PVH Corp (PVH) — Q1 2020 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. first quarter 2020 earnings conference call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH's written permission. Your participation in the question-and-answer session constitutes your consent to having anything you say appear on any transcript or replay of this call. The information to be discussed includes forward-looking statements that reflect PVH's view as of April 1, 2020, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the Safe Harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations, and intentions and its need to use significant cash flow to service its debt obligations. Significantly, at this time, the COVID-19 pandemic continues to have a significant impact on the company's business, financial condition, cash flow, and results of operations. There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of the circumstances means what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates, and suggestions. PVH does not undertake any obligation to update publicly any forward-looking statement, including, without limitation, any estimates or suggestions regarding revenue or earnings. Generally, the financial information and projections to be discussed will be on a non-GAAP basis, as defined under SEC rules. Reconciliations to GAAP amounts are included in PVH's first quarter 2020 earnings release, which can be found on www.pvh.com and in the company's current report on Form 8-K furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Manny Chirico, Chairman and CEO of PVH.

Good morning, everyone. Joining me on the call is Stefan Larsson, our President; Mike Shaffer, our Chief Operating and Chief Financial Officer; and Dana Perlman, our Treasurer and Senior Vice President of Business Development and Investor Relations. I'd like to take a moment and address all that is going on around us. Most recently, we have seen our country ripped apart by the lethal effects of systemic racism. This has caused too many instances of social injustice in our country. At PVH, we are guided by our purpose, which is to drive fashion-forward for good. And one of the best ways we can do this is to fight for racial equality within the walls of our company, throughout our industry, and in society at large. We are creating forums for listening and learning. We are also updating our talent, our position, practices, and training development programs to create new opportunities to grow so that we can increase representation across all levels and support our Black associates for success in attaining leadership positions across our company. Furthermore, the coronavirus pandemic has dramatically impacted our business over the past few months, affecting every region of our business. The health and well-being of our associates, consumers, partners, and the communities where we operate remain our top priority. Throughout our almost 140-year history, we have faced many challenges. And I'm confident that we will successfully navigate this backdrop as well. We have strong financial discipline, a healthy strong balance sheet with $1.8 billion of overall liquidity, and a wide range of global growth opportunities, driven by Calvin Klein and Tommy Hilfiger. Our brand and our people are our two greatest assets. They were both on full display during the first quarter. Our associates and business leaders truly demonstrated their passion, dedication, and agility. And I would like to thank each and every one of them for helping drive our business forward, despite the challenges that the COVID-19 pandemic presented. From working to efficiently close stores to putting plans in place to successfully reopen stores around the world, to those in our warehouses that have kept our businesses moving forward, and to those working from home, who wish to see and I cannot thank everyone enough for their resilience and commitment. Our iconic Calvin Klein and Tommy Hilfiger brands have continued to experience excellent consumer responses over this period, demonstrating strong brand health and loyalty during the crisis. Each brand attracted new consumers visiting our sites for the very first time, with good conversion and strong purchasing behavior over this period. Operating a diversified portfolio of brands with strong geographic diversity has always been one of our strong suits. And now more than ever, we have benefited from the diversification of our business. For example, the foresight and expertise we've gained from our Asia teams have been incredibly valuable as we navigated the coronavirus across other regions. This helped us get ahead of key decisions, such as adjusting our marketing campaigns and finding new ways to engage with consumers while driving our digital business during the temporary store closures, as well as safely and effectively reopening our stores once restrictions were lifted. Additionally, we were able to reallocate resources to better support what was open during this period, focusing on how to best fuel our own e-commerce sites and also working with our third-party digital partners. These competitive advantages—our people, our brands, and our diversified business model—give me great confidence in the long-term health of our business. Moving on to the first quarter financial results, we entered 2020 with strong brand health and increasing momentum across Tommy Hilfiger and Calvin Klein, in the majority of regions where we operate. Unfortunately, COVID-19 had a significant impact on our business during the first quarter as our stores and wholesale partners' stores were closed for over six weeks on average during the quarter. This resulted in revenue in our own stores being down 50% to 65%, depending on the region, while our wholesale revenues declined about 40% as shipments to our wholesale partners were dramatically reduced across all markets. Our digital businesses, both our own and with our wholesale partners, experienced outstanding performance and became our number one most critical channel during the quarter, with our European digital businesses being the strongest outperformer of any of our markets. On the operating margin side, our gross margins and SG&A rates were under significant pressure as well. While we tackled every expense line, including marketing and made difficult payroll expense-related decisions, most of these measures didn't get enacted until the end of the quarter. Additionally, we recorded about $100 million in reserves for future inventory markdowns and accounts receivable write-offs. Given this operating environment, we have also been addressing our inventory levels to reflect the current demand picture and are working closely with our suppliers in the event of any meaningful shipping disruptions or delays. Additionally, during the quarter, our licensing partners were significantly impacted by business disruptions as well. We will continue to work closely with our licensing partners throughout the year as we are planning for their businesses to experience similar pressure to what we are seeing in our business. With our long-term vision in mind, we took prudent and proactive measures to strengthen our balance sheet, preserve our liquidity, and improve our financial strength to come out of the COVID crisis as a stronger company. Overall, we ended the quarter with $1.8 billion of liquidity. Our CFO, Mike Shaffer, will discuss the specific steps we took to strengthen our financial position in his comments. As we navigate through the recovery phase, we will continue to evaluate how we can further strengthen our balance sheet, optimize our businesses, and identify efficiencies that will allow us to operate smarter and ultimately enhance our operating margin profile, which we believe will drive enhanced long-term returns for our stockholders. I believe these actions, in totality, will position us to successfully navigate the COVID-19 pandemic and emerge in an overall stronger competitive position. Before I hand things over to Stefan to go through our region and brand initiatives, I would like to thank Dan Grieder, who served as CEO of Tommy Hilfiger and PVH Europe for all his contributions to the company over his many years of service. I also want to congratulate Martijn Hagman on his promotion, and I am confident that Martijn will successfully lead Tommy Hilfiger and PVH Europe into the future as we capitalize on the significant future growth opportunities for our business. And with that, I'd like to turn it over to Stefan.

Thank you, Manny. Today, I would like to give you an update on our regions and brands. As Manny mentioned in his introduction, this has been a very different kind of quarter, where all of our brands and regions have been heavily impacted by the COVID crisis, with our stores and our wholesale customers' stores closed for six weeks on average during the quarter. Mike will later on the call share more details on how the numbers came out and give you an indication of Q2 trends. What I would like to share with you is how we are successfully navigating our brands and regions through the different phases of this crisis, what our key learnings have been, as well as sharing some of the green shoots that we're starting to see when gearing up to drive an accelerated recovery and to win with all brands and consumers post-COVID. From a regional perspective, our regions came into this crisis at different times. Asia and China, in particular, came in first and also recovered first. Then Europe was hit, followed closely by North America. Starting with Asia and China, they have provided us with the best learnings for the recovery phase in our other regions. Currently, all of our stores in China are open. Since China started to reopen, we have seen strong week-over-week improvements across the board. For example, our reopened stores are now approximately flat to last year, and our digital business is up triple-digits for both Calvin and Tommy. We're experiencing very strong conversion and higher units per transaction in stores with lower overall traffic trends. To drive transactions during the store closures, we offered virtual clientelling and engaged with VIP shoppers through WeChat. We livestreamed our brands to connect with consumers, which led to significant sales growth versus a typical day. Then Europe followed closely after Asia, where we have also seen strong week-over-week improvements. Currently, about 85% of our stores are open, and trends are very encouraging. We're planning for the U.K. market to reopen early next week. As we reopen stores, we have experienced strong conversion and favorable full-price trends with fewer promotions than planned. We have faced lower overall traffic trends, but these have improved more in smaller cities versus big cities as consumers are shopping closer to home. We have applied a data-driven approach to offer targeted promotions to increase sellouts while also keeping margins relatively stable. Overall, we believe that Europe's recovery will be about one calendar quarter behind the trends we're seeing in China. For wholesale, our full order books that were up mid-teens pre-COVID are now down low to mid-teens for each of our brands as we work with our partners to consolidate product systems to better match demand and to end the year as clean on inventory as possible. Lastly, regarding North America, stores here were the latest to reopen. We will be at 85% reopen by next week. We are pleased to see how consumers are returning. In our own stores, smaller locations are performing very well. Our domestic consumers are over-indexing, and it will be critical to target that domestic consumer for the remainder of the year as international consumers are traveling much less, and we don't expect this trend to materially improve this year. Our wholesale partners saw business improve with the introduction of curbside pickup and ship-from-store options. Digital conversion is significantly higher than last year, and we are attracting many new consumers shopping online. We believe that the recovery in North America will follow a slightly slower trajectory than Europe, and we expect promotions to be elevated. Similar to Europe, our wholesale partners stopped accepting shipments in March, which has been a headwind to the business, and we have only seen replenishment orders start flowing again. Across regions and brands, when we were hit by the COVID crisis, we had a very strong focus on short-term navigation through the immediate crisis. The health and well-being of our teams and consumers, cash preservation, expense reduction, and inventory decisions to adjust to the current demand situation were our top priorities. We're using multiple approaches to manage our inventories, such as canceling orders, repurposing and reflowing goods, re-platforming fabrics, consolidating future collections, and packing away certain core items where we can achieve strong margins in upcoming seasons. In parallel to hunkering down from a cash cost and inventory perspective, we redirected our focus early on to demand creation to where the consumer was shopping. We supercharged our e-commerce channels across all brands and regions, both owned and operated, and we are collaborating very closely with Tmall, Zalando, and Amazon, among others, in ways that move us to engage with consumers in live events, product launches, as well as connecting our inventory between our bricks-and-mortar stores and our online platforms. What is exciting to see is that consumers have expressed strong demand for our brands across all digital platforms. A few examples: our own digital businesses had excellent performance during the first quarter. Calvin's digital revenues were up 40%, and Tommy's own digital business was up over 60%, with triple-digit increases in the second quarter to date. Our Calvin North America e-commerce business turned a quarterly profit for the first time in our history. In Asia, we furthered our partnership with Tmall by featuring a virtual exhibit for our CK One product launch, and our CK One Tmall Club Day saw strong consumer demand in Southeast Asia. In Europe, we accelerated the rollout of connected e-commerce with Zalando, and in June our ship-from-store penetration reached double digits for Zalando in April and May. In North America, our Amazon business benefited from significant growth in Prime memberships, and this month, we will participate in their summer sales for softlines as they move their Prime Day to October. In the product assortment across brands and regions, we have seen consumers accelerating towards essential product categories. There is a big increase in demand for our essential categories like underwear, loungewear, t-shirts, hoodies, activewear, and jeans. All these categories are core strengths of both brands. We have redirected major product introductions and collaborations to e-commerce, with some launched purely digital. Our CK One launch had an Instagram reach of 57 million people. We also launched our Tommy Jeans Luna Jeans capsule in a live stream partnership with Tmall, achieving over 45 million impressions. Lastly, this crisis has made it clear that our product lead times have come down across the board to better match inventory to current demand trends. Our marketing has also been redirected towards social and digital to reflect the time we are living in. For Calvin, we hosted monthly live stream sessions from WeChat using local talents in the campaigns. Calvin launched its prior 2020 campaign, #ProudInMyCalvins, across social media, digital platforms, and e-commerce in over 20 markets. Initial sell-through is strong, and the campaign and collection had a 89% increase in average consumer engagement. At Tommy, we livestreamed our spring collections with the ability for consumers to purchase directly from the event for wear-now products. Tommy also hosted multiple celebrity live streams on short video platforms that generated over 1.5 million views and helped convert both new and existing consumers to purchase. All our brands have refocused on engaging with consumers in a more interactive way than ever before. I would also like to take a step back and give some global brand highlights, starting with Calvin. Calvin Klein began the first quarter with strong brand health, including very strong global awareness. The Calvin Klein lifestyle is truly resonating with consumers during this time, particularly our underwear, loungewear, activewear, and wear-now offerings. We adapted our marketing message to reflect this through our At Home in My Calvins campaign. Our efforts were successful as we saw significant growth in new consumers shopping our sites, and we continue to focus on new consumer acquisition as well as retention and conversion. For example, our CK One launch, which is a replay of the iconic genderless collection from the 1990s, caters to the younger consumer and now represents 10% of our CK underwear sales in Asia. Before the COVID crisis hit, we had already started working on setting the forward-looking brand direction for Calvin Klein. I am pleased to share that the team has completed this work, and we are looking forward to taking you through it in detail at a later time. So, I would just like to share that the evolved brand direction is built around going back to the iconic DNA of the brand and reconnecting it to the consumer and culture of today. It's focused on showcasing Calvin's unique strengths as one of the few authentic global lifestyle brands and will be a very strong foundation to drive consumer engagement and profitable growth for the years to come. The response from our teams and external collaborators has been very strong. Moving on to Tommy Hilfiger, Tommy entered 2020 with a strong underlying momentum. I would like to start by welcoming Martijn as our COO for Tommy Hilfiger Global and PVH Europe. Martijn has been the co-pilot behind the Tommy Hilfiger brand and business success over the last few years. He is a very strong leader and value creator. Tommy Hilfiger was recognized in the Top 20 on a leading business index for the top 50 luxury brands, which ranks brands across consumer sentiment, digital presence, omni-channel performance, sustainability, and overall performance. We also have exceptional sell-through of collaboration launches throughout the quarter, including the Tommy Jeans Luna Giraffe capsule, which shows that our differentiation is a true advantage, especially in a market like China. Moving on to the Heritage division, we are pleased to announce the completion of our sale of the Speedo business to Pentland in April for approximately $170 million. We will look for additional opportunities to streamline and/or exit businesses that are non-core. However, our Heritage Brands business was under significant pressure, although the online businesses from our wholesale partners represented a partial offset. The cash realization trend that's being accelerated by COVID is working for us in both Calvin and Tommy, but it's working against us in the more formal work product categories and Heritage. We are addressing these challenges by managing inventory levels more prudently, lowering our cost base, evaluating our store portfolio, and reviewing additional ways to optimize and streamline the business. Finally, as Manny mentioned, navigating through this crisis has made us even more aware of the unique strengths we have to build on coming out of COVID. We have two of the most iconic brands in the market globally, in Tommy Hilfiger and Calvin Klein, both with very strong global awareness as well as large, loyal consumer bases around the world. We also have a strong multichannel presence in North America, Europe, and Asia, and we are increasingly matching our reach towards where consumers are now choosing to shop. The crisis has made us move faster and get even closer to the consumer. What we have realized during this immediate crisis is that many of the key learnings from our work closely connect to what it will take to win post-COVID. Overall, we see that the COVID effects in our business reflect significant accelerations of existing underlying consumer market trends. An increased focus on e-commerce, product relevance, and consumer engagement will be core priorities as we drive towards an accelerated recovery. And with that, I would like to turn it over to Mike.

Thanks, Stefan. I want to briefly touch on the first quarter 2020 results and move on to the current state of the business. As expected, our business was significantly impacted by the COVID-19 pandemic as the majority of our stores and our wholesale partners' stores were closed for six weeks on average during the quarter. As a result of the widespread store closures, revenues from our retail stores were down approximately 50% to 65%, depending on the region. Shipments to our wholesale customers were sharply reduced as well, resulting in an overall decline of 41% in our global wholesale revenues. Our directly operated digital e-commerce businesses were fully operational during the quarter, and we experienced strong revenue growth in all regions, up 40% versus the prior year with double-digit to triple-digit revenue increases during the period while our stores were closed. This growth in e-commerce partially offset declines in our brick-and-mortar and wholesale revenues. Overall, our reported revenue was down 43%. Tommy Hilfiger revenues were down 39%, with international down 32% and North America down 51%. Calvin Klein revenue was down 46%, with international down 40% and North America down 54%. Heritage revenues were down 47%. In addition to the revenue decline, our results were under significant pressure during the quarter due to a $97 million increase in accounts receivable write-offs and inventory reserves, along with a significant deleveraging of expenses. We continued to pay certain retail associates for most of the time our stores were closed, and measures we are taking to reduce expenses didn't take effect until the end of the quarter. The unprecedented revenue and earnings decline as a result of the pandemic resulted in a loss per share, on a non-GAAP basis, of $3.03 for the first quarter. On a GAAP basis, due to the pandemic and reduction in our market cap, we took non-cash goodwill and intangible asset charges of $933 million. We also took non-cash impairment charges totaling $16 million related to store assets and $12 million related to an equity method investment. Moving on to the current state, our second quarter and full year 2020 results will continue to be significantly negatively impacted by the COVID-19 pandemic, and we expect that our revenue decline in the second quarter will be more pronounced than in the first quarter. The duration and extent of the pandemic remains highly uncertain. Our results could be impacted in ways we are still not able to predict today and, as a result, we are not in a position to issue more detailed guidance for the second quarter or for the fiscal year. We are continuing with our phase three opening of our stores in the U.S. and around the world. By mid-June, over 85% of our stores will have reopened globally. Although most of the stores are operating with reduced hours and occupancy levels, sales remain down across all regions on a year-over-year basis, although traffic and sales trends are improving each week. In the second quarter to date, we're seeing same-store sales for our brick-and-mortar stores that have reopened running down about 25% from North America, down 20% for Europe, and down 25% for total Asia, with China flat, and China was the first country to close and the first to reopen during the pandemic. In all, during the second quarter to date, for our total direct-to-consumer business, including stores that were closed for a portion or all of the second quarter to date and our directly operated digital commerce sites, we are running down about 65% for North America, down 25% for Europe, and down 11% for total Asia, but China is up 25%. Additionally, most of our wholesale customers have now reopened the majority of their locations across all regions. However, due to the significant levels of inventory that remain in stores, the majority of our North American and European brick-and-mortar wholesale partners stopped accepting shipments beginning in March, which has not materially improved into the second quarter. In response to the pandemic, we are taking every proportion to reduce our expenses and working capital. These actions started in mid-April and will continue into the second quarter and the rest of the year. We are reducing payroll costs, including salary and incentive compensation, furloughs, decreased working hours, and hiring freezes, along with taking advantage of applicable government relief programs. We are eliminating or reducing other discretionary and variable expenses, including marketing, travel, consulting, and creative and design costs. We are also tightly managing inventories, including reducing and canceling inventory commitments, redeploying basic inventory items to subsequent seasons, and consolidating future collections as well as negotiating extended payment terms with our suppliers. I want to emphasize that our priority has been on cash flow and liquidity. We ended the quarter with $1.8 billion of liquidity, including cash of approximately $800 million and $1 billion of available borrowings under our revolving credit facilities. As previously announced, we moved quickly to reinforce liquidity in response to the pandemic, suspending share repurchases under our stock repurchase program in March, following approximately $110 million repurchase we completed in the first quarter, and halting our cash dividend beginning with the second quarter. We entered into a new $275 million 364-day revolving credit facility and issued an additional €175 million of 3.625% senior notes due 2024. Importantly, we obtained a waiver of the leverage and interest coverage covenants under our senior credit facilities through and including the first quarter of 2021. We are cutting capital expenditures to approximately $190 million in 2020 from $345 million in 2019, with capital expenditures only for minimum requirements in our retail stores and for projects that are currently in progress related to our systems and warehouses. Additionally, we closed on the sale of our Speedo North America business to Pentland Group PLC, the parent company of the Speedo brand, in April for proceeds of about $170 million. We will give guidance for future quarters in the year once there is more clarity on the impact and duration of the COVID-19 pandemic. And with that, operator, we will open it up for questions.

Great. Thanks. Good morning to everybody. I guess, my first question is on the virtual composition on the other side of COVID-19. You referenced in the script kind of good trends about leisure comfort, curious how durable you see that? How is Denim performing, particularly with your expectations? And then on the Heritage business, does it still make strategic sense in a post-COVID world?

Yes, so Erinn, when it comes to the cash utilization trend in product, it's a trend that we saw pre-COVID, and we see the COVID effect accelerating that. Everything we see in the data and how the consumer is shopping indicates that this trend will continue. We are excited about this because the big cash product categories like underwear, t-shirts, hoodies, including denim, are all core to our two big brands. I guess on the Heritage side, Erinn, I would say we're taking a hard look. You could see that in the decision to sell the Speedo business, which was a good business, but it just didn't fit strategically with where we are moving the company. We will continue to look for opportunities to prune the Heritage business back and streamline it in the future as we are not seeing sufficient return on our investment and return on invested capital.

Okay, that's helpful. My second question is regarding the strength of digital. Have your perspectives on your retail footprint or your own retail changed? Do you anticipate being a net closer or a net opener of stores in the coming years? Additionally, could you share any insights on tourist stores, as I know they have been impacted more? How do you see their role evolving going forward?

I think when we look at the store portfolio, we are taking a hard look at how that needs to develop. I think those stores that were cash flow positive and marginally profitable six months ago, are facing pressure from the pandemic and the shift to digital, indicating the need to reevaluate. This will particularly be applicable here in the United States and, to some degree, in Europe. In Asia, where we are underdeveloped from a retail point of view; in China specifically, there seems to be a brick-and-mortar opportunity there. So I think there will be net openings in Asia. In the more mature markets, we will likely be net closers over time. Regarding tourist stores, as you might expect, we're seeing significant results in our permanent population stores in smaller cities that are driven by local consumers, whereas tourist locations like Orlando, Las Vegas, and major cities in Europe are particularly affected without that international tourism. Those stores are down significantly more compared to our local population stores, which are performing closer to flat to slightly positive.

Thank you so much.

Hi, good morning, everybody. Just from the perspective of inventories, I was wondering if you could give us your view on the progression towards supply/demand getting back in balance, both within your business, but also within many of your customers. Just in terms of a timeline or how you really see it playing out? And then the second question is just can you talk a little bit about distribution around door closures and wholesale door closures and how you're approaching that as you think through the rest of this year and into next year?

Yes, I'm going to let Mike speak to the inventory question, and I'll come back on distribution.

Bob, in each region, we have this period of closure. Goods were in the pipeline, goods were flowing, and you see that in our inventories. Our inventories are not reflective of the second-quarter demand; our balances are reflective of goods that we will be liquidating throughout the year. Our expectation is that we will get cleaner each quarter as we move forward this year, but we will carry some goods over. Core spring products like white t-shirts and underwear are core items that don’t change much, and we believe can sell next year. We expect to carry, pack, and hold about $250 million of inventory, so I don't think you will see the inventory truly reflect the math until sometime in the first half of next year.

I think, Bob, when you think about distribution, we’re closely watching the wholesale channel and department store channel that we sell into globally, particularly in Europe and North America, as it obviously faces tremendous pressure. I think we will inevitably see store closures and contraction in business. We've already seen some bankruptcies, and we'll likely see more consolidation. It’s clear to us that this is not an environment in which we want to get too far ahead of ourselves regarding inventory and demand for the fall. We're cautiously planning based on what we're seeing in our order books. We're not planning on excess replenishment within the season. As Mike mentioned, we have plenty of core inventory to support the most profitable sides of our business. But when it comes to fashion sportswear, we are really buying tightly and that will continue as we monitor both the virus impact as well as the ongoing effects of the pandemic.

Good morning, guys. Thanks for all the detail. I think Manny said, in relation to your comment that calvin.com just turned profitable. As we look at your overall digital business, I know you've been ramping up your digital efforts over recent years; historically, you really relied on your wholesale partners to capture the digital consumer for you and all the spending that it takes to drive traffic to the sites and the digital CapEx that goes with it. Can you talk a little bit about how quickly you think you have been able to turn the corner in engaging directly with consumers online and how that is affecting your overall gross margins, SG&A, and operating margins?

The impact on profitability from our e-commerce business, both our own sites and the pure-play digital players, has been significant. These wholesale partners are some of our most profitable businesses. Our teams have built efficiencies in our e-commerce channel that have significantly improved profitability. So, the e-commerce business did not negatively affect our profitability in the first quarter at all. The decline in profitability was driven by reduced sales volume and the expense initiatives that began late in the first quarter as stores closed, and we continued to pay people for a month before we started furloughs and other initiatives. You will see these start to align in the second half of the year, and the expense ratios will improve. Our margins were impacted by reserves we took totaling about $100 million, a significant portion of that towards future markdowns planned for the second and third quarters.

I guess just as a follow-up to that. At scale, is that business going to be your own digital business? At scale, is that going to be a positive driver for your long-term margins? I know at a certain point, it’s going to have a very highly variable cost structure. I guess—and I do want to ask one follow-up—I’m curious about the— we’ve heard a number of wholesalers packing away inventory, and you said about $250 million, what’s the response from the factories while they’re seeing you and your peers packing away inventory, which inevitably means they’re going to have capacity issues over the next year? Do you need to support them in any way to make sure the capacity is there when you need it? And do they need to start taking physical assets out of the system for the new normal? How should we think about that?

Okay. So, Mike, do you want to take the second point regarding suppliers and how we’re trying to support them?

Yes. We are working with our suppliers everywhere to keep them healthy and on track. Our supply base in general consists of larger players rather than smaller players, so there is some stability there. We do have financing programs that provide us some flexibility with vendors, but there is pressure in the overall supply base as people have been canceling orders and doing pack and hold. The only offset has been that many factories were closed, and demand has been down, but we now see our factories back to pretty much normal levels, though they may still deal with social distancing and other pandemic-related issues impacting efficiency. We are working together to communicate effectively and adjust as needed. However, I don't believe it will require significant material support above and beyond what would be in the normal course.

Regarding the e-commerce question, the redistributions choices we will make going forward will depend on where the consumer is heading. We see great opportunities for both owned and operated e-commerce. As Manny mentioned, our third-party e-commerce partnerships have proved extremely profitable. Scale will continue to improve profitability in those channels, alongside continuous improvements in execution, and we are pleased to see how our teams across the world are leaning into e-commerce. There is considerable demand, and we see profitability improving significantly in that channel.

Thanks, Larsson.

Great. Thanks so much. Just a follow-up on the comments about gross margin and the sort of $97 million on inventory and accounts receivable that was taken—the charge taken this quarter. And also the fact that on SG&A, some of the actions that you took came at the end of Q1. Can you just give us a little bit more directional color on how you see gross margin in Q2 playing out? And how you see SG&A dollars trending in Q2 relative to where they ran in Q1?

On the gross margin front, I think we're going to see a leveling off year-over-year. We should expect to see a positive impact based on the favorable response we are seeing as our stores open. We're not needing to be as promotional as we anticipated. We are encouraged and expect a positive impact overall compared to the first quarter. Additionally, if you think about our business from a gross margin perspective, the mix of business in the second quarter will shift more towards a retail model given that wholesale will be under more pressure, which also positively impacts margins overall, but will still be offset by the overall promotional nature of the environment as everyone clears spring/summer inventory from the second to early third quarter.

In terms of expenses, as you noted, the spread between prior year and this year was only partially recognized in Q1. In Q2, you will see that spread get larger as we realize additional savings, having the benefit of a full quarter rather than a partial quarter.

Thank you. Good morning, everyone. Regarding the topic of product lead times that Stefan mentioned, how do you frame that in terms of the target and what it means for margins and inventory levels going forward? Thank you.

Stefan, can you summarize that?

Dana, thank you for the question. It's an important one and one that has become very clear coming out of our crisis work. We will continuously improve lead times. There are multiple components regarding lead times. There is core replenishment that can get us down to one to two month replenishment. Then there are reactive capabilities to see when demand trends increase to adapt accordingly. Lastly, we need to enhance overall product development lead times. We are working to digitally enhance our supply chain and sourcing and product development to reduce lead time. I will share targets as they become concrete, but it's evident that a combination of these three strategies will improve our position.

And Dana, I'll add that this is a priority area that Stefan has been working on with our teams. I think pre-pandemic we were optimistic about seeing some benefits in the second half of 2020. However, this year, those benefits may be muted due to excess inventory requirements. But as we head into 2021, we could start to see some benefits that Stefan has brought to the company that should enhance margin and reduce inventory carrying costs over time.

Thank you.

Next question?

Thank you for taking my question. I appreciate that. There are lots of questions with regard to the reshaping of your distribution footprint, given the COVID crisis with wholesale closures being accelerated and the ship online accelerated. Can you help us give them a bigger picture thinking about what this all means from a growth algorithm perspective, where wholesale is a pretty high EBIT margin channel? But e-commerce sounds like it’s strengthening? And just how you're thinking about it? Thank you.

Well, Heather, I think as Stefan outlined very well, we need to follow where the consumer is moving. Trying to give you and our investor group specific guidance about sales growth, and what parts will shrink and grow in this environment is quite complex. It’s evolving very quickly. We are reacting fast, and using combined inventories across wholesale, retail, and digital channels has allowed us flexibility to adapt. However, we are adopting a more cautious approach for the next six to nine months since we cannot afford to chase growth at any cost. That said, we do expect significant growth in our digital segment from last year, which already saw a good year in 2019, but this year's growth will be driven by demand and channel pressures.

Yes, to build on Manny's answer, we start with the consumer. They increasingly shop across all channels. There are e-commerce and physical aspects, and we'll see both continue to exist. As we reopen our stores, the consumers are coming back, and they are exceeding our internal forecasts. Thus, it’s important to manage the fund allocation to match consumer demand.

Thank you.

Good morning. Thank you. Stefan and Manny, you both talked about being where the consumer is. And it sounds like in the quarter, as you emphasized those omni-channel capabilities, you stood up some functionalities like ship-from-store and curbside pickup relatively quickly. I'm just wondering, are there systems investments that still need to be made to support those omni-channel activities over the long term? And how should we think about those? Thanks.

You're correct. This quarter, the crisis drove us to move quickly in connecting digital and physical stores, and we were pleasantly surprised by the speed of that adaptation. We have to continuously invest in these capabilities. The ship-from-store capability was a lower-cost investment than we initially expected, but we will have to keep investing to grow these functionalities in the future based on consumer behavior.

I would just add that our CapEx guidance was set at $190 million, and that includes investments for e-commerce and omni-channel capabilities, and we are reallocating funds from other business areas to support this.

Longer term, the $190 million is significantly lower than our historical spend, so we are prioritizing those areas. However, as we move forward, our capital expenditures will be in line with our previous percentages of sales.

Great. Thanks. Manny, could you discuss any material differences in demand recovery from here that you're planning for as we think about Europe versus the U.S. based on what you have seen so far on the openings? And with that, what’s the level of promotional activity that you are seeing necessary to drive demand in Europe versus the U.S. today?

Regarding promotional levels, we usually see lower promotions in Europe than in the United States, and that hasn't changed. In Europe, we see strong full-price selling overall and have really targeted our promotions efficiently. In the U.S., as stores reopened, we initially started strong from a promotional perspective. However, we were able to moderate that initial approach, as demand exceeded expectations and we have adjusted promotions accordingly. So, compared to last year, the promotional levels in the U.S. are slightly higher, but not nearly as aggressive as we initially anticipated moving forward.

That’s great color. Best of luck.

Thank you. We appreciate your participation. Have a great day.