Q2 2020 Express Inc Earnings Call
Thank you for standing by and welcome to the Express Inc. second quarter 2020, <unk> earnings Conference call.
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I would now like to hand, the conference over to your Speaker today, Dan Aldridge Vice President Investor Relations. Please go ahead Mr. Aldrich.
Thank you Carol good morning, and welcome to our call I'd like to open by reminding you of the company Safe Harbor provisions any statements made during this conference call, except those containing historical facts, maybe deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1990 pod actual future results may differ materially from those adjusted importantly.
Looking statements due to a number of risks and uncertainties all of which are described in the company's filings with the FCC, including todays press release Express assumes no obligation to update any forward looking statements or information, except as required by law.
Our comments today will supplement the detailed information provided in both the press release any investor presentation available on the company's Investor Relations website. In addition, you can locate a reconciliation of any adjusted results discussed in our comments to amounts reported under GAAP on our website or in our earnings release.
With me today are 10, Baxter, Chief Executive Officer, very Upperclass, Chief Financial Officer, and that Moellering, President and Chief operating Officer, I will now turn the call. So.
Thank you Dan and good morning, everyone. During the second quarter I reached the one year Mark as CEO of express and I thought a lot about what has transpired for our brand our business our associates and our customers.
By now you all know that we unveiled a new corporate strategy in January called the Expressway forward, we outlined in many of the ways in which we would restore the relevance of the express brand the vitality of the express business and the long term profitability [laughter] company.
We identified $80 million and cost savings to be realized over the next three years and just six weeks later, we closed every one of our stores and turned our attention to taking immediate an appropriate action to ensure the necessary liquidity to weather the Corona virus storm.
Today, nearly six months into that storm and against a backdrop of more than two dozen retailers having filed for bankruptcy. This year, we have identified $425 million of liquidity measures to help keep our balance sheet strong and we continue to move our brand and our business forward.
We have advanced and in many instances accelerated critical initiatives within each of the four foundation foundational pillar. So the expressway forward strategy.
Let me be clear our transformation is underway.
Our focus is on achieving profitability and I'm as confident as ever that were on the right track to deliver our long term goal of a mid single digit operating margin.
I see that not only as a relentless optimist, although I most certainly M. But also because I believe that one of the most essential aspects of leadership is the ability to provide perspective.
So while this pandemic has certainly been challenging it is important to view, our progress and our results in the appropriate and broader context.
There is of course still much more to do.
We appear to be in the earliest stages of a recovery.
The majority of our stores of reopened and we do see very encouraging signs.
With significant momentum in our ecommerce business strong customer response to our new product vision and brand positioning and the pace at which we have been able to move through older inventory I would expect to see topline and bottom line improvement as we drive towards profitability.
With that said.
Traffic in malls continues to be a challenge. So this will take some time.
And while we monitor mall traffic consumer confidence and other external factors the executive leadership team and I are sharply focused on controlling the controllables.
The aesthetic relevance and value of our product.
Voice of our brand.
The way, we communicate with and treat our customers the quality and consistency of our execution.
Determining what to prioritize how to sequence our plans for the future and went to take bold and decisive action to protect the financial health of our company are all within our control.
There is a great deal of uncertainty about how when and in what way physical retail will rebound.
What is certain is that across the entire retail industry. The momentum of ecommerce was already happening well before the pandemic has accelerated significantly during the pandemic and will absolutely continue to accelerate.
Because advancing our digital capabilities and offering is within our control we will soon unveil a bold new ecommerce strategy.
Now, let me walk you through how the second quarter unfolded.
We began reopening our stores in early May following closures across our entire fleet due to the pandemic and saw consistent acceleration in traffic in sales in our stores through the third week of June with comparable sales down 15% as compared to down over 50% in early may.
As new hot spots emerged in several states in the fourth week of June we saw an immediate impact. This was exacerbated by prolong store closures in New York and the re closing of a number of stores in California that remained close today.
In light of the impact these required closures of had on our business I'll provide some channel specific commentary.
Traffic and sales stabilized somewhat in July with total comparable sales, including ecommerce at approximately negative 20% for the month.
This figure reflects retail comps, including ecommerce of minus 24% and outlet comps of minus 16%.
This was all achieved through a much more strategic approach to promotions. In fact, we did not anniversary too big site wide promotions, one of which coincided with last year's Amazon Prime day.
July marked the second consecutive month of positive demand in our ecommerce business, where we saw improvement from negative 35% in early may to positive 25% in the back half of July.
This all indicates that our strategy and our brand positioning are resonating with our customers and we have continued to see strength in ecommerce, which has been driven by the aggressive liquidation of spring product new receipts flowing into the assortment. The completion of our website re platform and the expansion of ship from store and buy online.
Hiccup in store capabilities to almost all of our retail locations.
It's important to note that we've enhanced our omnichannel capabilities since June and the customer reception has been promising.
As we have seen both orders and sales increases from June to July and we're just in the very early stages.
Now, let me turn to how we're moving forward and provide updates on some of the key initiatives in motion that support the expressway forward strategy and our drive to profitability.
I'll start with product.
As you know we made the decision to help production of the majority of June and July receipts, which is of course counterintuitive when and when establishing a new product vision, but it was the right thing to do for the financial health of our company and to position us for fall.
As we began flowing new receipts over the last couple of weeks response to our fashion product has been strong.
We're well positioned for the back half of the year and would expect that as we continue to flow newness into our Assortments, we will generate better results.
You'll recall that a key component of our new strategy was to better reflect the way people dressed today, both through the design and presentation of our product.
We've moved away from floor sets that were based on an outdated view of wearing occasions and began to establish our express at philosophy.
This approach was well received customer response has been positive.
Our focus areas for the third quarter those categories, where we can make market chains share gains now and into 2021.
Specifically denim men's and women's tops and modern tailoring.
We will apply our expressed that it design and merchandising philosophy to each of these opportunities and our fall and holiday receipts reflect this.
Let me just give you one example, denim.
You've heard me say that 78% of our customers, where denim to work, but only 17% purchase it from us.
Since I shared that statistic with you in January that 17% is now 22% and we just launched new genes for fall that will address this opportunity and drive our market share.
First we introduced our new Lux comfort knit gene.
Imagine the look of a designer premium gene with a comfort of sweatpants.
We had strong selling in its first week.
Second we will introduce the perfectly polished gene that was created with feedback from our customer on what they want from the denim they wear to work and go to and to go out.
And third we introduced a new temperature control feature in our hyper stretch gene for men, which adds another dimension to our highly successful hyper stretch fabric platform.
Finally, we continue to add new fits in washes across our denim offering.
Fantastic denim at an affordable price from express is a significant market share opportunity and as we've made advancements the customer has responded well so I look forward to continuing to share our progress with you.
As a brand long known and turn to for occasion dressing we of course saw declines when Easter problems graduations weddings, and so many other occasions simply did not happen this year.
We expect that as we emerged from the pandemic and there is a surge of occasions and celebrations that pent up demand coupled with there being fewer places for customers to make these purchases could turn to 2020 headwind into a 2021 tailwind.
The work, we have done to bring our new product vision the expressed that it to life is resonating with customers.
Despite the fact that the assortment today only reflects about 20% new product.
That penetration will steadily increase as we continue to flow new receipts and as we get into the fourth quarter I expect our assortments to fully reflect this new vision.
So thats product.
Now, let me turn to brand and customer.
In the first half of the year, we presented our brand and engaged with our customers in new and more creative ways.
We expanded our digital stylist program held virtual influence or events and based on positive response will continue these activities through the back half of the year and into 2000.
21.
Customer response to our new brand positioning and marketing campaigns has been promising and we've seen increased audience reach and engagement across channels.
The combination of a reallocation of media spend and the new approach to messaging is showing both customers and prospects just how much there is.
Discover at express.
In the first week of August we entered phase one of the relaunch of our customer loyalty program.
What are the most effective ways for us to retain an increase spend among existing customers will be through this program.
Now called Express insider, the new offering includes a more robust portfolio of benefits and a more compelling customer value proposition.
In terms of driving stronger lifetime value, we already know that customers in the previous program had two times the spend and three times the tenure of non loyalty customers.
And in the first quarter of 2021, when we introduced a new for tiered benefits system the ability for customers to earn rewards faster should increase their engagement and deepen their relationship with express.
And finally execution.
There are multiple aspects of execution, all of which support our drive to profitability.
First we have improved our speed.
We implemented a new go to market process that reduces lead times and completed the implementation of new assortment planning and product lifecycle systems. These are the EPZ five and Bamber rose initiatives, Matt spoke about that our January investor event.
As five will bring more granularity to assortment planning for example, new store clustering capabilities that will help optimize inventory investments.
Bamboo rose will support the go to market process through more streamlined ordering and tracking and enhanced communication through shared interface between expressed and our vendors.
The combined result of these systems will be greater visibility better decision, making and the ability to be more nimble, which I would expect will lead to product margin improvement overtime.
Second we've expanded our omnichannel capabilities I referenced ship from store and buy online pickup in store two critical ways, our customers can now shop, when where and how they want that also help us move through inventory more efficiently and effectively.
These are both available in the majority of our retail stores today with refinements and enhancements to come by the end of the third quarter.
And finally, when it comes to execution is agility.
While we significantly reduced the capital expenditures, we had originally planned for the year. We also quickly reprioritized and reallocated investments to support what we believed would aid us in coming through the pandemic and position us well for the future.
So we put our foot on the gas with regard to our digital business completing the replatform of our website and supporting critical elements of our omnichannel infrastructure, including the upcoming launch of the corner payment program Unexpressed Dot Com and the express mobile App in mid September.
We expect this capability will increase our average order value by providing financial flexibility for our customers.
Given the landscape and the forces outside our control the second quarter was certainly challenging.
The fleet rationalization plan that we announced in January proved to be well timed as our shift to greater investment in E. Commerce has served us well over these last several months.
This pandemic has an unexpected and now extended detour on the expressway forward.
But as you've heard me say before a detour may change your route and it may change the speed with which you get to where youre going but it does not change your final destination.
And now Perry will review, our second quarter results in more detail and outline the liquidity actions, we've taken and continue to take to ensure the financial health of our business.
Thank you team I'll start with our second quarter results and cut and liquidity position and then provide details on the actions we have taken and we'll continue to take to mitigate the risk mannington uncertainty and ensure the long term health of our business.
Second quarter net sales were $246 million at 48% decrease as compared to $473 million last year retail sales were negative, 51% and express factory outlet stores sales were negative 43%.
Second quarter comparable sales were negative 24%, including two a retail at negative 28% in outlets at nearly 15%.
Our sales continued to be materially impacted by Qubic 19 in the second quarter as we had over 30% of our stores close for more than half the quarter and some stores are still close in California, and New York.
Our merchandise margin contracted by approximately 2300 basis points and was mainly driven by high levels of liquidation as we work through inventory that accumulated asset result of store closures in the first and second quarters.
We were able to liquidate a significant amount of clearance inventory, which should allow us to pull back on promotions in the back half over the year.
Buying and occupancy was down $11 million on an absolute dollar basis, but de leveraged approximately 2200 basis points due to the decline in sales.
The dollar reduction in buying and occupancy is driven by our fleet rationalization.
Rent savings the organizational restructure, though we announced in January and incremental actions with Twoq to preserve liquidity.
It should be noted the buying and occupancy was impacted by 6.8 million dollar noncash impairment charge related to certain stores and store assets and this compares to similar 2.3 million dollar adjustment in the second quarter of last year.
During the second quarter, we had the gross loss of $44 million with the gross margin rate of negative 18% down approximately 4500 basis points as compared to the prior year driven by the sales decline.
We expect the actions we have taken during the first half of the year, including the liquidation of clearance inventory will lead us to improvements in gross margin in the back half of the year.
As training expenses were $93 million, a decrease of $43 million compared to last year.
Similar to the B B and no reduction the reduction in its Jenny expenses were driven by our fleet rationalization. The previously announced cost reductions associated with our corporate restructuring and incremental actions, we too as part of our Clovis 19 savings, which I will discuss shortly I.
As a percentage of sales as Geneight came in a 38% de leveraging approximately 900 basis points as result of the significant declining sales.
On a GAAP basis operating loss was $136 million.
As compared to last year's opening new laws of $10 million.
Excluding the impact of the previously mentioned noncash impairment charges, our adjusted operating loss for the second quarter was $129 million as compared to last years adjusted operating loss of $7 million.
Second quarter diluted loss per share was $1.67 on a GAAP basis compared to a loss of 14 cents per diluted share in the second quarter of 2019.
Adjusted loss per diluted share was $1.48 as compared to last years adjusted loss per diluted share of 11 cents.
Excluded from this year's laws with a tax benefit from the care sat the valuation allowances recorded against our deferred tax assets and the noncash impairment charge that I previously mentioned.
Our effective tax rate for the second quarter was 21.5% the rate reflects the previously mentioned valuation allowance recorded against our deferred tax assets.
This was partially offset by the cures act benefit of cutting back projected 2020, net operating losses to prior tax years with a higher federal tax rate.
Turning to our balance sheet and cash flow, we ended the quarter with 193 million bolus of cash and cash equivalents as compared to last years $154 million.
This reflects the covenants remediation efforts that we have realized to date.
Our cash also includes $165 million in proceeds from the revolver, we drew down in March and we still have approximately $52 million available under this facility subject to serve the borrowing base limitations.
Operating cash flow for the second quarter was negative $39 million and capital expenditures were $6 million, resulting in free cash flow of negative $45 million.
Our free cash flow for the quarter was positively impacted by $43 million of accrued rent expense.
Our cash flow was also positively impacted by the previously mentioned efforts to reduce expenses and improve liquidity, including but not limited to inventory cats expense and capital expenditure reductions.
Inventories were $232 million at 14% decrease as compared to last years $269 million.
Our inventory balance represented previously communicated actions, we two guys as we began to see the impacts of Corbett 19.
As a reminder, we immediately took actions to digitize the balance of second quarter deliveries by approximately $100 million and adjusted our plans for the full season.
In addition.
We will redact, approximately 300000 units representing $4 million to deliver to our outlet channel in spring 2021.
Our goal was to maintain the integrity of our assortment, while minimizing our exposure due to excess inventory, which has put us in a healthier position by allowing us to increase the penetration of new items in our assortment as we head into the fall season.
As Tim mentioned, new receipts began flowing in August we would expect our trends to improve as traffic recoveries and as we continue to flowing new receipts in the back half of the year.
During the first quarter, we took immediate action to ensure sufficient liquidity throughout the duration of this crises, including drawing on our credit facility, reducing second quarter inventory receipts identifying cost savings reducing capital expenditures.
And our sustaining the benefits of the care sat in total these actions were expected to results in approximately $385 million in improved liquidity in 2020.
Since then we have identified an incremental $40 million in liquidity savings, including approximately $20 million in rent abatements, we have agreed to with a number of landlords.
We appreciate the partnership shown by our landlords as we continue to negotiate renegotiate the majority of our leases.
We we also identified $20 million in additional store and corporate office related expense savings. Overall. These actions will result in approximately $425 million and improve liquidity in 2020 of which approximately 195.
$5 million was realized in the first quarter and approximately $85 million was realized in the second quarter with the remainder expected in the fourth season.
In addition to these actions we have incremental liquidity levers, we can pool if necessary.
As previously mentioned, we still have approximately $52 million available on our revolver and we will continue to identify additional expense reductions.
Furthermore, we expect the majority of the curious act benefits to materialize in 2021, as we as we cutting back 2020 losses to prior tax years.
Our balance sheet currently reflects $89 million of income tax receivable of which approximately $80 million is expected to be received in Q2 of next year.
In summary, based on the immediate actions, we twod and continue to take in response to cover 19, our liquidity position and flexibility the momentum of our E Commerce business. The strong response to our fashion receipts.
And the reopening of our stores all give us confidence that we have sufficient liquidity through fiscal 2020 and are well positioned for improved results in 2021.
This should help us achieve our long term goal of a mid single digit operating margin.
I look forward to updating you on our progress next quarter and we'll now turn the call back to team.
Thanks Barry.
Let me conclude where I began.
Reflecting on what has transpired over the course of my first year as the CEO of express.
We launched a new corporate strategy and set in motion to transformation of our product our brand our business and our organization.
We built a strong seasoned executive leadership team.
We identified $80 million of cost savings to be realized over a three year period as the first step in our drive toward profitability.
We completely re engineered our go to market process.
We developed a thoughtful fleet rationalization plan.
Launched a new customer experience model in our stores and relaunched our customer loyalty program.
We are creating product according to a clear design philosophy in presenting a compelling new brand positioning.
We accelerated a number of E commerce investments and initiatives, including the Replatform of our web site and the launch of up West a standalone digitally native brand.
And while the size of up West business has not yet material to our results. It has exceeded our expectations and we have learned so much that will not only in form our digital strategy for up west but also for express.
We have made progress against each one of our four foundational pillars, and we have taken decisive and appropriate actions over the last five and a half months to protect the financial health of this company.
Express is well positioned to emerge from this challenging period with the resources and abilities to achieve our goals and as a more resourceful and agile organization.
I'm very proud of the way in which our associates have embraced our new culture, even while working remotely. These last several months and the connectivity and collaboration across departments has never been stronger.
My confidence in our team our strategy and our future is as strong as ever.
Thank you for your time this morning, and I'll turn the call back over to the operator, so we can take your questions.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Try your question please press the pound or hash key.
Your first question. This morning comes from Marni Shapiro from retail tracker. Please go ahead.
Well.
To disrupt.
Marni. Please go ahead your line is open.
Hey, guys, sorry about that.
Good morning.
Good morning, So I guess, Tim a lot of good work going on and I'm seeing an online with the new deliveries and they look really good but obviously store traffic remains a problem. So I guess could you talk about you sound very confident in back half of the year end with the Assortments can you talk about this confidence in what you're seeing is it being driven by online so what.
It's going to get you get this customer going again really in the back half of the year.
Yep.
Very good question money as I said mall traffic continues to be challenging.
In August but in spite of that our August fashion deliveries.
Our performing extraordinarily well.
Both in store and online.
So the customers responding extremely well to the new fashion the challenges in the business remain you know some of the core categories like men suiting men's dress shirts.
Right.
Women's suiting wins, where what we would have historically called wear to work those those core categories for us remained very challenging but.
Fashion product is selling in both channels at selling very well in stores and of selling very well on online. So I would expect that as we continue to flow fashion product into this was the first delivery of fashion product we've had in three months. So.
With that customer with star for it and we're well positioned to flow fashion product now through the back half of the year. So I'd expect us to see continued improvement in both channels.
Although and you expect that traffic in stores is going to remain challenging so our focus Marty.
Clearly on E commerce, and driving as much of the business as possible to re commerce.
I ask a follow up just on the fashion specifically, how do you think about this in regard to the men's business because the men's business is much more key item driven I mean, youve had always had good denim business, there and things like polo shirts.
But can you think can you walk us through what the men side of the business could look like 10, a women will be cricketer, Spanish passions and very good.
Yes, and actually our men's fashion has been very good.
And we actually have a very strong fashion consumer demand side of our business. So key items will always continue to be important for us and mens, but just as an example, our men's denim business is.
Very very good and it's it's what I would call actually explosive online.
As we have.
Advanced our denim strategy. So Thats. An example of a core business in men's that is that is doing extraordinarily well, but our graphic tee business, which is a fashion business for men are graphic key business is fantastic the customers responding to all new graphic Tees that that we have put out there and it's not just.
Logo, it's also art driven photographic there're there're a lot of great things.
He is also responded incredibly well to fashion within our short sleeve shirts programs.
Printed short sleeve shirts have been fantastic Andy's responding well to comfort in the modern tailoring.
Categories. So we've introduced several niche suits and the suits have been fantastic and I think the key marni is really teaching the guy.
That and Netsuite can be one of the most versatile things he hasn't his wardrobe.
Yes, so if you've seen our social media and what we're doing on the web site were really showing a guy that he can wear a really comfortable pair of jeans that feels like sweats, a great graphic tee shirt and throw a knit jacket over the back of as chair and if he is on a zoom call heathrow's on that didn't jacket and he looks like a million bucks. So the male customer is actually responding really really.
Well to our fashion as well and our men's businesses better than our women's business right now.
Fantastic and the could just sneak in one last one did you guys talk about where your inventories are planned for the back half as the year.
Hi, My name.
From backup with a year, we expect the inventories to be down at similar levels as we have seen them for Q2.
So right now for Q2, we came down up 14% and we expect that we're going to continue to manage through our inventory in our promotional.
Cadence in the balance of the year to ensure that the inventory levels are down a similar levels.
Fantastic Best of luck I will take some outlined guys. Thanks.
Thank you.
Your next question comes from Roxanne Meyer from MKM Partners. Please go ahead.
Great Good morning, and thanks for taking the question.
I just wanted to follow up on Marty's question, you know as it relates to the merchandise in the newness that you had I think you said, it's about 20% newness. Currently can you talk about where that will be by the end of three Q and how we should think about the progression to the ended the year and then I also wanted to drive.
Distinction between you know, what's new versus how you are evolving categories. I know you talked about over indexing too.
Dan and nets.
How how are your categories of what is the timeline I guess sphere fear categories.
Others are great questions Roxanne.
The so I'll take the first part of it about 20% of our inventory right now is.
Like we like we said it reflects this new brand at it and Thats because our fashion deliveries just began flowing again over the past several weeks.
I would expect that by the beginning of the fourth quarter as I said in my prepared remarks that our entire assortment will fully reflect.
The express at it and new express at it.
So we have been slowly evolving the categories and I would have said that we would have been in much better shape and many of those categories had the second quarter played out the way we had intended as it was our intent to position many of those categories during that time.
However, the categories are also being positioned as we move forward. So as we continue to flow receipts in the third quarter.
The complex one of our inventory.
I will.
Further reflect with each delivery.
The express at it and by the time, we get too early in the fourth quarter.
We should see it completely reflected.
And that is in the retail business the outlet business as I've said previously.
We would expect pigs to reflect our vision in the first quarter of 2021.
Okay, Great and just I guess is a follow up as you shift and complete your category mix, how does that impact you are.
And how are you thinking about I mean, obviously youre kind of I have on charter time, but in but in general are you thinking about any changes to your promotional strategy.
We are definitely an unchartered times and.
They have they have certainly been more promotional than we would've anticipated.
And I've always said that we will continue to be competitive from a promotional standpoint. So we'll continue to react during this unprecedented time.
And do what we believe we need to do to be competitive that being said.
Our stated.
Vision to be a less promotional company remains intact and strategically.
We are building toward that.
I think that that it is likely that the fourth quarter of this year will be highly promotional as as it always is but but I believe it will be more promotional than what we've seen in the past and I believe it will be prolonged yeah. I think we're talking a lot about the fourth quarter likely starting a bit earlier in October.
And and being more spread out to avoid those sort of peaks and valleys as customers look.
Look to avoid.
Large crowds so from a promotional perspective, our strategy remains the same we're working toward being less promotional company and driving our business through customer and product initiatives.
The the you are up piece of your question are you are is building.
As we deliver more fashion and more elevated product into the assortment and so.
When you look across categories categories like women's tops, where we have a much more significant investment in great fashion.
Are you are is up.
The customer is responding well to those increases so our customers telling us that they will they respond to value, it's not necessarily about the price it's about the value that's in the product.
There are other categories that are working as well that are bringing our total you are however down.
So our actual our average order value online and our average unit retails in stores are actually down.
Much of that is a function of mix because we are selling less men's suits for example, so.
Our most important categories. So some of that as a function of.
Mix.
Some of that is also a function of that increased promotionality that we experienced in the second quarter of this year.
Okay, great. Thanks for all the color and best of luck since the fall.
Thanks Roxanne.
As a reminder, please press star one on your telephone in order to ask your question.
Your next question comes from Steve Marotta from CL, King and Associates. Please go ahead.
Good morning, Tim and Terry you bleed out.
And certainly from a liquidity standpoint, where you stand right now and I realize that youre not providing specific guidance.
There's not a decline from liquidity standpoint of course is cash burn can you provide a little bit of detail on your confidence that the current liquidity.
Levels.
We'll be enough to sustain through the balance of the year given what.
Thank you from a cash burn standpoint.
Yes, Steve.
Steve do we lose you.
No I'm still there.
Okay.
So Steve from from a liquidity standpoint, and a cash burn rate.
There is obviously there is really really good to rule of thumb before the cash burn rate because there's so many variables that goes into the cash burn rate.
But when you look at these are working capital needs fluctuate throughout the year.
And typically when you look at the Q4 is a quarter that our working capital needs are lower and our cash build during that timeframe, where we have dinis taken action.
Over the first over the last several months to ensure liquidity for the balance of the year, we have announced 480 $425 million of actions are the which we deliver on 195 in the first quarter through through already be mainly through our ABL and then for the segment closure we delivered.
Approximately $85 million in liquidity the actions and that was mainly driven by the $100 million.
Of out of inventory cost that we did in Q2 when you look at those inventory count I love the cash benefit is coming.
A spread between Q2 in Q3, given the terms that we have worked with our merchants.
And then and then when you look at the remaining liquidity that we're expecting is it's going to be spreads between Q3 in Q4, mainly in Q3. So when you look at all of that including the working capital fluctuations were confident that we do have sufficient liquidity.
For the balance of the year, and then to set us up.
For 2021.
That's very helpful. Terry you also mentioned in your comments just a point of clarity gross margin improvement is expected in the second half I'm, assuming you're referring on a sequential basis as opposed to.
Linear improvement on a year over year basis.
Yes, Steve absolutely, we're expecting we're expecting our gross margin to improve as we go into the back half of the year compare to the first half of the year versus obviously last year Q3 in Q4 and the expectation of these improvements in the back half of the year driven by the fact that.
Q2, we liquidated a lot of inventory.
That was spring related inventory because our stores were closed for the vast vast majority deal of Q on back half of Q1, and then into Q2.
And then with the fact that we have comparable red land inventory going to into Q3 compared to last year and now based on teams comments as well we have new receipts flowing.
We believe that our merchandise margin is going to improve sequentially two to spring to the spring season, and Thats the gross margin overall improvement.
That's helpful and also one another.
A question.
You said that there is an $80 million cash tax benefit expected direct to express in the second quarter next year is that accurate.
That is that is correct and that is part of cures Act. So so a part of curious act.
There is.
You can you can catty bag projected 2020 losses.
Back to over five years, and then been able to harvest the tax gains or sorry, the operating profit from.
The previous years, and then take that as a tax benefit and we do expect that to be approximately at this point an $80 million that will be received in 2021, we expected in the second quarter of 2021.
And that's included within the $425 million of.
No. It's it's not included it's not included as part of that the actions that we announced as part of that $425 million. Those erections that we expect in 2020 to materialize. It doesn't go beyond 2020.
I understand excellent. Thank you that's very very helpful.
Your next question comes from Susan Anderson from B. Riley. Please go ahead.
Hi, good morning, Thanks for taking my question.
I was curious it sounded like you thought and back to college was very encouraging, especially with the new product outlets. We agree I think we think it looks much better in the story.
Curious I think your Ted store productivity was 16% in June but then that back in July hotspot have you seen I guess it sounds like August continue to be pressure is that too too hot spots in the story and then also on the E Commerce trend at 25% in July also continue into I guess.
Hi, Thanks.
Good morning, Susan.
Yeah, as I've said mall traffic continues to be challenging.
So.
We saw that stabilization in July and that has continued.
I'm very encouraged by the momentum of E Commerce, and I'm very encouraged by the performance of our fashion product, our new fashion deliveries in both stores and E commerce, but I would say that our results in the in the first few weeks of August are very similar to our results in July.
But like I said very strong response to that new fashion across both channels. So as we continue to flow fashion over the course of the next several months and really reposition our inventories I would expect our results to continue to improve because honestly, it's still small percent of the total.
It's about 20% right now as I said so we.
We need to we need to see that inventory the inventory levels in that product increase.
We're also dealing now with the shift of Labor day out a week I think thats, an important factor for everybody to remember when you're thinking about August performance.
This was the week of of Labor day last year, and we're not in that until the week, leading into labor day last year, and we're not into that until next week.
That's helpful. Thanks, and then I'm curious on that on denim how did it perform in the quarter isn't with that you comfort get them I guess is that like a change in wash or what's your sense or how should we think about that.
The.
Great question.
Denim has continued to be.
A strong performing category for us in med very strong performing category for us and men.
In women's we have been repositioning our denim inventories and as we reposition the denim inventories. The response has been strong and our denim business has continued to improve.
The new jeans.
It's not really I mean, there are new fit there are two different things.
And your question there are new fits.
And we're certainly seeing a shift from away from the Super Skinny in both men's and women's into different like shapes. So we have expanded our assortments to include those different a leg shapes in fact, when I started a year ago, we only had a denim legging in women's.
The LNG we had.
So we have expanded leg shape. So there are different fits available across our denim assortment in both men's and women's today that we're not available a year ago. The fabric platforms is a different conversation and the fabric platforms are we're also seeing extraordinary success and.
They so the Lux comfort knit gene for example.
It has the it's available it can be available in multiple fits and so you can habit fit looser or you can have it fit.
Slimmer. So there are two different things both of which are having a positive impact on our denim business.
And Thats really helpful. And then lastly, how are you thinking about the store base is there opportunity now to maybe get out or tenant leases that or potentially on the border or even downsize some of the stores.
Uh huh.
Great question, and I mentioned that.
We announced a fleet rationalization plan in January and that fleet rationalization plan was.
Incredibly strategic.
And the decisions that we made were based on data that we had.
We had spent a lot of time.
Understanding.
So for example, we looked at the number of stores in a market in the potential transfer volume of a store we looked at the impact closing a store would have on our E commerce business in that market. Because we know that that also happens and we announced about 100 store closures in that fleet rationalization.
Obviously as.
As this pandemic has unfolded and the duration of it has been significantly longer than any of US would have expected. We are continuing to review our fleet, but.
While I believe that we will likely.
Have additional store closures I think it's premature to say right now.
What we would do because we'll want to be very thoughtful in that total impact of the business on those store closures and on the customer experience in the markets where those stores exist.
So so thats the first part the second part is that we continue to be in negotiations with all of our landlords.
As Perry said, we've negotiated about $20 million and ret rent abatements, thus far.
And we still have the majority of our landlords that we are working with and greatly appreciate really greatly appreciate the partnership of many of our landlords who have.
Agreed to new terms as we as we emerged from the pandemic.
Okay. That's really helpful. Thanks, so much good luck.
Thank you.
Your next question comes from Janet Kloppenburg from JP Research. Please go ahead.
Hi, Anthony you hear me.
Yes, we can good morning Janet.
Hi, I'm, telling us that online.
I was wondering.
But you hear me.
Yes, we can been sounds like a new product.
Selling well I'm wondering when you'll feel confident that's a net.
Since late 1 billion tons of legacy product versus the new product and.
How should we expect that in the third quarter.
Hi, Janet Yes, I had I had mentioned that I expect that as we have resumed flowing new receipts over the last couple of weeks and we'll continue to flow new receipts as we move through the third quarter that our Assortments will fully reflect our new express at it in our new vision.
By the time, we get to the early fourth quarter and that is in our full price our retail and ecommerce channels I would expect our outlet assortments to better reflect our vision or more fully reflect our vision by the time, we get into 2021.
Okay and in terms of.
And Phantom Assortments and content intake is now fully complete and executed or will that go through that transition Tam as we move through the rest of here.
We have several additional launches planned for the balance of the year in denim so.
While we have made very significant progress and we're proud of the progress we've made in the denim assortments that are in our stores and online now that assortment will continue to evolve and also will more closely reflect our ultimate vision for the assortment by the time, we get into the fourth quarter.
Okay, and just lastly, when given your response to the question about store closing and customer experience.
Do you have confidence that the consumer endpoint and feel comfortable.
Coming back to the mall and.
It's flat and perform in that channel or will you look to relocating stores as we move forward.
I think thats, a great question, Janet and I think it may be premature to.
To assess what the consumer behavior is going to be it's clear right now while we're still in the midst of this that you do.
A certain number of customers are not comfortable being in the mall environment. Our performance continues to be better and open air environments, where the customer seems to be more comfortable.
So I I think it's premature.
The but what I will say is that I do believe that as the customer gets more and more comfortable and as traffic improves I'm not sure to what level, but as traffic improves.
That we are positioned very well to compete very effectively against the other players in the mall.
That being said.
We do need to explore alternative locations for stores.
And we will be doing that as we head into 2021 testing some new things and we'll talk a lot more about that as we get into the back half of the year. So we are exploring.
Opportunities outside of the mall.
And just remind me if the ship from store capability.
Yes, Hi, Jim we have.
All of the vast majority of our stores about 93% of our retail stores have shipped from store capability.
So you're able to.
Fills me.
Digital demand that lane control inventories, Matt and and one into the PNM of that has never looked like it hit more costly land must be more costly than in store sale, but what does it look like versus the fulfillment sale.
So it has been extraordinarily effective in relieving inventory from stores that have been closed for a long period of time and also some of the stores in California still remain closed.
And the PM now it depends on how much split shipments. There are so we have a lot of algorithms to try to optimize shipments so that weve minimized split shipments when you don't have.
How many what shipments the CNL looks very similar to what we see at our E Commerce fulfillment center when you have us.
Let's shift is obviously right now shipping costs go up and that is a detriment to the PML, but we have algorithms we work on to optimize all that.
Thanks, very much and good luck.
Thanks Janet.
Your next question comes from Jennifer running from Wedbush Securities. Please go ahead.
Hi, guys I was wondering can you talk.
It is more about this stores like what percentage of the store basis.
For 7000 on if you're seeing any kind of shift to digital sales another area.
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Well first and then also I was just wondering.
I am happy with this full 20% of new product is working or eating and some of the product and there is not working in what's working investments Lincoln Center.
Thanks.
Sure I'll take the first part of the question. So I'll close stores standpoint, right now the only stores. We have closed right now on California, New York So.
Obviously changes five today, but we're looking right now have 45 retail store closed six CFO stores closed in California, and then in New York There are four closed doors.
And we are seeing a shift to online in those locations or to other store and surrounding those in New York.
Thank you and that the second part of the question. Gen. Obviously, there are always going to be hits and misses.
When you're talking about fashion, but.
I would say is we have a whole lot more hits and misses and great. His wife, So yes, exactly what tri fuel so encouraged by.
The results of the August fashion deliveries.
The customers responding really well.
So the fashion deliveries and as I said to big new programs like our Lux comfort that gene.
Great and yet you said results in August similar to July so it doesn't seem like maybe that's the part of the reason you haven't seen in celebration that lot of retail scene.
Thanks.
Yes look I think that we.
We have seen great momentum online.
But we are still.
Up against.
An assortment that was built around occasions wearing occasions, you know occasions like wear to work and going out but those were historically apart there was where our core competencies and a year ago, our stores and our website were all organize that way so.
We're still seeing.
The big negative impact of of people not attending occasions.
And people working from home and therefore, there wardrobe needs changing so we see a big negative impact on that versus some others as you've said who have seen momentum who are in much more casual businesses active businesses loungewear businesses.
So intimate apparel business even.
That have been very strong so.
As we flow this new product and it and it more closely reflects a much more modern way that the customer dresses.
I believe the results will continue to improve.
Great. Thank you.
Thank you.
And ladies and gentlemen. This concludes the question answer session of our call and does wrap the call for today, we would like to thank you all for participating you may now disconnect.
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