Steven Madden Ltd (SHOO) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Q1 2020 Steven Madden, Ltd. Earnings Conference Call. (Operator Instructions)

Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Danielle McCoy, Director of Corporate Development and Investor Relations. Thank you. Please go ahead.

Thanks, Jimmy, and good morning, everyone. Thank you for joining our first quarter 2020 earnings call and webcast. Before we begin, I'd like to remind you that during our call, we may make certain forward-looking statements as defined in the federal securities laws regarding our expectations or predictions about the future. Generally, these statements relate to projections involving anticipated revenues, earnings or other aspects of the company's operating results. Because these statements are based on current assumptions and expectations, they involve known and unknown risks, uncertainties and factors not within the company's control. And as such, our actual performance and results may differ materially from these statements. Our annual report and other reports filed with the SEC from time to time include detailed discussions of the risk the company faces, and we urge you to refer to these.

Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company's business operations and results. Such forward-looking statements with respect to the COVID-19 pandemic include, without limitations, statements with respect to the company's plans in response to this pandemic.

At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. Due to the dynamic nature of these circumstances, statements made on this call regarding the company's response to the COVID-19 pandemic could change at any time. Any forward-looking statements represent our judgment as of the time of this call and cannot be relied upon as current after today's date. We disclaim any intent or obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable law.

The financial results discussed are on an adjusted basis, unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release.

Joining the call today is Ed Rosenfeld, the Chairman and CEO of Steven Madden. With that, I'll turn it over to Ed. Ed?

Thanks, Danielle, and good morning, and thank you for joining us today. To all those listening, I hope you and your loved ones are healthy and well. The COVID-19 pandemic is obviously having a profound impact on people and communities around the world. At Steve Madden, our hearts go out to all of those who have been affected, whether as a patient, family member or a friend. We also wanted to express our gratitude to the health care workers and first responders on the front lines of the fight against COVID-19 as well as to all the other essential workers.

Since the crisis began, our top priority has been protecting the safety and well-being of our employees and the broader community. And I'm proud of both the steps we've taken to safeguard the health of our employees and our customers, including all our U.S. stores on March 15 -- including closing all U.S. stores on March 15 and how we've supported our communities through donations of medical-grade masks to hospitals, nonmedical face coverings to homeless shelters, meals for health care workers, financial assistance for organizations combating hunger and more. Beyond that, we have been laser-focused on taking the right steps to ensure the long-term viability and strength of our business, including maintaining and enhancing our strong financial position, so we can weather the storm as well as positioning the company to win going forward in, what is sure to be, a significantly changed retail landscape.

We entered this crisis with an exceptionally strong balance sheet with $228 million in cash and marketable securities and no debt as of March 10, 2020. Nevertheless, when the severe impact of COVID-19 became clear, we quickly took a number of precautionary but significant measures to preserve liquidity and enhance financial flexibility. We suspended our quarterly cash dividend and our share repurchases. We significantly scaled back all nonessential operating expenses, capital expenditures and inventory receipts. We made difficult decisions with respect to our people, including furloughing a significant portion of our employees as well as temporarily reducing the salaries of all remaining employees with salaries greater than $100,000. Finally, we drew down the maximum $50 million from our existing credit facility, and we began the process of securing a new larger asset-based revolving credit facility. We are well down the path on that effort and hope to close on the new ABL within the second quarter. These measures, when combined with our already rock-solid financial foundation, leave us well positioned not only to navigate this crisis, but also to play offense when conditions normalize.

Now let me turn to our first quarter results and current business trends. After a strong 2019, we got off to a good start to 2020. Through early March, we were on track to exceed our internal forecast and analyst expectations for first quarter on both the top and bottom lines. And we were very optimistic about the balance of the season due to the outstanding early reads we had on spring product, particularly in our Steve Madden Women's footwear business. Then, of course, everything changed. Stores closed, and our business materially weakened. For the quarter, consolidated revenue declined 14% and diluted EPS decreased 62%.

Looking at our business by segment. In wholesale as of March 10, revenue for the quarter was trending up low single digits on a percentage basis, but with the vast majority of our customers halting almost all deliveries for the back half of March. We ended the quarter with a 13% decline in wholesale revenue compared to the prior year, including a 15% decrease in wholesale footwear and a 5% decrease in wholesale accessories and apparel. In Retail, revenue through the first 2 months in the quarter was trending up mid-single digits on a percentage basis, including a low single-digit comparable store sales increase. But after a sharp decline in March, we ended the quarter with Retail segment revenue down 16% versus the prior year period.

Turning to the current quarter. In April and May, wholesale revenue is trending down approximately 75%. The majority of our shipments the last 2 months have been private label products to the mass merchants that have kept their stores open throughout the crisis. Branded wholesale revenue has been modest. We expect branded wholesale revenue to start to build slightly in June with more meaningful improvement beginning in July. In our Retail segment, revenue quarter-to-date is down nearly 60%. Virtually all our sales have been in the e-commerce channel, which has been a real bright spot. In the last 3 weeks of March, we saw pressure on our e-commerce revenue as customers pulled back their spending on fashion and focused on essentials. But beginning in April, we experienced a strong rebound and have since seen outstanding year-over-year growth. Our e-commerce revenue is up approximately 75% for the quarter so far.

Bricks-and-mortar Retail revenue quarter-to-date has been minimal as all our retail stores, with the exception of one joint venture store in China, have been closed most or all of the quarter. We opened our first 15 stores in the United States on May 20. We plan to open another 8 stores in the next couple of days, which will leave us with 23 stores open and 106 stores still closed in the U.S. Outside the U.S., we have 38 stores opened, and 49 stores remain closed.

Now let's look to the future. We cannot minimize the challenges we are facing. Clearly, our organization is being tested like never before. But my confidence in our ability to get through this and emerge a strong and thriving company is unwavering, and it's a function of our unique advantages as a company. First and foremost, we have an extraordinarily strong balance sheet, which is important not only because it allows us to sleep at night knowing we can endure whatever comes at us until the crisis is over but also because it positions us to play offense as we move ahead in contrast to some of our competitors who may be constrained in how they can invest or compete going forward.

Second, we think brands will be increasingly important going forward, and we have some of the strongest in our industry, particularly our flagship Steve Madden brand. Steve Madden had tremendous momentum coming into the crisis, and we've continued to see strong demand for the brand and its products during the crisis in the channels that have been open. We are also encouraged by how the brand performed during past economic shocks. During the financial crisis and the years that followed, Steve Madden was a significant outperformer and took meaningful market share as the brand's strong price value proposition and its offering of designer styling at accessible price points became even more compelling for consumers.

Speaking of value, as we think about the retail landscape going forward, it's clear that mass merchants and other value price retailers are positioned as likely share gainers. Unlike many of our branded peers, we have significant access and exposure to the mass channel through our private label business. In 2019, we had over $300 million in combined revenue with the 2 largest mass merchants. And we are working closely with each of them to explore opportunities to further expand our relationship as they seek to press their advantage and capture additional market share going forward.

The other channel that's a clear beneficiary and share gainer in the current environment is digital, and we also like how we're positioned there. Prior to the crisis, we were on a strong upward trajectory in our company-operated e-commerce business with 2019 revenue increasing nearly 60% and profitability up about 170% versus the prior year. And as I mentioned earlier, that business has accelerated further during the crisis and is currently running up approximately 75% for the quarter-to-date period. We are leaning in aggressively to our e-commerce growth initiatives, including increased investments in digital marketing as well as tests of new features like try before you buy, free 1-day and same-day delivery for $5.

Finally, we think our proven business model will help us to mitigate risk in this uncertain environment and serve as a key advantage relative to the competition. As the industry works through the fallout from the crisis and the resulting glut of inventory in the market, our industry-leading inventory turns of approximately 8x a year should enable us to rightsize inventory ahead of our peers. And history has shown us that when the large wholesale customers are seeking to manage their own inventories down, they tend to rely on vendors that can be nimble and work close to season, which plays to our core strength in speed to market.

So while we are clear eyed about the near-term challenges we face, we are confident that we are well positioned to navigate the crisis and to restore momentum and return to profitable growth when conditions normalize.

Before I turn it over to Danielle to walk you through the financial performance in Q1 in more detail, I want to take a moment to thank our employees for their extraordinary efforts during the crisis. They have inspired me with their dedication, spirit and resilience in the face of adversity, and they have my sincere gratitude.

And now I'll turn it over to Danielle.

Thanks, Ed. For everyone joining the call today, I hope that you and your families are staying safe and well during this challenging time.

In first quarter, our total revenue decreased 13.6% to $359.2 million compared to prior year total revenue of $415.8 million. Our wholesale segment declined 13% to $302.7 million compared to $348.1 million in the prior year period, driven by significant order cancellations in the latter part of March due to the impact of the COVID-19 pandemic. Wholesale footwear revenue declined 15% to $235.1 million, and wholesale accessories and apparel revenue declined 5.4% to $67.7 million. As of March 10, prior to the impact of COVID-19, each of those segments were trending up low single digits for the quarter compared to the same period last year.

In our Retail segment, revenue decreased 15.8% to $52.9 million due to the closure of all of our brick-and-mortar stores for the back half of March. Despite a downturn in our e-commerce business the last 3 weeks of March as customers shifted spending from fashion to essentials, our e-commerce revenue was still up mid-teens for the quarter. And as Ed mentioned, e-commerce bounced back strong beginning in April. We ended the quarter with 224 company-operated retail stores, including 62 outlets and 8 e-commerce stores as well as 30 company-operated concessions in international markets. 155 stores remain closed at this time.

Turning to our Licensing and First Cost segments. Our Licensing royalty revenue, which is now included in total revenue, was $2.2 million in the quarter compared to $2.5 million in last year's first quarter. First Cost commission income, which is also now included in total revenue, was $1.2 million in the first quarter of 2020 compared to $2.4 million last year. Consolidated gross margin in the quarter was 37.2% compared to 38.9% in the prior year. We took $11.7 million in inventory reserves as a result of the COVID-19 pandemic, which impacted consolidated gross margin by approximately 330 basis points. Wholesale gross margin was 32.5% compared to 34.5% last year due to the COVID-19 inventory reserves. Retail gross margin was 59.8% compared to 58.5% in 2019 due to a benefit recognized in connection with the modification of company's loyalty program, partially offset by the COVID-19 inventory reserves.

Operating expenses for the quarter increased to $119.3 million or 33.2% of total revenue compared to operating expenses of $116.8 million or 28.1% of total revenue. Excluding the newly acquired GREATS and BB Dakota businesses, operating expenses were down compared to the prior year. It should also be noted that while we took significant action to reduce payroll and scale back nonessential operating expenses, most of these actions did not go into effect until the second quarter of 2020.

Operating income for the quarter totaled $14.2 million or 4% of total revenue compared to last year's first quarter operating income of $45.1 million or 10.8% of total revenue. Our effective tax rate for the quarter was 15.2% compared to 22.6% in the same period last year. Finally, net income attributable to Steve Madden, Ltd. for the quarter was $13 million or $0.16 per diluted share compared to $35.1 million or $0.42 per diluted share in the first quarter of 2019.

Moving to the balance sheet. Our financial foundation remains strong. As of March 31, 2020, we had $245.4 million of cash and marketable securities and $29.1 million in debt. Inventory totaled $102.3 million, down 11.3% compared to the prior year figure of $115.3 million. Our consolidated inventory turn for the last 12 months ended March 31, 2020, was 8x, and our CapEx in the quarter was $3.3 million. During the quarter, we repurchased approximately 879,000 shares for $29.1 million, which includes shares acquired through the net settlement of employee stock awards. As mentioned in our 8-K released on March 30, we have since suspended share repurchases as well as our quarterly cash dividend in order to maintain ample liquidity and financial flexibility during this uncertain environment. However, we remain committed to returning cash to shareholders and expect to resume both share repurchases and the quarterly cash dividend once the environment normalizes.

Last, given the significant uncertainty related to the COVID-19 pandemic, we withdrew our 2020 revenue and earnings guidance on March 18 and will not provide guidance at this time.

Now I'd like to turn it over to the operator for questions. Operator?

(Operator Instructions) Our first question comes from Camilo Lyon with BTIG.

Ed, I was hoping you could give us an update on your current inventory position, both owned and at Retail and any comments you could provide on overall channel inventory. And then I have a follow-up, please.

Sure. Well, look, the plain and simple answer is we have some excess inventory, and there's some excess inventory in the channel. And I think that goes for every vendor and retailer in the industry right now. Anytime you have a season that is essentially stopped in its tracks without warning, you're going to end up with some excess inventory. The good news is I think that we're likely in a much better position than most vendors, most brands, and that's a function of our inventory turn. As you know, we turn our inventory 8x a year.

In the wholesale channel, it's actually about 10x a year or even faster than that. So I think that we're going to be -- we're going to have less excess inventory than our peers, and we should be able to work through that and get that in line with sales trends relatively quickly compared to most.

Great. And then to that point, maybe you can talk through how your fall orders are unfolding and how you're positioning your inventory buys. And then just following up on your comment on working through your excess inventory. Is there a change to how you're flowing your goods now? And is there an impact to -- or what impact might that have on the selling season? In other words, will your inventory continue to flow through maybe past the point of when it typically would, therefore, extending the season, the selling seasons?

Sure. Yes. Maybe I'll take those in reverse order. Yes, we are flowing some spring/summer goods in a little bit later than they would otherwise normally arrive. And the fall season itself, I think all the deliveries are going to be pushed back on average about a month. So we will -- we and the retailers will be looking to extend the spring/summer selling season a little bit before diving into fall. In terms of fall, look, I'm not going to quantify it. And -- but again, it's -- I think it's pretty widely understood that retailers are planning fall conservatively and open-to-buys are down. We have gotten indications from our key retailers that we should do better than our competitors. But again, that means our planned decline is smaller than what they're seeing -- than what they're planning overall. It's still a decline.

Great. And I guess just on that point, and I'll turn it over. So if you're -- if orders are now starting to come in at a negative rate, as you would expect, as everyone is trying to work down through their inventory that they have on hand, and there's low visibility into the demand picture for fall and holiday, what are the discussions that you're having with your factories? Are you staging inventory? Are you taking any sort of steps to build to order? Or are you building any spec inventory? Or how are you positioning that if we use what's happened in March, April and May as guideposts with respect to early cancellations? And it sounds like you got some of those cancellations that were reinstated for the spring season. So how do we think about the overall picture and what you are planning to do with what looks like to be, I guess, pretty significantly down orders in the back half?

Yes. Look, we're buying according to those plans for fall. So I think our fall inventory should be in line. The inventory issue is really the spring goods. And we're obviously working through that with our -- of course, with our factory partners, but also working through that on our end as to the plans for disposing that inventory. And our goal is to be through all that seasonal inventory by the end of the year. That's the plan.

Our next question comes from Matthew Degulis of KeyBanc Capital Markets.

So I view Steve Madden as a very social event-driven business. Customer wants to look good and on-trend and reaches for a pair of Steve Madden. So my question is, what can Steve Madden do to meet consumer needs and wants when there are very few social events on the calendar? Any major shifts in product categories or channels is what I'm getting at.

Yes, it's a good question. And look, one of the things that you've heard me say over the years and something that we think is the strength of our brand is that we are not known for one category or type of footwear, we're known as the on-trend player and the player that provides whatever product is of the moment. And we have the permission from the customer to play in all categories. So we're not the sandal player or the boot player or the dress shoe player. We do whatever is trend right at the moment. And so we let the customer tell us where she wants to go and then we deliver the right products in that category, and that's what we're going to continue to do going forward. I think over the last few years, we've already been in the trend of increased casualization, and we've responded very well to that. And in fact, Steve Madden has grown throughout that period. And the way we did that was by taking fashion sneakers from low single digits as a percentage of sales to about 30% of our sales over the course of a few years. And so if that trend continues or if there are other changes in consumer preferences, we'll evolve the product assortment accordingly.

And one follow-up. So is it a good strategy to chase into these categories given your quick supply chain? Or are you better served by being conservative across the board?

Well, I don't think -- I think that chasing actually is a reflection of being conservative because, in my mind, when we use the word chase that means we don't make a big commitment upfront. We see what's working, and then we quickly respond to it, and we utilize our speed-to-market capability to "chase" into those trends. So I think to your point, no, we're not going to make big bets on categories upfront with big inventory purchase commitments, but we never do that, and that's the benefit of our model.

And our next question comes from Erinn Murphy with Piper Sandler.

I guess my first question is just around the reopenings, Ed. I know it's very early days, but can you just talk about what you've seen in the last week from traffic conversion once you have the opened pocket of stores you have, any key geographic differences as well?

Sure. Yes. Well, as you said, it's only -- in the U.S., it's only been a week that we've been open, and it's 15 stores. You're talking about just a little bit more than 10% of our store base. So not a lot of information to go on. But so far, the stores are running down about 60% in sales, although the last 2 days have been considerably better. So the last 2 days were down about 40%. So we do hope that we continue to see a build there. Although I just caution everybody not to put too much weight on results from 1 week in a little more than 10% of the store base or certainly 2 days. In terms of traffic and conversion, as you might expect, traffic has been even weaker than the down 60% but conversion has been up. In terms of geography, gosh, the one call out is we opened a store in Orlando. That's a very big volume door for us. On a normal basis, that's been, by far, our weakest store, probably not surprising, given there's a pretty significant attraction in Orlando that's not operating currently and not driving traffic. Our best store has been in Atlanta.

Got it. That's helpful. And then I guess just as you reopen stores, can you just talk about how easy it's been to pull back your labor? I know you've furloughed a significant piece of your labor. Are you having to compete with the unemployment benefit? And then just what other expenses are you having to incur you try to create the safest environment possible for consumers coming back to your stores?;

Yes, it's a good question. We have had some employees who've elected not to come back for various reasons. But generally speaking, we've been able to get the stores opened and on time with our schedule and have the appropriate staffing levels. In terms of expense, obviously, we're spending money on PPE. There's a training for the employees on the new safety measures and protocols. And we do have to make sure that we have the appropriate staffing in the stores because we're asking more of the store employees there. We're cleaning and disinfecting every 2 hours. There are additional protocols around return product or products that are tried on, et cetera. We are obviously monitoring the occupancy in the store. So typically, if you were seeing the kind of sales declines that we're seeing, you might be able to scale back more on labor in the store, but that's not possible given all that we're asking of the store associates.

Okay. That's helpful. And then just last question for me, just around the off-price channel. I'm just curious, I think that business traditionally for you has been made for. I'm curious what the appetite is for product as we go into the back half from the off-price channel?

Yes. I think it's a little early to say there. Those conversations are very much ongoing. So we don't know exactly what that's going to look like going forward. But I think that you're -- where you're going with your question is a reasonable hypothesis. I think that the off-price are certainly -- anticipate that they're going to have a lot of opportunity buys or closeouts available to them, and we have to expect that, that may depress upfront orders for some period of time.

And our next question comes from Sam Poser with Susquehanna.

I have a handful. Number one, I mean, you guys have been historically great at finding the current fashion trends and so on after being able to shop markets and really see what's happening. Given that you can't really travel and current trends may be more elusive than -- identifying those trends may be more elusive, how are you -- what are you doing to identify sort of the future trends into the fall and so on?

Yes. Well, we've really ramped up our testing, particularly on our own website. And so we're -- I would say, the volume of tests is as high if not higher than it's ever been. And we're putting things on preorder even before we have any production on them, so we can start to get reads, and we are, in fact, getting some very good reads on new products. So that's going well.

And then when you think about like how you're -- what it's looking like for fall potentially, is there a big variance between, let's say, brands like Women's Steve Madden and Blondo, arguably the 2 hotter -- the hottest brands versus other brands in the portfolio, be it Dolce Vita or Anne Klein and so on where there's just going to be a huge variance on what's going to lead to that, whatever it's going to be down, it might be down 40% in one and flat in the other? I mean, is that -- how's that going to -- how do you think that's going to work out from a general brand perspective?

Yes. Without commenting on the sample, the illustrative numbers you suggested, I do -- I agree, again, with your thought process that, yes, I think that the retailers are going to really lean on the brands that had momentum going in and the brands that are really important to them and that drive sell-through for them. So we certainly anticipate, as I mentioned earlier, that Steve Madden is going to do better than whatever the company or department average is in terms of the planned decline, meaning the Steve Madden brand. We have some smaller brands that may be more in line with the overall or even weaker.

And then lastly, can you give us an idea of what that -- what you e-commerce penetration was last year, and what you anticipate that being sort of -- where are you focusing on a more normalized level? And specifically, how you're moving marketing around, what results you've seen and how much more work you have to do and how much that may generally cost to do that?

Sure. So our e-commerce penetration last year, in our wholesale business, it was high teens as a percentage. In our Retail segment, it was high 20s as a percentage. So we're anywhere around 20% e-commerce penetration for the overall company in 2019. It's going to be considerably higher than that this year. I'm not going to speculate about where exactly that's going to land, but certainly, it'll be significantly higher. And we think much of the change in the acceleration in e-commerce will probably be sticky. We think some of the habits formed in the pandemic will be lasting and there will be permanent changes to consumer shopping behavior. So we're planning for a higher level of e-commerce penetration. In terms of investments, one thing I want to point out, while we've scaled back our overall marketing plans for the year relative to our original forecast, marketing is still planned up for us this year. That's because we really do continue to lean into our digital marketing initiatives and the marketing that we're doing to support our e-commerce business. And in fact, we accelerated that marketing spend -- we have accelerated that marketing spend during the crisis. We've seen some of our competitors pull back there, but we've really leaned in and are seeing some very strong return there.

Just to clarify, just to make sure I got this. You said 20%, does that mean last year, you did about $357 million in phone digital business?

No, no, I said -- okay, so there's -- we have a wholesale segment and a Retail segment. So in the Retail segment, which is 18% of our business, high 20s, I think it's 28% of that business, was done on our own e-commerce channels. But our wholesale business accounts for 82% of our business, and of those sales, I think it's high teens, I believe it's 18%, went to e-commerce retailers...

Like Amazon or...

Or toward e-commerce consumers. Yes.

And that's only for...

And also nordstrom.com.

Okay, included -- it includes some of the -- does that include a macys.com, too? Or is it just...

Yes, it includes all products that we believe went out the door through an e-commerce channel. Some of it's estimated because some of them, you don't have perfect information about what went to bricks-and-mortar and what went to e-com. So together roughly 19%.

So when you put out $90 million -- you did about $90 million in owned e-commerce.

That's about right.

Okay. Yes. I just wanted to clarify because -- and I mean if you think about $90 million last year and you think about where you'd like to see that, let's say, in 2 to 3 years, what do you think? Because you're going to get some acceleration right now off that.

It's going to be considerably bigger, but not going to put a number on it.

Our next question comes from Susan Anderson with B. Riley FBR.

I was wondering if you could give some more color on the private label business during this time. It sounds like they were the only one taking shipments. I guess I was curious, did this business perform better or worse or kind of in line with your expectations during this time? Because I think a lot of the mass retailers also had noted that apparel and footwear was also weak.

Yes. So it's a good question. So in terms of the retail sell-through on the private label products with the mass retailers, when the crisis first hit, so sort of mid- to end of March, we were seeing a significant decrease in our retail sales performance with those retailers. So our sell-throughs were down about 50% there. Again, they were seeing very strong overall sales, but as you pointed out, it was really -- I think customers were flocking to those retailers for essentials and passing up the fashion. But as we got into April and May, we've seen gradual improvement virtually every week, and now we're right in line in terms of sell-through with where we were a year ago with those retailers.

Great. And then, I guess, how are you working with your wholesale partners, I guess, particularly department stores just have to clear the inventory once the stores do open? It sounds like there were a number of cancellations. So are you expecting a ton of inventory to be cleared and will you have to provide markdown money? Then I was also curious how your wholesale partners, particularly those stores that were closed, the online business, how that's done during this time period. I guess, have they been able to sell-through a lot of your product on their own website?

Yes. So in terms of the performance online with the wholesale customers, yes, in almost every case, we've seen a very significant increase in their online business. Now we have to point out that it has not been enough to offset the impact from the store closures. So on an overall basis, we've still been down, but the increases online with the key customers have been very significant. In terms of how they're managing through their inventory, look, they've been selling it online. Many of them have been more promotional than normal online. I anticipate there's going to be an increased promotional activity in the stores as well as they're now reopening, at least for some period of time. Not going to get into the details of the markdown money discussion. But I think you can assume that for the spring season, when they've canceled massive amounts of goods on us, our willingness to provide markdown support is different than normal.

Great. That's helpful. And then lastly, as consumers start to get out, especially younger consumers as things open, are you seeing any of the fashion items start to pick up at all? And do you think there will be pent-up demand at all there or -- I guess, as consumers are still cautious, potentially still not going out and about a lot.

Yes. Well, we definitely are seeing some very strong demand for some of our products. And as I pointed out, it was doubly disappointing that we were -- had this crisis this season because of the very strong early reads that we had on spring product. But much of those products have continued to have very strong demand throughout the crisis online and now as stores are reopening. So we've got some really strong products, particularly in the sandal category, some very strong flat sandals, flat forms, wedges, et cetera. We've got some good sneakers, some good wedge sneakers. So we do have a number of products that are working. And there are some signs of pent-up demand, which we're hopeful drive some business.

Our next question comes from Tom Nikic with Wells Fargo.

I know that the cost-saving measures that you implemented, it probably wasn't enough to really affect Q1. Is there any indication or help you can give us as to how we should think about operating expenses for Q2? Like, I mean, maybe how much of a decline, like, we should be modeling or anything like that?

Given the -- given that we're not providing guidance, I'm not going to give a specific operating expense number for you, but I can try to give you some context that might be helpful. The first thing is we have variable expenses, which run 3.5% to 4% of sales, so you can apply that to your revenue assumption. And there still obviously be some savings there in Q2 given that the revenue will be down. For the year, we've taken -- we've also taken about $25 million out of our forecast in discretionary expenses. So that's things like bonus, travel, marketing, although I will remind you again that marketing is still up year-over-year. It's just up not as much as we originally planned, again, because of the digital marketing initiatives that we're continuing. But that's $25 million for the year, which is pretty much all in the back 9 months. And then the last thing is that about 70% of our expenses are -- historically are in what we call the fixed category. But in an environment like this, even expenses that you traditionally look at as fixed, you have to -- they have to, in some sense, become variable. And so for instance, salaries is something that's normally fixed, but we've already had about a $16 million savings in payroll in April and May due to the furloughs and the temporary salary reductions that we instituted. And that number will grow because we are, not at this point, bringing back everybody from furlough or restoring the salaries. I hope that's helpful.

That is helpful. And then a follow-up -- sort of, I guess, following up to Sam's question about e-comm. Your e-comm growth this year will probably be pretty strong, and I think you talked about the 75% growth quarter to date. Just as far as like infrastructure and I guess logistics and fulfillment perspective, do you feel like you have the capacity and the capabilities that you need? Or do you think that there will be some incremental investment that you'll need there?

I really feel good about how we're positioned there. As you know, this has been a key initiative for us for the last few years, and we've been seeing very strong growth in e-commerce. And we've really -- we've made a lot of investments, and we've really positioned ourselves to continue growing. As you know, a couple of years ago -- not quite 2 years ago, we implemented the free 2-day shipping. And we've been able to do that because of the fulfillment network that we have, which includes our multiple warehouses, California, New Jersey, Texas, et cetera, Florida, but also because we utilize our stores and fulfill product from our stores. And in fact, while this hasn't been the case recently due to the unusual environment, but in normal times, we fulfill the majority of our products or have fulfilled the majority of our products from our stores, and that enables us to get product to folks quickly and cost effectively. And so I do feel good about how we're positioned there and I think it's scalable.

Our next question comes from Laura Champine with Loop Capital.

I really appreciate the information about how sales are tracking by segment. And I know that on your own Retail side, you've only got a handful of stores open. But if we look at your wholesale doors, what percentage of those stores do you think are open today? And what's your expectation for more of a full opening?

Yes. So if we put the mass merchants aside because they've obviously remained open throughout the crisis, I would say, on average, if you look at our wholesale customers right now, it's about 50% of the doors are open. But that -- those numbers are climbing each week. And over the next month, I would assume that we're going to have the vast majority of our wholesale customer doors open.

Got it. And this is just a housekeeping thing, but on your Retail segment, the gross margin benefited from a change in the loyalty program. Can you spell that out what it was? And if you can quantify, that's helpful.

Yes. Sure. So we made a change to the loyalty program, moved away from a points-based system to a new system where there are tiers with various benefits, including promo codes that folks get after they purchase for their next purchase. And so we had some points -- point liability on the balance sheet, and those points went unused when we converted the program, and so we recognized a benefit to gross margin. That benefit was about, let me see here, 310 basis points to the retail gross margin in Q1. As we pointed out there, we also took inventory reserves in Q1 related to COVID-19 that offsets some of that. Was that it? Or was there a follow-up there?

Is there -- how much did the inventory reserves impact gross margin for Retail? So if it was 310 benefit, how much of that was offset?

Sure. Yes. 110 was the offset in Retail.

And our next question comes from Ross Licero with Telsey Advisory Group.

Just wanted to see, you said the e-commerce channel was up 75%. Can you give any color on the profitability you're seeing in that channel right now?

No, I don't think I can at this moment. I will say we have been more -- we remain profitable there, but we have been more promotional than normal. And as you've seen out in the market, with brands and retailers, we have increased the level of discounting and promotional activity, given the excess inventory that we have and frankly, just the competitive situation in the market. But we hope to return to more of a full price posture online later in the summer.

Okay. Great. And then just regarding the store portfolio, can you give a little color on the opportunities that you're seeing for refinement, whether it's to close stores or take advantage of some of the rent opportunities out there? And how are negotiations going with your landlords?

Yes. So look, I think you can assume that we were already taking a hard look at our store portfolio and evaluating whether or not we wanted to get out of some of our underperforming locations. And you can assume that this environment only makes us more inclined to close stores unless we can get a much more attractive rent arrangement. So you will see us be a net store closer this year. At this moment, I can't say how many because it's a fluid situation. In terms of our discussions around rent on the stores that remain open, look, we're in dialogue with our landlords. Those discussions are ongoing. Because they're ongoing, I can't say too much about the content of those discussions. I think somebody said once that negotiations are like mushrooms, they grow in the dark. And I think that applies here, so probably best not for me to discuss them publicly. But we're hopeful that we'll be able to come to an arrangement with our landlords that'll give us some relief.

Our next question comes from Chris Svezia with Wedbush Securities.

Just going back to the inventory for a moment. Ed, maybe just some more color about how you plan -- or how you're thinking about moving spring/summer inventory between off price, your own outlet stores when they open? And any thoughts to holding some inventory potentially back just because maybe it's core items, et cetera, there's no point in putting them out in the marketplace. Just how should we think about that? And is really Q2 the high watermark for year-over-year inventory, how should we think about that?

Yes. Well, look, we're going to have to use every tool in our toolkit to move the inventory. So that means some promotional activity on our own website and in our stores as well as at our wholesale customers at their stores and their websites. And it means moving some to the off-price channel, obviously, moving some to our outlets. We're going to do all the things that we can to move the inventory. As I said, I don't think we're in as dire of a situation as many given the fast inventory turns. And yes, we will carry -- it's likely that we'll carry some core products, and we may carry some core product into next year. But as I mentioned, we -- our goal will be to move through the seasonal product this year.

And when do you expect to have more of your stores open? Is there any sort of thought process, plan? Are you thinking by July, you'll have all your stores up? Just sort of what's your thought process behind that?

Yes. Look, again, a very fluid situation. We're opening some more at the end of this week. And I think from here, provided, of course, that the virus itself doesn't start moving in the wrong direction in terms of new cases, that you will see stores opening pretty much every week from here on out. And I'd like to think that over the course of the next month, we'll get the majority of our stores open. I certainly don't think that we'll have 100% of them open at the beginning of July, given the store footprint that we have. But it'll be a gradual reopening each week from here.

Okay. And just following up on my prior question, just the inventory. Is really Q2 the high watermark for inventory year-over-year in terms of growth there?

I just -- I don't -- I can't say that for sure and I'd prefer not to get into forecasting quarterly inventory here.

Okay. Final thing just on your comment about June, you expect from a branded perspective to start shipping more product and July to be up more meaningfully. Just what's the basis behind that? I know it's not year-over-year growth. I'm just trying to understand, is that just product that was supposed to be shipped? Or just how should I think about what drives that improvement in July?

Well, yes, that's based on our discussions with our wholesale customers and the orders that they're giving us. So keep in mind, when the crisis first hit, most of these wholesale customers, again, putting the folks that remained open aside, but most of the wholesale customers essentially stocked everything and canceled all their spring orders. But we've worked with them to then get orders reinstated and all of them have reinstated some portion of their orders. Now keep in mind, for the most part -- or for most customers, it's a fraction of the original amount, but still, they've all reinstated some orders. And that's the basis for how we're forecasting it by month.

Okay. And final thing, I'm sorry. Just when you think about fall holiday, the majority -- you haven't booked a significant portion of that for your retail customers. So what I'm getting at is the inventory of the on-order exposure is really related to spring/summer, fall, where you'll have some full holiday, some core items the majority of that really hadn't been placed as of yet, therefore, from an inventory exposure perspective, as you get into that fall period, there really isn't that much exposure in the stores.

That's correct. The inventory exposure is surrounded spring/summer, not fall.

(Operator Instructions) We do have a follow-up from Sam Poser with Susquehanna.

Can you talk -- 2 things, can you talk about the sort of -- there's probably going to a lot of promotional activity going on now then once the stores reopen. How long -- I mean you saw a drag on gross margins in the -- you saw a decent gross margin on the quarter. They weren't down a ton. But I mean, how should we think about Q2, end of Q3 relative to Q1 on gross margin pressure, given the likelihood of promotional activity, both on your wholesale business and likely on your Retail business once you reopen as well?

Well, again, since we're not providing guidance, I don't think -- I'm not going to provide too much -- or I'm not going to provide specific guidance around the gross margin. But look, I think it is going to be a promotional environment, and there is pressure on gross margin that we should expect to see going forward due to some of that promotional activity. I will remind you that we did take the inventory reserve in Q1 of nearly $12 million. So that's -- we've accounted for what we believe we'll have to -- product that we believe we'll have to sell below cost. And I should point out that, that includes not only the inventory that was on our books at the end of Q1, but also inventory that was in the factories or products that were in the factories, both complete and in process that we thought we had exposure on. But again, that accounts for anything you think you're going to sell below cost. There'll still be an impact to the gross margin from products that will be going out at very -- at no margin or very low margin.

But we could assume there's going to be more gross margin pressure in Q2 than there was in Q1 just because of the -- because it went into the heart of the crisis versus really 3 weeks or so in the crisis in the first quarter?

You've gotten all you're going to get out of me on this one, Sam.

All right. And then, I mean, there was -- there were little -- last year and even in February, there were some little hints that the -- there was signs of life in the dress shoe business. Could we assume that those signs of life have left the building, at least for this time being?

Well, what I would say is we had very strong reads on dress shoes early in the season, pre crisis. A lot of -- some very good reads on opened-up dresses, but also some on pumps and some closed-up dress shoes. As we went into the crisis with most of our wholesale customers, we did see that category slow down as you might have expected due to everybody staying home. But we've still seen some pretty strong demand on our own website. So I think we clearly have products that folks are responding to, and we do remain a destination for that product.

I am showing no further questions in the queue at this time. I'd like to turn the call back to Ed Rosenfeld for any closing remarks.

Great. Well, thank you very much for joining us on the call today. We look forward to speaking with you on the second quarter call. And in the meantime, stay safe and be well.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.