Q2 2020 Designer Brands Inc Earnings Call
Welcome to the designer brands and second quarter 2020 conference call.
All participants will be it looks like a remote.
And your need assistance places only kalkan specialists for pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask question.
That's a question your first starting in one already touched on flow.
<unk> question, Please press star them too.
There's no this is being recorded.
<unk> vertical conservative Stacy Oh man.
[laughter] facing hurdle.
Excuse me. Please go ahead.
Good morning earlier today, the company issued a press release compared results of operations for the three month ended August 1st 2022 to three months ended August sorry, 2018. Please note that the remarks made about the future expectations plans across the company constitute forward looking statement.
Results may differ materially through the various factors listed in today's press release, the companies public I like the FTC.
Companies, so no obligation to update any forward looking statements.
Yes, they are Roger Rawlins, Chief Executive Officer, Jared <unk>, Chief Financial Officer.
They turn over the call to Roger.
Good morning, and welcome to designer brands second quarter fiscal 2020 earnings call.
Let's start off by thinking our teams for their continued efforts as we manage through a gradual reopening of stores. There was completed on July 12.
This has been an overwhelmingly challenging time for our industry, but I'm confident in designer brands playbook to strategically and successfully navigate the current environment.
We will continue to execute against our strategic pillars of delivering differentiated products and offering differentiated experiences to drive growth.
Importantly, we continue to uphold the highest safety protocols and stores, including increasing cleaning supporting social distancing monitoring the number of customers in our stores, creating sake try on areas in required all customers and associates to where masking every one of our stores, we have and will remain focused on prioritized.
The health and safety of our employees and customers. We continue to employee best in class safety measures in our stores, including providing P. P to our customers and employees.
Equally as important to US is the long term health of our business in the second quarter, we took significant actions to protect ourselves amidst this uncertain environment, including greatly improving our liquidity position instituting cost controls and aggressively rightsizing inventory through markdowns in aligning inventory and consumer demand.
We also narrowed our focus to the top 50 brands in footwear and reduced points of distribution for Koodo produced France, all while supporting our communities through our charitable and diversity and inclusion initiatives.
We remain acutely aware of our responsibility to support our communities. During this time as we discussed last quarter. We have teamed up with Reebok and long term partner sold for salt to provide over 100000 pairs of footwear to a central workers and families impacted by cobot.
As of the end of this quarter, we have donated approximately 3.4 million pairs of shoes since the beginning universe partnership was sold for sold in 2018.
I want to acknowledge we have challenges that will require us to bleep and our ability to change.
Many our business driven however, some are society like being honest about or opportunities to continue to make progress on diversity equity and inclusion.
Well a lot of work remains I'm encouraged by our continued progress to date and how we will continue to infuse diversity equity and inclusion into who we are in all that we do.
We are hiring experienced diversity equity and inclusion leader, who I will help support to drive organizational focus and change we're asking our leaders to fully commit and embrace diversity equity an inclusion through their performance and talent goals and we are evolving our hiring approach practices in policies.
We can't do better and we will do better.
We continue to feel the impact of Koeppen 19, and there are still a number of unknowns regarding what the future holds and this is affecting how our consumers are shopping.
According to data insights from sense Threesixty in an ongoing study the percent of Americans, believing the pandemic would last longer than six months has risen from just 9% in early April to just under 50% at the end of Q2.
The environment remains incredibly fluid and it is critical that we adapt.
We're taking our learnings over the past six months, particularly related to consumer behavior changes in adjusting our actions accordingly to better serve our customers needs.
To protect the long term sustainability of our business. We've taken further actions to enhance our liquidity and financial flexibility. In addition to the numerous steps taken to reduce operating costs.
As announced on August 7th we recently retired or legacy cash flow revolving credit facility entered into a new asset based revolving credit facility and close the new senior secured term loan.
We expect that these measures will provide us with vastly more flexibility to efficiently manage our business and increased liquidity to weather a variety of scenarios on the road ahead.
Jeremy will go into further detail on the liquidity measures, we're taking a just a moment.
Additionally, we have taken numerous actions in terms of cost control initiatives at the end of July we made the difficult decision to implement an internal reorganization and reduce our workforce. This will allow us to realize annualized cost savings of approximately 40 million pretax net of our plans reinvestments in the business.
These actions were not taken lightly but were necessary as we plan our business moving forward.
We also continue to have active discussions with all our partners to establish updated payment terms.
We've aligned with vendors on new payment terms and are expecting them to strictly adhere to these going forward as we work to be as efficient as possible. We continue to focus on ways, we can optimize spend across the board.
Conversations with our landlords continue as we work to find more flexible lease terms better matching lease obligations to traffic in sales.
Well, we are still in the early stages of these discussions the majority of our landlords have agreed to more flexible terms, helping to mitigate topline impacts from Cowen.
As we evolve our approach we were thinking differently about how to better provider customers the products they want.
Our flexible business model affords us the opportunity to quickly adapt to changing consumer preferences and challenging macro environments.
We were able to chase categories, where we see strength and in the near term we're capitalizing on this flexibility to meet customers' needs.
We continue to focus on emphasizing our everyday value proposition prioritizing the top 50 brands in footwear and ensuring that we have affirmed financial foundation.
With our customer staying home, we've seen a clear shifting consumer behavior and preferences by way of increased demand for athleisure product.
Even with the steep markdowns, we applied to traditional seasonal and dress customers are strongly gravitating towards comfortable in casual looks as they spend much of their time at home and engaged an outdoor leisure activities.
In response, we are flexing, our agile business model and building our fall assortment to reflect consumer demand receipts have been modified away from traditional seasonal in dress towards that leisure DSW is current highest performing category.
Given our current under penetration in this business, we see a large market share opportunity ahead of us designer brands has the flexibility and the necessary vendor relationships to become a go to sneaker headquarters. During this time in particular, we have had conversations with the top five athletic brands in North America, who were excited.
About leveraging our platform to build their customer base, our primary female customer base is a highly desirable audience for these brands and we are currently under penetrated in men's athletic footwear. So all parties have much to gain from these potential partnerships.
At the end of the second quarter in U.S. retail our athletic business represented 24% versus 17% and 2019 addressing seasonal represented 40% versus 47% in 2019.
In the second quarter, we saw athletic Comping down, 24% stronger than our overall store traffic, which was down 59%.
Conversely dress and seasonal are comping negative, 66% and negative 47%, respectively, reflecting changing consumer demand.
In the fall season, we continue to plan for an increase in athletic penetration relative to normal levels to north of 25% of our assortment.
Furthermore, our merchandise margin rates on non athletic and non kids business was in the teens compared to mid Fortys last year. Conversely, the balance of the assortment was much more in line with what we've seen historically.
We're also increasing our assortment in evergreen categories like kids as parents continue to need to replace their children shoes comps are down 13% in kids penetration has increased to 8% versus just 5% last year.
Our status as one is the largest retailers a footwear coupled with our flexible business model allows designer brands to command attention from the top 50 brands in footwear.
Customers are currently demanding products almost exclusively from brands. They know and trust based on our site search data, we actually see consumer searching for shoes online by brand first and then sorting out a specific type of shoe such as sandals or sneakers.
As discussed last quarter, we plan to grow even deeper with these top 50 brands.
We know that our customer wants national brands more than ever and we're prioritizing our inventory buys to reflect that.
In response to this shift we have strengthened our partnership with key brands that will result in DSW over indexing on product allocated to us in certain cases, we're getting access to national brands that we have never had before were securing product in every style color in size as these brands recognize our command of over 30 million.
In rewards members and our position as a strong go forward customer as other retailers are slowly disappearing.
We're being given more product choices in all major brands are expanding the breadth of assortment, we can sell through.
Some or even providing us with special makeup and Closeouts. In addition to their full line of goods, which we can offer to our customers a compelling price points customers, we'll see a noticeable difference in our assortment and penetration within these top 50 brands of footwear, starting this fall.
Our Canada business continues to perform strongly especially given its already higher penetration at the end at leisure and kids. This allowed the shoe company to perform more in line with athletic and athleisure focused retailers in the U.S., who are recovering more quickly from the impacts of cobot.
We're taking learnings from our Canada business in applying them as we adjust our approach to the fall season in the U.S.
The board of our new initiatives and to build out our brand awareness, we have increased our marketing efforts across all channels, including TV direct mail and digital in late July we launched our first tick Tock campaign, which became one of the most successful commercial campaigns on the platform today the campaign titled Hashtag too many shoes challenge it.
Guided by a partnership with Jay Leno featured an original song performed by up and coming artist Julian extra and singer demo. Additionally, we top several tick tock influencers to get on board today videos with the too many shoes hashtag have more than 3 billion views, bringing attention to DS stuff.
Your first significant number of people who are not currently customers. This is just one example of the type of innovative marketing that we are implementing to influence a new set of potential customers to the DSW brand.
I'd like to take a moment to address our commuter business not surprisingly we have faced challenges in our commercial operations. Given it is heavy focus on the dress business one of the original reasons, we purchased the.
Furthermore, the timing of the strategy to focus on crude as private label has proved unfortunate given the macro environment and the consumer pull back in this category due to the pandemic and the wholesale business remains soft.
We believe the kudos capabilities will continue to be important as we look to provide everyday value to our customers and deliver our exclusive brands at a better value than ever before.
Integration remains on track, but we continue to evaluate our operations and we'll closely monitor consumer behaviors over the coming months given the shift in consumer preferences as a direct result of the overhang of covert 19.
To ensure a business is appropriately positioned amidst this changing environment and to provide us more flexibility to chase into various categories. We've made the recent decision to shut down sole society and focused on Vince Camuto, Jessica Simpson and Lucky, which are all tremendous brands for our company.
This has been a challenging period as our store base was not fully opened during the quarter and while our weekly traffic in store generated demand saw materials sequential weekly improvement upon reopening we saw definitive pause in that improvement near the middle of June and we've been hovering with store traffic Comping negative between 30 and 40 per.
So fairly consistently since then.
Even with this stubborn store traffic pressure demand for our athletic and kids product continues to fair much better and in many weeks actually comped positive and we continue to flex our assortment toward these categories until the consumer feel safe and comfortable going out and congregating in a meaningful way, we believe our store traffic will be.
Remain pressured on the other hand, our overall digital demand comps remained robust with digitally demanded transactions for the quarter up over 40% versus last year in the second quarter, our comps were down 43% compared to down 0.6% in Q2 2019 in total sales were down 43%.
Although sales at our stores remain challenged our track record of Smart strategic digital investments has helped position us for success in driven continued strength in our online business with the rapid changing of the retail environment, we've accelerated our innovation and digital investments to meet the customer where they are.
Digital demand grew by 27% at DSW U.S. during the quarter compared to the same period last year and this represents 43% of total demand in the quarter compared to 19% last year.
Digital sales in Canada were also up considerably I, 154% compared to 2019.
As we work on innovative ways to enhance and improve the shopping experience. A few key initiatives are working well for example, curbside pickup and buy online pickup in store have appealed to shoppers who wants to get product quickly, but don't yet feel safe traveling into real retail locations. We are seen roughly five and a half per set up.
Commerce demand from these initiatives, we continue to use stores is fulfillment centers to optimize our geographic footprint and ship product rapidly. Additionally, after successfully testing a self checkout process housed in our App, we're rolling out a broader test at 37 retail locations. This self checkout capability has not only improved.
Safety in our stores, but also given us another touchpoint with our customer because the self checkout experience takes place in our App, we're seeing more downloads, which gives us the opportunity to communicate with a greater number of customers digitally and increase engagement with our brand.
Finally, our website redesign has made finding and buying product virtually easier than ever.
In light of the dynamics of the quarter, we were aggressive with our promotional activity to drive sales, particularly in the dressed and seasonal areas. Our markdown efforts enable us to clear through views those categories to begin fall with a fresh position as a reminder, last quarter, we said that while gross margin rates would improve comes.
Fair to Q1, they would still be very depressed in Q2, as we finalized our spring inventory clean up. This did in fact occur also we saw notable gross margin deterioration as a result of pricing actions taken in the quarter. However, we ended the quarter with inventory down 37%.
Versus last year, and anticipate returning to somewhat more normalized levels of merchandise margin rates in the fall, although still down versus last year.
Moving forward, we have significantly decreased future inventory receipts and refocused our orders on on currently trending categories.
The health of our inventory position allows us to chase into trends as they emerge and this flexibility is a significant strategic differentiator for dbi.
Having adopted through the first several months of cobot, we've developed a pressure tested and comprehensive plan should we see another significant shutdown of business in North America.
In the early stages of the virus impact we successfully moved to a digital only offering.
We know what the customer wants and we know how to deliberate to them.
Digitally or in person and socially distance and we will be prepared in any situation. We have the flexibility to chase into trends and leave a significant portion of our inventory open to buy in order to do so.
We are prepared for the fall season, with the heavier assortment of athleisure product in a spotlight on comfy cozy products given the current consumer demand.
But if the market changes and consumers are headed back to the office, we expect to be able to flex our model to fit different scenarios and offer the assortment the customer once we understand how to operate as digital only or digital first retailer and are seeing our online engagement increase substantially we have the liquidity to manage through it.
We're consumer demand is constrained cobot 19 continues to be a significant disruptor for our industry and visibility is still limited for the back half of 2020.
As always we are committed to updating you as we move through the rest of this year with that I will turn the call over to Jerre Gerard. Thank you Roger and good morning, everyone.
Our second quarter continued to be materially impacted by cobot 19.
Over the past six months our team has taken numerous steps to run our business most efficiently as our industry and our economy work to recover from the first waves of the virus and to prepare ourselves for long term success.
Please note that the financial results that we will reference during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise for a complete reconciliation of GAAP to adjusted earnings. Please reference our press release.
First I will share the steps, we've taken from a liquidity and cost perspective in more detail and briefly discuss our second quarter results.
Last month, we took additional actions to bolster our liquidity.
We retired our 400 million dollar revolving credit facility and entered into a new 400 million dollar five year asset base revolving credit facility.
This ABL revolver provides more flexibility to maneuver through this change in consumer landscape.
Along with the new ABL, we entered into a new financing arrangement, which included a new senior secured loan.
With the support of six Street in early August we announced the closing of a $250 million senior secured loan to further support the ongoing needs of the company.
Finally, we also want to remind you that in may we suspended our dividends and share repurchases and given the terms of the of the liquidity agreements I. Just described we will continue to four go these.
Since February Onest of 2020, we have drawn down $203 million and currently have approximately $214 million available for borrowing.
We're comfortable with our balance sheet position and ended the second quarter with $206 million and cash.
We continue to lower our capital expenditures significantly during the first half of fiscal 2020, Capex was $22.1 million.
We plan capital expenditures to be between 30, and $35 million well below last year's $78 million as we have delayed our store openings and non essential projects.
Since the pandemic began we have been agile with regards to our expense structure across all areas of the company.
Our stores remained closed for a large portion of the quarter. So we continue to see a reduction in payroll and even as stores reopened payroll levels were below normal given the flexible store labor model being driven off of depressed levels of in store traffic.
On a positive note we were happy to reduce the number of employees on furlough as we reopened our stores.
In addition to the furloughs that we announced in the first quarter, we implemented a meaningful reduction and workforce at the end of July.
This was a very difficult decision to make but certain changes were necessary in order to strengthen our long term financial position.
Additionally, we continue to negotiate with our landlords during the quarter, we finalize deferral agreements with nearly all of our landlords covering the time our stores were closed we're now focused on active discussions with our landlords to realign our rent on lease terms with traffic realities.
As we prepare for the future we are evaluating even more substantial options such as temporary or permanent closures a significantly underperforming stores.
We also reached agreement with all of our material vendor partners on arrangements for invoice payments that were disrupted during the initial months of cobot.
At this point nearly all of these disrupted amounts have been paid.
And we have reached new go forward payment terms with these material vendors that provide for extended time to pay which more closely aligns with our anticipated inventory terms.
In total we reduced adjusted operating expenses by $43.9 million in the second quarter sequential improvement from the 26.5 million dollar reduction in the first quarter and we plan to maintain a strict operating expense posture.
Moving to inventory our focus has always been maintaining healthy inventory levels that align with projected sales.
We took numerous steps last quarter to end the spring season, with clean inventory implementing aggressive promotional activity and selective pricing activity and we're happy with how the residual spring inventory is priced as we head into fall.
Total inventory was down 37% versus last year and on a unit basis inventory was down 17% to last year.
Similar to the first quarter, we continue to have elevated inventory reserves against remaining yet to be sold inventory of approximately $64 million to address the excess spring 2020 and older inventory still on hand.
Additionally, fall receipts are planned down and total between 15% to 20% to last year with athletic and kids planned up double digits and dress and seasonal planned down to reflect the consumer demand trends.
We have kept a significant amount of flexibility with open to buy available to chase into trends as they develop throughout the fall.
Let's move on to our results for the second quarter net sales decreased 42.8% to $482.8 million, which included $6.6 million and intersegment revenue that is eliminated in consolidation.
For the second quarter total comps were down 42.7% versus down 0.6% comp last year.
In the U.S retail segment comp sales were down 44.9% during the second quarter versus down 1.5% last year keep in mind that stores and some of our largest geographies such as the northeast were closed for a significant portion of the quarter exacerbating the decline in sales.
As stores began to reopen we saw a consistent pattern with demand comps improving eight to 10 points each week nearly mirroring traffic comps, but in mid June overall growth trends began to slow as the pandemic surged again, especially in Florida, Texas, and California, all large markets for us.
On a relative basis, both kids an athletic performed well.
Comps for kids were only down 13% as parents continued to replace products for growing children, while consumer soft comfort and footwear supporting and at home lifestyle, leading to the athletic category being down only 24%.
These two categories significantly outpaced the other categories as well as store traffic declines supporting our decision to expand our penetration in these areas.
We were able to partially offset negative sales trends at our brick and mortar stores with strength in our E. Com business digitally demanded net sales and us retail were better relative to store performance up 27% on top of a 22% increase for the same period last year.
We were pleased that online sales did not slowed during the quarter, even as stores reopened in fact, we saw digitally demanded net sales for us retail represent 43% of our total demand for the quarter versus 19% last year.
And Canada comps were down 27.9% for the quarter. Despite the decline at the stores results were partially offset by a strong digital growth up 153.6% given the smaller digital base as a comparison and our strong and growing loyalty consumer base.
Let's turn to our Komodo group the pandemic could not have come at a worst time as it relates to our integration efforts that komodo, a preeminent dress and seasonal footwear house.
First the wholesale business remains substantially challenge given the general condition of department store customers and decreased customer demand for product categories in which Komodo has historically dominated.
We have seen our largest customers continue to cancel existing orders are hold off on placing new orders, which has led us to liquidate a high level of inventory.
Second and most importantly, the primary reason that we purchased Komodo was to support us retail and exclusive brands and the strong sales synergies with their national brands. However, given that these products have traditionally focused on dress and seasonal products.
The businesses, particularly challenged at the moment.
Strong aversion to public gatherings and shelter in place mindsets, we've seen the dress and seasonal categories significantly slow leading to weakness within komodo.
We will continue to closely monitor key indicators for that business, but expect that the softness will continue through the back half, particularly as retailers pivot overall assortment towards athleisure and cozy products for the fall season.
Our strategy to increase our penetration of computers exclusive brands and our assortment remains on hold until we see a change in the market environment and higher demand for these categories.
For the time being we have cut back on future production levels, reducing future production by approximately 73% for the balance of the year.
Total net sales were komodo, including sales to us retail were $30.5 million in the second quarter down 70.4% versus last year.
Sales sales were $15.6 million in the second quarter versus $88.6 million last year, including sales to our retail segments, with which totaled approximately $4.5 million versus $16.5 million last year.
Commission income decreased 33.4%, including income from our own retail segments on exclusive brand business, which totaled $2 million for the quarter.
At ABG comp sales were down 36.2% and the second quarter driven by closures at many of our retail partners locations.
Within EPG as our partnership with Stein Mart, who announced on August in August that it has begun the chapter 11 bankruptcy process, although historically a meaningful relationship we have gradually been minimizing the contribution from Stein Mart and our budgeting and go forward planning as such the financial impact of this event is not anticipated to be material.
Well to the current or future state of designer brands.
And anticipation of industry changes, we have been focusing on non traditional partnerships such as our such as our recently announced agreement with Hy Vee to mitigate the impact that we have seen with traditional retailers.
Our adjusted consolidated gross profit decreased $220.9 million to $40.3 million in the second quarter versus $261.2 million in the prior year. Our consolidated gross margin was materially impacted by cobot 19, decreasing to 8.2% in the second quarter versus 34.
5% in the prior year, but where they substantial improvement from the first quarter.
At our US retail segment, we saw a meaningful improvement in merchandise gross margin versus the first quarter. Despite continued pressure as we moved through inventory that we had reserved against in Q1. However, we took additional markdowns to continue liquidating the remaining spring inventory and de leveraged on fixed costs given year over year sales as well as.
Saw elevated shipping expenses as a result of increased digital sales.
Similar to the U.S. business Canada's gross margin in the second quarter was 11.4% a decline of 23 percentage points versus last year, but a sequential improvement over the decline in the first quarter.
Trends in Canada were similar to the U.S., but relatively speaking the business performed better given the higher concentration of athletic and kids.
Komodo adjusted gross margin rate was a negative 31.6% in the second quarter versus a positive gross margin rate of 26% last year.
The gross margin decline was significantly greater than the first quarter as we had to take record level markdowns across the portfolio as a result of the changing consumer preferences and pressures facing commuters largest customers.
Moving to operating expenses in the second quarter consolidated SGN, a for all of our businesses was down 20.6% to $169.2 million versus $213 million last year.
As we took decisive actions to cut cost across our organization as a result of temporary store closures.
Given the significantly lower sales base, our SGN a ratio was 34.5% of sales above last years level of 24.9%.
Depreciation and amortization totaled $20.9 million in the quarter compared to $21.1 million and the prior year.
Adjusted operating profit for designer brands was a loss of $126.7 million in Q2 versus a profit of $50.6 million last year.
Interest expense was $3.8 million during the second quarter versus $2 million in the prior year.
Moving to taxes, our effective tax rate for the quarter was 29.3% compared to 30.6% last year, we expect to see a notable cash tax benefit in 2021 related to the carry back rule of any net operating losses going back five years, which relates to the cares Act and includes years in which the USA.
Tax rate was 35% versus the current rate of roughly 21%.
Total weighted average diluted shares during the quarter were 72.1 million compared to 74.3 million last year.
We reported a net loss of $98.2 million or $1.36 cents per diluted share, which included net charges of eight cents per diluted share from adjusted items, primarily related to impairment charges and restructuring expenses. Excluding these charges adjusted EPS was a loss of $1.28.
Per diluted share for the quarter.
During the second quarter, we opened one store in the U.S. and closed one in Canada, resulting in a total of 522 stores in the us and 144 in Canada.
I would now like to turn to our outlook in March we withdrew our guidance and at this point it still remains too difficult to estimate that continuing impact of cobot 19 on our consumer and on our business model. We will continue to refrain from providing guidance until we have better visibility.
Looking forward, we continue to see pressure at least for the next quarter or to on demand for non athleisure product and because dress and seasonal product are so integral to our DNA. We continue to believe we will see meaningful pressure on our topline versus historical performance, even while we have taken swift immaterial actions to pivot strongly towards athleisure and.
Comfort product in the near term.
As a result of these dynamics, we are expecting sustained pressure on our consolidated sales and margins.
We expect cobot 19 to continue to have a significant impact on business in the second half with sales modestly improving over the first half, but still down notably versus last year quite likely in the double digits. Given we have taken significant markdowns and our inventory is in good shape, we expect our merchandise gross margin deterioration to slow in the back.
Back half of the year on a sequential basis.
With lower sales volumes, we anticipate a continued fixed cost deleverage, but at a slower rate to mitigate this ongoing pressure across the business. We continue to focus on aggressive cost reductions, including rent relief and vendor negotiations.
It should be noted however that there will be approximately $50 million of noncash expense items in the fall and given the work we've done with payment terms and inventory management. It is feasible that we could actually generate positive free cash flow in the second half.
As you heard from Roger our long term strategy for the business remains intact, even as we adjust our near term plans. We are a dominant player in the footwear space and we are quickly adapting and this environment to meet changing consumer demand with that we will open the call for questions.
Operator.
Thank you we will now begin the question answer session.
The asking question, we microstar than one on the Touchtone phone.
Users speaker phone, we ask you. Please go ahead.
And the seats.
Regarding the question. Please press Star then too.
Todays first question comes from Sam Poser with Susquehanna. Please go ahead.
Hi, This is will offer Sam thanks for taking my question.
I wanted to ask are you guys see any benefit.
Some nike's decision to continue to turn the whole scared wholesalers.
Yes.
Fruit availability of product or improved allocations.
Well we have.
We've had lots of conversations with these top 50 brands and.
What I'm really excited about is how all of them are sharing their interest in partnering with us and in that is both with their inline assortments its with the special make up opportunities and with close out product and I think what we're seeing from every one of those brands is they're excited because we have 30 million rewards members with.
Roughly 80% of them being female so that's a customer that those brands are targeting and when you add in there that we are so underpenetrated in mens.
Specifically in athletic.
They have growth potential with us so I think those things all combined for each of those brands is why those brands of ultimately decided to invest more heavily with us.
Got you Thats helpful. Thank you.
Now I guess can you frame out the promotional environment going forward.
I know you said that you cleared through.
Lastly mountains.
Yes.
Dress product.
Can you just can you frame it also.
Looks like over the balance of the year and just and also with that marketplaces or what are you seeing out there from a promotional stance.
I mean.
I think probably would I'll just give you sort of a sense of how how things are performing for us is really going into detail of Q3, but sort of our game plan. Then when you look at how we have flex this business model as we go through fall to really focus on athleisure in this comfy Cozy book is how we're describing it.
We're seeing that our athletic business is running positive comps and driving margins a couple points higher than last year are at leisure assortment knowledge, representing 50% of our sales versus 35% last year and running margins greater than last year and our kids business is steadily improving.
We think back to school is going to be an elongated back to school period, and I think as Weve steered away from career address where and the early reads, we are getting around trail and booties.
Where we are investing for fall and the fact that we have our inventories as we headed into fall about 37%.
We're we're looking optimistically about about how fall can play out I mean, we can be in chase mode, and we are invested in areas, where we're seeing the consumer responded and that's the approach were taken and yes people were going to be promotional but frankly, we don't have a lot of that product to promote because we dealt with it in the first half.
Yes and.
And one thing I would add to that and we are very excited with what we're seeing on and the categories that we pivoted towards and as Roger said, we're about 50% and those categories that are doing well that deal Thats still does leave though the 50% that you heard that the kind of trends, we're seeing on those other ones and so as you guys are looking.
At your modeling.
You just got to balance that accordingly.
Okay, great. Thank you.
You're welcome.
Our next question today comes from Rick So.
Please go ahead.
Thank you good morning, and hope everyone as well.
Thanks, Rick.
A question about the kids.
Segment, so nice to see the penetration increasing here.
But can you talk about the outlook for the back half in light of the new back to school paradigm, that's going on I.
I think you mentioned that kids in athletic would be up double digits. This fall just hoping for some color on just the kids part Roger you mentioned that.
Do you expect an elongated back to school season, I'm curious if that means that.
You expect sales to accelerate from where they are right now or whether you expect them to be consistently strong throughout.
No I think well give you a data point I think we did this NPD data that we're able to track to and and this is why I'm excited and why we got indicators.
In July what we were able to see was that we performed about 20 percentage points better than other shoe retailers in the kids category and that's why that penetration continues to increase in what we're seeing is that this is going to last I would describe it as sort of four weeks later and in markets where.
Are we have the kid going back to school, meaning they are actually walking in a classroom we're performing.
Inline or better than last year, and doing what we'd expected markets, where it's sort of a hybrid.
Armed performing as good as the as the ones where they're in school and then the ones where they're all stay home I mean, obviously, it's no different than all the other social activities that.
People have historically going to church short to school or whatever it is the those folks that are performing those activities, they're not buying choose the same way that others are so.
Again, I feel good about how we've positioned kids and our performance, but it will be.
A longer window of time to get that selling thats what were seeing.
And I know there was inter quarter volatility given spikes in the virus in some of the Big States can you talk about how much of a negative impact. This caused in the second quarter and do expect these affected states to catch up to the rest of the fleet. This fall or do you expect continued volatility going forward.
You know it was we talked about this on the on the Q1 call that you know as as things were ramping back up in stores were getting opened we were seen in those let's call them I say mature markets, meaning they had been opened for five or six weeks of where we were in that minus 20 ish kind of comp range in stores.
While digital continued to grow in the 20% to 30% range and what we have experienced is as those different markets get hit we fall back to the minus 30 to minus 40 range is what we're seeing.
I think the area, where we have been hit harder I think than some other retailers is we heavily penetrate some major major markets New York Metro is a big market for US DC is a big market for us Philadelphia as a big market for us and those are areas, where this this thing is hit us harder than than others in.
For example in some of those markets were.
We've been down in the 70% range, while the balance of the changes in the minus 30 ish range and or better and that's the area, where we need to see some kind of improvement in those major markets frankly for store traffic doesn't mean, we still can't sell the you know what out of digital opportunities and we can't go get some amazing close out buys that.
Our attractive to those kind of markets that we can sell online. So we're looking for other ways to engage customers in those markets, but those are the biggest headwinds I would I would tell you that we face.
Thank you all the best this fall.
Thank you threat.
Our next question today comes from talk.
Okay.
Wells Fargo. Please go ahead.
Hey, good morning, guys. Thanks for taking my question.
Yes, good well thanks.
[music].
Thanks.
I wanted to ask about.
The digital performance.
There was a pretty stark difference between.
Yes, which you achieved.
W. banner.
Which was which was good and then the Canada.
Growth, which was.
So far stronger.
Much better.
Why was Canada, so much stronger than than to us.
And I guess, yeah, theres any sort of is the category mix should that anything like that.
Just trying to figure that out.
Well I will tell you one Mary Turner right now is smiling the leader of Canada, but.
There's there's just a significant differences in size is what I would tell you when you're running a billion dollar digital play that's been around for 12 years versus one that is fairly new.
And does not in.
Penetrate nearly as large as what we do in the U.S.. That's that's one big piece.
And what I would tell you is Tom I think I'm actually really proud of the the performance we had in dotcom in the us growing at 27%, but we mentioned this in the in the script that transactions were actually up 40%.
But we really leverage that channel this quarter to liquidate goods, because we didnt have customers walking into stores and so we went after the non athletic space in a big way and I would tell you. If we would have had if we'd have known a pandemic was going to hit and could have invested in athleisure inventory of the way that some of our competitors.
Positioned already in advance right.
I'd tell you we would have done a hell of a lot more business dotcom I mean, a lot more business because we did not promote dotcom.
For an athletic standpoint.
We've been able to sell that stuff at regular price and I think thats actually helping us in a big way, we're not running buy one get one on all these athletic brands and Im So excited about that and that's why as we think about the fall and go forward.
These brands are doubling down with us because they see we can sell their product without having to discount and even some of those brands for this fall we're going to test.
Through our digital channels being able to sell some curated apparel assortments within those brands.
Because we do not have to discount to sell athletic product and.
I think that is going to help position us longer term with those brands.
Got it makes sense.
Just a quick clarification I'm, sorry, I missed I think you said.
The overall inventory the fee plan was for the back half can you just wonder if I mean.
No. It's some we didnt I mean, we were entering fall down, 37% and we're investing heavily and the athleisure product we are investing heavily into.
I keep calling a comfy cozy, it's hard I need to show you photos to get you touched on what did it but think of it as you can sit on your couch and issues or you could walk through mailbox initiatives and that's essentially the way that I'd describe it to our team.
And we're getting after the beauty business, because we're seeing strength and trail and those kind of categories, but outside of those categories were going to stay extremely lean and inventory and we will chase it when when the consumer gets more comfortable going back into those settings, where that product is relevant.
Got it alright, thanks for taking my questions.
Yes.
Thank you.
Your next question comes from Gabby Carbone with Deutsche Bank. Please go ahead.
Hi, good morning, Thanks for taking our question so with inventory meaningfully reduce going into third quarter. Just wondering if you get pride any additional color on how gross margin could play out for the remainder of the year. What do you you to be some of the biggest headwind on where do you see opportunities for improvement.
Yes, Gary I think.
Again in that athleisure space, where we're trending above last year, that's roughly half of our assortment that's very positive.
Because we cleaned up the non athletic inventory in a way that we.
We feel we're in chase mode.
I think we will still face some challenges simply because when fashion, it's more challenging right now.
And the fact that last year, we were growing in a material way our exclusive brands and we've we've stepped back a bit on that simply because we we want to invest more in these top 50 brands for now.
And then also obviously some of the shipping.
As we grow dotcom, which we anticipate continuing the kind of track we were on through the first half some of those shipping challenges will ultimately impact our margin rate as well, but in general we anticipate being closer aligned to where we were in the back half last year, yes. The only thing I would add to that Gabby is and I mentioned this in my script.
Thats merchandise margin Rogers talking too, we do anticipate it with negative sales of any sort you start to deleverage and we do have our fixed cost occupancy in our gross profit calculation and obviously the increase in digital penetration you've got associated shipping.
Got it that's helpful and just a follow up when it comes of store optimization. How are we thinking maybe you at store count given the strong shift to digital and that I know using your stores apathy et cetera, but our priority. Maybe if you can just talk a little bit more about that thanks.
No I think we're going to continue to lean into our our warehouses and operate them as warehouses, and we're putting more and more product closer to the consumer in those warehouses. So that they have the ability to buy it when they are physically there as well as being able to ship it within hopefully at some point here soon.
A couple of hours to their doorstep. So I think that is thats been rooted in our strategy for years, but as it relates to the sort of the real estate portfolio. We're looking at at many ways in which we can cut costs and I think looking at that portfolio and having honest conversations with our landlords about the position of the business.
And ensuring that they're going on that journey with us and if they don't then we will be looking at.
If it means we have to exit some locations. We will do that we've been lucky enough to date, we've not had to do that because the landlords have worked with us and we're actually happy with the kind of percent rent deals and other things that we've been getting on on some of the deals that we've recently struck Jared and if there's anything else you that.
The only thing I would say as we partnered with a consulting firm Angie Realty.
The deferral of work was was great and we as I mentioned Weve reached a negotiation reached deferrals on almost all of our landlords and leases.
We are actively now talking about rent reductions and Roger mentioned that where we have lease events happening E. There's there's a termination or a kick out coming we have been able to successfully moved to 8% of sales formula that is well below where we were pre cobot.
Even though it was fixed when you look at as a percentage of sales were well below that.
We are aggressively going after that and there are some even without a lease event that we need to have that kind of partnership and Angie is is out there right now leading that discussion and we'll have to make some tough decisions, but we think we've got some good opportunity.
Great. Thank you brought the color best of luck.
Thank you.
Ladies and gentlemen, as a reminder.
A question. Please press Star then one.
Next question comes from Chris Svezia with Wedbush. Please go ahead.
Good morning, everyone. Thanks for taking my questions and I hope, they're all doing well.
Thank you.
I guess first.
It's hard for you I appreciate.
No cash is king air in your comments about possibly positive free cash flow in the second half.
I was wondering just kind of given the puts and takes the model do you feel like you'll be profitable as a total company in the back half of the year or any probably can give us just based on some of the.
Parameters give about sales to some degree margin nature, just how do we think about profitability.
Second half of the year.
Yes, obviously ill start there.
For station with we don't have the visibility to provide guidance, but but when you do look at what we've given color as far as continued sales pressure. So while we've got some great sales tailwinds with with the pivot towards athletic Athleisure Kids company Cosy on that as I mentioned, you still have the other half of the business, which.
It is down 50, 60, 70% and when you look at that you couple that with our fixed cost infrastructure of the leases.
And just general general cost and the margins that the margin dollars that don't flow through when you don't have those sales I think it could be challenging to get to profitability in the fall not not impossible and if we see the trends we think that there's there's certainly opportunities today to to do do pretty well, but.
With current trends I think that could be a challenge all that being said, we've got about $50 million of expense fixed expense and depreciation and stock comp in the fall that is noncash related and so when you look at that coupled with the work we've done on working capital that's where we said there is possibility Ted that still generate positive.
Free cash flow.
That's helpful. Thank you.
I guess Roger for you.
When I think about if I kind of step back and look at the acquisition that you did photo and its original intent on and obviously I can appreciate the comments of where the consumer is right now and how they're spending and sort of putting the private brand.
Penetration on on hold but how do I mean, it seems like that may laugh for some time into next year. The these trends we're seeing in the market and athleisure from curious how do you think about the operating cost model or the Koodo infrastructure and are you at a point right now we're leaning up or is there additional.
Actually could be taken or whereas maybe light at the end of a panel for that strategy that you had put in place call. It two years ago or so.
Yeah, Thanks, Chris I mean, as we've talked about this we bought it.
To provide differentiated products for our retail channels and and I think that is the the focus of the business and I was really happy with how the product looked and what we have built from a spring assortment standpoint.
And I think this is just frame up.
95% of what we sell is something that ultimately we control through our own direct to consumer experience. So the challenge we are faced with right now with Komodo is more on that 5%, which is the wholesale side and we've got to work hard to do a better job of either growing.
Sales were finding a way that we have to cut back our ESG today and that's work that we're in the middle of than.
I think give you. An example, some things we've done recently with these some of these latest changes in our award we shut down.
Roughly about a dozen brands.
Frankly, we just we just didnt see progress and we are going to focus our efforts on Vince Camuto on Jessica Simpson and Lucky because those are three great brands that we know we can grow with our with our retail partners as well as within our own retail outlets.
Okay.
Okay, I guess just final follow up on that.
Expect next year to start to ramp up again, the private label initiative and I know you launched mix number six.
Onto the again in the stores this year.
Yes, the kind of run when you start to think about it next year.
Build back up again or is it still completely off and I'm just curious from a cost perspective.
Operating costs embedded in that business, where they need to be or is there are more potential that can get done there to streamline operations.
You know our goal when we acquired the business was to get to 25% to 30% of our business being through our exclusive brands.
The let's just say commuter produced friends and I don't think got plan has changed I think the reaching that milestone is going to be out longer than what we had originally anticipate obviously this this whole pandemic impacted that in a material way, but again, we have to have differentiated products to support our long term success.
And I think the best approach to that is leveraging all the data we get from our selling channels and acting as a vertical retailer to be able to bring those goods life for customers and when you think about how exclusive brands going to play out. The next 12 months, we've cut back our.
Production levels and exclusive brands by about 70% for the balance of the year, but our plan is to get back.
In spring of 2021 to be something penetrated closer to where we were in early spring of 2020, which was in that 10% to 15% range. So.
That's where our efforts are focused and then again growing that's just get lucky and we will address the SGN today.
In the event, we don't see the kind of progress that we need over the next over the next year.
Okay got it out one final quick thing for me just on not taxes Jared the clarification I know many years ago RV I DSW there were a net loss carry forwards that benefited DSW and companies were combined is that when looking at these tax losses, they just that the cash flow but underway.
Reported basis your tax rate is still.
Whatever I will say 27, 30% that how we should look at this cash flow benefit for 2021.
Yes, yes, so I mean that cash flow benefit in 2021 that I'm, referring to is really all of the losses that we are generating this year. The cares act is giving us the ability to go backwards over the last five years and apply these losses to those to those last five years of of taxable gains.
That's that's a special exception.
They had changed the rules that you had to only apply them go forward, but but that cares act is allowing us to go backwards up to five year. So so thats why we and we are anticipating a very sizable cash tax benefit I will say you know as we look and at the year in totality you could see some walk.
And our effective tax rate and that's really just a matter of you can only.
Look at you Gotta look at the last three years and if you're at a cumulative loss than than you've got to take valuation allowances against that and we aren't there yet, but but there's there's that possibility depending on what happens in the fall you can see some real craziness shake out what the tax rate it's all.
It's all on the balance sheet and the cash is going to come in regardless, but that's.
Just a little precursor of some some craziness, we're looking at for the fall.
Perfect. Okay sounds good appreciate it thank you.
Thank you.
Ladies and gentlemen. This includes the question answer session turn the conference back over to the management followers.
No again.
No we have a lot of our associates listening on this call. Thanks for everything you're doing in.
Let's get after for the fall season, Thanks, everybody have a good day.
Thank you Sir This concludes todays conference call. Thank you all for attending today's presentation. You may now disconnect your lines on a wonderful.