributable to that mix shift that we just alluded to but there was also further impact which was a little bit a geography.

Income statement.

And.

Related to how we fulfill our E commerce orders. So is as you know Paul we've historically shipped the majority of our E commerce orders to consumers from our stores or and in Q2, we pivoted and we're fulfilling everything from our warehouses and well that the profit.

To the company and the profit contribution is quite similar whether we could sell from stores or from warehouse or when we fulfill from warehouse.

We have a higher gross margin and then a higher associated SGN today, and so that was also a an impact that we saw on in the quarter that that you know.

Well we'll.

Go back to normal essentially going forward, where you will continue to see that that's going forward.

In terms of your second question I think you were asking about.

How we are if I understand correctly.

How do we think the wholesale customers are doing in terms of moving through spring inventory and how does that compare with where we anticipated that right.

Yes, correct.

Okay.

Yeah, I think that if you look at the inventory in the channel you know that customers have really move through a lot of inventory.

And particularly if we think about Steve Madden inventory in the channel frankly, our stock levels are too low.

You know what we saw was when the crisis that everybody.

Turned off the this big it wasn't taking in a new products and everybody got very aggressive initially online and then.

Also in stores once they reopened.

Promoting and trying to move through that seasonal inventory that spring summer inventory.

You know.

These promotions in general we're not targeted they were a across the board promotions and the case of the Steve Madden brand in particular, frankly, I think they went deeper than they needed to and really burned through that spring summer inventory are.

Quite quickly and left us in a position now where we're actually a little bit light relative to where we'd like to be.

In terms of inventory in the channel.

And I think that really you know it I think particularly acute for the Steve Madden brand, but I think it's probably.

The case for their overall businesses are in that seasonal inventory category now no dress shoes would be different I think that that some of the retailers.

Our stuck with a with excess dress shoe inventory that they still need to work there.

Gotcha. Thanks, Good luck.

Thank you.

Your next question comes from GE So from your.

Your line is open.

Great. Thanks, so much I just want to follow up on that last point about some of the dress footwear I'm as we go into Threeq to is there any any category shifts that maybe are going to be.

More favorable in terms of like what the current trends are that will help sales and Conversely are there any that won't be maybe more on favorable in can you sort of change the mix I'm as you look out into the right back half the year to sort of get into the styles that are trying to you know the strongest.

Yeah, well, one I think it won't come is any surprise that dress shoe penetration is is down from where I was a year ago from where we expected would be coming into the year and we've really pivoted more towards.

Casual styles and that's really what's what's perform in the market. So for US we've had a lot of success and worsened they'll continue to see lots success with our flats sandals, particularly our Wanna mention flats sandals, our platforms, we're doing very well with foot beds.

And as we going to fall, we'd never like to talk.

Competitive reasons too much about what we what we're seeing but I think not giving away too much you say that were pretty focused on sneakers and casual boots.

And we're also.

Pivoting towards some of this cozy slash comfort footwear, so I mentioned the foot bad but were also a has also got slippers sneakers with for et cetera. So in terms of you know can we pivot yes, we already have pivoted as you know that's really.

[laughter] Ben.

You know the secret to our success or.

For many many years is how quickly we identify new trends and ER and get our product assortment inline with what the customer wants.

Got it maybe if I can just follow up with one inventory was down a lot in the quarter, obviously, that's a really good sign.

Obviously, the very fluid environment, maybe things get better things get worse can you just talk about your ability to sort of changed if we get into sort of you know the you know the holiday season, and things are starting look better because if there's a vaccine or something or some something good happens like can you just talk about that part of that potential.

Sure. Yeah look we are positioned conservatively on inventory going into fall, we thought that was the right way to approach it.

But as you know.

Chasing a our speed to market capabilities as I think second to none in our industry and chasing inventories really.

We're chasing hot trends is something that we do very well, particularly in fall when we utilize our keep our you know our sourcing capability Mexico.

Yes, if we identify are the things or if it looks like things are better than we anticipated we will be able to chase.

You know.

That being said.

We have I want to reiterate that we have positioned conservatively. So will we you know.

Well, we absolutely maximize every last dollar sales are things are great. No. Yeah. We felt it was more important to protect us protect ourselves in the downside.

Got it thanks Fred.

Thank you.

Your next question comes from Thatd Ghali's from Keybanc capital markets Your line.

Hey, guys. Thanks for taking my questions.

Can you talk through the impact of by now pay later has had on your E com business and can you quantify default rates are your unit economics on the suburban.

Sure.

Yeah. So you know we think we've talked a in the past about the success that we've had with our installment payment option after pack.

And essentially the way that traditional product work was a the customer would pay a in four installments, 25% a at time of purchase and then additional 25% every two weeks thereafter.

And so we worked with after pay to come up with a custom product for us.

In which.

The first payment is not due until two weeks after.

And then and again, it's it's the balance of the payments come every two weeks.

And yet you know one of the benefits there for consumers other than stretching the payments out. Another two weeks is that is that they could get the product and tried on before any payments.

Our deal and we've been really thrilled with what we've seen from that so far I'm not going to quantify but the percentage of checkout.

Which was already very substantial with the traditional after pay product.

Has gone up a materially or with the new product a and we've also seen a further benefit to the average order value. So again the average order value.

After payments previously was much higher than the balance of our business and we've tried before you buy it even higher.

In terms of a default rates that deal that's after pays a after pay takes the the credit risk here. So that's not as Steve Madden issue, but they they don't report a so far a any issues there.

Bigger issue for us would be if it was driving up the return rate, but so far we have not seen an increase in the return rate with people that are using tried before you buy which actually surprised us a bank Levy economics work, even with a with a with a are pretty reasonable increase in the return rate, but so far we haven't seen.

We'll continue to monitor them.

Got it that's really helpful and one one more if I could since your consumer base skews relatively young can you talk about how your customers have benefited from the consumer stimulus and how you're planning for potentially a smaller package this time around.

Yeah look I think it's it's hard to to quantify we certainly did see when the original 1200 dollar stimulus checks went out we certainly did see apart.

On in our ecommerce businesses.

In the days or in the days after those checks it peoples bank accounts.

In terms of the expanded unemployment benefits that folks are receiving.

Look I think.

It's certainly a good bet that that's helping consumer demand for footwear and that's a that's benefiting us.

But it's you know, it's very hard to know exactly how much we're certainly hopeful that.

The government is able to align.

On a on a program, where those state staying effect or or.

Not at the entire 600 dollar expanded benefit at a meaningful amount because we do think that with double digit unemployment. That's a that's going to be important to drive demand for footwear and accessories.

Thanks, guys.

Thank you.

Your next question comes from Erinn Murphy, Fran I for Sadler lateral.

Great. Thanks, Good morning, and hope you both are doing well I guess my first question. It on the private label business and if you could just speak to how it trended in a quarter versus your overall can have any 2% decline in wholesale and then I guess last quarter you spoke to afford a fine. There was relationship just curious if you've had any progress on potential shelf space gains for either turn.

Get her Walmart if we look forward.

Sure.

Yeah, So private label or was it was.

The decline was obviously considerably smaller than what we saw in branded footwear.

But it was still still down significantly in Q2, you know keep in mind.

Bargain Walmart remained open but they did cancel some orders and they did push out some orders are and so there wasn't impacted those customers and then the balance of our private label business.

Really nearly came to halt for a period there one of the interesting things that we've seen in this period is because a lot of the big retailers Department stores et cetera have had this initiative to push private label, but you know with so much of the business moving on online or in private label typically does not perform as well online I think there's there there could be a little bit of a swing.

Back towards towards branded business with those customers.

But going forward, we feel very good about how our position we're targeting Walmart our.

I think we mentioned in the last call that that's right when the crisis hit for a few weeks there we saw sell throughs down considerably if those customers, even though they were doing a lot of business overall, it was probably mostly on essentially some customers weren't buying a lot of fashion, but since then we've seen nice improvement and our sell through performance is very good with each of them and you know right in line with with no.

Analyze levels.

Ah So we feel good about that we can did have discussions with them I don't think there's anything new to report about but we have new programs that were working on to them and I think that those will be growth customers for us in 2021.

Got it that's helpful. And then my second question just as on the retail business could you share a little bit more about what you've seen it stores every open from the traffic perspective conversion and then it sounds like you've read close stores in California, just how where trends in some of these hot spot markets, whether its Texas, Florida, California, you know at Kate <unk> Mallory, how does look kind of different.

Now relative to the rest of your fleet.

Sure.

Yes so.

As we mentioned, we we reopened stores in the you ask the first.

Stores opened on May Twentyth and on the last call I think those stores had been open by had been opened about a week and I think we disclosed at that point that we were down 60% in sales in the first week.

So.

For the first.

About five weeks that those were open we were seen steady improvement.

In those stores in the performance in those stores by by June week, three we worried about down 35% and a and we're hopeful that we were going to continue to head into positive direction. Unfortunately, as the cases spiked, particularly in the south and west.

We did see.

Sales slow down again and in fact in July our comps in the reopen stores are down about 50.

And we are really if you look at the what's causing that we're really being hurt and in Florida and Texas.

In particular, a as as well as in Manhattan, which we know the stores. We just opened in July and they've been performing.

You know seen big comp declines versus the prior year terms of California. The comps are also underperforming there and then of course.

Hi, good stores are now closed.

You asked about traffic and conversion.

Not surprisingly traffic is a is considerably lower than the <unk> then the sales numbers I'm reporting to you, but the conversion is up significantly.

Got it thank you guys I'll come back.

Thanks.

Your next question comes from San Soldier Francisco kill Angela.

Good morning, Thanks for taking my questions going to go through well.

I've got three things number one can you talk you touched on it in your retail stores.

Your isn't isn't it.

Brent the items that you mentioned the categories that you mentioned earlier than that are performing.

And online.

And then.

When do you think about the back half of the year and you know I'm I think the follow up on on another question you know.

What do you think it's going to take because I would think could be for you guys to sort of.

Become the priority of your largest ran that accounts, when they likely or or or be more you know exceptionally conservative you saw that from a promotional activity. So.

How do you know how does it play out that you become a priority.

Even if things start to improve a little bit.

In sort of a core part of your business recall.

Well.

Look I [laughter] peak, we offer priority.

I I you know the brand continues if we're talking about the Steve Madden brand in particular continues to be the leading performer in its grid and its market. So ER.

You know our sell through performance right now is good it's just that the stock levels are very depressed so.

So you know the retail sales themselves are still are down meaningfully but in terms of sell through percentage. We continue to perform we were performing very well pre crisis and I think dirt even during the crisis, we we've outperformed our competition so.

I think its business comes back I still think that we're positioned well and I think certainly Steve Madden is going to is positioned to outperform you know, it's it's competitive set and its and its department and take share.

Well I got let me just follow up and I had one more question.

I guess, what I mean is how does I guess, but overall cata your category were most MC bad lives.

From a priority.

For a retailer and then you know you'll get more about how does it get to be back to sort of the priority of was how long that that's good.

You didn't get a bigger share of a much smaller part, but that yeah, I don't know exactly I.

I don't I can't speculate when exactly everything is gonna be back to normal because a lot of that has to do with the trajectory of the buyers.

You know, if we get a vaccine and and.

It goes back to normal I think that you know you'll see a pretty quick rebound here, but you know until that point, we'll just have to you know we'll have to react to what comes but but certainly if we perform a in terms of sellthrough, that's what's going to.

Encouraged the retailers to buy more.

And then can you give us all idea of sort of what your monthly cash burn is and how do you foresee that sort of knowing what you know now without saying secondary got better beyond what you know we on what you guided the third quarter two.

But in perspective.

Yeah, we're not we're not burning cash.

In fact, our current forecast or.

Hi, guys actually ending the year with with more cash than than we started and that's with no borrowings.

And do it I mean, you expect I would assume in Q3 you're expecting.

Still do leverage on the yesterday, but less so than in Q2 and sort of fair way to think about it.

Yes.

Any other details you'd like to give us there would be greatly helpful.

[laughter] well look I think you saw that we took some pretty.

Meaningful and Swift actions to reduce SGN anyway. So I asked you name it was down about 36% year over year in Q2.

It's not going to be down that much in the back half, but you shouldn't you certainly we'll see you know we expect that you'll see double digit.

Percentage decline year over year in dollars, but.

But given the sales declines that still well.

Result, and asked you need de leverage.

Thanks, very much and stay safe and good luck.

Thanks, Dan.

Your next question comes from Camilo Lyon from BT <unk> your line.

Thanks, Hi, Ed how you doing you know how are you.

Warranted.

Good morning, I wanted just to follow up on a couple of points you made so.

I guess the first one on.

On the Q3 wholesale guidance on footwear down 35.

You just help us think even if its contextually if there's.

This sort of lack of enough inventory at least in your brand at wholesale cleared through a lot of got spring summer into or you're well positioned relatively speaking for fall how does the down 35.

Then really.

Kind of translate into like what for Q orders might be.

I'm assuming that this trajectory that you already on right now is consistent one through the end of year, they're material improvement from the downturn five or is that a fairly consistent number that we should think out for the balance of here.

You know, it's a little [laughter] little hard to say Oh, we have so much less visibility than we than we normally do the resellers are certainly attempting to position themselves very conservatively and as we said a you know I think they'll try to chase.

If a if sales trends are better than they anticipated and so that you know that means that there's still a.

Pretty wide range of where Q4 could come in I, certainly think Q4, we have the opportunity to do a little bit better than than what we've outlined in Q3, but but it's it's early to say.

Okay, and then maybe if you could comment on.

The discussion so you're having with those retail partners with respect to the competitive landscape you know if youre a suffering so do you agree that you are but you have your balance sheet that can get you through this pandemic I would imagine that the competitors in your space are probably far worse.

So is that what you're hearing from your recent your wholesale partners and be a you've seen that reflected yet in your order growth says as more open to buy dollars wouldn't wood in my mind shift to you.

Because you're a lower risk better quality better brand with better prefund sell through.

Yeah, I think that it all that we would agree with with everything you just said and we've certainly heard that kind of commentary from our key retail partners. We know some of our competitors are.

Struggling financially or some of them.

May even struggled to deliver a fall product or newness at least in the early part of fall.

And and some of them are not able to invest in their brands and marketing et cetera. The way that they are that the way than they might like so I think that does potentially position us to take market share going forward. I also think that the you know we've been the top performing Grand the last couple of years for.

For our key partners in our department and I think that at a time like this they're gonna be.

Leaning on the brands that have a history of a proven sell through for them and I think our model also.

Helps because anytime they're going to be look to look to buy more conservatively upfront and chase in season or you know we it was curious historically, we've taken share because of our ability to chase and because of our speed to market capability.

So all that.

It could potentially benefit us.

Whether or not we're seeing that yes, yes, I think in some small way.

You know, but but you know much that would be that something we'd hope to see in the future.

If that were to play out would that be a Q4 unfolding.

Or could that actually materialize in Q3.

I think there's probably already a little bit of that in Q3, but but.

Yes more Q4.

Okay, and then just I wanted ask on China more from a supply chain perspective prior to the pandemic you would you had made moves to diversify your production.

And.

You know come out of China and have a just a broader manufacturing base.

Can you update us on where that stands.

And Ah you know if you move production closer to the U.S. what that enables you to do if there is a more of a chase mentality as we get deeper into the default.

The fall winter season of the of the second half.

Yes. So you are are right that we had been moving pretty aggressively.

Out of China.

And particularly for spring, we had we had reduced the China penetration considerably in term.

With respect to fall 2020 that.

That transition really.

Was paused.

Because of due to all the disruption with Coke in 19.

China was really good right place for us to get most of our most of our product we want to make sure we were able to deliberate and there was considerably less risk sticking with China for fall 2020, but for spring 21.

We will be moving a lot of production out of China.

And that will be to places like Cambodia, Mexico, Brazil, Vietnam et cetera.

And as you point out there our speed. It's just the follow up in the last thing you said there are speed advantages to some of these are some of these other countries you know Mexico, it's obvious.

The transit time is far reduced or even Brazil because.

Typically quite relatively cost effective to fly to fly products from Brazil.

So there's a speed advantage there I will say that at that moment airfreight is considerably more expensive.

Around the world.

Got it if I could you can one more on handbags sounds like you're expecting I looked at worse of a backup season on that we could just to elaborate on.

Is that more of a price point weakness within the cabot's within the consumer or just the consent to the similar trends you would expect or you are seen on the fashion footwear side, just lack of need in there for lack of purchase.

Yeah, you know if you look at the back half is a whole I think it'll be pretty much in line with a with footwear, there's just a little bit of time in Q3 versus Q4 there.

So generally speaking the trends are not should not too different.

Got it thanks very much good luck.

Thanks, Phil.

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Your next question comes from Laura Champine from <unk> capital Your line children.

Thanks for taking my question, it's really a follow up about the tone of business. So when you commented that do you expect from chase into this fall, but the wholesale footwear could be down 35% overall retail I'm could be down 25% or you give.

Yes, your to date performance or do you expect a lift as we move through this quarter.

No desert, that's the that's the expectation for the entire quarter, that's not the the July month to date number.

Got it and is it fair to say that if you're successful chasing into fall product that there might be.

Some potential upside to the wholesale footwear number that you gave you would expect potentially for Q3.

I don't really think Sony Chase would really impact Q4.

Got it thank you.

Thanks, Laura.

Your next question comes from Susan Anderson from B. Riley FBR your line.

Hi, Good morning, Thanks for taking my questions and I guess as a follow up to the the performance in the stores or I guess as it relates to online.

As is hot spots shut down again or maybe traffic worsen are you seeing any of that transferred to online or you're also seeing the online business in those areas weaken.

Uh huh.

I think what we've seen is pretty steady trends in a in E. Commerce. So the strong growth.

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Throughout so even as the stores reopened we did not see E commerce or take a step down and as you know what is the virus is picked back up and the store sales have slowed or in California. The case of California closed I don't think that we've seen a material jumping E commerce, but but again it if it hadn't decline when.

When the stores reopened.

Okay, Great. That's helpful and I guess it was that the case to win I guess, all this door storage reopened it online stayed pretty consistent Phil.

Prior to they did like yeah. Okay. It did in fact just the.

Put a finer point on that our E. Commerce sales are up more in June and July than they were and.

April and Matt.

Okay great.

And then I guess, just a follow up on the wholesale orders did you say what your I know you talked about private label being bid at mass, but maybe not elsewhere online. It's tougher how is private label contributing to that is it worth do you expect it to be worse or better than the down 35 next quarter.

Branded and private label will be pretty similar for Q3.

Got it Okay. And then also did you talk about I mean, if this how much you've been able to shift maybe more into casual footwear versus fashion is that mix changing at all in the back half.

Yeah.

We have.

We certainly have.

Pivoted towards more casual products, a you know I talked about in fall you know, we're pretty focused on sneakers and ER and in casual boots I'll say the dress penetration for instance is down by about a third.

So, it's a pretty meaningful shift.

Okay, Great. That's helpful. Thanks, So much you guys. Good luck there with fear.

Thank you.

Your next question comes from Janine Stichter from Jefferies. Your line children.

Hi, good morning.

So my color on the off price you know, there's obviously a lot of excess inventory out there. So curious what the appetite you're seeing is fair price in that channel in it you might have how big operators are there for you.

Sure.

So.

Off price as a total is around mid teens as a percentage of sales maybe mid to high teens I can get to the exact number.

After the call, but it's definitely not range.

And in terms of what were seen in that channel.

Look on the one hand, Oh, we have seen things open up in that or you know we had a lot of excess inventory, resulting from the inventory cancellations that we saw and we've been able to to secure orders with a with the off price retailers for.

The majority of that.

That inventory so so we feel good about that.

Where we are seeing.

And I think an impact from what's going on though is on their appetite for upfront orders and I think I'm actually glad you asked this because it's interesting when you look at our business.

If you look at that that down 35 for instance in wholesale footwear that we talked about if you looked at our forecasts with what we call the first tier.

You know, which would include for instance, the department stores.

It's much better than that.

Well were being dragged down is in the business that we do it make ups for off price accounts are now that may seem counterintuitive, because I think we've all seen the reports about off price retailers and how there are some of them or even comping positively in reopen stores certainly much better than what the department stores are seen.

But I think there's a couple of things going on there one is.

Keep in mind that the off price retailers have very little ecommerce business to speak of so when stores were closed or their business was basically went to zero.

The department stores.

We're still moving through inventory online and they were as we articulated earlier being very aggressive in terms of pricing and really good burned through a lot of inventory. So I think they've got down or they were probably had less excess inventory than say the off price retailers.

Coming out of or as stores reopened.

The second thing now is is what you alluded to which is that the off price retailers. You know, there's a lot of excess inventory still out there from the brands and anticipate that they're gonna have a lot of closeouts to buy a and so I think they're holding back on upfront orders or because it.

And so we're definitely seeing steam that impact.

Great. That's really helpful. And then I just want to offset some of the brands you acquired last year I know you had planned for and apparel relaunch Ferrebee to quoted this fall and then obviously expanding the distribution for great do any of those plans change just in light of and everything else glass.

[noise] well to be the good BB Dakota, Steve Madden.

Product launch remains.

Remains on track that's happening this fall and thank you can see you can see some of the product on our C band Dot Com a web site or currently.

I encourage you to check that out.

In terms of a great we have.

Slowed down the the distribution expansion plans there. So that you know we were planning for a push into wholesale with great. This year, that's not happening.

That's really going to be more of a 2021 initiative.

Okay. Thank you very much.

Thanks.

Your next question comes from Steve Marotta from C.L., King and Associates your line children.

Turning it into you know I want to focus a little bit on as she today congratulations on a year over year rushing into second quarter that was.

You've moved swiftly on that no doubt first can you talk about bad spent that expense in the second quarter versus last year.

And as you're able to the third quarter furnish need standpoint, I know, you're not going to give guidance, but can you talk a little bit about the.

Puts and takes the flexing up on a sequential basis for S. You know from the second quarter to the third quarter what are the largest buckets. There what are the largest variables. Thank you.

Sure.

Well I'm trying to give you some some context I don't know.

I don't have the specifics Q2 versus Q3 in front of me what I can try to get some context. So.

For the year, we have a saving so in terms of the actions that we took with employees. A initially we did furloughs and we did salary reductions.

For existing employees ends and the combined impact of that for the year is about $21 million.

And I would say at least three quarters of that.

Hit us in Q2.

That was a significant impact in Q2 and will be a.

Considerably smaller going forward.

So that's that's one thing to note.

However, we then as I mentioned in the prepared remarks did do the.

The outright termination at the beginning of July.

That's a.

Round numbers $25 million annually in savings.

So you can you know you can.

You know, we're going to get a little bit less than half of that in the back half here.

You know, there's obviously variable expense savings, which which we got in Q2.

Well, we'll get some of those in Q3, but it'll be smaller because the sales decline a won't be as significant but I want to point out that because of the shift to E commerce, which has much higher.

Variable expenses as a percentage of sales.

The the actual impact of variable expense.

Reductions is may not be as great as you otherwise would have a would have thought.

And then in terms of other.

Expense items.

Again.

This isn't the quarterly break out, but you know we've taken.

Over $20 million out of discretionary expenses compared to last year, that's excluding marketing, where we are where we actually are still increasing.

Our marketing expenses, we really lean into the digital digital marketing initiatives.

We've got some you know we've got some government benefits as well cares acted cetera.

But that's really helpful. Can you comment on bad debt expense in the second quarter versus last year, and your expectations for that and third quarter.

Yeah, It's it's a it's Gary.

That's very modest you know keep in mind, we do have the factoring or more precisely the collection agency agreement with Rosenthal. So the vast majority of our accounts receivable.

You know our are factored and in that relationship there taking the credit risk on all approved accounts. So for instance, the companies that have filed for bankruptcy. So far this year.

$3 million of open a argued that when when they filed for bankruptcy, but that's a but none of that as is our exposure.

That's very helpful. Thank you so much.

Thanks good.

Your next question comes from from Wells Fargo.

Hey, good morning, and good morning. Thanks My question.

Sorry, if this was a.

Plano clarified during the gross gross margins question earlier, but.

Why does the E commerce likewise, the ecommerce gross margin so much higher than the install gross margin I'm not sure I understand that.

And typically.

Couple of things going on to it typically we're just less promotional or online and we do and we do more full price business online than we do in the stores.

Now I keep in mind of course that you know we're also there's digital marketing associated within a settlement expense and there are some MSG nay items.

You know and higher variable expense NSG today, and its associated ecommerce business, but the gross margins are always higher and then in this particular quarter, because we were fulfilling the products from the warehouse.

And also result in higher gross margin on ecommerce and lower Yeah, excuse me and then also higher.

SGN today.

But in comparison.

When you ship the product to the store the.

The amount that you spend to get it from the warehouse to the store also goes into Cogs, so that impacts the gross margin at the store level.

Got it Okay, and then one more just sort of bigger picture higher level when you kind of.

When you think about your business post pandemic you think you know maybe this kind of Spurs you too.

Uh huh.

Maybe accelerate some of the initiatives around your channel diversification so maybe.

Try to push hard Oh outside the U.S. push push the retail segment, a little bit harder, so you're not as dependent on the.

You a wholesale channel as you've been historically.

Yeah.

Absolutely look I think what are the things that we've done well over the course of the company's history is is to lead into distribution channels that are that are growing and a and emphasize ones that that arts and Ah you know if you look at our mix over time.

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You know, it's changed pretty pretty dramatically.

And so we're obviously highly focused on the channels that are growing right now digital would certainly be at the top of that list.

You've heard us talk a lot about the investments in the focus that we're making on our owned and operated digital businesses, but we're also focusing on that on a wholesale business.

You know.

Online as wells online marketplaces. So you know zappos Amazons Alon Doe T mall et cetera. Those are those are high priority for us.

And then there are other channels that we think you know we really need to focus on as well you know Aaron mentioned earlier the value channels and we're very focused on continuing to grow our business with folks like Walmart target, which would fall into that U.S. wholesale category, you just mentioned, but but certainly have a strong.

Uh huh.

You know there's strong outlook for those businesses.

Got it thanks, Ed that's electricity.

Thank you.

Your next question comes from Dana Telsey from Telsey Advisory Group your line.

Good morning, it in Danielle hope, everyone safe and healthy.

As you think about the impact of the timing shift of the Nordstrom anniversary sale, how you're thinking about that and also their store closures and others and just lastly on capex any updates to Capex plans for this year. Thank you.

Sure.

Yeah. So the anniversary sale moved back about a month.

I think that.

There's sort of couple of thoughts to have an impact that one is I think you actually could be good where the Steve Madden brand.

For the sale to be taking place later, you relative to the overall Nordstrom assortment, we obviously skew younger and targeted a younger consumer what are the younger slice of their consumer and one of the things, but having the anniversary sale.

You know in July when it normally takes place is you know younger people tend to be more buy now wear now and so I think you know, there's there's fewer younger consumers who want to buy.

Tall shaft, who can july than a it tend to tended to have the sale skew a little older. So I think that when you pushed that back that could actually be helpful for us and what we do.

I think Nordstrom.

Great that's about that.

Of course, obviously does leave you.

A little bit of a shortened selling season, if you're if your trait chasing into things that you learn about at Nordstrom anniversary. We certainly still do have the time to chase into them, but the period or you know between the sale and a and when everybody starts promoting around black Friday is shortened and so that's something we'll have to to deal with this year.

In terms of Nordstrom store closures, Yeah, we will see an impact there are because we are you know all door at at Nordstrom.

That being said, they're relatively smaller doors.

I think it's only something like 6%, our Nordstrom business, that's done in those doors and and we end Nordstrom. Both believed that we should get back around a third of that business on north you've got pop. So so it's not a super meaningful impact.

Got it then just before the Capex on your real estate, Oh, what folio sorry, how do you think about your stores and negotiations with the landlords how's that going on lease abatement changes in lease structure our time.

Sure, yes, okay. So I thought it I believe the category I forgot about that one.

Yes, so capex, we've cut back very significantly this year I think you're gonna see that number come in around half of where it was a year ago. We really tried to cut back on anything that was that was not essential we still are making some systems investments, but other than that just spending as modest. So we think we did 18 million last year it could be more.

Like nine this year.

And then in terms of the discussions with the landlords.

We've made some come to agreement.

With some smaller landlords, we've gotten a gotten some abatement.

But the bigger conversations with the larger landlords are still ongoing and you know there's just not a whole heck of a lot to report yeah, but but we're optimistic that we'll be able to figure something out with them and hopefully have something to share next call.

And how outlets doing versus the malls is they're different some performance still.

Yes outlets is continuing to outperform full price stores, you know, we're definitely seeing outdoor centers perform better which is not surprising.

Thank you.

Thanks Dana.

Your next question comes from samples are from Susquehanna Your line.

Just real quick the.

Given that the big guys were sort of that you sort of said maybe more promotional didn't they need to be with your product.

They also have they also have a on the other side of that them are they asking for <unk> markdown money for the over aggression or how it or how does how is that all playing out with all of this stuff going on this year.

[laughter], well I'm hesitant to to get into a lot of the detail. There I think that when I said in the last call a if I remember correctly was that you can assume that that when retailers.

Cancel.

Enormous amount the goods on us that our willingness to provide markdown money for that season is a is considerably different than it normally is a and that that remains the case doesn't mean that they don't ask.

Thanks, very much good luck.

Thanks.

There's no further questions at this time I would now like to trying to hold over back to Antonio.

Great well, thanks, everybody for joining us this morning or have a great day and stay safe speak to you on the next call.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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