Burlington Stores, Inc. (BURL) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Burlington Stores First Quarter 2020 Earnings Webcast and Conference Call. At this time, all participants' lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. David Glick, Senior Vice President of Investor Relations and Treasurer. Thank you. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate everyone’s participation in today’s conference call to discuss Burlington’s fiscal 2020 first quarter operating results. Our presenters today are Michael O’Sullivan, our Chief Executive Officer and John Crimmins, Chief Financial Officer. Before I turn the call over to Michael, I would like to inform listeners that this call may not be transcribed, recorded or broadcast without our express permission. A replay of the call will be available until June 4, 2020. We take no responsibility for inaccuracies that may appear in transcripts of this call by third parties. Our remarks and the Q&A that follows are copyrighted today by Burlington Stores. Remarks made on this call concerning future expectations, events, strategies, objectives, trends or projected financial results are subject to certain risks and uncertainties. Actual results may differ materially from those that are projected in such forward-looking statements. Such risks and uncertainties include those that are described in the company’s 10-K for fiscal 2019 and in other filings with the SEC, all of which are expressly incorporated herein by reference. Please note that the financial results and expectations we discuss today are on a continuing operations basis. Reconciliations of the non-GAAP measures we discuss today to GAAP measures are included in today’s press release. Now, here’s Michael. Michael O’Sullivan: Thank you, David. Good morning, everyone and thank you for joining us on this morning's first quarter earnings call. I hope that you are all safe and well in these challenging times. We are very glad that you could join us. On this morning's call, we would like to structure the discussion as follows. First, I will begin with a discussion of the first quarter. I will focus my remarks on where we ended the quarter with regard to our inventory levels and our cash position. Second, I will provide an update on the timing of our store re-openings and the initial traffic and sales levels that we are seeing. I will also describe the actions that we are taking in our stores to provide a safe environment for our associates and our customers. Third, I will describe the opportunities and the risks that we may face over the next 6 to 12 months. With this as context, I will talk about our full potential strategy and some of the actions that we are taking to accelerate this strategy. I will then hand the call over to John to provide more financial details. After that, we will be happy to respond to any questions that you may have. Okay. Let's start with the first quarter. It was a very unusual quarter to say the least. Our business was strong through the first week of fiscal March, up to that point our comparable store sales growth for the quarter was running at about 3%. Of course, over the following couple of weeks the emergence of the Covid-19 pandemic began to have a major impact on our business, especially in those parts of the country where the outbreak is the most severe. In order to minimize the health risks to our associates and our customers, we made the decision to shut down all of our stores by March 22nd. We also shut down our offices and distribution centers. As reported in today's press release, our sales declined 51% in the first quarter. We estimate that the Covid-19 pandemic drove a cumulative sales miss of approximately $1 billion to plan in the quarter. This led to an adjusted net loss of $312 million or $4.76 per share. This loss includes a $272 million charge that we took against our inventory at the end of the quarter. I would like to provide more detail on two aspects of how we ended the quarter. First of all, our inventory valuation and secondly our cash position. With a $1 billion miss to sales plan you would normally expect significant overhang of inventory. In fact, before the impact of the markdown reserve, our total inventory position as we ended the quarter was about in line with last year. This was driven by two factors. Firstly, we started the quarter with total inventory levels down 19% consistent with our strategy of running with leaner inventories. The second factor was that as the pandemic emerged in March, Jennifer Vecchio and the merchant team were able to move very swiftly to tighten liquidity and to work with vendors to collaboratively renegotiate, defer or cancel open orders. Although, our inventory level at the end of the quarter was in relatively good shape, we did take a $272 million charge against the value of this inventory. There were two reasons that we did this, firstly, the inventory in our stores is comprised of merchandise that was received in January, February and early March. It is aged merchandise and as our stores reopen, it is no longer seasonally appropriate. The second reason is that the next several months are likely to be very promotional as retailers try to clear the merchandise in their stores. As I will describe in more detail in a moment the priority for us is to turn our inventory so we can free up open to buy and take advantage of great opportunistic deals. We believe that the inventory charge that we have booked will pay for the markdowns that we expect to take in the second quarter to drive these inventory turns. As John will explain later in the call, we use the retail method of accounting, which means that this inventory reserve reflects our estimate on the full cost of these markdowns. Okay, let me move on to our cash position. When we shut down stores on March 22nd, we took a number of steps to reduce cash expenses. These steps included eliminating or reducing salaries, furloughing associates, reducing other operating expenses, lowering our capital expenditure plan and deferring accounts payables. As a result of these actions and our recent debt offerings and revolver draw, we ended the quarter in a strong financial position with approximately $1.5 billion in cash. We can use these resources to play defense or to play offense depending on the situation that we face. This significant cash positions also reflect actions that we took in April after our recent financing to begin to catch up on a portion of our accounts payable. We completed that process after quarter end in May. And at this point, we are completely current on our accounts payable. I would now like to provide an update on our store re-openings. We began reopening stores on May 11. And so far we have reopened 332 stores. As of tomorrow, that number will increase to approximately 400. As you would expect the situation is dynamic but we are anticipating that we will reopen most of the balance of the chain by the middle of June. For the stores we have reopened to date, we have been surprised and pleased with the traffic and sales that we have seen. These stores are experiencing sales levels that are ahead of the comparable period last year. There is clearly pent-up demand. And we do not know how long this sales trend will continue. Also, as we reopen, we are marking down the merchandise in the stores and offering very compelling values. We would expect the sales trends to moderate as we sell through this merchandise. With that said, let me make two points. First, as an off-price retailer, we are pleased with what we are seeing. We are excited by the chance to turn our inventory and to pursue great opportunistic buys in what we expect will be a very strong off-price of buying environment. Secondly, beyond this initial reopening period, we recognize that there is considerable uncertainty ahead. But we are current on payables, we have lean inventories and we have ample liquidity. So, we are well positioned to chase the sales trend or to pull back based on whatever situation we face. The most important priority as we have reopened stores has been to ensure very high standards for safety and social distancing. During the shutdown period, Fred Hand and his team did some terrific work to develop a detailed safety and social distancing program for our stores. This includes a combination of signage, personal protection equipment and new operating procedures for stores. When it comes to social distancing, we are somewhat helped by the fact that our stores are typically off more and in most cases are much larger than many of our peers. As we have reopened stores, we have continued to look for ways to make adjustments to improve this safety and social distancing program. The safety of our associates and customers will continue to be the overriding priority for us. In his remarks, later in this call John will provide more detail on the first quarter. But I would like to move on now to look a little further ahead to talk about what the retail world might look like in the next 6, 12 or 18 months. What this means for our full potential strategy. And what actions we are taking to position ourselves. As I have already mentioned, we expect the next few months to be extremely promotional as retailers attempt to rebuild traffic to their stores and to turn their inventory. This is likely to be exacerbated by some struggling retailers closing large numbers of stores and liquidating their merchandise. We believe that the inventory reserve that we set up at the end of the first quarter will enable us to aggressively compete in this environment. Beyond this initial period, it is very difficult to predict what will happen. But it is possible even likely that the aftermath of the pandemic will lead to conditions that are very favorable to off-price. A weak economy with the customer looking for great value. A weakened competitive set especially in the department and specialty store channels. And a very attractive opportunistic off-price buying environment. We are optimistic about the opportunities ahead of us but we recognize that it is important to be patient and appropriately cautious. We know that our long-term success will not be defined by this quarter or even the rest of this year, rather it will depend on a steady march towards our full potential. This means getting prepared being patient. And taking advantage of the opportunities as they come. During our fourth quarter call in March, I described in some detail our off-price full potential strategy. The essence of this strategy is to offer our customers even stronger merchandise value by becoming more off-price. Meaning more flexible, leaner and more opportunistic. In the environment we are headed into, it is clear that this strategy will be more important than ever. In this call I am not going to revisit all of the details of our off-price full potential strategy. But you should expect that over the next 12 to 18 months, we will pursue the key elements of this strategy with even greater focus and bigger than we had previously planned. The key message is that in this situation where we are likely to be faced with significant opportunity but also considerable uncertainty. The action implication for us, is to be even more off-priced, more flexible, leaner and more opportunistic Let me give you a few specific examples. First example, as I described in March, we intend to build more chase into the business. This means planning our sales conservatively then being ready to chase sales if the trend is there or to pull back if the trend is weak. As we emerge from the pandemic, there should be plenty of availability. So, we will plan our sales even more conservatively knowing that we should be able to support any ahead of plan sales with great opportunistic buys. Second example, as I described earlier, we started the year with inventory levels down 19%. This is a key element of our full potential strategy to run with leaner inventories. Given the level of uncertainty in the months ahead, we now plan to operate with even leaner inventory levels. This will not only provide more flexibility to respond to the sales trend. But it should also drive faster turns and lower markdowns on any ahead of planned sales. Third example, in March, we talked about the need to increase operational flexibility including the need to get merchandise to the sales floor faster. Before the pandemic, we were thinking that this might take us a couple of years to accomplish. But now given the impact of the economic slowdown on the transportation industry, we think we may be able to get there much more rapidly. We will have more to say about these topics. And about our specific plans for the back half of the year when we report our second quarter results in August. But for now, let me reiterate the key message. In this environment, whether it’s likely to be significant opportunity but also considerable uncertainty. The core principles of our off-price full potential strategy are going to be more important than ever. With that I would now like to turn the call over to john to provide more detail on our financials.

Thanks Michael, and good morning, everyone. Let me start with the review of the income statement. For the first quarter total sales decreased 51%, comparable store sales through the first week of fiscal March increased about 3%. As Michael mentioned earlier in the call, our decision to close all of our stores on March 22nd due to the COVID-19 pandemic drove the sales decrease. The gross margin rate was 2.0% versus last year's rate of 41.0%. The gross margin decrease was driven primarily by a $272 million inventory charge taken in the first quarter. This charge was taken to account for an increase in inventory aging which was caused by our extended store closures, and in anticipation of a very promotional environment in the coming weeks and months. Under the retail method of accounting, we have adjusted our inventory valuation to reflect our best estimate of the markdowns that we plan to take to liquidate aged inventory. We expect most of these markdowns will be taken in the second quarter. The inventory charge creates a reserve to provide for the anticipated markdowns. So, at this point we do not expect any additional markdown expense on this aged inventory in the second quarter. Product sourcing costs which included the cost of processing goods through our supply chain and buying costs were $76 million in the first quarter of 2020 versus $79 million last year. Adjusted SG&A, excluding management transition costs was $390 million versus $428 million last year. The dollar decrease was primarily due to a reduction in store payroll. Adjusted EBIT excluding management transition costs decreased by $617 million to a negative $499 million, driven primarily by the $272 million inventory charge and the decrease in sales. Depreciation and amortization excluding favorable lease costs increased $4 million to $54 million. Interest expense excluding the $1.1 million in non-cash interest on convertible notes remained flat versus last year's first quarter at $13 million. The adjusted effective tax rate was 39% for the first quarter versus last year's first quarter adjusted effective tax rate of 18%. The increase in the tax rate was due primarily to the increased benefit from federal tax operating losses being carried back to offset income in previous years when the federal tax rate was 35% versus the current rate of 21%. The benefit from this carry backs increased the tax rate by about 12% in the quarter, which was offset slightly by a decline in hiring credits. Combined, this resulted in an adjusted net loss excluding management transition cost of $312 million versus last year's adjusted net income of $85 million. During the quarter in order to preserve our liquidity position during this period of store closures. We suspended our share repurchase program. Prior to this suspension, we repurchased approximately 244,000 shares of stock for $50 million. We have $348 million remaining on our share repurchase program which remains suspended. All of this resulted in diluted earnings per share loss of $5.09 versus income of $1.15 last year. Adjusted diluted earnings per share were a loss of $4.76 versus a profit of a $1.26 per share last year excluding the $0.04 of management transition costs. Turning to our balance sheet. At quarter end, we had approximately $1.5 billion in cash, $400 million in borrowings on our ABL. And had unused credit availability of approximately $150 million. During the quarter, we issued $805 million in five-year convertible unsecured notes with a 2.25% coupon and 32.5% conversion ratio. As well as $300 million in five-year senior secured notes with a 6.25% coupon. We ended the period with total debt of approximately $2.3 billion. Merchandise inventories were $626 million versus $896 million last year, a 30% decrease. The decrease was made possible by aggressive actions to reduce inventory receipts during this period of extended store closures. And was driven by the $272 million markdown reserve that we took at the end of the quarter to cover future markdowns. Pack and hold inventory was 22% of total inventory at the end of the first quarter of fiscal 2019, compared to 28% at the end of the first quarter last year. During the quarter, we opened 12 new stores. Relocated 10 stores and closed three stores for a total of nine net new stores. We ended the quarter with 736 stores. In the second quarter, we expect to open three new stores with no expected closings or relocations. In fiscal 2020, we now expect to open 64 new stores and close or relocate 26 stores. This would translate to 38 net new stores planned to be open in fiscal 2020. This is a reduction from our original store opening plan of 54 net new stores for fiscal 2020. Eight stores shifted from spring 2020 to fall 2020. And 16 stores shifted from fall 2020 to the spring of 2021. We decided during the first quarter to delay these stores and the capital expenditures associated with them in order to preserve our liquidity due to the impact of the COVID-19 pandemic. We continue to believe in our long-term store potential of at least 1,000 stores. And this shift should not be viewed as a change and a long-term outlook for store growth. Cash flow provided by operations decreased by $326 million to a use of $272 million for the first quarter. Driven by lower net income due to our extended store closures, which more than offset the cash flow benefits of accounts payable and rent deferrals. Net capital expenditures were $57 million for the first quarter of fiscal 2020. Net capital expenditures are now planned to be approximately $260 million for fiscal 2020 versus our original plan of $400 million. This decrease which was part of our strategy to preserve liquidity was primarily the result of deferrals of store openings, remodels, maintenance CapEx projects and corporate renovation projects. While we are not prepared to give sales and earnings guidance due to the uncertainty of the current environment, we can update you on certain fiscal 2020 cash flow and expense items. That may be useful for your modeling purposes. As I just mentioned, capital expenditures, net of landlord allowances are now expected to be approximately $260 million versus our previous outlook of $400 million. And we now expect to open 64 new stores while relocating or closing 26 stores for a total of 38 net new stores in fiscal 2020. This compares to our original plan of 80 new stores, with 54 net new stores and reflects the shift of 16 new stores from the fall of 2020 to the spring of 2021. Also, depreciation and amortization expense exclusive of payable of these costs is now expected to be approximately $230 million versus our previous guidance of $235 million. And interest expense excluding $24 million in non-cash interest on the convertible notes is now planned to be approximately $80 million versus previous guidance of $45 million. This increase in interest expense is due to the recent $1.1 billion high-yield in convertible note offerings in addition to the $400 million in new borrowings on our ABL. With that I will turn it over to Michael for closing remarks. Michael O’Sullivan: Thank you, John. As I wrap up these remarks. I would like to thank the entire organization at Burlington. Because of their hard work and commitment, we are emerging from this pandemic stronger than ever before. There is a lot of uncertainty ahead but we are very well positioned to absorb the risks and to take advantage of the great opportunities that lie ahead of us. With that I will turn it over to the operator for your questions, operator?

[Operator Instructions] Our first question comes from Matthew Boss with JP Morgan. Your line is now open.

Thanks. And congrats on a nice pace of initial reopening. Michael, could you share any color on sales levels that you're seeing with the initial stores that you've reopened? And any thoughts on the potential implications for the sales trend going forward? Michael O’Sullivan: Good morning, Matt. Great to hear from you. Thank you for the question. Let me start by prefacing my answer by saying that the dataset that we have is very limited, and covers a short period of time. In fact, the way to think about this dataset is that there are about 250 stores that have been open for approximately two weeks. And there are about another 80 stores that have been open for just a week. So that's the dataset that we have. As I said in my remarks, the sales levels in these stores have been strong, running ahead of the comparable period last year. We've seen this strong sales performance in every market where we've reopened. And all our major businesses in these stores apparel, accessories, footwear and home have experienced sales trends that are above the comparable period last year. Moving on to the second part of your question, what are the potential implications for the trend going forward? I have to say that at this point, we just don't know. But there are a few reasons to be to be cautious. Firstly, there's clearly pent-up demand, the customer has been cooped up over the past eight weeks. Finally, if you have a chance to get out. It's difficult to know how long this pent-up demand will last. A second reason for caution is that as we reopen stores, we're marking down our aged inventory. So, we're offering very compelling values. And as we sell through this clearance, the trend should naturally moderate. The final point I would make is that the promotional environment is only just warming up. Even after we've sold through our clearance, other retailers will still be promoting I imagine for the next several months. Especially retailers that are closing stores and liquidating stock. This is likely to be a significant headwind for us for some time. Look, as I said in my remarks, we are surprised and pleased with the trend. We're very happy to returning our inventory and creating open to buy But we're being careful not to read too much into this early trend. It's great but we do not know how long it will last. And so the action implication for us is to remain nimble, flexible. Our merchants know that there is plenty of merchandise available. So, if it turns out that the sales trend in the coming months is very strong then we'll be ready to chase it. And if not, we will hold back.

That's great color. John, as a follow-up, you ended the first quarter with roughly $1.5 billion in cash and over $1.6 billion in liquidity. What's the best way to think about your cash burn rate as well as your ability to generate positive cash flow as stores reopen? And hopefully begin to ramp up in incremental volume?

Hi, Matt. Thanks for your question. Yes, cash burn is kind of a tricky question to answer just because our operating environment is so dynamic and under these conditions. As the environment changes, the way we think about preserving or using our cash continues to change. So back when our stores were closed and we were putting our new financing deal together we shared a few things that are probably worth revisiting now. At that time we said, with the $400 million ABL drawdown that we had done. Plus, our year-end cash balance about $400 million that gave us the ability to operate for several months without revenue given the steps that we take in to preserve liquidity. We also said that pro forma after the transaction that was going to give us enough cash to last us beyond the end of fiscal 2020 without revenues. Thankfully, the operating environment looks quite different now. Our stores are reopening, that's giving us some positive cash flow. And as that happens we're also stepping up our store payroll and our DC payroll, bringing furloughed associates back as we need them. In addition, if our stores continue to reopen and stay open generating enough positive cash flow we would plan on bringing back our furloughed corporate associates. And would also restore some of the temporary pay reductions we put in place. But over the last several weeks, we had been catching up on our temporarily deferred accounts payable and we're now fully current with our accounts payable. With the uncertainty around the future, we're going to continue to manage cash very prudently. You've heard Michael describe how we plan to manage our inventory in this environment. We're going to continue to carefully manage every element of our cash flow through the same filter. Looking to leverage our cash with great opportunities. But being careful not to get too far ahead of ourselves. While we learn just what the new normal is going to look like.

Thank you. Our next question comes from Ike Boruchow with Wells Fargo. Your line is now open.

Hey, good morning. Michael, John and David. Hope you all are doing well. I guess Michael, first one for you. I mean I think we talked a lot about ’08, ‘09 and the off-price channel being able to take advantage of a really strong buying environment, gaining a lot of share. I guess, I'm curious your thoughts on the current situation. How does it compare to ’08, ’09 do you think things could play out the same way? Are there put and takes, I'm just kind of curious your high-level thoughts are. Michael O’Sullivan: Sure, good morning, Ike. Thank you for the question. The underlying circumstances in 2008-2009 were quite different. But I do think it's a valid comparison. The aftermath of the pandemic may well create many of the same conditions that followed the financial crisis of 2008, specifically I think those likely could be huge availability of off-price merchandise great values compared with weakness in the department and specialty store channels and a strong consumer need for value over the next couple of years. Those conditions should be very good for off-price. But for the next several months, there's a lot of uncertainty and some major risks and challenges. The rest of the year is going to be very tricky to navigate and there's one other point to keep in mind when comparing our current situation with 2008-2009. I think that the pivotal moment in the financial crisis was really when Lehman Brothers declared bankruptcy in 2008. After that the economy and retail sales had to fall apart; the third and fourth quarters of 2008 as I recall were very difficult for all retailers including off-price and the spring of 2009 that wasn't great either. It wasn't until the back half of 2009. So a whole year later that the off-price retailers really started to post very strong high single-digit even low double-digit comp store sales growth numbers. And from that point onwards really began to take market share. If you apply that same timing to the current situation, it takes us to late spring or even summer of 2021. So, yes, I actually agree. I think it's a valid a comparison. I think this could turn into a big opportunity for off-price, but one of the lessons from 2008 I think is important is it could take some time before the opportunity really materializes.

Great, Michael. Super helpful and followed up on pack and hold and just curious you're thinking about your pack and hold business going forward in the off-price volume environment over the next several months is going to be strong. Is there any opportunity to buy up more merchandise now, defend the stores next year just overall your pack away strategy would be helpful? Michael O’Sullivan: Sure. Actually, it's a very timely question. At Burlington, pack and hold historically has been a relatively small, I would say been a relatively small part of our business. Certainly compared with some of our peers but even before the pandemic, we've been looking at strategically increasing how forward level of pack and hold go, making it a bigger part of our mix. We're actually planning to gradually do this, to gradually grow our pack and hold balanced over the next few years. But we're now thinking that we should accelerate this increase. If the off-price buying environment is as attractive as we expect it to be then the next several months could be the perfect time to strategically increase our technical levels. And to be clear, we would only pack away the very, very best deals. The very, very best values. So, yes, we do think there's a significant pack and hold opportunity. We're working on the details and the specifics on how to go after that. I would expect that we'll have more to say on this topic in the second quarter call in August.

Our next question comes from John Kernan with Cowen. Your line is now open.

Hey. Good morning, Michael, John and David. Good to see the excitement from your core customers of the stores reopen. Michael, in your remark you talked about the inventory reserve you took at the end of the quarter. I know you put quite a bit of emphasis since you joined on the full potential strategy plan. And then operating with leaner inventories per store was obviously a big part of that strategy. Just can you provide more details on the strategy behind the markdown reserve now? And then what that sets you up for the second half of the year strategically and financially? Michael O’Sullivan: Great. Yes, well, good morning, John. Thank you. I actually like how you bring the question because the reserve as I'll explain the reserve does tie directly to our strategy. But let me start by describing what the reserve is and then I'll talk about our clearance strategy and underlying rationale for that strategy and how it links to full potential. First of all, the reserves we've taken are intended to cover the cost of the markdowns that we expect to take on our existing inventory in the second quarter. As John mentioned in his remarks, we're on the retail method of accounting so this reserve is expected to cover the entire cost of those future markdowns. This is an important point when comparing with other retailers. Some retailers just reserve for a portion of the future markdown they expect. In contrast, our inventory reserve covers the full cost of the markdowns that we expect taking Q2. But let me take a step back and talk about our clearance strategy. And let me start with the obvious point that any inventory whether it's in a retail store, kept away at a warehouse or at a vendor warehouse is worth less now than it was in March. There are two reasons for this. Firstly, and the easiest to understand is that seasonal merchandise is now ended season and in the case of Eastern merchandise it's now out of season. And secondly and this is frankly the more important point of the two is that there is a glut of all merchandise types. There were goods that were made long before the pandemic that was scheduled to be delivered to retailers in March, April, May and even June. These orders were cancelled and now these goods have no home. Then in every category not just seasonal but basic merchandise as well. This glut of merchants buy will force down the value of all inventory over the next several months. Every retailer has to recognize that the inventory that they have is worth less now than it was in March. If they don't recognize that and if they mark it down then it's their sales. So department and specialty store retail it makes sense to try to minimize the impact of this by starting out with shallower markdowns and then eventually take them steeper discounts to clear the goods. But for us, there are two reasons I would say much more aggressive. Firstly, as an off-price retailer if you can turn your inventory you get the chance to go into the market and take advantage of great opportunistic buys. It is only really the off-price retailers who can do this. We can then slow these goods to stores to generate sales that are over and above for sales rate from our existing inventory. The full economics of picking this approach are much more attractive and holding on to aged merchandise watching it turn slowly and then reluctantly taking a steeper markdown later on. The second reason to be aggressive is that we recognize that the promotional environment just only going to get more intense as more and more retailers open back up and try to track traffic to their stores. And this promotional environment as I said in my remarks is going to be exacerbated in the coming months by store closures and bankruptcies. But I guess if I put all that together and sum it up, I would say our current strategy is to turn our existing inventory as rapidly as possible. And to use the liquidity that that will create to take advantage of opportunistic buys and thereby driving incremental sales and market share. As I said earlier, the inventory reserve we've taken is expected to pay for the full cost of the markdowns that we expect in the second quarter to support this current strategy.

That's helpful, Michael. I think a logical part would be just how long do you think it'll be before you start buying fresh merchandise that you can flow to the stores and what should we expect for back-to-school and holiday? Michael O’Sullivan: Sure. Yes. It's a good follow-up. Of course, it depends on trends but for those stores that we, for those stores that we will reopen in May that would be about 400 stores. We anticipate that we will have sold through the majority of that clearance by the second half of June. So three to four weeks from now. For the remaining stores, in other words stores that will open in June, it's obviously a little harder to say before when they actually reopen but if these stores follow a similar pattern earlier openings then we sell through the majority of their clearance in the second half. So in terms of buying fresh merchandise. We are in the market. We have opened but I would say Jennifer and her team are being thoughtful, patient and surgical. We're only going to be buying the very best deals, but we know our vendors know and the off-price customers certainly know that all the previous reference points for value need to be thrown out. Whatever value the merchandise had at the beginning of March is not the value that it has now. And that principle is going to be top of mind for our merchants to go back into their -- into the market.

Our next question comes from Lorraine Hutchinson with Bank of America. Your line is now open.

Thanks. Good morning. John, can you just spend a minute walking us through the first quarter P&L with the focus on what these results mean, if anything for your future performance?

Thanks Lorraine. That's a good question. It really was a crazy quarter and yes it is difficult to kind of get some context around our -- the results that we report today. I think it might be helpful just if I can walk through how they compare to, how we had planned the quarter. Yes, our guidance was based on how we had planned it and obviously things came up quite different from the way we expected. Lots of puts and takes but I think there's a high level way of kind of putting the appropriate context around it. So our EBITDA for the quarter were about $600 million below what we had originally planned. And there were some big pieces head in both directions. If we start with sales, our total sales were down about 51% from our plan which is about a $1 billion to take a kind of a normal gross margin flow through rate that hurt or EBIT by about $430 million. We also took $272 million hit for our markdown reserve, which restated the value of our inventory and as we've explained that charge is based on the estimated markdowns we expect to take over the next few months to liquidate our aged inventory. So the combination of the sales miss and the gross margin impact from our store closures is about $700 million negative of EBIT dollars. Offsetting this EBIT reduction we had about $110 million in expense savings, more than half of the expense savings were from the furloughs and the salary reductions that affected our store, DC and corporate associates. The remainder of the save came from managing the other components of SG&A expenses and from some Covid related tax credits. These savings were partially offset by about $10 million of incremental Covid related expenses costs of personal protective equipment, additional cleaning and some assistance we provided to furloughed associates. So to do a quick recap, we lost about $430 million from sales. $270 million from the inventory aging reserve. We had expense savings of $110 million; incremental expenses of $10 million reducing the net expense save to $100 million that gets you to the EBIT impact of $600 million that we saw in the quarter negative impact. As far as future performance, there's just so much uncertainty. There's not a lot I can say about that as our sales rebuild it's certainly our intent to get back to our previous performance levels as quickly as we can. And I really don't think the first quarter results would be much of an indicator of future performance. I certainly hope they won't be but I can say that by recording our aged inventory reserve in the first quarter, we don't expect to incur additional markdowns in the future to clear that inventory. I hope that's helpful.

It is. Thanks. And I just wanted to follow up on John's question. It sounds like you'll be buying fresh goods for the majority of the fleet -- in time for back-to-school. How would you expect the mix of your business to change to reflect this new post Covid environment? Michael O’Sullivan: Sure. So the right way, as you'd expect we're looking very closely at these trends that we're seeing in the stores that we've reopened. I mentioned earlier, we're actually seeing trends for businesses but as you'd expect when you dig below the surface you see specific styles that it types specific category that are growing faster than others. And those are the things that our merchants are really focusing on as we get back into the market. For competitive reasons I won't get into a lot of detail but you can expect the pricing and dicing sales data that we're seeing to figure out which categories to go after.

Our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is now open.

Great. Thank you so much. And thank you for the very comprehensive comments and thoughts, Michael and John; I thought they were very helpful. I wanted to ask about your distribution centers and your second off- price full potential strategy. The increase in the operational flexibility at getting merchandise and sales force faster. First, are all the DC's open and operational at this point and are they able to replenish store inventory as its selling down? And then I have a follow-up to that. Michael O’Sullivan: Sure, Kimberly. Thank you for your question. Good morning. The short answer to your question is the DCs, our distribution centers are open and also all at this point and they are flow to merchandize to the stores that have reopened. Now there are a handful or actually a dozen stores that we've reopen that started so strongly out of the blocks, their sales trend was so strong as we reopen them that they're running very low on inventory and it's taking a little bit of time just for those couple of dozen stores to cash back up. So the answer to your question is yes. We are now back to our stores.

Okay. Great. That sounds like a high-class problem, Michael. And in terms of the follow-up, I'm wondering if you could just expand a little bit on the timing that you had initially planned with being able to pursue the end-to-end strategy of getting the merchandise to the sales floor faster. You obviously talked about the economic slowdown is impacting the freight industry and you might be able to get to this goal faster than you thought. So I'm just wondering if you can talk about the blocks, the building blocks of executing this strategy and if you have, if you think you might be able to see any sort of early results later on in 2020. Thanks so much. Michael O’Sullivan: Sure. So, yes, as you said we back in the call in March we have identified more flexible, more operational flexibility as a key component of our full potential strategy. Obviously, a key part of that is the supply in our distribution centers, the transit time scores et cetera being able to sort of reflect that actually move the goods fast that kind of thing. Now we were become-- we actually -- we were passing a couple of pilots that we were going to be doing in 2020 that we're going to be testing a number of different ways to speed up the supply chain makes it, make it more flexible. We were looking at a number of -- a number of things that we were going to test as part of those pilots. We're still planning to pursue pretty much everything that within those pilot programs. But we're now thinking in more ambitious tests this year. One of the things falling us back before was just the cost of retention specifically the cost of speeding up over the couple of years, we and other retailers have talked about capacity issues in transportation whether it's in rail or trucking or whatever. And how the cost of transportation has gone up. As a result of their current economics work, we're fortunate we were expecting that costs, everything we're seeing, health, the costs allows [Indiscernible] occupation, and we think that's going to provide us with the opportunity to make much more progress than we previously thought. So that's what we're looking at right now as the details of that. But the key point is that we're -- we've really been thinking about this there's something we're going to pilot and discover what different -- best to do for us --we're actually now being much more ambitious in terms of try and accomplish.

Our next question comes from Michael Binetti with Credit Suisse. Your line is now open.

Hey, guys. Congrats on the reopen here and thanks for all the detail today. Very helpful, John, I guess just maybe a little help with from the near term first. You mentioned a couple times the inventory reserve you've taken should largely cover the cost of the inventory that you had on hand at the end of the quarter. We've heard from some of the other retailers you can't take reserves against inventory, it's inbound or anything that might have been coming in after the cutoff of the quarter. So I'm just -- I'm curious, you look, you seem to compartmentalize that pretty well for us, but what are the major puts and takes you see that influence the accounting on the gross margin in the second quarter now that you have that, I guess, I'd call it the bottom bucket of the inventory isolated and already accounted for. What do you anticipate will be the major puts and takes broad brush strokes?

Sure, Michael. Let me see what I can do is that, yes, so as you mentioned from a merch margin perspective, we believe we recognized age inventory markdown liability that was caused by the store closings that we've experienced. So go forward merch margins will largely be driven by our ability to properly balance our inventory levels with demand just like any other quarter really, but much more volatile. So a lot trickier to do it. So we're going to try and manage it the way we always do but you can expect the results to be more volatile just because we don't have a clear signal. Our bias of course is going to be to manage inventory conservatively and chase sales if demand exceeds our expectations. We expect as Michael described, there's going to be tremendous values out there to buy. So overall we would expect our merch margins to not be materially impacted if we buy the appropriate level of inventory. It's easier said than done, but we're going to manage it conservatively. EBIT margin is a little bit of a different story. It's a little harder question to answer because our margins going forward are going to be driven by our sales levels and it's really hard to forecast that right now as I'm sure you can imagine. So given the likely depressed sales levels we would expect deleverage on expenses to potentially more than offset the gross margin that we're going to generate. Yes, how much the expense deleverages will impact our profitability beyond the second quarter? That's dependent on our ability to get back closer to last year's sales levels. It's really difficult to put numbers or ranges around any of this just because of the uncertainty. Yes, I guess the only other thing that is, yes, we're -- we typically do a really good job of managing our kind of our store payroll to our sales levels that's going to be particularly challenging in the second quarter partly because of the volatility around demand and uncertainty around what this our sales forecast or what our actual sales are going to be. But also because there are going to be some incremental expenses at the stores. We've talked about safety and the comfort of our first store associates and also our customers being the most important thing and there are some costs, incremental costs related to doing that particularly during the store opening period that we're going to incur to ensure that customers as a coming to our store are comfortable shopping at our stores.

Okay. Let me and thank you for that. Michael, let me ask you, usually the off-price industry is defined with very fast terms normally you wouldn't have much visibility very far out like I don't think at this point you'd really know what's available for holiday yet, but I'm sure you're thirsty for visibility as many. And based on the comments you've made on inventory availability being a step change higher than normal here, what we've heard from some of the major vendors that are public companies the levels of inventory cancellations they're planning to the back half can go from aggressive to staggering in some cases. So I'm just -- I'm curious what gives you some visibility a little further out than what would be the normal, they're fairly short term period for off-price. There's going to be a duration of good inventory availability and then as a follow-up giving your tenured space at one of your competitors and before that I think as a consultant to off-price in McKinsey, there's thousands and thousands more off-price stores in the world and there was and the obvious source of market share has been going backwards for 10 years here. So with more of you as a trough trying to speed on the inventory available in the space relative to the last recession, I think off-price merchandise margins went up 200 to 300 basis points in '07 to '0. Are the economics of the buys as good today given how competitive it is, what you would consider the best buys out there of distressed inventory that needs to come out during periods like this? Michael O’Sullivan: Yes. Good question. Let me actually break the question in two pieces. First of all, in terms of visibility or merchandise availability. I guess I would go back to the point that I made a little bit earlier. This situation is actually completely open. I do think there's a worthwhile comparison relative 2000, but back then retail store is not closed at all for two three months and back then you did not have merchandise deliveries that would be delivered to retail over that two, three months period, what you really had was with some softening in the trend and cancellations and that's what drove merchandise availability. So now you have a situation this much more significant in terms available merchandize, as I said you basically have two to three months worth of merchandise that's available that surplus and that's unprecedented. Now how long will that last, I think it's likely to last for a while because it's such a huge amount of merchandize. So that I think the first part of your question. The second part of your question sort of competition within off-price. The reference point that I think is useful when you think about competition within off-price or not off- price is that if you look at, if you look at the sales of the pre-major off price retailers and you just pick public data. I think NPD published data. You get to a market share and this is all three of us combined. We have a market of less than 10% of the apparel, accessories and footwear in the United States. Now we sell other start apparel, accessories and foot wears but if you just stay with that market for a minute, we have a market share of 10% makes that easy that means that 90% of volume, sales volume goes through a non off-price channel. So I think off-price still has a huge amount of market share opportunity left and given weakness in a number of other retail format, I think that it's clear that there's an opportunity of market share.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. So now I'd like to turn the call back over to Michael O'Sullivan, CEO, for any closing remarks. Michael O’Sullivan: I'd like to thank everyone for joining us on the call today. We appreciate your questions. We look forward to speaking with you again at the end of August to discuss our second quarter results. Thank you. And have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.