Q2 2020 Abercrombie & Fitch Co Earnings Call
Thanks, Dan.
Good day.
Second quarter fiscal year 2020 earnings call today's conference is being recorded.
You have a question that anytime during today's conference you mean.
Star one on your Touchtone phone.
Let's take your questions at the end of the presentation.
Yourself to one question during the question answer session.
You at this time.
Pam Quintiliano. Please go ahead.
Thank you good morning, welcome sports betting quarter 2020 earnings call joining me today on the call a friend's car with Chief Executive Officer, Dr. Pesky, Chief Financial Officer earlier. This morning, we issued our second quarter earnings release.
Well on our website corporate Bobby Dot com under the Investor section.
Also available on their website, an investor presentation.
Please keep in mind that any forward looking statements made on the call subject to Safe Harbor provisions the private Securities Litigation Reform Act Nike basketball.
These forward looking statements are subject to risks and uncertainties that could cause actual results could differ materially for any expectations and assumptions we've actually.
A detailed especially on these factors and uncertainties it could take the public filings with Securities Exchange Commission.
In addition, we'll be referring to certain non-GAAP financial measures during the call.
Additional detailed reconciliation of GAAP to adjusted non-GAAP financial measure or religion release issued earlier this morning.
I will turn call over to Frac.
Good morning, everyone I, suppose you Andrew loved ones or something.
Got the second quarter results I wouldn't like to start by thanking our global team partners.
Like unique challenges, but okay, they've continued to team up build up.
The RBC store at home office dose, yet or better partners around the world together, we've continued to successfully navigate a question Kerry.
I spoke about.
It's hard if need be organization.
Due to hard work he she ingenuity persevered arching, we've been able to quickly we react changing customer yeah, fortifies our position in the future.
Okay, well QQ copy revenues were down 17% compared to last year.
[laughter] corridor, we remain nimble we.
We utilized our need a job inventory management strategy.
[laughter] speaking to work [laughter] and providing them well.
Like what their lifestyle.
Okay, [laughter] favorably with our gross profit rate expanding <unk> 40 days like fueled by lower promotions in Paris, and who you are.
I would probably not just stuff.
<unk> operating expense leverage in our Q2 operating income.
Yes.
Oh, the unwavering focus I mean, any strong liquidity, we generated $87 million operating cash.
Every quarter with $767 million, the cash and equivalents approximately 1.1 billion.
Okay.
It's imperative to make quick dziedzic, yet another thing while continuing to fund critical long term investments for future growth.
Over the last couple years it strengthens our foundation.
That's a teacher matchmaking each.
Including.
Did you do square footage is updating our interest bearing fruit.
I think it didnt omni channel capabilities.
Let me be mistaken.
Okay, and continuing to about brand positioning predict customer.
The significant progress made mediums depends on a kind of transformation initiative.
[laughter] Susan Allen.
He differentiators of our ability just to teach you see cheaply our entire organization.
Our solid foundation has enabled us to stop you gave a customer.
Yeah, I was hoping Nike and go back up.
[laughter].
At the same time, often despite what the social justice troubling, but the uncertainty but back to school Dr. <unk> looks like this fall.
Throughout we have stayed close to work but.
Yeah, I think the adapting our product marketing messaging as employees worldwide, but they're changing reality.
Well, Okay. We were encouraged by our Q1 important thing.
Thank you choose if that happens so.
[laughter] time, it's roughly 50% or global sluggish open doors operating 70% productivity did you have continued to shop.
[laughter] breath restrictions eat we open more stores.
[laughter] quarter, roughly 90% for global basis open, which is consistent where we are today.
Well open the operating it would do in many of our global location.
Q1 door to continue to every year over year declines in traffic, partially offset I could see person.
I think it can you open it strikes me close what stores.
He won't be more customers. So maybe I can make its popularity.
You can you just what we've shipped inventory by channel the southeast yeah, well utilizing shipped from store.
We've also been done adoption, but I think that's.
He's a double cost roughly 80% of are you have there based on the ended the quarter.
Got it will provide more detail I really got the point trends.
Its doors reopening our digital business doesn't need strong for the quarter, just fell to 50% to $386 million robust double digit gains each month and pre traffic conversion and you are.
Combined total due to our website shortly but those are 25%.
I would like to approximately 50% in the quarter.
You talked about which we're talking about maybe my team well to social issues facing.
On Oh.
Body welding products, resulting in strong to jump across that every month corridor.
We achieved record Q2 digits Bell.
Okay.
You've made which is hugely did just that.
Let me tell kit okay.
Thank you bye.
Digital sales volumes ever cheap towards more category, including many of 'em up when Luxco classification.
As a reminder, meaningful digital business entering this year. It show accounted for roughly a third about revenues over <unk> billion dollars 29 team.
It's all global platform distribution center infrastructure in place, which has enabled us to keep up with strong digital yeah.
Both brands five junk age and strong growth rates in the quarter, that's what's been awareness.
Oh, sorry, [laughter] certain architecture continued to pay off.
[laughter] property item outperforming.
[laughter], why well Saturn I'm grateful to crop gender.
Well, there remains choppy where it could you. Please what else you can offer resonated.
I'm, especially proud to perform broke down I'm sure. It's a highly competitive category, although predominantly spoke quite.
Oh, the guy side, [laughter], multi pack cheese, graphic <unk>, lomb shorts, which dropped.
Needless to say I'm extremely encouraged that Q2 performance I'll start.
It is our biggest brands representing roughly 50% more revenue 20 lightly we remain confident in the global growth opportunities like that.
I feel like they're experienced double digit sales go up a 100% broken the digital channel.
Well continue to embrace and you asked the question really go the other coffee labs intimate offering.
Well, it's still early in life cycle, yes.
Well like basically you can can you talk a product focused about our chief customer lifestyle.
[laughter] what was the false you're going to be shifted messaging away from promotions and it starts telling.
Yeah, we're involved with bike products and brands Boys Cross channel [laughter] basically book our customer.
We also subtropics they care about the most with an emphasis on Friday mental health to bother me champion.
Oh, you price campaign for the qualities bursty overseas.
[laughter] he wants her well done campaign, featuring kick talk starts Charlie indexes.
We are thrilled to have truly 60 part of a poster team.
They truly why our customer in the clubs they support including said boy.
I think those of you were not subject to our Charlie it's the most all uplift on the platform.
82 million followers, and sticky dictate but almost 36.
There are popular cooked social media, roughly 27 million $70 million, it's definitely got Instagram.
Well they partnered in our house, you're Gonna mobs felt was supposed to <unk> one of the expert Chaucer brand doctors know because no one of our customers David celebrity will not.
[laughter] styles to watch unique product recommendation.
In addition, Charlie created the fashion denim pants challenge.
Monday, the campaign 5 billion views worldwide and 1.2 million video submission.
Since its launch we've experienced improved traffic I need a biometrics.
Actually I totally get because not all.
Well, it's Dave Shaffer additional story Federation, rather than they do a deal.
I also heard he gets you need to follow through buying one theory, we have never been seen by talking maybe take a faster ramp the honest dialogue that part of that certain parking their lives.
Well, there's a lot excited about hollister.
Notwithstanding though.
When they just had multiple categories double digit omni channel elsewhere in short knit tops Burke.
Many product acceptance office jobs with double digit growth in key short Jeep in our signature fragrance, yes.
The both genders or stop at white.
One of our key buying driving watching continue to resonate.
Given our annual price watch and its Darcy.
And that's probably kids why does continue to be driven by our summer essential shorts.
Oh, probably adults and kids second quarter market [laughter] late summer and all the phone celebration.
Right part it was quite quickly creative thinking.
Conversation or to probably show up for customers.
Exactly why same thing.
That's what you want Salvatore well I suppose we support launch the Ti pivoted to highlight the bolt the byproduct media site LGBTQ, Okay, well probably.
[laughter] port part of the conversation.
Overwhelmingly positive.
Well it is important so many our customers across brands, it's worth but [laughter], you don't need $4 million Bicyclist Metro cloud gets Chile support organizations that we work closely with that worked closely with diabetes <unk>.
[laughter], rather the upcoming marketing team the bigger.
Yeah, well worth making mistakes, but marketing I can't wait to see what am I thinking can teach accomplished especially for everything to do well suppose somebody a conversation our adult show as well as our kids My theory opens its focused on Vishal partners with Citi.
We continue to be extremely pleased the ongoing evolution of our eight up adults and kids product positioning I'm. So excited about what the future.
Well, what do we continued our environmental social and governance work apostrophe watched our online.
It's actually sustainability campaign, both brands to continue to be cars. So sponsor a threat of partnership which it sounds like that's interested gift cards. So we stuck.
Oh for trying to calibrate thought I'd like to take a minute, but youre stuck at school season, which clearly sorry difference this year.
What we might do spikes in several of our key early back to school market in California, Florida, Texas delayed start well cross country, maybe students to gain if they Fortunately we did very well start in years past the sport truck Bel Ray Sims.
[music].
Bill we got depending what the scenario we consider.
Yes.
Over the last several months, we proactively bottom is very conservatively shifting eating more focused warehouse retaining wall product and marketing.
[music].
Quarter to date [laughter] teachers, my favorite wage new products, we've experienced improved year over year Ami conversion and digital has maintained strong double digit growth.
Recently, I'm still trying to be Craig I'd be anniversary last year's piece that we make it seems more sorry, I'm trying to get back to school and the mix between physical and virtual.
Well I had their cautiously optimistic success selling season will extend into September but essentially October.
Throughout the country and the weather becomes more seasonal.
[laughter] corridor, we expect to recoup some but not all the walk though.
Historically a larger.
As such yes, while in Q3 sales trends to be consistent with Q2 in a down 15% to 20% range.
Roughly 80% or California, still they've done a current trends slightly behind that.
Despite challenging BARDA can easily.
Cheney's workers, France, and associate with no. So internationally, we've made difficult, especially this year to ensure their wealth additions coming out of that carry even stronger on the other side.
They procure and we have a chance to address roughly 25% of our leases. So up so renewal of the contagion realized you think we'd already.
And our already deep digital penetration this gives us the ongoing opportunity to level set or square footage talking between Oh, well on each health system suppliers.
Oh solution.
Our balance sheet, and we continue to leverage our financial flexibility to long term and further strengthen our position diversified global omni channel retailer.
I will turn call over to stop.
Thanks, Fred I like to start by adding a huge thanks to our global teams our vendor partners I'm incredibly proud of how we navigated we achieved our best second quarter operating income since 2014 delivered $197 million operating cash flow.
Oh, the Q2 results net sales of 698 million were down 17% compared to last year.
Hi, Brad that sales declined 15% bolster which includes going there.
20% for Abercrombie, which includes kits.
By region that sales declined 16% in the U.S., 15%.
38% a pack our smallest region.
So were tropic remain below last year, partially offset by improved conversion at 56% year over year digital growth.
Looking specifically at reopened store performance second quarter Global store productivity was roughly 70% your period.
My last May and June Sonic acceleration and trust, which subsequently experienced the productivity decline in July.
Yes.
Breaking down trends for the by region, starting with our largest market you us.
At quarter store productivity was at 75% of last year.
5% of our base open at quarter end.
On average our U.S. stores were unable to open for business for approximately one third of the days in the quarter due to government and landlord impose restrictions on occupancy.
Our cooperation.
You realize productivity improvements in the June but took a step back down in July the resurface cobot at key early back to school markets, including the re closing up roughly 80% of our stores in California.
Back to school start throughout most of the country.
Yeah, Matt store productivity with approximately 60% of last year.
We ended the quarter with all that you stores open although the majority of our locations that are historically largest European markets UK did not open until mid July.
And they thought of course store productivity was roughly 70%, but 96% of sorts open ended the quarter.
Hi, Brad Global basis, Hollister stores, Alphaform, and other kids, which generally have higher digital penetration well in the U.S. policy. Our kids were more adversely impacted by back to school before us.
As Fran mentioned, we've been actively preparing for covert spikes and back to school uncertainty on the U.S., we have not been caught off guard Russia.
We do not believe back to school performances.
In issues have seen strong digital starts the new products across brands.
We also experienced store productivity improvements over the past couple of weeks of students more visibility.
We continue to play into the back to school season, a lot longer that house in the past most falls I believe there start dates so well in September.
Moving on our gross profit rate, 60.7% was up 140 basis points to last year.
It's from it was a result of hiring you are promotional and clearance levels below last year.
We entered Q3, but inventories curious about 7% last year are comfortable our positioning.
Teams have done an amazing job managing the on has an auto order inventory.
Over the past several years, we've made significant progress are proving to speed and agility of our product development calendar and lead times.
This progress has enabled us to adapt quickly to changes in the bad.
As we looked at the back half will continue to balance gross profit rate what sell throughs.
Certainly on the topline, we're conservatively managing inventories literally shifting gears a channel.
Optimizing our distribution center capacity for increased as all of them as a positioning the business to chase.
And I'll cover the rest of our results on an adjusted non-GAAP basis excluded from our non-GAAP results this year or $8 million asset impairment charges, we believe our principally attributable to cope with Nike.
He started his adversely impacted results about 15 cents there were no exclusions last year.
Operating expenses, excluding other operating income was $404 million as compared to 538 million last year, which included $45 million flagship store exit charges, primarily related to our Hollister Soho location close in Q2.
Operating expense leverage 610 basis points, the 530 basis points related to the adverse impact from flagship store exit charges last year.
Jordan distribution expense decreased on a dollar basis, driven by decline and store payroll store occupancy.
Partially offset by increased shipping and handling it's fast on higher digital.
Marketing general and administrative expense was down on a dollar basis, primarily driven by reduced payroll marketing their controllable costs.
We remain focused like tightly managing expenses and finding areas for additional savings, but we will not start the business. We anticipate that certain expenses will flex back up in the second half, including store payroll and variable store occupancy assuming stores event.
Overall, our goal remains consistent continue to reduce fixed non customer facing costs to enable reinvestment in customer facing activities at our ongoing transformation initiatives.
Operating income was $22 million compared to a loss of 39 million last year included a $1 million.
Thanks.
The effective tax rate was 1%, which was lower than last year as it was all the changes at level and mix projected pretax results and full year.
Net income per diluted share was 23 cents compared to a loss of 48 cents last year 46, I thought constant currency basis.
Last year, reflecting adverse impacts flagship exit charges of approximately 50 cents.
Our balance sheet remains strong we ended the quarter with cash and cash equivalents of 767 million until the liquidity of approximately 1.1 billion.
The plan I'm holding higher than average cash balances to preserve flexibility going it's uncertain environment.
In July we completed the issuance of 350 million of senior secured notes, which will mature and 2020.
These proceeds were used to repay outstanding obligations under the existing term loan facilities.
Well as tourist related fees.
Transaction extinguished our terminal facility, which was set to mature in 2020 watt approving our near term liquidity position.
We continue to see capital expenditures of approximately $100 million year with about half of that attributable to stores and the other half attributable to digital technology investments being made us.
We still believe its source matter at a fairly important part of the omni channel Brad experience.
They must be the rightsized and the right location, but the right economics.
Today, we have opened nine stores that meets that criteria what goes in 14 that happens.
As we look at yearend, we have over 200 leases coming due which represents about a quarter of our store base. We will continue to whole conversations with our landlords to quite a mutually beneficial and agreeable passport <unk>.
We will evaluate all options, whether it be remodeling, a rightsizing or walking away completely at closing stores.
We're excited about progress we've made a global store optimization, what more share and real estate as they lived through the year.
Lastly, our dividend and share repurchase programs remain suspended.
You know the heightened uncertainty in the marketplace, we are only providing a sales outlook at this time.
Brave airplane, the business or all the sales trends consistent with Q2.
There are cautiously optimistic that the trend will improve but we will manage expenses caseloads, assuming it will not.
We are confident our marketing plan to assortment and have the ability to chase and that's where it's a mad improves.
Looking ahead, we remain confident our ability to win as a global specialty retailer that caters to a broad customer demographic for kids to post collegiate adults, but continued progress park transformation initiatives at our solid balance sheet, we're confident in our ability to thoughtfully pivot and strengthen the company no matter what obstacles maybe thrown our way.
Ill turn it over the operator ready for questions.
Thank you ladies and gentlemen.
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And your telephone keypad.
Hey, speakerphone.
Let's turn it off.
<unk>.
Yes.
It yourself to one question.
I can press star one ask your question.
Your first question from GE so.
Please go ahead.
Great. Thanks, so much so.
They're actually two questions first we surprised by the strike that got him in the quarter. It ought to talk about everything shifting toward athleisure.
So we're used to sort of surprised that you were able to jerky sales are good that's certainly talking about merchandising and get your part of your buys for the early part of next next year, given that theres about see that could be a much more differently bargain.
Well thinking differently, there people going back to work in their friends and things like that are you thinking there was definitely are you still get very conservative telling about nor the towards.
Thanks much.
Hey, good morning, we were very excited that aren't getting visits for acute channel I think everybody. The company that was at one of my favorite word balance and making sure that we keep a bounce Norris taught me very important although we didnt see a shift with the customer moving into more stocking cozy merchandise. We also had a very strong.
Got any business, we understood the customer take very close to them I hearing what their mindset is base they.
Well really responding to our product so not really surprised at all.
Staying close to the customer and then regarding next year at this point, what we're seeing throughout this whole year that our entire KBR customers.
Oh he knew one could started that for example last longer.
We came to start merchandise to make sure that we get swimming shorts and tees out on applying for longer than we normally do I past years, we're announcing the same thing happened it back to school, starting a little bit later on but we actually starting to flow in ever back so merchandise things really <unk> public except that we're going to continue to stay cookie cutter and kidney care products Accordingly.
As we learn more throughout the year.
Got it and then you can you just sort of clarify your expectation for the third quarter you know it sounds like what can the down 15 to 20 guidance, you're saying, it's like August it started off a little bit weaker, but you expect just for the seat would be sort of wait or a writer obviously with yields, especially for the bridge little bit later, it's sort of thing they drop you know.
You know whatever is happening in August and September and October and that's how you plan to get that 15% to 20% or am I misunderstanding, what your sorry about that.
Yes, you are understanding it correctly.
We see quite a spike at the end of July in the beginning of August and then a decline in September and October what we're saying it's much more about extended back in school and I guess why the club Mark.
Oh, no longer selling season.
Just like we thought for first time a product.
Got it okay. Thanks, so much.
You're welcome.
Thank you.
Please go ahead.
Hey, good <unk> talk about the profitability of the E com channel or grows in slightly relative to last year and I expect to handle should been surcharges during the holiday season.
And I'm Scott also curious if you could talk about the world's good opportunities. Maybe you know you heard as rich said about 25% of the stores you know coming up for renewal book in the in the sorts of remaining do you have opportunities to to work right down I wanted to get out of certain locations.
Faster than you can you then you would have been able do previously it's because it's going to actually.
Side, if you could address those things.
Hi, Thanks, Paul I think I'll grab oldies, so let's start with the E com channel or the size and the relative to last year. So our E. Com channel is profitable on a four wall basis, and actually little bit more profitable this year than last year now the one thing we love about the E Com channel as it is highly leverageable.
As we grow the sales there you know you do bring along some of that variable shipping, but you're leveraging a fairly email fixed pool of assets through our distribution centers around the world. So I'm really excited about what we saw in the channel through Q2, Oh, let's see moving onto the holiday shipping surcharges, Yeah. We have seen that in the news we've been working very closely with each other.
Our carrier, we've been adding new regional carriers I, what's gonna be busy up there in the in the fall season for sure as we get closer to holiday how should we expect to see surcharges, though like I said, we'll work with our carrier some mitigate those as much as we can but some of those will flow through and that's baked into our planning for the back half.
The goal there as to offset those surcharges with expense savings across the rest of the piano.
<unk> dollars a dollar the way we like to think about it. So we're doing great work around expense going back to last quarter. We mentioned that we took out about $200 million plus of expense from where we weren't the beginning of the year. We remain on track for that and every day, we're looking for more to help offset things like surcharges.
Moving onto the real estate opportunities yet we have a great opportunity. This year I mean, we've learned a lot. This year, so far I with what we've seen uncoated, we've seen some nice occupancy saves to this day, you're working with our landlords and seeing some of the saves on variable occupancy, but we really need to do a lot more work we've been talking about this for years, we have a great opportunity at this company to reduce soccer.
Let's see reduce square footage, we produce square footage on average of about 4% per year of the past five years and there's definitely more to come. So we're excited about what we're going to see in the back half, we love stores, but we'd have to have the right economics. The rightsizing the right location. So Tom to work or do we have a great opportunity at year end.
And then on the last question on flagship we remain committed to exiting our flagships in the future nothing new to report at this point, we have three opportunities to leave flagships. This year. That's in our current lease stock and we'll continue just trying to find opportunities in the future.
That's about digital Doug good luck.
Thanks.
Thank you.
Susan Anderson with B. Riley. Please go ahead.
Good morning, nice job on the quarter [laughter].
Wondering if you could maybe gets a little bit more color just around back to school in the third quarter. It and I guess you know what percent of your business typically makes up back to school or how love. Our dog <unk> are you cannot category [laughter] and then I was wondering you know it sounds like you expect it to be prolong but are there you know pieces of the back to school business that you think.
Yes, I guess rolls materialize this year. Thanks.
Starting with I'll pick it up so we just got the August is our largest month, but we do believe that's what we're seeing from the customers shopping habits, but the fact sports betting extended longer we don't anticipate making all that I thought we do expect to see a much longer run into September I wasn't potentially even until October one the.
Whether changes as well in the mindset shift and already starting to see that shift out of the kids are realizing that the ASCO is actually happening and when they're going back.
It delayed or virtual reality, it's always setting and for them. So what we've been able to deal with Katy our inventory accordingly kept those sorts of cheese is where I'm at regular price on the floor longer throughout the quarter that evidencing the margin that we're able to drive through that and we're going to continue to Katie wasn't very closely.
They to our customer a weekly basis. The teams are finding a keeping our inventory names that we can make sure that we can shape where need day.
Great that's helpful and I guess, yeah. So just a follow up on the gross margin then nice job in the quarter and pulling back on the promotions I guess, how are you thinking about that for third quarter in the back half given I guess the per wrong prolong back to school, but then also the holiday period are you expecting it to be promotional.
This is Scott I'll grab this one you know just gross margins for the back half we haven't given an outlook obviously, but it's it's really about inventory management. You know Fran mentioned, we are planning our inventories conservatively and if we see demand outstrips supply than we have a great opportunity to raise the you ours and see gross margin expansion after that.
How we're approaching the back half were going to be conservative on inventory, we want to expand gross margins. We like you know the how we delivered the gross margin expansion in Q2, and what that does that he had else, but it's going to be about supply and demand.
Around holiday absolutely, it's gonna be promotional its promotional every year and I think what you're seeing across the industry is those those companies that have been able to really manage their inventory tightly have been able to expand margins and raise that you are and so we're in that cap object Q2, and hopefully it will be a not camping and Q3 Q4, but there's there's plenty of uncertainty out there on the top.
Outlined so we're just going to manage a day by day as we go through the fall.
Great well nice job again go back in the back half.
Thank you.
Thank you all next go to Janine Stichter with Jefferies. Please go ahead.
Hi, good morning, Thanks for all the color just wanted to get a little more detail on the inventory extremely clean it sounds like you feel like you have enough just wondering if there's any categories, where you feel like you could be a little bit light and I don't have the inventory to meet demand.
Well it she is very focused on keeping a very balanced inventory names. So at this point in time, they have been so diligence what their inventory in response to the business on but we feel our inventory going very balanced on at this point in time, we have a great Dorothy.
I mean, very agile and that can chase into what we need so we're meeting with the team at weekly at that point to make sure that we're staying on top bother demands.
Great and then just a follow up on gross margin I want to ask about input costs are you still seeing potential for favorable costing in the back half are there.
We are yeah. The environment is remains positive for costing you look I mean, where it is and the transportation to little little tricky. That's the part of the Fob are getting it here, but a little cloudy out there, but outside of that input costs I have been solid and here, we see opportunities for good costing the backup and hopefully.
We ended 2020 altogether.
Great. Thank you very much.
Thank you all Nexgard Carla Casella with JP Morgan. Please go ahead.
Hi, I'm I'm kind of question you talked about the inventory being down in your gross margin was a lot better this quarter than we expected can you just talked about the clearance.
Trends doesn't go into back to school that you're seeing any major changes here on clearance trends.
Or promotional trends across you know your competitive set.
I would say the Scott I would say the promotions look similar like steel similar to meet the to recent past and pass back the schools I don't think they've been overly elevated but again it comes back to a case by case basis, though those companies that have been able to manage their inventory tightly have been able to raise that you are in pull back on.
Promotions and we were in that camping Q2, so nothing extraordinary or out of the or are there I would say.
And then there's no reduction you had this quarter is that a similar rate you expect your next year.
10% reduction.
We're gonna be planning inventories down year over year receipts will be down so it's going to come down to the top line and so with our outlook of the 15 adult 20, which is a similar trend to two last year or I'm, sorry to last quarter. In Q2, you know we expect that continue to make progress on inventory. Our general goal was to try to keep inventory in sales in line you know couple hundred basis points.
Up and down and we're continuing to make progress towards that.
Okay, Great and then just one last one on the priorities for free cash. So you mentioned them in the quarter when at what point or what what are you looking for either in terms of.
Getting bianco big free cash flow before you reconsider share buybacks.
That's great question, and it's something we've talked a lot about internally, it's really about certainty on the top line or less uncertainty I would say.
We have a great balance sheet right now $1.1 billion liquidity I, just did a financing last quarter to clear up some near term maturities. So we have but we're in a nice position. We have nice flexibility as you mentioned, you know $100 million and capital. This year, we have great investments that we're going to continue to make in the future. So as we get towards the back half a year and we start to see some.
Certainty on the topline so that might be a time, where we bring back share buybacks, but a lot of water to go into the bridge before then but it's really about certainly on the topline.
Great things probably answered.
Thank you, we'll next go to Janet Kloppenburg JK researchers.
Go ahead.
Good morning can you handle.
Yeah Okay.
Oh, great Blatche on a nice quarter plan.
A couple for you and a couple Scott.
[music].
I was wondering what you'll see in Europe, I think that back to school demand trends I'm not similar to the last maybe though there later I'm not sure.
And on the comes to closing shift that we talked about have you plan to inventory levels, you know about content into that demand shift how should we think about that.
Scott I got on a little ways. So on the 26 million dollar occupancy.
<unk> expense decline.
That was that.
It's permanently eliminated from the piano or might that come back and what is the outlook for web concessions for the rest of world could that be.
A nice positive.
Our outlook as we go through the rest of war.
Wasnt nickel children.
Thanks, so much.
Okay, and I'll kick off the starting with any I guess you are correct. The back to school in New York starts much later in fact, if it's not even started yet and they are really in a much more summer mine that but that really happened much later in the third quarter. Additionally, on North America has a much more significant back to school.
That's why the kids in Europe, where uniform so it's not as significant.
Regarding something cosy, yes, the inventory management team to planners that merchant source their team have really been focusing on the customers response to our products accompanying cosy part of our DNA as you know we have a franchise in the end up adult called thought that that has been incredibly strong.
So we have shifted but we also keeping a balance we're seeing a response to fashion.
Women's dress business is very strong whether she's working those balances I presume called anyway to go out like yeah. So we have shifted but balance is extremely important.
And it's been an omni Oh sorry.
But go ahead.
Oh I plan on Europe does that mean that maybe they'll current trends are better and and just I'm just trying to get an idea of how products is resonating in Europe, because I know you put a big effort behind that.
We've had we've had good response to our product in Europe I was the country's opened up yeah with different types. So we're seeing different things across the country or market our largest market UK just opened in mid June overall.
Im Good response, yes, yeah, we talked last year about opening our office in London, and putting that he had there that are getting close to the summer. So we're starting to see the benefits of our product teams over there I really dialing up the assortments and making sure were distorted in the right places to cater to that European customer across the different country. Yeah. That's that's encouraging and that was what I was trying to.
Understand better so thank you.
And just caught on my questions. They are yeah, yeah for sure moving onto the rent question. So the 26 million dollar occupancy said in Q2, yes that is permanent and will not come back a couple of pieces in there. There are some variable occupancy save as you can imagine what store sales being down and or stores being closed and then we have some abatements in there.
That had been booked on fixed rent contracts as we have.
Come to terms with our landlords rent concessions for the balance of the year, yet we expect to see some additional rent concessions for the balance of the year. We continue to be engaged with the majority large majority of our landlords to find a mutually agreeable path forward to get through these closure periods and then that'll really take us into year ends where we had over Q1.
Third leases coming due and our expectation is to make further progress on occupancy and store square footage then.
Okay, Great. Good luck you guys. Thank you.
Yeah.
Thank you, ladies and gentlemen, as reminder, that of star one if you'd like to ask your question. We'll next go to keep Fitzsimmons with RBC capital markets. Please go ahead.
Yes. Good morning, Thank you for taking my questions and congratulations on an impressive second quarter I guess my question and I suspect you're Gonna told me conservatively, but you know as we look ahead. The holidays. That's how argue a protein managing the business between you know payroll inventoried product flows events as well, especially around.
Black Friday, we've heard some other retail we're talking about promoting holiday you know starting in October So just curious about how your team.
Or how you're internally planning on the holiday to shake out and then you know real quick Fran outerwear, obviously with a you know a pleasant surprise last year in the fourth quarter I'm happy to the Street I Am curious just you know your views on the outerwear categories. We approached the back half. Thank you.
Hey, good morning, forget we agreed that holidays going to be very different. This year. Just says the balance of this year I mean since the beginning of this year certainly has been what we're seeing in our business. It was an extension of the Cds I know I've mentioned, a couple of Tonight deploying that summer last longer than we expect back at school to last longer.
We don't necessarily believed that our customer is going to shift that quickly that into a holiday mindset, particularly pre Thanksgiving day.
We are going to manage our inventory and manage our kt, but our product accordingly. So once we get have peak together a couple of opportunity weeks. They December we talk of industry about the trial that we always said at the beginning of December that could be great opportunity for us it really.
Understand what's working and our assortment it can be able to drive that through the market day.
So we're seeing a very different well, but we're taking it honestly a week by week at this point in continuing to stay close to our customer.
Yeah, and does the management of expense and inventory I agree conservatively is the right word of the keyword you know for us would be book towards the back half its about managing expenses very tightly managing inventory very tightly and if you can do those two things. The topline is relatively stable you can generate some cash flow into the liquidity could be strong.
And what that does it gives us flexibility gives you flexibility to invest in the short term and marketing, but things that could help drive the top line and it it for longer term investments. So that's what we're trying to do with them as its hybrid generate that cash and liquidity and have flexibility in the business.
Okay.
Sorry, [laughter], just getting to that one.
Periods on we are spanning all of our businesses I've got just quoted you conservatively I will approach the back half the same way, we have a great opportunity to chase our business.
We test our product ahead of time, so we're getting some views on that currently.
Thank you that's the blood.
Thank you.
Thank you we'll next go to Mark Altschwager with Baird. Please go ahead.
Hi, good morning, because our surgical burden on for Mark Thanks for taking your question.
Did you get into astray savings this quarter, how much of this is a temporary reduction that'll come back and sells recover presume more permanent change the cost structure and then your shield.
Range expectation for up to three inline with what you reported this quarter should we expect it somewhere decline and I, she and I, it's they'll come back in your categories. Thanks.
Let's say or on these savings for this quarter, yes. There we were pleased with what we delivered in Q2, we mentioned on our last call, but we went through a zero based budgeting exercise and looked at every spend that was going out of the company for the rest of the year I'm. So pleased with the results in Q2, we do expect to see continued savings here in the back half.
Some of that might be temporary we might have some reinvestment stock on the business as we think about the long term and not just today.
There could be some SGN investments that the trickle back at <unk>.
Marketing was the savings that we saw in Q2 or market teams have done an amazing jobs utilx saving things that are non customer facing you know content and things back of house. So I'm really pleased with the results there and hopefully we'll see continued savings there because we really want to protect the marketing is that is in front of the customer in or digital marketing, which has been amazing.
Oh sales expectations Q2, so.
With a you know the similar sales trends of the back half like we just said we're going to manage it conservatively, we're not going to be plowing expense back into the piano, assuming sales are going to come back. So if we manage the inventory tightly manage the expenses tightly that's going to be good cash flow liquidity are not going to give us flexibility.
Great. Thank you.
Thank you.
David Buckley with Bank of America.
Hi, Good morning, Thanks for taking my questions. Scott was there any reversal and your one Q inventory write down that contributed to the second quarter gross margin expansion and then.
Just building on the.
My question. He tells you can draw them about those ongoing called it out there do you expect you said you're stuck in the second half and actually.
Okay. David on the first question there was no impact in Q2 due to a reversal or anything but that Q1 inventory write down that state in the past in Q1, and then on SGN, a so called Opex. It is definitely a little more expensive to operate or source. These days and operate our distribution centers things like the flex.
Last but you'll see in there and a much much heavier cleaning it up and additional cleaning so they're they're bits and pieces here as they add up to a few million dollars here and there, but what we're trying to do is offset these increased cost with savings elsewhere in the p. at all so we feel good about the work that we've done as a company around Opex and are confident that we can continue to find sunshine.
Savings to offset the additional operating costs.
Thank you.
Thank you all makes good.
Sure.
Retail tracker. Please go ahead.
Hey, guys, congratulations only really standing quarter, especially given everything.
And loved the Charlie Delta I know, there's little beeping situation. These days.
So we think to [laughter]. So, let's just talk about the digital business very strong growth Im curious did you see the customer file growth as well and is that customers are used to the new customer is just a lapsed customer. It is it is the store only customer. The finally moved online if you could just put a little color behind that.
Oh, sorry, yes, we did see our customer file Bro, obviously based on the strength of that that business, we have seen new customer to style as well and get back on.
On Charlie Dixie just for a minute.
Drove a tremendous amount of brand awareness due to file loyalty phase it does itself.
Okay and then.
Yeah, I'm, just curious if you're seeing or you see left shoppers come back into the brands and where shoppers that we're still only coming online digitally.
It's a bit more in latter so depressed.
Yeah, depending on how long stores, if an open we have seen some of those store only customers come on line you know for those places where the stores were closed for you know I speak very very long time, some of those store customers weighted to come back or whatever the stores were opened so we like that you know that's one of the silver linings of what has happened here to get some of those store only customer shopping.
In line, we want to turn them into dual channel customers because those are our most customers. So that's a nice silver lining coming out of cold and hopefully we can keep those as dual channel in the future that I mean, right. It's a great time to get omni channel retailer might because we're obviously benefiting from a blend of.
The digital as well as the store you mentioned earlier today.
Curbside up and running an 80% of our stores and I think it nicely double the build on that but that's not the helping the customer shops.
Okay, just sneak in one where you see any advantages with AMC as you were booking holiday inn into spring.
We have seen good costing I would say as we've gone through the beginning of this year towards the end really you've seen the input cost the commodity costs with part of it had been down and so the supply demand dynamic is probably tilted a little bit in the retailers favor. So we achieved good cost we're pleased with our costs for the back half like I said hopefully whereas.
You guys continue into 2021.
We're planning conservatively on inventory so our overseas are definitely down to last year, but we're seeing the benefits on those costs.
Fantastic Best of luck with respect to school.
Thank you.
And ladies and gentlemen, this does conclude our time for questions and answers on the conference back over to Fran.
Additionally for closing remarks.
Thank everybody for participating in our call today I look back talking with all of you again at the end of third quarter about are ongoing progress on until that is placing can you just take care of yourself.
Thank you again that does conclude today's call. We do thank you for your participation you may now disconnect.
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