Q2 2020 Earnings Call
Welcome to the tier three apparel.
Quarter fiscal 2020 earnings Conference call. My name is <unk> and I will be your operator for today's call. At this time all participants are in a listen only mode later.
A question and answer session.
During the question and answer session. If you ask a question. Please press Star then one on your Touchtone phone. Please note that this conference is being recorded.
I will now turn the call over to Neal Nackman, the Companys CFO , Sir you may begin.
Thank you.
Good morning, and thank you for joining us.
Before we begin I would like to remind participants that certain statements made on today's call and in the Q and a session may constitute forward looking statements within the meaning of federal Securities laws.
Forward looking statements are not guarantees and actual results may differ materially from those expressed or implied in forward looking statements important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC.
The company undertakes no duty to update any forward looking statements. In addition, during the call. We will refer to non-GAAP net income non-GAAP net income per share and to adjusted EBITDA, which are all non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website I will now turn the call over to our chairman and Chief Executive Officer Morris Goldfarb.
Good morning, and thank you for joining US with me today are Sammy Aaron our Vice Chairman and President.
Wayne Miller, our Chief operating Officer, Neal Nackman, our Chief Financial Officer.
Jeff Gold Barbera Executive Vice President and Korea, Trivedi, Vice President Investor Relations.
Let's review the results of our second quarter.
Our results were in line with our bottom line expectations or were led by continued outperformance in our wholesale business, which was more than offset which more than offset heightened challenges in our own retail operations.
Second quarter net sales were up 3% to $644 million.
Our second quarter wholesale net sales increased 8% to $589 million.
Our second quarter non-GAAP net income per diluted share was 23 cents compared to 22 cents in last years second quarter.
Let me provide you some details on our own retail operations.
By the end of this year, we will have eliminated over 140 stores down from over 350 stores, which represents approximately a 40% decrease about bass and wilsons stores.
We're being aggressive and finding a solution for the remainder of our own retail operations.
In July we engaged outside advisors to assist us with this process.
Our own Dk, and why and Karl Lagerfeld stores reflected low single digit positive sales comps for the quarter. Despite the reduced traffic in high volume tourist centers, which is where many of these stores are located.
For the second half of the year, we anticipate performance benefits at Dk, and why and Karl Lagerfeld stores as a result of improved product and store design.
We remain committed to eliminating the losses in our own retail operations as swiftly as efficiently as possible.
Before we get to our wholesale business I'd like to provide you with an update on our sourcing operations in terex.
For many years, we've emphasized our proficiency and our global sourcing capabilities and our strong vendor relationships as strength has always been to deliver great quality product, that's priced competitively and delivered on time.
As we've shifted production globally, we've historically moved with our longstanding vendors, who oversee new factory development.
We believe that consistent management oversight and expertise are essential regardless of the country of origin.
Four years ago, we sourced about 80% of our production from China. In spite of the fact that our overall business has grown dramatically we estimate production in China will be down to less than 50% this year.
Most importantly, we have done so with the comfort of knowing that we are in the REIT countries with the right partners.
We believe we have significant additional sourcing opportunities outside of China over the next several years.
Now, let me address tariffs as the risk of terrorists have increased over the past six months, we strategically accelerated inventory receipts from our suppliers, which is reflected in our higher inventory balances as compared to the second quarter of last year.
I just recently met with several of our largest Chinese vendors, who continue to be extremely supportive in sharing the tariff costs implemented to date.
Our ability to accelerate inventory receipts as well as obtain vendor support are expected to minimize the impact of tariffs on our financial results for this fiscal year.
Looking ahead to next year, while the effective trade negotiations and tariffs between the us and China remains uncertain, we expect to be able to mitigate the impact of tariffs through continued expansion of our sourcing alternatives obtaining further price concessions from our vendor partners in China.
And implementing selective wholesale price increases, where we deem appropriate.
Our wholesale business remains a key driver of our results.
Calvin Klein, our largest business and one of the dominant resources in the women's apparel market had another solid quarter of growth.
I'm also pleased to report that the extension of our partnership with PVH as it as a result of the new women's CK jeans license is off to a very strong start.
Our partnership with PVH is something we do not take for granted we appreciate.
The fact that they continue to provide us with new opportunities the newly developed CK jeans product line has garnered significant interest and generated a strong initial order book.
Shipment and shipments will begin for this holiday season, we believe that we can build the substantial lifestyle women's CK jeans business that will grow to $250 million in annual sales over the next several years.
We continue to develop our product base to increase the diversification of our classification businesses.
Over the last year, we developed an internal strategy to make denim a significant classification for the company.
With the launch of CK jeans, the expansion of our Tommy Jeans collection and the future launch of DKL wide Jeez, we will become a very important resource in the denim space.
These denim initiatives with some of the world's most recognized brands will enable us to dominate that category.
This is exactly what we've accomplished and our other classifications, such as outerwear dresses performance and women's suits.
Moving onto our Tommy Hilfiger business second quarter performance continued to reflect the strength of this brand and our product we have with greater than 30, then 30% sales growth compared to the second quarter last year.
The growth in the business was once again broad based.
We continue to find multiple ways to create product line extensions to appeal to a wider consumer for example, within the Tommy Hilfiger sportswear business Weve expanded our distribution to Dillards and nordstrom's for this fall.
We're excited by new developments in the Tommy Hilfiger jeans business.
For spring 2020, we have created a completely new collection named Tommy Jeans.
Which will be housed in the jeans area and department stores and also be sold to better specialty stores.
Featuring genes with multiple fits in watches as well as top set us softer. This line is designed to appeal to a more casual in younger customer.
We believe Tommy jeans has the potential to be a significant growth area for us.
Our teams strong execution I am expertise in design merchandising sourcing and selling are an integral part of the continued success of our Tommy Hilfiger business.
Additionally, PVH is brand management expertise and compelling marketing capabilities have made Tommy hilfiger of powerful global brand with far reaching appeal.
Our Karl Lagerfeld business had a good quarter and we continue to experience traction in building. This brand that we introduced to the North American market, we've positioned Karl Lagerfeld, Paris, with an elevated brand status as well as expanding the lifestyle appeal of the brand to incorporate a more casual element.
Throughout of Karl Lagerfeld Creative design legacy the brand is launching a tribute to Carl the White shared project.
Actors models fashion designers and friends of Carlyle have been invited to create a version of his iconic white shirt.
The line of shares will be sold exclusively on Karl Dotcom and Farfetch dotcom with all proceeds of sales going to charity.
Our own Dk unwind Donna Karan brands registered another strong quarter with greater than 20% sales growth compared to last years second quarter.
We're making good progress with our international distribution, we're now operating our own shops in Spain, and Portugal, and L. core thing glass, one of Europe's largest department stores.
Overall for Dk and why we continue to create synergies and are looking forward to moving that brands teams from their 120000 square foot legacy office space to a newly designed modern and highly efficient 70000 square foot space within the same building as GE threes headquarters.
On the Dk wind marketing fronts building upon this success and momentum of last year's digital first hundred hundred percent decay in why campaign, we're excited to elevate this year's fall campaign.
To feature a global Mega Star Haulsey.
With roots in New York City policies of global power with analysts talent as a singer songwriter and artists, making her an ideal match as a brand ambassador for the Dk wine brands.
He has a strong social media presence with over 36 million fans and followers across all social media platforms.
Before all AD campaign will also include extensive media digital print and outdoor placements in major cities throughout the world.
Additionally, next Monday during the heart of New York Fashion week Dk, why will host the birthday party in Brooklyn to celebrate its thirtyth anniversary.
The seventh the festivities will include a performance by halting.
Licensing continues to be another great opportunity for the brand.
It is an important profit driver and a great way to expand our global presence through the introduction of additional lifestyle product categories.
This past quarter, we entered into a long term exclusive global license for Dk why intimate apparel.
With World Class partner Calmark, who has also been dk and why sleepwear partner since 2008.
Komara will transition the license from Hanesbrands in January 2020.
Capitalizing on continued success of our Dk and why home business. We also signed a license agreement for a decade, why furniture with living style group, a leading pure play online furniture company and are looking forward to the launch this fall.
Based on all these initiatives and the strength of the auto book, We're now anticipating dk related brands wholesale net sales growth to be approximately 25% for this fiscal year.
Our successful management product development and distribution capabilities have set the stage for many years of meaningful growth for the Dk and wide brand.
Lastly, in spite of the global tourist travel headwinds Philbrick, Anaesthetists swimwear and resort brand continues to perform to perform well with mid single digit comp sales increase we continue to expand the brand's footprint.
This quarter, we opened four stores, including Las Vegas, Rome, and kept pre as well as two pop up stores in Macau in Paris.
Also the this quarter the brand launched a highly anticipated collaboration with off white.
Designed by virtual add low who also as the artistic director for Louis Vuitton men's wear.
The collaboration sold out very quickly and gained significant global fashion press.
We will continue to find creative ways to expand the awareness of this iconic status brand.
Corporate wide online sales continue to be a focus for us we see this as an opportunity to gain market share and sure that our brands and product are well represented and showcased in our on our retail partners web sites as well as our own.
We will continue to invest in personnel and systems in the online space.
I'll now pass it on to Neil for a detailed discussion for our second quarter results and our guidance for fiscal 2020.
Thank you Marcy.
Net sales for the second quarter ended July 31, 2019 increased approximately 3% to $644 million from $625 million in the same period last year net sales of our wholesale operation segment increased 8% to $589 million from $545 million and the Tommy Hilfiger decaying lie in Calvin Klein brands were the main drivers of this increase.
Net sales of our retail operation segment for the quarter were $84 million, approximately 22% lower compared to last year sales of $107 million. We reported same store sales decreases of approximately 21% for wilsons stores, 16% broad GH bass stores, and an increase of 3% to DKL online.
Net sales of our retail operation segment were also negatively affected by the decrease of approximately 55 stores operated by us as compared to the second quarter of last year.
Our gross margin percentage was 36% in the second quarter of fiscal 2020 as compared to 37.1% in the prior year's period.
Part of this decrease in gross margin is a result of the decreasing penetration of the retail segment, which operates at a higher gross margin and impacting gross margin rates by approximately 50 basis points.
The gross margin percentage in our wholesale operation segment was 32.8% compared to 33.4% in last year's quarter.
The gross margin percentage in our retail operation segment was 46.5% compared to 46.6% in the prior year's quarter.
As CNS expenses were $196 million in the fiscal quarter compared to $199 million in the same period last year.
Net income for the second quarter of this fiscal year was $11 million or 23 cents per diluted share compared to $10 million or 20 cents per diluted share in last year's quarter non-GAAP net income per diluted share was 23 cents for the quarter compared to 22 cents per share in the prior year.
non-GAAP results in this quarter exclude the impact of non cash imputed interest and the gain on lease terminations.
Looking at our balance sheet accounts receivable increased to $465 million from $448 million at the end of the second quarter up approximately 4% and in line with our wholesale sales growth.
Inventory increased approximately 24% to $842 million.
As we discussed in last quarter's call, we had expected inventories to continue to build.
As Mark mentioned earlier this increase is higher than our forecasted sales growth as a result of accelerated inventory receipts in anticipation of the fourth tranche of tariffs as well as the normalization of the post launch year inventory balances for the D. can why brand.
We anticipate inventories will be back in line at the end of this fiscal year.
We spent approximately $18 million on capital expenditures.
This year to date.
We had long term debt outstanding of approximately $554 million at the end of this quarter compared to $494 million at the end of the second quarter last year.
We also purchased approximately 1.3 million shares the $35 million and have 2.9 million shares outstanding under our authorized share repurchase program.
Our quarter, ending cash balance was $40 million this year compared to $42 million a year ago.
As for our guidance, we're revising our fiscal year ending January 31, 2020 guidance to include the impact of the fourth traunch of tariffs, which which we estimate will cost us approximately $12 million for this fiscal year.
We are now forecasting net sales of approximately $3.3 billion net income between 154 and $159 million or between $3.10 and 3020 cents per diluted share.
This compares to net sales of 3.08 billion and net income of $138 million with $2.75 per diluted share in fiscal 2019.
On an adjusted basis, excluding non cash imputed interest expense of $5 million and a 2 million dollar gain on lease terminations. We are anticipating non-GAAP net income between 156 and $161 million or between 315, and 325 per diluted share compared to non-GAAP net income of $144 million were $2.86 per diluted share in the previous year.
Our guidance continues to assume a weighted average diluted share count of approximately 50 million shares.
We are projecting full year adjusted EBITDA for fiscal 2020 between 295 million to $300 million compared to $269 million in fiscal 2019, we now anticipate the non-GAAP retail losses in our retail operation segment in fiscal 2020 will be approximately $5 million higher than the loss in fiscal 2019.
This assumes a high single digit comp declines at both Wilsons and bass for the full year.
You can why retail sales are planned about flat to the prior year as the average comp store count is down.
As for Deakin wise wholesale and licensing operations revenues are now plan to grow by approximately 25%.
For our third fiscal quarter ending October 31, 2019, we are forecasting net sales of approximately $1.17 billion and net income between 90 and $95 million will between $1.85 and $1.95 per diluted share.
This compares to net sales of $1.07 billion, and net income of $94 million or $1.86 per diluted share reported in the third quarter of fiscal 2019.
On an adjusted basis, we are forecasting non-GAAP net income between $91 million to $96 million, which is a $1.87 to $1.97 per diluted share as compared to non-GAAP net income of $95 million or $1.88 per diluted share in the previous year's quarter.
And as for our retail operations, we are assuming a high single digit comp decline in total for the quarter.
That concludes my comments I will now turn the call back to Morris for closing remarks.
Thank you Neil are winning formula for success is unwavering in what remains a difficult retail environment. Thanks to our world class team, we have a track record of being able to adapt and thrive in any environment. We will continue to strategically leverage the strength of our global power brands DKL wide Donna Karan Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld through brand right design and development to create great commercial product, we continue to grow at capabilities.
And elevate our position as a supplier of choice for our retail partners.
Backed by our strong financial position GE three remains poised to achieve significant growth over the next several years.
I'd like to thank our shareholders partners and stakeholders for their continued support.
Thank you operator, we're now ready to take some questions.
Thank you.
We will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone Paul.
If you wish to BMO. Please press the Pathfinder the hash key.
If you are using a speaker phone you may need to pick up the handset first before pressing numbers. Once again, if you have a question. Please press Star then one on your Touchtone phone.
And our first question comes from Ed Yruma from Keybanc capital markets. Please go ahead.
Hey, good morning, Thanks for taking the questions I guess first on the net impact of Terrace. Another a couple of moving pieces in guidance.
Including just kind of continued weakness in your own retail operations can you give us what the incremental impact from tariffs was with the revision of guidance and what the implied.
Loss is on the retail business given the updated numbers.
Yes, so the it's about a $12 million impact and we're absorbing four.
For the forecasted period.
And with respect to the retail operations I would tell you that we took down.
We took down topline sales.
Essentially in a low single digit zone, an incrementally so that we're now really looking at high single digit negative comps for the second half, it's approximately $4 million of additional losses in the back half.
Got it at more sounds like you've got some really exciting momentum in that business I guess, if you step back I know you gave.
Some of the components of denim, but kind of if we look out longer term what is denim as a percent of sales or kind of whats. The total denim opportunity and how does that denim business differ in that from margin perspective from some of your other kind of wholesale our wheelhouse is thank you.
Thanks for the question.
We look at denim as a huge opportunity that the huge opportunity.
For for the company.
Uniquely we again have the best brands.
For.
Giving us the ability of marketing denim with each one of them.
And what hopefully would be housed in denim classification were working closely with our retailers. We believe young clearly I said that the CK gene opportunity over the next several years is.
Possibly $250 million.
If you take Tommy I think Tommy Tommy is.
In that zone, as well and I believe that.
With the the DNA of DKL NOI hitting another customer base, we again have a similar $200 million to $250 million possibilities. So the entire classification.
Has the ability of reaching $500 million to $750 million in sales.
We can clearly look at we're approaching the business a little differently.
Than the call it the pure play denim vendors. The Levi's model is different than each one of ours ours will be more focused on tops and denim as a fabrication.
It will be young it'll be active it'll be spirited in a similar fashion.
But I believe that you will see a definitive difference in how we market when we finally, when we finally hit the stores, which is soon to come.
We will do will be poised in fourth quarter for you to get a good view of what we will look like for the future and it is unique it is exciting and our retailers share the same.
The same attitude that we do the bookings are strong.
The the margins on the denim side of the business should be pretty much in the same zone is our performance area.
So we're excited it again is another platform for us to pursue and it's consistent with everything that we've built from the coat business on dominating classification as I've said earlier in the credit scrip is what we do best.
Great. Thanks, so much.
Our next question comes from Erinn Murphy from Piper Jaffray. Please go ahead.
Great. Thanks, good morning.
I was hoping you could talk a little bit more about kind of your mitigation.
Strategies against rising carats. It sounds like you believe you have some flexibility, particularly into next year as well. So maybe just speak to the regions you've been diversifying in Q and then what is your general view on price increases do you have any plan for the back half and do you think that consumer out there it's strong enough to take them generally thanks.
Thanks for your question Erinn, it's a good one it's not a surprising one.
It is.
Clearly the topic of choice, but people forget that different companies have different strengths.
We are known to be.
Incredibly strong on our sourcing capabilities each one of our leaders.
It is really an entrepreneur who pretty much on the zone businesses traveled overseas developed the country of choice for that given period and moved on.
That's that's basically who we are we were initially poised to run our business for a lifetime out of South Korea that changed we moved to Indonesia. We then move to outer Mongolia of all places. We then moved into China and then we have satellites in Vietnam, we have satellites in today's still in Jakarta.
Jordan, we are in the Caribbean based countries is not a country that we are not well positioned in with significant talents sitting in all those countries. Our main office is in.
In hand to China, and then hand, Joe it's not led by by Chinese executive happens to be an Irishman.
Supported with Chinese South Koreas, French Indonesians Indians, and we are poised to move anywhere that we need to move.
We've proved that out historically were doing what is absolutely prudent if we were to move all our production out of China overnight, we would be a bad risk for an investor.
I think we solidify our ability to produce product quality form on time for our retailers and thats, what we need to do primarily as we solve the problem of sourcing in the best country necessary.
So right now the call out has been from pretty much every institution or any every analysts have you gotten all your production out of China.
Once you get your production out of China. Your terminal you can bring it back those factories will go out of business. The G. Three factories will go out of business because they are highly dependent on G. Three you can't make a U turn if if all the trade issues or solve than say you know I made a mistake I'm going back to where it's best for me.
So you still need to keep a foothold to until we fully recognize the depth of the problem and the term of the problem.
So we are exactly where we want to be if it was necessary for us to take another 50% of the 50% out of China, which would leave us with maybe a 25% dependency and that would be primarily because of.
What we believe is a shoe issue, we were not able to source efficiently today, all our needs for shoes outside of China short of that we can move much more out of China. If we believe it's necessary. We don't believe its prudent today and we still operate our business for long term sustainability and not not for a quarter. So it's where we are as far as price adjustments.
We've tested price adjustments in our own stores, we've raised our retails and quite honestly and we took the.
The promotional signage off of our Dk and why stores and our businesses better there's no resistance to price increase on good product.
Price price is very helpful and you need to promote product or you need to dispose of product, but a few constantly delivering new fashion product. There is the ability of raising prices, we don't produce commodities, we don't produce.
Underwear, we don't produce.
Dress shirts as a commodity.
We do we produce fashion apparel with primary brands. So I think that gives us the ability in select areas of raising our prices as needed. We're a fashion company, we're not we're not a hard commodity company.
I hope that answers your question a little bit if it is.
I hope you any further play that.
Yes, just one clarification on the price increases you said you increased your retail pricing in store that just dk and why it's Jordan I, just stick and why because we believe our product is appropriate for it.
And any planned price increases on the wholesale side in the back half of this year.
Uhhuh, we've done it already.
Okay.
We've we've raised prices moderately where we believe it's it's effective and our early indicators are that is working as well.
It's a little bit too early shipments just began for fall, but the early indicators are or whatever we have shipped is work.
Got it and then just last question for me just generally how are you feeling about the fall holiday.
Stephen can you comment on your order book I think it was 75% complete at the end of the last quarter.
And any kind of trends on back to school that part thank you.
They are in our order book.
Inventory. So I don't think this company has been ever been in a better position. We are poised for growth we're poised for prosperity and we have the best brands in the industry to support that and we have the best team in the industry as we walk through our company you'd be amazed as a talent pool that we have the mass than the last three or four years. It's it's clearly best in class.
Great. Thank you so much.
Our next question comes from John Kernan from Cowen. Please go ahead.
Hey, good morning, Morris Neal Thanks for taking my question.
Thanks, John Thanks for being here.
Sure.
Neil just the $12 million that you provided us not in terms of the ticket this year.
Let's say that.
Assuming 15%.
For the remainder of the year I'm just wondering if you can help us with math into next year. It seems to be a pretty wide range of estimates.
Got out there right now in terms of what the PNM impact is for you is there anything.
You can do to help us understand what the overall impact would be in a 15% tariff scenario for next year. We can obviously do some back of the envelope math on what you're giving us now but.
Just wondering if there's anything more.
Substantial you can give us in terms of terrorist for next year and what the plans are.
Yes, John its look its hard for us to give you a specific number for next year I'd like Mark said, we are reacting to whats happening on our ability to move product and reduce our art did the product that we have subjected terrace, we think is significant.
The impact of price increases that we take could also be significant so it's very hard to.
Just to give you a specific number I would just.
Just in terms of a lot of them are the mechanics that analysts have been going through keep a few things in mind.
We do have about 14% of the goods that we import.
Or will ship directly in terms of our disclosures we have disclosed in the prior year, we imported about that we purchased about 61% of our products from China.
So some of the analysts have gone this correct. The math would be that you would want to subtract anything that's actually an export it items, so thats about 15% of our product.
The other the other key factor Polydor to give you a little more framing is that when you think about fob or merchandise cost I think if you if you use the 75%.
Figure as far as part of our cost of goods sold that's a reasonable barometer I think as far as you know specifically what will be coming in from terrorists like I said, it's a little bit early for us to give you a specific.
Guidance on that and also lastly, as we mentioned the vendor support has been.
Significant as we expected and we hope that that will continue as well.
So John .
Relatively John it's relatively easy to take our total import number and tack on 15% and say that's liability.
What we're getting is great participation with our vendor partners.
We believe there is opportunity to raise some prices, where as I said, where appropriate so it's hard to come back to you and give you a fixed.
A fixed number we believe that we are in good shape. We believe that we can provide earnings growth for the coming year.
And we've gone through crisis is many times, we've gone through areas, where we didnt lose just our vendors we lost our customers and we turned it around and found new customers new opportunities. That's that's where this company is.
We have been around from 1956 on this this is not a company that went out and tacked on to Brandon created some success for short periods of time.
Well who were approved out.
Provider of product into the wholesale industry. Our failure today is the retail piece.
Thats, where the frustration in our world exists today, and we're trying to get better at it but I don't have I don't have a lot of concerns are the future of our wholesale.
That's actually very helpful. Thank you.
Just a follow up on the retail business Morris you did.
I mentioned that you are working aggressively towards a solution you reached out to some advisers to assist you in strategic alternatives.
Any update in terms of.
Lease lease explorations into next year, and how we model the store base over the next two to three years.
I don't think you're going to be satisfied with my answer on lease expirations were far more aggressive than purely the lease expirations we have.
Three directions to to approach and right now there is a little sensitivity in discussing them, but there are three opportunities that exist for for our retail solutions and they are all pretty good as far as.
Store account, we've eliminated about 40% of our.
Store base in the last.
Year.
Three years I'm, sorry in last three years.
So I can assure you that there will be a continued reduction or.
Possibly elimination of some of our retail.
We're on it it's it's not.
It's not taking a pill in disposing of it weve hired.
Outside consultants to help us in the areas that we're struggling with.
We will get there.
Got it. Thank you just my last question would be when we can obviously seeing your success on the floor of many of your top wholesale partners just any comments on how the performance digitally or initiatives.
But your.
Assuming that in the digital space with your top wholesale partners. Thank you.
We were successful on all our brick and mortar stores that have.
Non line component, where at least equally successful as they grow their online business our business with them grows and we.
Most cases.
I believe I can comfortably say, we lead the charge and performance in womens apparel on on those sites.
We do have.
We have a strong business with Amazon that were.
We're jointly trying to build a little bit more aggressively.
They we've pulled back a little bit for.
For good reason.
For our company.
And now we've we've stepped on the gas a little bit for.
An effort to build Amazon and the pure play online businesses as well so.
Exactly.
Thank you.
Thank you thanks for your question.
Our next question comes from Rick Patel from Needham and company. Please go ahead.
Thank you good morning, everyone. Just a follow up to John's question on tariff. So I understand it's very tough to pinpoint the exact impact, but as we think about this from a very high level is your general thinking that the pain will be shared evenly among G. Three the manufacturers and wholesale partners or do you think you can offset more than that just some broad context would be helpful. Because.
Obviously, it causes big swings to the next year's projections.
So we I don't think we've ever stated it was an equal swing between our wholesale partners and ourselves.
No. It strongly it's got three elements.
That it affects it affects our vendors our wholesale partners and ourselves.
So.
Our job is to make sure that the product to retails at whatever price, we put it out at.
If the product doesn't retail we've done something wrong is generally not the retailer weve positioned it wrong, we designed it wrong always sourced it inefficiently so.
As of as of now we have not determined we've done anything wrong. The product is selling we've increased some pricing where we believe.
The consumer can accept it.
And we'll modify it as time goes on well, we're not going in and saying all of the increase has to be.
Contributed by the by the.
The consumer the direct consumer she's not paying for it. We are initially we're paying for part of it our vendors are paying for part of it and to a lesser degree our wholesale partners are.
Beginning to pay for it.
That's helpful.
And as far as the outlook goes your second quarter came in a little bit softer versus your expectations for your annual guidance was taken up by about 20 million can you help us understand the mechanics of that did timing shifts come into play or is it all CK jeans, just curious on what's driving the change versus the implied back half from prior guidance.
Yes, exactly the second quarter topline misses were really about half half of that attributable to the retail business and the comp coming in higher than we had planned.
If you looked at the top line Miss it the wholesale part of the business it was probably less than 1% impact so well and if you looked at the performance of our wholesale businesses by brand. They were really strong across the board. So there was no particular category or brand to suggest let us down in the second quarter.
With respect to the second half.
The strength is primarily driven by Calvin Klein jeans business being new.
Being and it showed well we've got an order book Thats been developed we roll that into the forecast and then in addition to that or D. can why order book has also strengthened and we roll that into the forecast and as I mentioned earlier, we did take down some of the retail sales for the second half. So those are the main moving pieces in terms of top line.
Both for the second quarter in the second half.
Thanks, a lot good luck this fall.
Thank you.
Our next question comes from Dana Telsey from Telsey Advisory Group. Please go ahead.
Hi, good morning, everyone.
As you think about the denim jeans business with the Calvin business that you have and just the category. Overall are you getting additional square footage in your wholesale accounts given the improvement in the product that Youve put together and then lastly on the retail component what did you see in the outlets this quarter traffic how did it compare to prior quarters tourism, what do you see as the change there. Thank you.
Thanks for your question Dana.
Then and not only that we get additional footage we get additional budget for new classification.
So in most cases the.
The pad is a denim pad were difficult.
Its shares some space, but generally its.
It's additional footage it's additional signage its specific marketing that goes toward it.
And.
In many cases, it's a different floor, if it's a it's a multiple floor department store.
You might find denim.
On the active floor.
Or.
Denim floor and.
Our products, our Calvin product spread out through the store and many different locations.
As far as the question on on traffic traffic has been down.
Traffic in.
Tourist.
The tourist inspired centers is down dramatically and I think I addressed it in my presentation in spite of that.
Tourist centers that are.
Pretty much occupied the tenancy of.
Dk and why Karl Lagerfeld, and and build Mccann are doing well all of them are posting.
Positive increases the the rationale for it I believe it is much better product than we have historically had for dk and why.
The introduction of Karl Lagerfeld, and the unique events that we've done with philbrick and so those centers those those brands in those centers are doing well.
Traffic in some of the other centers.
Is in the centers that we have.
Bass and Wilsons in that is there much broader our door count is much more aggressive.
The traffic is not not our only problem product was.
It was an issue management was an issue Fixturing has been an issue. So we have a host of problems in the the core piece of our retail the the.
Call it the.
The more luxury segment of what we provide and.
The globally recognized brands are doing much better.
Thank you.
Thank you Dana.
And our next question comes from Heather Balsky from Bank of America. Please go ahead.
Hi, Thank you for taking my questions.
Hi can you talk about what you're seeing from an input cost perspective outside of trade.
And then also it looks like you bought back some stock can you talk about.
Your plan for free cash flow this year, and how you're thinking about buybacks and debt repurchase debt paydown for us there. Thanks.
So starting with the back part of the question looking at the cash flow in the business continues to accelerate.
So so we're very bullish about that we did step into the market before.
Prices being where they are.
We may do that again.
If we don't do stock buybacks. The first the most pressing use of our free cash flow will be to pay down.
Pay down our term loans, which are the highest interest rate piece of the capital structure.
Always fall and as far as our input costs sorry, Susan.
We were actually not seeing any significant pressure.
On input costs.
I think the biggest challenge we have is obviously the tariff issue.
Thank you very much.
And our next question comes from Jim Duffy from Stifel. Please go ahead.
Hi, This is Peter Mcgoldrick on for Jim Thanks for taking my question.
I've got a quick one on.
Wholesale margins, if you were to split the license and.
If you're just split the license brands led by CK, how did those operating margins compared to that of your own brands as you see.
Dk high margins improving from most low mid single digits can you share the trends in that business.
Yeah, I would say that overall, they were down about 60 basis points and that was pretty evenly spread or.
Between the between our own brands in the licensed brands.
But clearly Peter.
Our own brands are providing they will provide this year better margin we have.
International capabilities with.
Our own brands that with.
Calvin Klein and Tommy Hilfiger were limited to North America.
And.
Our margin.
Is far better in Europe .
With the game why than it is in the states and product is getting better the breadth of our product.
Is improving we're we're beginning to operate shop in shops as I stated.
And of course, a in glass and we would have to assume that recapture on margin in shops that we run is going to be better than just providing.
Just providing wholesale product so the brands that we own were bought with the intention of providing better margin for ourselves and our investors and I believe were operating consistent with what our plan was.
Okay. Thank you and then just a point of clarification on that the license brands. Despite having the royalty payment do have a higher operating margin than the on brands right now.
No no we're up of that actually.
But the.
The owned brands have a higher.
Gross margin and operating margin than the license because its primarily because of the royalty.
Okay. Thank you and then.
In terms of the outlook as you look into Fourq Q. It looks like there is a.
Our margin improvement.
Built in there could you shed light on the key drivers of improvement.
Are there any onetime pieces or any other key call outs.
Yes, Peter primarily the we think the compares in the fourth quarter are actually in our favor that last years Q4 was.
Little more significant.
Versus the other quarters and certainly versus what we're expecting for this fourth quarter.
Okay. Thank you very much.
Thank you Peter.
And our last question comes from Susan Anderson from B. Riley FBR. Please go ahead.
Hi, good morning, Thanks for taking my question.
I was curious on the detailed why wholesale growth maybe if you could talk about performance and the department store channel, particularly.
The new department store doors versus the Macy stores.
Sure.
Our Uh huh.
It takes a little while to to launch a brand.
Particularly the way that we do it we have about a dozen different classifications of product.
With a dozen management team is in a dozen different locations within the stores. So they don't all work Harrell.
Sometimes the dress business launches is very strong this sportswear businesses a little slower.
Performance is off the charts, great and footwear is weak or using those as an example, please don't take me literally.
Because that's really not the case, though we launch we try to launch.
As many classification simultaneous simultaneously to make an impact in the store, we derive the benefit of broader distribution within the retail box and more attention that the brand is.
Is the obvious and in a multitude of locations.
So where were getting good.
Our business is growing dramatically as I said earlier, we're where we will have 25% growth.
In the UK and why this year.
The expansion of.
Door count is very important and the expansion of.
Both customer base.
Really creates the door count expansion.
We originally.
Bought decaying why as Macy's exclusive as as the brand matured.
The decision was made that it would not be a macy's exclusive any longer.
And the brand is adopted by pretty much every department store, we're distributing it now the dillards is supportive of the brand.
There is.
This distribution.
In pretty much all of the department stores its.
It's.
A good launch in Europe .
So where we are where we expect to be we were fortunate to find.
An acceptance for the brand and some of the elements of the brand in places like foot locker and Dicks is a potential customer the brand. So we're we're in a good space quite honestly I would tell you a surprisingly good space as it relates to distribution.
So.
Thank you for your question Susan.
Great. That's helpful. If I could just add one follow up.
On the China Theres not to beat a dead horse, but I may have missed this did you guys say if there was a third quarter impact or is it all in fourth quarter, and then I guess I was kind of curious how much of the product are you able to ship in early I guess, just trying to figure out the 12 million dollar impact is that like one quarter's worth of tariff impact.
Yes, so we think it impacts both Q3 and Q4 it'll be more towards Q4, obviously, we've got the significant inventory increase.
In that in terms of bringing inventory in early so that will help directly offset the Q3 impact, but it will impact Q4 more than Q3, but will impact in both.
Great. Thank you. Thanks, so much good luck next quarter.
With that thank you very much for listening in thanks for your questions and have a great day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.