Q2 2021 Guess? Inc Earnings Call
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[music].
Good day, everyone and welcome to the gas second quarter fiscal 2021 earnings conference call.
On the call Arts, Carlos Alberici, Chief Executive Officer, and Beauty Anderson, Chief Financial Officer.
During today's call the company will be making forward looking statements, including comments regarding future plans strategic initiatives.
Capital allocation and short and long term outlook.
Putting potential impact from the current a virus pandemic.
Companies actual results may differ materially from current expectations based on risk factors included in today's press release, and the company's quarterly and annual reports filed with the FCC.
Comments will also reference certain non-GAAP or adjusted measures.
GAAP reconciliation and descriptions of these measures can be found in today's earnings release.
I'd like to turn the call over to Carlos. Thank you operator, good morning, and thank you all for joining us today.
Once again I hope all of you on your family so safe and healthy during this unprecedented at times as you know what are you smarts handle was injured in a bicycle accident recently.
Is under great care, but we expect this would be a long recovery process for him and.
On behalf of football our board and our entire guess family we pray for his fast him for recovery Maurices and amazing person. He is very strong and we all hope to get him back soon.
It's in the next few minutes I will speak about the overall environment and our company then I will touch on our second quarter results and I'll close with how I see our outlook for this year and into the future.
I'm sure I speak for everyone on this call when I say that we all continued to be tested with it pandemic and its impact on life.
I guess, we're managing through the situation with our eyes on the road and our hands firmly on the steering wheel.
I'm very proud that our teams are underworld continued to rise to the challenge imposed by the its crisis in an extraordinary way.
I believed that the progress we made in the second quarter, both with our financial results and with our initiatives to better position the company for the future demonstrates our team's strong leadership their relentless hard work and they are amazing commitment to our customers on our company.
Since we last spoke a few things have changed in the world than in our company and some have stayed the same.
Among those things that changed the most important one is visibility which has improved meaningfully starting with our story openings in all regions. We have had relatively consistent performance for several weeks now almost across the board we have seen a significant reduction in customer.
Traffic from the comparable prior year period, partially offset by the improved conversion rates.
Improved visibility is helping us size, our expected demand more effectively and that's a result, we can't project or inventory needs more accurately which is key to optimize and future sales margins I'm profitability.
The improved visibility helped us to better assess our liquidity, enabling us to capitalize on share repurchases, we think girlfriend material long term return opportunity for our shareholders.
And improved visibility gave our board the confidence to reinstate our quarterly dividend.
The second change relates to customers lifestyles, and shopping behaviors, which clearly have not returned to pre pandemic conditions.
This to us signals that the changes may be more permanent now we originally thought.
Well many people feel more comfortable shopping online done in stores those that do venture out are much more intentional to make a purchase when they visit.
Our ecommerce business in North America, and Europe delivered high single digit revenue growth during the second quarter on gross profit dollars grew more than 20% that's margins improved significantly as a result of increased full price selling an improved I am yes.
We are confident that our ecommerce business will accelerate in the second half of the or as we increase our investment in marketing continue to reposition our product offering and complete our salesforce platform implementation.
We are encouraged with our digital business in August which was up in the teens and again with improved margins driven by strong performance in Europe and to a lesser degree in North America.
We continued to see that product priorities have shifted towards more casual dressing. We expect this to evolve over time as people begin to go out again, but we believe that casual uncomfortable close will remain a key priority for our customers.
Based on this trends we are investing in the development of a strong assortment of active apparel outerwear stretch unsustainable denim.
And then extensive lineup tops and dresses in multiple callers that capitalize on high quality uncomfortable niche fabrications.
We're also focused on see something less than essential products and strong lines of accessories, including handbags.
What we reduced marketing spend dramatically during the second quarter, we see an opportunity to increase our investment in the second half of the year to continue to strengthen our brand position on drive traffic.
We are planning multiple campaigns for the season, featuring several of our product line, so womens mens accessories and kids.
Guess has recently engaged Italian actor and Singur Mccallum order on him as a new world wide face up guess men's.
Micaela is the lead actor in the movie 365 days one of the top movies from Netflix currently screening in 200 countries.
He will be featured in our fall Winter 2020 collection campaign.
We intend to intensive power global efforts on digital media, including social media and have plans for direct mail, TV advertising and outdoor media, including Billboards buses and others.
One very positive industry development relates to inventory ownership in our market, which seems to be already rebalanced and better aligned with current customer demand.
This should result in a less promotional environment going forward, leading to improved product margins.
We continue to make inventory management, not key strategic initiative and make good progress this quarter as we experience a product margin increase I know where inventories are in a good place.
At quarter end inventories were down, 13% and we own less clearance inventory than a year ago.
For the rest of the year, we continue to plan our inventory purchases based on expected demand and have built flexibility with fast track processes and basic product ownership to react to potential higher demand.
We already see opportunities for increased business I believe, but we will be able to capitalize on this strategy.
With respect to resource utilization and cost structure I'm very impressed by our team's ability to do a lot more with less achieving great efficiencies and significant reductions in our cost structure, both temporary impairment Kt will spend more time on this later on.
Regarding the things that have stayed the same unfortunately, there and then make is still with us and we have seen you outbreaks in multiple countries.
People are still very uncomfortable socializing and leaving their homes and for now tourism continues to be non existent between countries as a result of restrictions and loan willingness to travel.
I recently, Brad then in July the amount of tourism spend in Europe was down 95%.
With the Chinese penned down 98%.
For this reasons, we're approaching the second half of the are cautiously.
We continue to make our priority the safety and well being of our teams our customers on the communities that we serve.
We closed door, California stores, an enclosed malls after having them reopened and we're now reopening many of them again.
We are happy to report that most of our stores worldwide are now reopened.
Our headquarter buildings in North America, and in Europe have been operating at 50% capacity and the remaining team members work remotely.
As we closed our second quarter, we were pleased with how we manage the business in light of the circumstances presented by their pandemic.
Our retail sales were better than originally anticipated and our wholesale businesses, which also performed better than expected benefited from some product shipments pull forward from the third quarter into the second quarter as many European customers requested products earlier than expected.
Margins were better than planned to us, we minus inventories well and benefited from positive rent relief in Europe. We also manage cost effectively during the period all in all we reported up 41.7% revenue decline, we almost broke even at the operating level for the period on an adjusted basis.
As we look into the second half of the year, we expect a slow recovery of our retail business driven by similar metrics to those that we have seen since we reopened our stores, but with a gradual improvement and customer traffic.
We believe that there is an opportunity to expand the holiday selling period and have worked on plans to begin the season earlier with direct mail customer appointments optimizing omni channel capabilities.
Focusing on other initiatives to avoid customer congestion during peak periods.
Regarding our wholesale business.
In the last week of June we launched our spring summer sales campaign with a live event in Lugano, Switzerland, which was attended by over 200 people plus the event was life's trained and over 550 people participated.
I believe this was unusual in our industry on was very well received by our customers.
Paul with the creative teams have done an incredible job with the collection and I believe that the product line is the best that I have seen in all my years with guest.
The response to the line has been very positive on the customers' interest in our brand is very strong. We're very excited about the opportunities that we see to gain market share even in the near term.
This year, we continue our strategic planning implementation work and I'm very pleased with our progress.
We still believe that our company isn't as strong position to capture that 500 basis points improvement in operating margins that we had targeted at last year as most of the improvements are expected to be driven by operational efficiencies that we are confident remain available to us in the near future.
Our brand positioning work is in full force.
Our commitment is to elevate our guess unless you know brands focusing on high quality materials. It get your rationalization and developing one global line for each brand, while addressing market needs with specific products by region.
We continue to believe that our brand DNA and our obsession for inclusivity sustainability and celebrating customer diversity.
Represent a significant strength in today's environment.
Regarding our customer Centricity initiatives, we implemented salesforce for our guests website in North America and into European countries, France, and the UK.
Tomorrow, we're launching 19 additional countries in Europe, and 26 more will be rolled out through the rest of September and October.
We also launched the customer Threesixty project that I mentioned in our last call. We continue to upgrade our omni channel capabilities.
The entire plan should be fully implemented by the end of next year.
We continue to believe that our E commerce business penetration will grow as a result of this strategic initiative to represent over 23% of our direct to consumer business in three to five years.
From 13% last year.
We plan to update our entire strategic business plan in the next few months and shared with you during the fourth quarter at an investor and analyst meeting.
In closing well we are approaching the short term cautiously we're focused on the long term and we see very bright days ahead.
Our vision for our company on our brand remain intact I strongly believe that the long term impact of this crisis in our company will be extremely valuable as we reposition our brand and redesign our business model.
The crisis inspired our team to think differently to China to every aspect of the business onto architect a simpler more efficient and capital light model.
We're building a business that will be better positioned to compete in the future and gain market share globally.
We have a true iconic global brand that has been relevant for consumers all over the world for 40 years.
I guess state relevant by adapting it's model time and time again.
I believe that companies that adapt their business models to actively embrace new consumer preferences, placing the customer at the center of everything they do well gainshare and overcome this crisis faster.
We fully expect to be one of those companies we have a strong team, which is even more excited about our future. Today, then I have seen it since I came back to guess.
I strongly believe that in the next few years, we will deliver outsized returns to our shareholders, Poland I and our entire leadership team couldn't be more excited about our future with that let me pass it to Katie Katy.
Thank you Carlos good morning, everyone.
This is our second quarter navigating the company there what is no doubt charging period in our history.
Well consumers remain cautious we were pleasantly surprised with the initial level the productivity that we saw at their stores reopened across each region during the quarter.
This is a site not only have a macro coverage, but also the strength of our brands and the effectiveness of the business decision that we have made over the last.
Once again this quarter, we have proven that we can successfully controlled middle of the piano with appropriate reactions to the current environment all while maintaining.
Long term health our brand.
We decreased operating expenses by $70 million.
And this product margin.
Very clean inventory position.
As a result, even with sales down over 40%, we were able to maintain somewhat breakeven adjusted net earnings and a solid balance sheet.
I'm happy to report that our liquidity position remains strong.
I believe this is a competitive advantage for allowing us the flexibility to make appropriate investments to drive our long term strategy as well as return value to shareholders.
In the first quarter at the beginning.
We took strong actions to preserve our liquidity not having a clear outlook to what the future how given the uncertainty at the global crisis.
Richard credit facilities extended our.
Secured additional low interest term loans in Europe.
The situation began to stabilize during the second quarter, we paid.
I can't portion of the borrowings.
Seize the opportunity to return incremental value to our shareholders with a $39 million repurchase our shares.
We announced today that our board has decided not to declare any cash dividends from the prior two quarters and it has approved the resumption of our quarterly dividend program this quarter.
Long term capital allocation policy has not changed.
Let me take you through some of the details on our performance for the quarter, let's start with sale.
Second quarter revenues were 399 million down 42% in us dollars and 41% in constant currency.
Revenues were negatively impacted by store closures in all regions at the beginning of the corner and lower productivity the prior year at stores open.
Our stores were closed for approximately 30% of the days in the corner and when they were open.
It was roughly half of our customer flow in the prior year.
Overall sales productivity for our retail stores sensory opening for the quarter was down 21% any you asked from Canada down, 31% in Europe and down 26% in Asia.
We've been seeing traffic declines, partially offset by significantly higher conversion and our tourist centric locations have been experiencing a tougher recovery.
Our ecommerce business in North America in Europe was up 9% for the quarter.
Our wholesale and licensing partners were experiencing similar decreases in demand, resulting in lower sales in these areas in Q2 as well.
Gross margin for the quarter with 36.9%, 2% lower than the prior year.
Margin increased 210 basis point this quarter, primarily as a result, higher I am here as well lower promotion.
However, this was more than offset by occupancy to leverage 410 basis points on lower sales.
Regarding.
We are still in negotiations with our landlord to appropriately adjust our rental expenses in line with a store closure and declines in traffic as a reminder, general we suspended rent payments for April may and.
But all rental expenses, our crude until final agreements.
At which time the adjustments are made.
This quarter with about $8 million and credit for filling negotiated front really deal mostly in Europe.
Adjusted EPS for the quarter with 148 million compared to 218 million in the prior year a decrease of 79.
A little over half of these savings we will consider one time for example, we received government support in various countries across the globe like employee payroll savings during closures.
We put in place salary reductions that have since been reinstated.
Pulled back hard on advertising.
I also say that some variable cost five stores.
Distribution and payroll I thought the store and corporate level.
We are filling back.
For a more normalized.
The other half we will continue to benefit from on a go forward.
We have decreased corporate headcount as well as traveling professional fees and other discretionary spending.
We've also adjusted how we stop our store, allowing for significant savings and labor, while maintaining the quality of our customer service and our selling culture on the floor.
Right now for the most sorry, we have more buyers and look or relative to what we have historically seen in our stores and these lower traffic levels help optimize our labor center, while still capitalizing on the man.
We have a fast and continue to at that.
All aspects of our business to reduce redundancies that we have across regions and our operating in a leaner and more agile model.
I will be on the middle of the Pan out as we focused on maintaining cost structure that makes sense for our organization in our new normal.
Adjusted operating loss for the second quarter was $900000 versus the profit at $48 million last year.
Our second quarter adjusted tax rate was 156%.
28% last year.
As a total company adjusted pre tax earnings is roughly breakeven for the second quarter the tax rate changes over prior year from quarter to quarter are more pronounced and in the past due to the mix of tax jurisdiction.
Inventories were 419 million down 13% in us dollars at 15% in constant currency versus last year.
After paying back 185 million of borrowings on our committed credit facilities. We ended the second quarter with $328 million in cash and had an incremental $236 million and borrowing capacity.
Capital expenditures for the first six months of the year were $10 million less than one third of what we spent in the same period of the prior year.
We have mentioned we continue to invest in those initiatives that are mission critical to our business plan like our digital capability.
Free cash flow for the first six months of the year with an inflow of $29 million, an increase of $87 million versus an outflow of $59 million last year.
This improvement included the nonrecurring payment of last year's $46 million, you Commission side as well as the adjustments this year to our payment terms with our vendors and I'm paying frac glamorous, while we finalized negotiation.
Given the continued level of uncertainty in the current environment, we're not going to provide formal guidance.
However, let me walk.
Thoughts on how we're planning sales for the rest of year.
At this that we were encouraged by our initial reopening performance, which was stronger than expected.
However, they continue to recover since opening is moving slower than anticipated and some cases like the Americas.
During from reopening level.
Consumers remain cautious about shopping which will most likely not test for the ended the year given the nature of this crisis.
In August we saw sales productivity at our retail locations of down 29%.
In Canada down, 13% in Europe, and down 33% in Asia.
Congress has picked up quite a bit driven by Europe, and we are tracking up double digit there.
We see particular risks for the holiday shopping period, or social Destocking and consumer caution could impact our high end store volumes during that time.
As mentioned, we are mitigating this risk by implementing strategies around elongating, the holiday season, and reducing congestion during peak times, while still capitalizing on the demand.
Our wholesale and licensing businesses pretty much follow our retail business as our partners are experiencing similar headwinds.
As a result, we expect both Q3 and Q4 revenue performance the prior year to be in a negative mid teens range.
Obviously hopeful that trends in the back half of the year will turn out better than that but we are planning our business.
We are confident in our product and our marketing strategy and have the flexibility in our inventory to meet that demand should exceed our expectations.
In closing the work that has been done by our teams across the business and around the globe over the last few months has been grueling to say the lease.
So over warning for team to see the first of their labor in our performance and we can see us and our clean inventories are strong liquidity position are well managed expenses and the ongoing sales recovery across our segments.
Fuels momentum and teamwork and we feel that right now.
With that I will conclude the company's remarks, unless open up the call to your question.
Thank you we will now begin the question and answer session. If you would like to ask a question you could you still by pressing Star then one on your Touchtone phone.
We are using it speakerphone. Please pick up your handset first before pursuing any numbers once again, if you'd like to ask your question. Please press Star then one on your Touchtone phone.
First question comes from Susan Anderson from B. Riley FBR. Your line is now well then.
Hi, Good morning, Thanks for taking my question nice job on managing the quarter in a tough environment.
And I was wondering if you could get a little bit more hi, Carlos and little bit more color maybe on the wholesale environment I guess in the Americas, and then also globally and I guess, what's the trend you've seen in order to as we go into the back half and obviously as stores start to started to reopen up until now.
Yes, so Susan I think that.
The behavior of the wholesale business for us has been somewhat different depending on the region.
You know one in North America, where we saw was a a pretty you notice a.
Big rate of cancellations over the orders that we had at the time that they've been they make a broke and and we had to work with our vendors very closely to really redirect and on cancel some of our purchase orders and worked with them to adjust our purchases overall in.
The case of Europe, we had a different type of behavior, where.
The many of our retail partners.
We worked very closely with them thinking about what was the their appetite to continue to maintain those orders on the the rate of cancellations with significantly lower we worked with some of the a bigger countries and I'm bigger retailer partners.
All over Europe, and and we were able and I think I mentioned during the last call.
That is about 10, the top 10.
Retailers represent about a more than that 50% of our business. So can imagine there was a pretty significant and they were very very interested in keeping a lot of those orders. So.
In that particular case, what we decided to do on someone in partnership was to.
Skip one season, we decided to counsel development of what we call pre spring summer and and by doing that we were able to elongate the for winter season, and gave up our partners more time to be able to really move through the purchases up they hit me. So overall.
The results are have been.
Very very strong and you know even got some additional demand yeah. This quarter than the second quarter that would did not expect but because of the those retailers are selling the product a better than they had anticipated. So we have to ship earlier.
And with respect to North America going back the or the obviously they still have the capacity to.
Really sell more products. So we purposely kept some product to ownership and some flexibility to be able to react to the unexpected demand or expected in a way and and that is happening, but slowly but you know we have been able to fulfill some.
Additional orders that came after those cancellations took place.
Looking into the future you know, we're starting to feel a you know better because a we see that the race. It strong interest in the brand very strong, especially in Europe.
And you know people just loved the line you heard my opening comments you know the the event that we had and Lugano was very successful and and we saw a lot of enthusiasm about a you know how the brand is a elevating the product the experience you know the fabrication so where are you.
During the styling everybody just really came out very very excited about what this could be in the future and we believe that we can gain market share as a result of that we have a big wholesale network here and and I think that there is a big opportunity, especially comes.
During that some companies are not delivering on time or they are having a bigger challenges, including financial challenges. We think that Oh, we can be one of those are the big brands that can really getting a lot of share as a result.
Great. That's very helpful. Thanks for all the details.
I guess just as a follow up yeah, I think the product is look great and the website, let's get to I'm curious if you've seen a bigger shift in sales to at the millennial and then the gensix customers during that.
Then, making then also as the new product has rolled out and then.
Are you seeing any changes are impacting purchases of that the older consumer as you kind of mixed in the new product. Thanks.
Yeah, So you don't [noise].
This.
During the quarter, we had a couple of programs that our team brand partnerships under Nikolai Marciano had produce and and the one was with J. evolving and there was a big campaign and then the product has done very well and obviously, we are talking to that younger audience with.
A lot of that assortment and right now they are a couple of capsules one under the gives you a say brands and the other one in gifts original Sun and again, we think that the product is amazing and and it's a really resonating with that younger customer with respect to our.
What we called the heritage cuts customer.
We are seeing a similar type of behavior, we're seeing on.
I think at Katie mentioned than during her prepared remarks that.
The rates improve conversion, we are seeing that traffic has been a slower but when people come they are a lot more intentional and and we feel that the product is definitely a aligned with what they're looking for what we saw especially in the second quarter was.
Out of where now purchases in on to a lot of Ah shorts, then on T. shirts, and a lot of the type of product that you would expect during summer time.
We have done well with denim more fashion denim that basic denim, but you know overall, we're seeing a great response for the product, but what I was talking about his product that the ultimate customer hasn't seen yet.
Great. That's helpful. And then I guess, just lastly, how are you thinking about that promotional environment in the back half you guys where did it really good job in the second quarter pulling back do you think you can continue to do that it sounds like you feel good about your inventory levels. Thanks.
So let me address the overall environment and then probably couldn't you can talk about margins.
Just with respect to promotions, we what we see is that people really a controlled their inventories on the they made a lot of changes to what they were buying Oh. That's included of course, we were very early on with a with managing inventories I think that is paying off.
But as a result of that you know I think that there is a lot less inventory in the system based on what we're seeing and how people how companies are responding to with their promotions and ER. So result of that we expect that margins.
We'll continue to get healthier in our case, we made this a very high priority for US we want to elevate the brown, we don't want to be promotional we want to be.
Put the brand in a completely different space and and we have bought inventories that are aligned with that strategy and of course, we think that there's going to be an opportunity for those that have a flexible supply chain to be able to react to increase them out hopefully we.
I'm going to have that opportunity and and we are prepared for that now that being said we plan to second half cautiously.
We don't see total clarity that that's you know the crisis has been.
Completely control with the virus and everything else. So therefore, we are we're being very careful.
So Katy do you want to talk about the gross margin.
So in terms of.
Obviously Q2 was better than Q1 for a couple of reasons first we talked a relatively large inventory charge in Q1.
Lower sales, so obviously getting left the leverage on the occupancy line.
We came in with the clean inventory position, we're seeing improving.
We also have more sales elaborate.
Leverage margin leverage.
And we also had a dollar a one time.
Most of that within Europe.
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So when we think about Q3 in Q4, we think as Carl said, we're going to maintain a clean inventory position, we're going to continue to benefit from improving I am you lower promotion some pricing and then normalize will gain more leverage on the occupancy.
We think lots of rent relief going into the back here specifically in Q3, but if I know, it's going to compare to what we thought.
Great. That's very helpful. You guys. Thanks, so much good luck in the back half.
Thank you. Thank you Susan.
Thanks.
Thank you. Our next question comes from Janine Stichter from Jefferies and company. Your line is now open.
Hi, good morning, everyone, Congrats and all the improvement.
Thank you Janine good morning.
Morning.
After a little about ecommerce growth has been a little bit lower than we're hearing from other companies. Maybe that you talk about why you think that may be and then maybe elaborate on some of the benefits you think you'll get from the sales force implementation and then also a little bit more around your plans for marketing and the channel. Thank you.
Yeah sure, let me start and I'm sure Kt will add to my comments.
You know, we we continue to support visit US you know we have been on this for since I came back on even before that I think at the company consider theres, a very high priority and and we see a big opportunity to continue to grow that channel and ER and do.
Even a better job in seamlessly responding to customers needs on this but.
Overall, it Q2, we U.S. and kinda was up low teens traffic was down, but we were able to offset that with a higher conversion.
Europe was up mid single digits on indicates of Europe, especially we were very very careful with not promoting also we were going through the sales for the salesforce implementation for those countries and and because of how we are architecting. The solution that really had some impact on.
A negative impact on on traffic on direct traffic.
But that is about to be over once we complete the implementation as I mentioned, we will be almost done by the end of October.
But we were also very careful with not promoting last year, we were more promotions that we would like to be and and as a result, we were able to see a pretty significant increase in margins I think I mentioned that our margins overall for E com where over 20%.
And we are happy with how we're running the business.
That being said, we think that we we would like to have more traffic coming into the sites and and we were somewhat conservative with away we were marketing.
Specialty digitally and we are going to increased the level of spending in the second half that is already ongoing.
Speed and you know, we see that the opportunity to really use all of our assets you know I mention about the new campaigns.
I think they look incredible and and I think that to really bring some of those ounces into.
Social but also inside digital.
For our web sites I think that is going to have a pretty significant impact on on traffic. We also saw that as we were reopening stores. A you know some of our ecommerce business somewhat.
Celebrated.
We think that's you know because we have such a low oil or group of customers that are really shopping yeah.
In some cases, you know both channels.
You know some of those sales probably took away from the ecommerce business.
With respect to our future you know we have been working on this for some time with the Salesforce implementation in both North American Europe.
But also in we do not have full omnichannel capabilities, especially in Europe, and our plan is to really roll those out and I know many of those are are things that we do have in North America.
But I will be impacted by the conversion as well and I think I've mentioned the last time, we talk.
Excuse me a we are implementing all solution from Salesforce core customer threesixty on the whole idea is to improve customer data integration personalized marketing journey engagement on and data analysis and result, so.
All that should happen next years is a very long project, but but we think that.
With everything that is happening on how the consumers shopping today.
We Bennett, we will benefit from accelerating that project. So so we are excited we can't wait to get all this done a the good thing is that the the conversion which is the first big.
Step on that foundation is is going really well and we are seeing great result.
We have seen the homepage uploading time, you know performing.
Extremely.
Better than we used to we are seeing that the average page loading time is at least two times faster, we're seeing a higher rate of conversion of 60 plus percent.
And we're seeing bounce rate down about 24%. So so we know that are the platform is the right one and were excited about that.
Great. Thanks, Robin color and I guess, just as a follow up if you think about the initiative you laid out last year. The invested it sounds like ecommerce maybe one that you're maybe slightly ahead of plan on is there anything else you feel like you've been able to accelerate and then on the flip side.
Sure.
Like the pandemic has put a delay on the implementation.
Yeah, I think it's a great question on to you know frankly, we are excited because we have been able to accelerate a lot of things you know just.
One of the Big things was logistics for especially in Europe, and we have been able to renegotiate a lot of our contracts.
We have closed one DC in the Netherlands, we are about to open one and Poland and and we think that all this as a pretty significant impact to the bottom line at some point.
We have done a lot of vendor consolidation work I think at.
Just our supply chain teams on almost fully integrated we have reduced SK use in a big way by pursuing this idea of.
Developing one global nine for each brand.
This is something that even in my years, where the company whatever 10 years ago.
We tried to do on we could never get a ton and now we are almost on completely you know we're gonna have a global line coming up in the next few months. So that's super excited about that we're doing a lot of infrastructure work and we have identified great areas for an efficiency.
<unk> redundancies some of it is coming from doing this you know running the business differently like the one global line, but many other things, we think that we'll be able to eliminate redundancies and by doing that.
A cutting costs and running a simpler business.
The I mentioned everything about the brands I think there we are going significantly faster on you know Paul has been.
Just a tremendous unless that or just leading on this and doing a great job and I think that we're going to be they're very very quickly something that also was a or something we wanted to do it but it was difficult then it's not just about the product where we one is for the entire experience to be elevated.
So we're doing a lot of working with visual merchandising and really designing how we're going to present the product in the stores when learn as much product. Thus we used to have and is the feeling is gonna be more of a boutique type of experience and we feel that we can.
Do both you know.
Create that elevation in the experience, but also sell more so super excited about everything we are going to share with you more specifically, how we're planning to do things and you are right customer Centricity has being one of those initiatives, where we're putting more money, we're spending a little bit more money than I think Oh, we were.
Ah thinking the last time that we met or talk.
But we think is worth to every penny so and we're talking about a couple of million dollars isn't on a significant spin.
Great. Thanks for all the color.
Great. Thank you have done.
Thank you. Our next question comes from John Kernan from Cowen and company. Your line is now open.
Good morning, Carlos Katie Congrats on managing.
The business through this difficult time period, it's great to see the balance sheet.
Great. Thank you John confident.
The competence around the dividend and share buyback is.
Clearly stands out among others.
Thank you Doug maybe.
Right.
You can talk a little bit about the balance.
Between retail and wholesale Europe's for the remainder of the year, obviously I think.
The PML inflection year over year in the second quarter versus what happened in the first quarter was impressive.
Just wondering how we should think about.
You know retail wholesale dynamic in Europe.
Think about that business as it fits into your sales guidance for the remainder here.
Yeah. So so let me start and then.
Could you maybe you want to chime in as well you know I think that obviously, our wholesale business in Europe is a super strong and you know it's a big part of our business on is a big part of our profitability. So you know just every time that we can really support that business.
And and really develop an expanded the more we want to do.
Also our retail business.
Has performed.
Better than what we had anticipated you know the in terms of productivity. The dynamics are very similar meaning okay, we still see lower customer traffic.
Offset partially offset by improved conversions and that is kind of like across the board you know, we didn't mention Asia, but we see that.
In addition to North America, we also see that in Asia.
I think that you know our outlook is is somewhat.
Impacted by some of this strategic moves that we May you know just we decided not to really give enough time for the products that we work we had in the pipeline for both our.
Stores and also our partners retailers in Europe, we tried to really give more time on that obviously is moving some of the revenues on on shipments you know throw out the the second six six months and even into from from the second quarter into its or so.
So.
It's somewhat difficult to give you a very precise direction on this.
For the wholesale business, we eliminated one season or pre season, and and with respect to the retail side. We you know we expect to somewhat similar performance than what we have been seeing and we saw a little bit of a reverse or the.
North America stores were doing better or early on.
And then there are sales decelerated and then we so that in Europe or was it a little bit you know the opposite.
But there are some very unique circumstances that impacted the region like a the sales.
The clearance was somewhat postponed by some of the country. So so we you know they are different circumstances that impact both businesses and I think that you know overall, what we continue to expect is that the wholesale business will behave very similar.
As to what we have with our retail business because they all kind of depend on the same things Joseph stores are closing for us.
That's probably means that there are closing for them as well for our retail partners. So we are trying to be very careful and with how we plan.
Inventories and so forth, but but overall I think that so far we have done okay.
Yeah.
In terms of retail in Europe.
For the mid April and for Q2, we were down 31%.
But Carlo said, we really did decelerate.
Is the promotional period flop, though the promotions took place last year in Europe in July this year more on August but also some of it is just the.
They are getting stronger and how prices a little more under control.
Be about.
In terms of wholesale Carla, it's more but timing shifts.
Two into Q4.
It's really helpful. Thank you and maybe Katie.
One more question for me just I know, it's tough to answer specific modeling questions given the environment, but the S.J. expense management in the first half there was pretty tremendous.
Down over 30% in the first half and down over 30 in each quarter. So.
How do you managed just DNA in the back half of the revenue declines.
Our clearly moderating significantly versus what we saw in the first SAP.
Was there anything we should be mindful of as we think about overall S.J. dollars and how that's going to trend versus your sales plan in the back half.
Sure. So obviously expense reduction and management as a priority in this environment.
So we had $70 million.
This quarter.
<unk>.
So as I said in his prepared remarks about.
So in the U.S.
So the store level.
Our clothes and also at the corporate level.
In the U.S. and work we.
People go on furlough and the government.
Yes.
We've had people and the government gets.
Payroll stipends in Europe, but similar to that.
We had reductions those are reinstated at the end of July.
We also had a big decrease in advertising this quarter. So Q1, we had.
As a little bit of Alaska.
Bigger increase in Q2, and Carlos ever going to be leaning more into advertising and marketing and Q3 and beyond I would say that pickup is more nonrecurring and then obviously variable cost associated with close stores and lower productivity distribution supplies.
Little over.
The $70 million decrease in terms of permanent animal, we'll see kind of going forward into Q3 Q4, our store staffing model I mentioned that.
We really we felt that the source.
And we've been able to achieve savings there and also traffic as is lower so we need people on the floor to deliver the service that we'd like to guess so that the savings that will be going forward. We took some headcount reductions at the corporate level.
And then obviously discretionary spending travel professional fees et cetera. So.
When I'm thinking about.
Okay.
The savings we saw in Q3, even think about going forward.
There is always fluctuations depending on sales volumes business mix timing of other expenses.
Sure No. That's that's a lot of detail on appreciate that.
That's a block we look forward said that the updated investor day in Q4.
Yeah. Thank you John.
Yes.
Thank you as a reminder, if you would like to ask your question. Please press Star then one on your Touchtone phone again, if you'd like to ask your question. Please press Star then one.
On your Touchtone phone.
Our next question comes from Dana Telsey.
Telsey Advisory your line is now open.
Good morning, everyone, a nice to see the progress as you think about things like that.
As you think about this upcoming holiday season, Carlos and three imagining what holiday looks like globally. How are you thinking of the positioning of it and lastly, how do you think on the merchandising side Youve introduced some athleisure, what's happening with Dan how are you thinking about product and pricing. Thank you.
Thank you Dana good morning.
Well, so with respect to quality they notice I made the comment.
As we start thinking about the impact of what's happening with IP and American how people are behaving and I'm not being completely comfortable shopping and so forth to doing a high peak periods I think that we felt that we needed to rethink about the entire model and for that.
Reason, we are planning and have a whole calendar to really start promotional efforts.
Not necessarily you know just discounting by promotional efforts and being more visible with customers and and making a customer.
Connections, but much earlier during the this season and we hope that that it's going to give us more time to really work the entire process throughout the the those a few weeks.
With that said you know the product I think looks great. We have been like you said you know investing in active apparel and you know that whole category. I think at is is growing as we speak and we feel especially as you go into.
Our next year you not that the line that I was mentioning is the first big.
Effort that we have made in terms of extending the the skews and and having a broader assortment is not huge but but we're seeing a tremendous response in our campaign right now for that line talking about like tripling, our our sales.
Potentially.
With respect to other products I mean, I think we have an incredible nine of outerwear.
We have.
A great assortment of denim now and I think at you know the the assortment is very focused great denim fabrications.
Just a lot of Ah cohesiveness between in the line.
That is being offered a in Europe on in North America uneven in Asia.
There is a lot more consistency on how the brands is represented.
And then going into other.
Parts of the line in terms of accessories in our handbag collection I think as you say come to non theres nobody in the marketplace that has what we have with the perceived value of our product.
The quality and price and then you know do you asked about pricing, we have been very strategic with our pricing and in some cases, you know if we felt that the perceived value of the.
Either the government or the accessory or any product that we may be looking and if we felt that it deserved to be at a higher price, we increased prices and same thing going the other way but.
I have to tell you that we don't find a lot of cases, where where we think that considering the quality, though we are offering and deciding that that we should go down in price at all so it's a if anything we have gone up a.
Most of the time and and frankly, we haven't seen a deceleration demand as we did this.
Some of this products are products that have been part of the collection for for a very long time.
So we have been but but we are being careful and its it all starts with a perceived value is not about okay. Let's go on tried to get more margin is not like that it's more about how much is this word based on what we're doing and the quality and then based on that we set the price.
Thank you best of luck.
Thank you Dana.
Thank you. Our next question comes from Janet Kloppenburg from JJ K Research Associates incorporated your line is now open.
Hi, Hi, everybody good morning.
Good morning.
Sounds like you're making good progress Carlos and especially on the digital salons I was wondering if you could talk a little bit about the penetration or the growth of the north American digital business and the second quarter, because we thought we heard you know great weights of increases for many many of the company.
He is that you compete against and also I was wondering what's the trend was quarter to date and also.
What you're thinking on tourism, Carlos it's down a lot as you talked about.
I'm wondering what what percentage of your business.
We flex tourists sales and maybe Katy follows what you're thinking about about the choice business for the rest of the year and I've a couple of follow on thank you.
Yes. Thank you John it's a well let me start you know our digital business I think I mention U.S. and kinda, which is kind of like a run together for us in is up low teens them for or was up during the second quarter.
These are just we we are looking that we are making a lot of changes in terms of product. There you know where assortment was a you know had a lot of opportunity and we have made some changes in a chief merchandising officer.
Being with us for a very long time, and now is overseeing that a product assortment and and the whole Ana and when we are making significant changes there.
And we are seeing a good results as a as a result of that but you know the product.
Is the is gonna be bought more intentionally for that part of the business and with a broader assortment and we think that that's going to make a difference I think I made the comment that our.
Mm total ecommerce digital business last year represent about 13% of our direct to consumer business and Oh, we see a big opportunity to grow non obviously, we are we have a big wholesale business and that also impact that's not included in.
Direct to consumer business. So I'm sure that if we work to include all that you not just the business of guest product that is being done does it really is a is a pretty sizable business. So I'm not sure that you can compare you know just with the everybody that is in our space.
They have a similar business model. We also have like Switzerland. So what do you expect the penetration to be higher Carlos this year versus last.
Well I, yes, you know actually if you look at how the E commerce business performed they perform better than the other channels. So.
For the so we are growing that business, even if it isn't growing at a very huge pace is still growing well the other ones are contracting so definitely the the penetration.
We'll go up but you know with it and we think that's it I think I've mentioned, we think that the next three to five years you know we see we have line of sight too.
An over 23% penetration, even when things are more normalized so.
We believe in we believe in this business in a big way. So that's why we're making most of our investments other than.
Related to stores, you know, we're making in digital or building our digital capabilities.
With respect to tourism.
Yes, sorry, you mentioned tourism and and you know obviously, we have pockets of very significant businesses or you know the we have a brand that is a global brand. So you know just when you have international tourism, everybody is very interested in coming and shopping and that happens in.
Eric but it also happens in Europe, you know a big business in Spain Big business in Italy, and these are all countries that have the big businesses in tourism. So.
Obviously this hurts us in a significant away when tourism has stopped as it is now.
We are not.
Basing our numbers or our plans on tourism coming back you know frankly, we all what you're hearing today and what we put in our outlook is completely based on our current trends, which do not benefit from tourism. So that's kind of like.
Where we are looking at it and if if things get significantly better of course, you know we'll work on that and we feel that we have the inventory to be able to support and respond to that.
Okay and just one last question Carlos I was encouraged by your discussion about the assortment shifts towards casual on active.
Just wondering when you have the [noise].
The wholesale advancing logano with those product adjustments are line adjustments made giving the wholesale accounts you know and the assortment elevation as you go into next year, but we have those ships and or they reflective in New York split.
In 2021, Assortments, yes, yes, exactly exactly and people were Super Super excited about that because they see they see that we move so quickly to really you know just address the new customer lifestyles the new.
Just a objective of looking for comfort and high quality and buying things that last and I think that again.
Paul has led that effort in an incredible away and so so yes. The line was already addressing all these things that I'm talking about.
Okay, and just given the guidance from minus mid teen revenue for the third and fourth quarter.
I think that calls for some improvement of where you are today does that just reflect improving economies globally or maybe some long dated back to school business. Maybe you could talk me through that transition. Thank you.
Yeah, Yeah, you know turn it back to school for US is not a huge season. So you know it's not now of course, we are elongating the for winter.
Seasonal, especially in Europe, only because we have eliminated that pre spring summer the season that I mentioned before.
But but we you know these are we are counting on a gradual improvement of customer traffic and then you know picture. Once you have settled that that Brito behavior, then picture that wholesale should follow that's kind of like the way we have been thinking.
No we're not anticipating here that all of a sound you know the virus goes away or that.
But as you know the U.S. gets tremendously better you know they we we are seeing that every time that restrictions are released by governments or otherwise.
You know our business seems to do better because customers are a little bit more open to shop, but but the changes so far have been somewhat a small and to we're not we're not counting on dramatic changes from here you know it could be I think that Katy said that it could be that we are.
Being conservative.
I think the biggest risk to that is are we gonna have inventory. If we are conservative and then over something there is increased demand while we feel that we have built the system to be able to respond to that increased demand.
Okay, well lots of luck and thanks, all the details today.
Yeah. Thank you think you've done it.
Thank you no further questions in queue at this time I will turn the call back to Carlos for closing comments.
Yeah. Thank you well I just I just want to say thank you again.
For participating in this call today, we look forward to updating you on our progress when we report our third quarter results. So until then please stay safe and well and thank you again.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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