Designer Brands Inc. (DBI) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Designer Brands Inc. First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stacy Turnof. Please go ahead.

Good morning. Earlier today the company issued a press release comparing results of operations for the 13-week and 52-week periods ending May 2, 2020 to the 13-week and 52-week period ending May 4, 2019. Please note that the remarks made about future expectations, plans and prospects of the company constitute forward-looking statements. Results may differ materially due to various factors listed in today's press release and the company's public filings with the SEC. The company assumes no obligation to update any forward-looking statements. Joining us today are Roger Rawlins, Chief Executive Officer; and Jared Poff, Chief Financial Officer. Now, let me turn over the call to Roger.

Good morning, and thank you for joining us to discuss our results for the first quarter of fiscal 2020. I’m going to start off the call by thanking our team for their diligence in taking swift and effective action to ensure the safety of associates, customers and our communities during this difficult time. Our industry has been heavily impacted by the COVID-19 pandemic and we’ve acted strategically to preserve the long-term viability of our business. Despite short-term challenges, we are adapting to the environment and refining our near-term focus based on learning so far. We will also continue to execute against our three strategic pillars in innovative ways to deliver differentiated products and offer differentiated experiences and focus on new growth opportunities to increase market share. These strategic pillars coupled with our priority of keeping employees and customers safe and healthy, guide our decisions as we navigate the COVID-19 pandemic. Preserving liquidity and financial flexibility has been a top priority for Designer Brands. As discussed previously, we reacted swiftly upon seeing the risks of COVID-19 by significantly constraining our cash burn. We notified vendors and landlords that we were suspending payments until there was better visibility, massively reducing spring receipts and implemented significant cost cutting and capital preservation measures. We drew down on our $400 million credit facility and immediately focused attention on amending that facility to ensure we would remain within covenant compliance and improve our access to liquidity. Moving forward, along with the success we've had reopening the majority of our retail locations, we've reached alignment with nearly all of our major vendors and landlords on past due amounts and have extended go-forward payment terms, which gives us more flexibility from a liquidity perspective. We are continuing to evaluate our liquidity options with a focus on ensuring a firm financial foundation for the company. We've also needed to make some difficult decisions to manage the business more efficiently and develop a cost structure that will enable us to operate as a leaner organization. We announced cost cutting initiatives in March and April, that included furloughs, reduction in compensation for nearly all employees not placed on temporary leave, as well as the Board and the freezing of hiring and merit raises for 2020. We're deferring CapEx where we can and have delayed new store opening plans across North America where possible. We are actively negotiating with vendors to strengthen relationships as we rationalize our brand portfolio in order to focus our business on the largest footwear brands and our own exclusive brands. Finally, we like many other businesses are undertaking a review of our fleet and are working to streamline and optimize our retail footprint. Lastly, before turning to our results, we want to take a moment to recognize the importance of giving back to the community during this time of need. We have teamed up with Reebok and long-term partner Soles4Souls to provide over a 100,000 pairs of new footwear to COVID-19 frontline workers and their families. Additionally, in early May, we kicked off our donation campaign on giving Tuesday. This gave our customers a chance to engage and help their local communities. DSW locations across the country accepted new and gently used shoe donations and customers who gave two or more pairs received an instant $10 reward. I'm proud to announce that since 2018, we have donated over 3 million pairs of shoes through Soles4Souls. Turning to Q1 results. We were pleased with the trajectory of our business through March 5 and we're on track to achieve growth in 2020. In fact, comps were up in the low single digits even with less promotional activity, driven by structural changes in our business model. As the COVID-19 pandemic began, we faced a number of challenges during the first quarter as a result of store closures, decreased consumer demand and disruption to our wholesale business as Camuto's largest customers canceled a substantial number of orders. We began seeing a meaningful deterioration in store traffic beginning on March 6 and the trajectory materially worsen by the time all North American stores were closed on March 18. This directly overlapped Marpril, our second most significant selling period of the year. For the quarter, total sales were down 45% and comparable sales were down 42%. During the time that our North American stores remain closed, we served our customers through our e-commerce operations at an accelerated pace. Over the past several years, we have made substantial investments in our digital infrastructure, which enabled us to pivot quickly and meet our customer's needs in this unique situation. This was supported by our ability to utilize our stores as fulfillment centers, a competitive advantage as retailers shifted to digital-only sales beginning in the second half of March. We've seen unprecedented e-commerce demand and we were well prepared to fill orders in a timely manner as we optimize shipping across 500 points of distribution. Other key investments over the past few years included redesigning our website, launching the DSW app, rolling out ship from store and adding clearance product to our online product assortment, all of which proved essential during store closures and our shift to a digital-only model. We continue to evolve our capabilities with the recent rollout of curbside pickup and contactless self-checkout. Ultimately we were able to generate strong e-commerce growth while our stores were closed with digital demand up 25% at DSW U.S during the first quarter and representing 50% of total demand versus 22% last year. Our digital strength in Canada was even more robust with e-commerce net sales up 348% during the first quarter versus last year. While we do not expect growth in digital to continue at this pace, we believe that our accelerated work in digital will serve us well moving forward. We're taking a phased approach since we started to reopen our stores on May 1 and hope to have nearly all our North American stores open by the end of June. We're excited that approximately 90% of our total store base is now open. We've continued to monitor state government and local mandates, and have been carefully reopening stores in areas that we believe to be safe for our associates and customers. As of today, we have welcomed roughly half of our team back as we execute these plans. It is important to note that the majority of our Northeast locations, which represent nearly 20% of our in-store business and are some of our highest volume stores remain closed at this time due to continued COVID-19 concerns and local restrictions. We're looking for the best ways to make the store experience safe for our associates and customers. We made several COVID-19 related investments to assess the situation at hand and attain appropriate supplies. We partnered with Johns Hopkins and conducted testing on the longevity of the virus across multiple surface and material types. We've taken these results along with recommendations from governmental health organizations and implemented a number of changes to our store operating model. These include mandating employee use of personal protective equipment, making PPE available to customers, improving cleaning measures at checkout, enforcing social distancing, reducing capacity in higher risk locations, sanitizing try on areas, updating return procedures and implementing frequent full store cleanings. As we begin to reopen stores, we are seeing an acceleration in traffic and sales trends as compared to Q1. Although it is still early, we currently see a relatively consistent store traffic maturity curve once a store reopens. We believe that this is also being driven by our investment in broadcast advertising that helps us reach a large portion of our core audience. To this end, we anchored our integrated marketing programming on a recent national television campaign, we launched aimed at making our customers aware that we are reopening and highlighting the safety changes we have made. And we've seen a strong improvement in traffic in these markets. We've also restarted the use of direct mail, our most effective marketing vehicle specifically aimed at geographies where we have reopened. Quarter-to-date, comp trends are improving week-over-week. And in stores opened over a month, sales are now trending to 80% of the volume they were doing last year. This trend has improved significantly by 8 to 12 percentage points each week as the customer is informed, the store is opened and they become comfortable with our COVID procedures. Despite the sales weakness, we experienced this past quarter, our team quickly adapted to the environment to right size our merchandise receipts and inventory plans, so that we can improve our financial flexibility. Furthermore, we were more aggressive with promotional activity to drive sales, given the seasonal nature of our assortment. As a result, we were successfully able to manage our inventory levels and ended the quarter with flat inventory units on hand versus last year. We expect that our cancellations and liquidation efforts will lead to inventory being down substantially in the fall as we navigate an unknown season of consumer demand. The impact of this virus will not be short-term in nature, especially in its effect on consumer behavior. As such, we have taken a close look at how we need to evolve our near-term areas of focus. We've shifted to a digital first model in recent months, utilizing our strong e-commerce framework, and we expect to continue with this strategy going forward. We have analyzed our learnings from the beginning of the pandemic and are prioritizing two initiatives in the near-term that fits squarely into our existing long-term strategic pillars. First, delivering every day value, a focus supported by our recent acquisition of Camuto. And second, prioritizing the top 50 brands in footwear. During the pandemic, our customers' needs have evolved. We have seen an influx of younger digital-only customers drawn in by our online offerings, marketing investment and their desire to participate in our donation campaign. On the opposite side of the spectrum, we have our more mature store-only customers who haven't been able to meaningfully shop with us for quite some time due to store closures and ongoing COVID-19 concerns. Regardless of demographics, we know that every day value is critical to customer's footwear purchase decisions. We are looking carefully at how to provide attractive everyday value through pricing assortment and convenience. In recent months, we have taken certain pricing actions that allow us to demonstrate extreme value, while also clearing some seasonal and dress product. This has taken the form of hard price reductions, as well as the acquisition of some exciting branded close out opportunities. We have the unique ability to provide value to our customers on their inline product through our rewards program, source branded special makeup product to offer a visibly differentiated pricing value and partner with brands on premier close out deals. The combination of offering top quality footwear brands at regular price, special makeup and close outs enables us to maintain one of the largest assortments in footwear. This is further bolstered by our recent acquisition of Camuto, which gives us the ability to deliver our own brands at a better value than ever before. As we scale our VIP program and build our loyalty customer base, we are able to offer compelling rewards and promotions, supporting our everyday value offering. Finally, our investments in providing a great online experience, coupled with our new rollouts of curbside pickup and self checkout are redefining convenience at Designer Brands. In addition to increased focus on value, we are also learning during this time that customers enjoy the comfort of familiar brands. Time and time again, we see our customers returning to their favorite labels to seek their next pair of shoes or latest accessory. And we are accelerating our brand rationalization work to grow even deeper with a top 50 brands in footwear. As points of distribution are rationalized, our vendors are excited to grow with a customer that is actually increasing share, and we are excited to gain great access to product and find enhanced economics and partnerships. With our flexible assortment, scale and strong vendor relationships, we have the ability to adjust receipts and impact our assortment when we see categories and brands performing particularly strong. For example, during the pandemic, two categories have seen relatively better results, kids and athleisure. Parents have continued to shop for growing children's feet and athleisure has become a hot trend with people spending more time at home and taking more opportunities to exercise. As we all continue to navigate this challenging time, there are still too much uncertainty to provide 2020 guidance. The rapidly evolving nature of this pandemic, coupled with unpredictability of the supply chain impact and consumer buying behavior makes it difficult to accurately account for how our business may be affected. Presently, we plan to continue to concentrate on near-term areas of focus, prioritizing the top 50 brands in footwear, emphasizing our everyday value proposition through value assortment and convenience bolstered by Camuto's capabilities and ensuring we have a firm financial foundation and ample liquidity. Finally, we would be remiss not to address the recent civil unrest in our country. As a company, we stand firmly against discrimination, bigotry and injustice in all forms. And I personally feel strongly about not staying silent in the face of recent, horrific racist events. These are deep rooted issues that we as a society are required to confront and address. Change is desperately needed and at DBI our management team and Board are committed to doing our part. Our company has always stood for self expression and I believe a diverse team is absolutely key to our success. Recently, we have taken time to listen and reflect on what we are doing internally to be the best company possible for our employees and our customers. We have a diverse customer base and it is important that our own team mirror that diversity. Currently 53% of our workforce is comprised of people of color and we have opportunities to expand the diversity in our leadership team. We will be intentional in our actions over the coming weeks. We will listen and we have. I have had transparent, often emotional and highly productive conversations over the last couple of weeks. I want to personally thank our African American business resource group, MySOLE, of which I'm the executive sponsor for their invaluable, honest and transparent counsel. We stated publicly black lives do matter because they do. And we needed our employees and our customers to hear it. We will partner with people and organizations making a difference. And we have from 3 million pairs of shoes donated to Soles4Souls through our former board member, Hank Aaron and his 755 Society focused on technical education. Any changes require a growth mindset embracing the challenge recognizing sustained effort is required and holding ourselves accountable. The road ahead remains challenging, but we have invested in the right areas to position Designer Brands for long-term success. Again, we want to emphasize that the health and safety of our employees and customers continues to be our priority. We are confident in the long-term sustainability of the business and our ability to grow market share to create long-term value for our shareholders. With that, I will turn it over to Jared. Jared?

Thank you, Roger, and good morning, everyone. Our first quarter was full of unprecedented challenges and unforeseen changes. Our team has come together and taken numerous actions in the near-term to help manage our business through recent volatility and set us up for long-term success. First, I would like to discuss the steps that we have taken from a liquidity and cost perspective and then I will discuss our first quarter results. Please note the financial results that we will reference during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise. These non-GAAP measures should be considered in addition to and not as a substitute for or an isolation from GAAP results. Last month we amended our $400 million credit facility. And as a result, we have suspended dividends and share buybacks. Since February 1, we have increased our borrowings by $203 million and place that liquidity and cash thus ending the quarter with $250.9 million in cash. We remain comfortable with our liquidity and continue to assess our needs, while also working with our bank group to evaluate alternatives for incremental flexibility as we move forward. Lastly, we also significantly lowered our capital expenditures. For the year, we plan capital expenditures to be roughly $25 million to $35 million, well below last year's $77.8 million as we have delayed our store openings, nonessential maintenance and distribution center projects, as well as various business and IT plans. In terms of rightsizing the cost structure, we have reduced expenses across our all areas of the company. Payroll expense declined significantly following our actions to furlough certain team members and reduce salaries across the rest of our employee base. In total, we reduced our operating expenses by $26.5 million in the first quarter over last year and we expect to maintain a disciplined operating expense posture for the balance of the year. We have also been working diligently with our vendors and landlords to renegotiate our payment terms. We anticipate a material benefit from the tax rule changes, which allow us to carry back this year's loss up to 5 years, including years in which the U.S tax rate was 35%, as opposed to the current rate of roughly 21%. As such, we are anticipating a meaningful cash tax benefit in 2021 as we receive a refund tied to the 2020s COVID impacted performance. Ensuring inventory levels are aligned with current and future demand has always been an important priority for us. First quarter is historically a critical time for our retail segments with Marpril and Septober being our two biggest selling seasons together generating approximately 40% of our sales and over half of our operating income. Having stores close to the public during the Marpril selling period significantly impacted our business. To prevent high levels of aging seasonal inventory, we took proactive measures during the quarter to institute deeper markdowns and promotions, resulting in elevated markdowns of approximately $40 million on products sold. In addition to these markdowns taken on products we sold in the quarter, we recorded inventory reserves against a large portion of our yet to be sold inventory totaling approximately $60 million. This inventory reserve practice is required under the retail inventory method of accounting used by our U.S retail segment. This results and charges to cost of sales at the time the retail value of inventory is reduced by the markdown as opposed to when the product is sold to the customers. As we look forward, we have meaningful -- meaningfully curved future receipts and have taken necessary pricing actions in order to maintain a cleaner inventory position despite the decline in sales. As Roger previously discussed, we ended the quarter in good shape. Inventory on a unit basis was flat to last year and was down 17% in total, including the impact of reserves. Based on selling thus far in Q2 and the cuts we have taken to receipts, we are anticipating our inventory balance entering fall to be substantially down compared to last year, positioning us well for the season. Furthermore, if trends are stronger than anticipated, we have the potential to see upside because we have already taken these reserves and have the flexibility to chase into trends as they develop. Now moving on to our income statement results. For the first quarter, net sales decreased 44.7% to $482.8 million, which included $19.4 million in intersegment sales that was eliminated upon consolidation. For the first quarter, total comps were down 42.3% versus a 3% increase in comp last year. In the U.S retail segment, comps were down 42.4% during the first quarter as stores were closed for nearly all of the highly critical Marpril selling season. On a relative basis, both kids and the athleisure categories performed better. Comps for kids were only down 14.7% with parents always needing to replace product as kids grow. We also saw consumers seeking comfort during this time and the athleisure category was only down 33.2%. As you know, kids and athleisure are both strong and growing categories for us and we believe we continue to have a sizable amount of runway to further develop our position in these categories. Obviously as the customer pivoted even more strongly towards casual and athleisure, the resulting opposite impact was to dress and seasonal, historically very strong categories for us. Accordingly, with the flexibility inherent in our business model, we are following the customers' directions and we are building our fall assortments to lean into those trending categories even more strongly. As Roger previously discussed, the strength of our e-commerce business partially offset our negative store sales trends. We saw the highest penetration of digital demand ever experienced in the history of our company as we essentially became a .com only retailer starting on March 18. In Canada, comps were down 32.4% for the quarter driven by store closures. However, results were slightly offset by a combination of our strong digital growth, which comped at 348% and represented over 55% of total comp sales for Canada and an increase in loyalty members. Similar to the U S., Canada saw pressure across the board, but performed relatively better, given their higher penetration of kids and athleisure product and a much smaller digital base from which to grow. Canada has been a point of strength for us as we applied our successful initiatives from the U S for the new Canadian operations. Last year's relaunch of our online presence and rewards programs ensured Canada had a well-developed infrastructure to lean on during this crisis. Turning to Camuto. We saw notable disruptions in our wholesale business as our largest customers canceled a substantial number of orders just as DSW did with many of their vendors. Total net sales for Camuto for the first quarter, including sales to DSW were $82.1 million, down 21.5% versus last year. Wholesale sales were $67.3 million in the first quarter versus $91.8 million last year, including sales to our retail segments, which totaled approximately $17 million versus $10 million last year. As I have commented before, while not the primary strategic rationale for the Camuto acquisition, one benefit is commissioned income, which increased 39% in the quarter. This was primarily due to increased activity with our own retail segments on exclusive brand business. Prior to the impact of COVID-19, we were making good progress in increasing our penetration of exclusive brands throughout our assortment as well as moving the production of those exclusive brands to Camuto. We have been very excited about the early sell-throughs we were seeing on the Camuto design product that hit the shelves at the start of the quarter. One of the key benefits of the Camuto acquisition is our increasability to build out exclusive brands within our own portfolio. We remain focused on increasing our penetration of these exclusive brands in our assortment and expect to continue to transfer more production from third parties to Camuto as we move forward in 2020. Finally, in the first quarter, comps at ABG declined 62% driven largely by temporary store closures by our retail partners. Our adjusted consolidated gross profit decreased $285 million to a loss of $26 million for the first quarter versus a profit of $259.3 million in the prior year. This decline was primarily due to increased markdown activity and reserves taken across all segments, as well as increased shipping expense and significant deleverage in occupancy and fixed distribution costs given the material COVID-19 related sales declines. At our retail segments, we would expect merchandise margins to begin to improve in Q2 as the inventory with the Q1 reserves are sold through. However, we anticipate additional markdowns will continue to be elevated as we liquidate our spring inventory. Additionally, we expect deleverage on our fixed costs given year-over-year sales will continue to be depressed and shipping expenses will continue to be elevated as customers lean on digital sales in lieu of venturing out into a store. Camuto's gross margin was 16.9% in the first quarter, 770 basis points below last year's level of 24.6%, primarily due to the increase in inventory reserves as we expect to sell seasonal inventory below our costs due to the cancellation of orders. However, as we accepted order cancellations, we managed our markdown allowance agreements with our retail partners to mitigate some of the gross margin deterioration on product that wasn't canceled. We do anticipate much steeper actual markdowns beyond Q1, as we liquidate the inventory that was canceled. We have significantly reduced fall production in order to better position ourselves for the season. Moving to Designer Brands operating expenses. In the first quarter, adjusted consolidated SG&A decreased 12.3% to $188.3 million versus the prior year as the company took decisive actions to cut cost across the organization as a result of temporary store closures. Given the significantly lower sales base, our SG&A as a percentage of net sales was 39% above last year's level of 24.6%. Depreciation expense was $22.6 million in the quarter compared to $21 million in the prior year. Adjusted operating loss for Designer Brands was $212 million in the first quarter versus earnings of $46.8 million last year. This was driven primarily by the impact of COVID-19 on our gross margin, partially offset by mitigating reductions in operating expenses. Interest expense for the first quarter was $2.2 million versus $1.8 million in the prior year. Moving on, our adjusted effective tax rate was 38.4% in the first quarter versus 25.4% last year. The increase in the effective tax rate was primarily driven by the ability to carry back current year losses to a tax year where the U.S tax rate was 35%. Total weighted average diluted shares during the first quarter were 71.9 million compared to 78.3 million last year. Reported EPS for the first quarter was a loss of $3 per share, which included net after tax adjustments of $84.1 million or a $1.17 per diluted share, primarily related to the impairment charges. Excluding these charges, we had a loss of a $1.83 per diluted share for the first quarter. $84.9 million of the impairment charges were to write down fixed assets and lease assets at stores were COVID-19 impacted cash flows did not have the time to recover within the remaining lease term. Additionally, we wrote off $20 million of goodwill associated with our first cost business at Camuto given this significantly reduced cash flows that business is expected to generate over the next few years as a result of COVID-19. We also wrote down $7.6 million of intangibles. During Q1, we opened one store and closed one store in the U.S and in the quarter with a total of 521 DSW stores. In Canada, we did not open or close any stores and in the quarter with 145 stores. As a reminder, we withdrew our guidance in March. We will continue to refrain from providing guidance and look forward to sharing details when we have better visibility. As we have run multiple scenarios using myriad different assumption sets in nearly all scenarios, we continue to see pressure on our sales and our margins. We expect to continue increased promotional activities going forward, which may pressure our gross margin levels for the remainder of the year. We have made substantial progress in reducing our inventory levels, as well as cutting back our inventory receipts, but there is still notable uncertainty in the market as it relates to consumer demand. Additionally, we have instituted new payment terms with our vendors, which better align payment plans with the sale of the inventory. And we are an active dialogue with our landlords discussing go-forward rent structures, which obviously pose various levels of challenge, depending on various levels of impact to store traffic. We no longer expect Camuto's operating profit to be positive in 2020, but we are confident that going forward, Camuto will help drive overall consolidated profitability as they grow their production of our exclusive brands, increase their DTC business and focus on growing a select number of national brands more thoughtfully with targeted distribution. We anticipate that Camuto produced exclusive brands will be our biggest growth driver as we strive to reach our long-term 30% penetration. Our long-term business strategy remains intact. We are a dominant player in the footwear space and where we are evolving to anticipate and meet changing consumer demand. We remain committed to keeping you updated on all factors as we move through 2020. With that, we will open the call for questions. Operator?

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question today comes from Sam Poser with Susquehanna. Please go ahead.

Good morning. Thank you for taking my question. I'd like to know, first of all, on Camuto Group, how do you -- how was the mix of product going to change within Camuto Group going forward, given the focus on kids and athleisure versus dress and even dress casual?

Yes, Sam. This is Roger. Thanks. Thanks for the question. I think, obviously you know, that Camuto has historically been known as a dress house. And when you look at actually across Designer Brands, we actually own about 12% of the women's non-athletic footwear business across all of our businesses. I mean, we think we are the dominant market share player in that space. We see that as an asset and there will come a time when she's going to go out of her home and go to a restaurant or do something in the evenings or go back to work. So we are happy about where we're positioned and we think we will leverage that when the recovery does hit. But in the interim window of time, what we've got to do is we are going to figure out how do we get after the sneaker business in a bigger way. We brought in some resources that know that business better than frankly we do ourselves. We are working in a huge way outside of Camuto with DSW and shoe company with our athletic partners, because the beauty of our model is we have 30 million consumers, 80% of them are female. And guess what, we do not have a huge portion of their wallet when it comes to athletic. And given how those large athletic players are looking for athletes, and when I say athletes, not the Olympic athletes, but the one that runs in front of -- the ones that run in front of my home every day as I'm on these calls. We have that customer. So we're excited actually about the kind of conversations we've been having with the top athletic brands. And given you a long winded answer here, but there's just -- there's so much opportunity in athletic for us to get after, or I should say athleisure, both at Camuto and at DSW and shoe companies. So, I think we are not going to back down from the fact that we are who we are. We are a dress house, we are seasonal house. That two, our businesses have been historically, but we have a great opportunity to grow athletic share during this time period.

Thank you. And then, can you talk about some of -- can you talk about this focus on the top 50 vendors, maybe give us some examples. Is this just taking the reduction of what you called labels away or I mean, to what degree is this a completely taking this whole thing to another level? And with brands like Nike, Adidas, Sketchers, the ones that are like even Steve Madden that have a big athletic portion of their business. Again, how do you -- I mean, I know you want to grow your athletic trend with Camuto, but I mean, how do you compete with the people that have already been there for so long? And I left out a bunch of new balance and so on, that can really -- would you rather do it yourself and try to grab, share at a price, or do you just take advantage of these very established brands in these spaces?

I think the -- that is exactly the point. Going after the relationships in a bigger way with these top brands, we have the conversation at dinner the one night about the 700 or 800 labels that we carry, that ultimately we help convert into brands. While we're not going to play that game anymore, we're going to invest our inventory dollars, meaning owned inventory into these top 50-ish kind of brands that are the ones that the consumer demands. And I think this is the data point that through COVID that has really stuck out for us is that 85% of our sales as an organization are digitally demanded. And I want you to understand that what that means. When I say 85%, 20% to 25% of the time they're on the website, they decide to click to buy at that moment, but the research we've done and what we've seen is the influence it has on when they walk into the physical plant is significant. So being able to have a broader assortment from these key brands, which when you look at the top 20 search terms on our website, 18, roughly of those top 20 are these major brand names. And yes, sandals will show up there, or yes, boots will show up there in winter, but getting after these top brands and we're in the process of having these discussions with all of our top partners. And people are shutting doors, people are filing bankruptcy and we're going to be here. And so they're looking for places for them to grow, and we think we are that destination both online and in the physical location. So I think that's a great, great point. And then when you look at -- this is the best example of how important, athletic -- athleisure can be for us. In the month of May, in stores that were open in May, our athleisure and kids business combined was up 17%. We comped up 17%. That's fantastic. The challenge we have is we have a large chunk of our business that's seasonal and dress. And guess what, that's not comping. So -- but we're really proud of the progress that we've made with athletic and as we go forward for the back half of this year, and I think the foreseeable future, you're going to see that penetration grow significantly.

Thanks. I’ve got one more. With the e-commerce business, you were up 25% for the quarter. Can you sort of talk about how that may have trended by month and can you give us any color into how that e-commerce business has been doing since you've reopened stores? So can you walk us through, February, March, April, into May and June on e-commerce as a percent increase, and can you provide us what the penetration of e-com was in Q2, Q3 and Q4 last year?

So I'll -- I won't give you all of that, but I'll give you, I think, enough color to get you to understand how pleased I am with our performance. So, first -- during the first 5 weeks of the quarter, we had walked away from a significant amount of promotions that we had ran last year, frankly, because we wanted to drive the customer into our warehouses to improve margins. And actually our first 5 weeks, we were in the low single-digit comps across the enterprise. And .com comps were minimal, but it was the right thing to do. And then we got hit with COVID. And for the eight weeks that followed that, our digital demand was up 49% during that window of time. And the minute those stores closed, we started to have -- we actually had 3 of the 6 biggest days in the history of our company happened after stores closed. And when I say biggest days, meaning .com days. So like what Black Friday, Cyber Monday kind of days. And we managed through that successfully without any major site issues and all these omni tools we have invested in, we were fulfilling 80%, 90% of that demand out of our, what we call warehouses, but were the stores. And -- so I'm really proud of the work we did. And then as it relates to Q2, we're still in that 25%, 26%-ish range of .com demand. So as stores are starting to ramp back up and we're getting a bunch of them open now, we're still seeing demand online as well.

Up around 25 or so percent?

Yes. Yes.

Okay. Thank you very much. Good luck.

Thanks, Sam.

The next question comes from Rick with Needham & Company. Please go ahead.

Thanks. Good morning. And hope everyone is well.

Thanks, Rick.

I had a two part question related to the productivity from your reopen store. So, first, can you provide some additional color on these reopened doors and productivity, as we think about DSW versus Canada? And then second, this ties into Sam's last question. Can you talk about the trends that you're seeing in markets as a whole so that when we think about a market at stores plus e-com for those areas where stores have reopened are those -- how's the market revenue look versus last year?

Yes. So Rick, I'll -- I think I will answer the end of that first, but we're seeing that right now in stores that have been opened for about a month, we are at about 80% of the volume we were doing last year. I think, the good news is that is significant progress. We've really started opening stores April week three. That first week we were doing roughly 5% of the business in the -- that first group we had opened and now to see them be closer to 80% is a significant improvement. As we said, it's been improving 8 to 12 kind of top points each week. So I think I'm really, really happy with that. As it relates to U.S versus Canada, Canada we have been much more aggressive with some of our markdowns that we've taken. We didn't have the ability to get out of as much seasonal product up there as we were in the U.S. So the comp trends have been better, but margins have been impacted in a bigger way. But again, overall, we are beating our expectations that we had coming out of this as it relates to the doors that we have opened.

Got it. And you talked about planning inventories down substantially in the back half, any additional color there? Does that mean down mid single digits or down double-digits, any relative context? And then, also can you provide color on how you're thinking about categories, just given the relative strength that you're seeing in active and kids. I'm assuming, are those categories going to be playing lower as well, or can we actually expect an increase in inventory there?

Yes, we ended the quarter with inventories down roughly 16%, 17% in dollars. And I think that's sort of the directional plan as we head through the balance of the year, but we are going to keep significant open device. So what I keep going back to is 2008. And we have a playbook that worked in 2008, as it relates to turning on our marketing, which we've done. Hopefully you've seen the TV we're doing at a level that we've never done in the history of our company. You'll hear us on all the different digital channels that you listen to. So we're ramping up marketing in a significant way and we're going to manage inventories in a chase mode so that when we see it, we will get it. And I think that leveraging the relationships we have with these top brands is key to the approach that we take. So I feel pretty good about that. And then as it relates to categories, obviously, I -- Jared and I were in the office for the first time this week and I said, I think it's the first time in 13 weeks, I've actually worn a pair of pants, that's not a sweat pants. So, we're going to continue to figure out ways to get after this at leisure, kind of look and as Sam had pointed out, whether that be sneakers from some of the brands or sneakers that we can develop at Camuto, that is what he and she are wearing right now, and we've got to continue to get after that along with kids.

Thank you very much. All the best.

Thanks, Rick.

The next question comes from Tom Nikic with Wells Fargo. Please go ahead.

Hey, good morning guys. Thanks for taking my question. You said something in the prepared comments about rationalizing the brand portfolio. And I think, Jared, you might've touched on it briefly as well during your comments. I'm not sure I completely understand what's happening with the Camuto business and the brand portfolio. If you could sort of elaborate on that a bit, that would be helpful. Thanks.

Yes. Thanks, Tom. So, when we acquired Camuto, they were working on or managing upwards of 30 plus brands. And so the work that we've been doing is trying to really identify who are the target customers for each of our brands, what's the market look like for each of those brands and then what investments are required to grow them. And so that's the work that we've been doing and it won't be 30 brands, this is what I could tell you. It's going to be something significantly less than that where we will focus our attention. And this isn't just because of COVID or because of downturn, this has been our game plan from day one, but that's what we mean. So you're going to hear about us focusing our efforts on Vince, on Lucky, on Jessica, on JLO and on our exclusive brands. Those are the areas of the business that we see that there's growth potential and market opportunities. So that -- that's where our core focus is going to be.

Got it. And a quick question on, I guess the store associate base. I know you had to make the unfortunate decision to furlough a large portion of your employee base. Have you had any sort of difficulty getting people back to work? Did people find on their jobs elsewhere, or do you anticipate any issues, re-staffing the stores as things get back to normal?

We have -- unfortunately we ended up having to furlough about 88% of our entire workforce. I'm happy that, because our stores are getting back up and we're getting sales, we've now called back roughly 60% of our organization, which I'm excited by that. And as we start to open the Northeast and some of these other larger markets, that number is going to go up significantly in the next couple of weeks. So -- but to date, we have not experienced any major hurdles is what I would say. What I'm really proud of is the investment that we made in protecting the health and safety of our associates. I think probably us and American Eagle because we work together a lot on different projects, obviously because of Jay and his relationship between the two companies. But I think the two -- our two brands I think stood out when you go in to see what the experience is like for our customer. And we messaged that to our associates. So, I think we are a very safe place for an associate to come back to work and we haven't really experienced any, I would say, major kind of challenges of getting folks back to work.

Got it. Well, thanks for taking my questions. And hopefully we can all get back to a somewhat normal -- a normal situation sometime soon. Best of luck for the rest of the year.

Thanks, Tom.

The next question comes from Steve Marotta with C.L. King & Associates. Please go ahead.

Good morning, Roger and Jared. In the prepared remarks, you mentioned that the company's reached alignment with nearly all major vendors and landlords on past due amounts and its extended go-forward payments. Can you peel the onion back a little later there? Is this just a matter of extending terms and pushing back payments, or are -- has there been a net amount of reduction that you're -- that you would have otherwise been expected to pay that you are not also, if you could dovetail that into you mentioned essentially future agreements that are still the potential to save money on rent is what I heard. And maybe could elaborate a little bit. Thanks.

Yes, Steve. This is Jared. Thanks for the question. We approached -- so let me kind of take it back to when we first went into COVID. We first went into COVID, we reached out to all of our vendors and all of our landlords and said until we have a better clarity and visibility on our -- amending our current revolver, and when our stores are going to reopen, we need assistance and not having to pay things as do. And we received huge support across the board on that front. Once we had visibility on those two items, we actually started reaching out one-on-one with all of our top vendors and with every single one of our landlords to say, okay, of those items that we didn't pay you for but were due, let's get on to payment plan for that. And the vast, vast, vast majority were very cooperative and we are on a -- we are back in good graces and we are on good terms and we are not in default with any of those major creditors. And that is being paid off. Every deal was different, but it's being paid off over the next few months to the next couple of years, if it was added to the end of a lease term. Those were not concessions. Those were deferrals and I think that's what your question was getting to. We then had a discussion and reached alignment with all of our vendors about our new go-forward terms. And those are for any orders that have been written for future delivery. That is going to be much more aligned with what our anticipated inventory term is going to be. So we should see some permanent working capital improvement come out of that. Again, as Roger was talking about, given the amount of growth we're going to have with the top 50 vendors, having that part of the discussion, it was a good time to have that with them and it's worked out very, very favorably there. On the landlord front, we are working with A&G Realty Consultants, one of the largest lease workout groups. And we are now assessing, how do we go back and have the discussion with the landlords on what does the actual rent expense look like based on what's happening with traffic. And to be perfectly honest, right now, as much as we don't know what the permanent impact of traffic is, the landlord doesn't either, but we all know that right now, it's impacted pretty substantially and it's causing significant deleverage on our occupancy line and that's not sustainable in the long-term. So with the help of an advisor who does this for a living and does it very, very well, we are having those discussions about how do we get true actual relief in some way shape or form on that big expense line.

That's very helpful. And I actually have another follow-up or two on that, but I'll take that offline. Roger, can you talk a little bit about, you mentioned opportunistic buys and close outs. Can you talk about what you intend to utilize immediately? What you intend to pack away, how that will I assume positively impact your margins potentially in the short-term and maybe what percent of the business you would anticipate, maybe at the balance of this year, maybe a little bit of next year, I assume it's going to be a little bit more than it has been? And maybe you can just talk about your strategy around buyouts and close outs.

Yes, Steve. Thanks. Historically, those have become a significantly decreasing portion of our assortment and what I'm excited about is we have had these conversations with our top brand partners is talking about how do we continue to sell their inline product, which is the same goods you could find in other retail channels. But the beauty of that for us is be through our loyalty program we're actually able to offer a value proposition that you can't find elsewhere. So we're able to pass value to our consumer through that. And then the second big chunk of our assortment is the special make-ups, that allow us to show compare at value. And then the third bucket are the close outs. And that has fallen down to be 8% to 10% of our business. And we're anticipating that we should double that, or bigger as we move forward. And then having these conversations with our top brands, being their first choice for liquidating those kinds of goods, that's the approach that we're trying to take. And so far this conversations gone really well. We've had some really good close out buys that some of them will, will show up in fall. We've tried not to do a ton of pack and hold of spring goods, frankly, because from a liquidity standpoint right now, I'm really not into buying a bunch of stuff and putting in a room somewhere and burning through cash with that. So we are going to continue to get after the close out business in a big way and to be able to pass value under our customer. And when you combine all three of those, there really is no one else out there that you can go to from a brand perspective that has all three of those within the same brand portfolio. So that that's the approach we're trying to take.

Very helpful. Thank you for the clarity.

Yes. Thanks, Steve.

The next question comes from Gabi Carbone with Deutsche Bank. Please go ahead.

Hi, good morning. Thanks for taking our question. We understand you aren't providing guidance, but on gross margin, how should we be thinking about the trajectory through the year at the U.S segment? And if you could dig take into the headwinds we should be considering that will continue and if there are any offsets you see potentially? Thank you.

Yes. Yes, Gabi. So you are right. We are not providing guidance. What I would tell you is due to the fact we did have to take large reserves because we're on the retail method of accounting. In Q1, we wouldn't expect the gross margin deterioration in Q2 to be as severe. However, it certainly is going to be impacted as we continue to have to look at ways that we can liquidate out of this inventory that we -- obviously, we are intending to sell and didn't have the opportunity to do so. As we get into fall, where we have right-sized the buy, and as Roger mentioned, we are sitting on a lot of open to buy, and we will put that to work in a chase mode, should we see the trends materialize, we would expect our margin rates to get much improved, much closer to normal in the fall with one caveat. I mean, depending on the level of actual comp sales, our occupancy deleverages, if it's anything below about 1.5% positive. So that will probably continue to be a headwind. But from a merchandise margin, fall should look much better.

Got it. Thank you. And then just a quick follow-up. You mentioned store optimization kind of going ahead. How are you rethinking your store count in the U.S.? Is there anything you can tell us now how you're thinking about that?

Yes, Gabi. This is Roger. I think I'm pretty certain in all of retail, we have one of the better fleets from the way we've positioned the business. As we exited last year, there was roughly five or so doors that were cash flow negative. So that's pre-COVID. So we were in a really, really good place. The conversations that we're having now with the landlords is that was pre-COVID. And as the consumer behavior permanently shifts as a result of what we've all just gone through, that number is significantly higher. And so what we're trying to do is to try to get to some level of, let's just call it, a normalized sense of how does the consumer come back to the physical store versus shop online. And then we've got to sit down to have the tough conversations with our landlords that are they going to work with us or not. And the beauty of our model is, and credit to Bill Jordan and our real estate team, our deals really every five years, we have the ability to open or close a store because of the way our leases are structured. So, 20% of our fleet each year, we have the ability to make some decisions on. So that's the lens we're using, let's get through Q3. Let's see how things play out as things come back to normal and then sit down and have the real conversations with the landlord about the actions that we need their support on to ensure that we can still stay open in all of these markets. And as part of that, it will also be a conversation about how we bring these services to life. And part of the discussion can be, we are a traffic driver. And we have found an incredible tool, called W Nail Bar, that when we open those nail bars, we can get more traffic to our center. So, in helping to invest with us on how we can retro some stores, we’ve a greater appetite to go after that once we get through this. So those are all things that, as we have the conversations with the landlords, we keep reminding them. But I really like the fact that we have the ability to adjust our fleet roughly 20% a year.

Great. Thank you so much for all the color.

Yes. Thanks, Gabi.

[Operator Instructions] The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Good morning, everyone. As you think about the digital business and the penetration of the digital business that you've had, how do you see the cost structure aligning with that? How do you see shipping costs go forward and how you're planning and the penetration rate? And lastly, on the expense structure, what doesn't come back, or how much of the expenses that you've realigned, what doesn't come back? And what are the categories where there's opportunity? Thank you.

Well, thanks, Dana, for the question. I think, again, as we talked about the digital demand, again, think about 85% of all of our purchases really start with that digital -- with a digital sale. And as it relates to shipping costs, right now is not, frankly, a time to be able to negotiate rates with some of those carriers. What I like about our business is during this pandemic we’ve one carrier that we utilize today. We turned on the ability to use multiple carriers. And we did that while only having roughly 20% of our workforce in place. We've turned on buy online, pick up in-store years ago, but we turned on curbside pickup during the pandemic. We have some new things we've done around self-checkout. So, I think there are things we can do that can leverage the digital experience in a way that reduces the cost of shipping as we run the business more efficiently. So I feel like it's probably going to stay in the ballpark of where we are today. And then obviously, as that continues to grow, we will find ways to negotiate harder on what those rates could look like. As far as expense realignment, I mean, obviously, the largest expenses we’ve are payroll and our occupancy costs. And the occupancy side, as Jared had mentioned, we're getting after that over sort of a three staged approach. So over the next six months, I think we're going to be able to answer that question more specifically for you. As it relates to payroll, as I shared earlier, roughly 60% of our team is back to work. And that's going to flex based on the kind of demand that we are able to generate. And again, we're at roughly 80% of the business we were doing before in our stores. So expenses will have to model after how those sales recover. But our intent is to try and get as many people back to work within this organization as we possibly can.

Yes, Dana, one thing I would add to that. You may recall back in 2018, we went through a pretty big labor force -- or a labor model redo, where we actually made our labor model in the stores much more flexible because we were finding at that time, there was a mismatch of when we had floor coverage versus what the traffic was. But here, as we have seen big impacts to traffic, that gives us a lot more flexibility to flex that up and down than what we had before we did that big redo.

Thank you.

All right. Thanks everybody …

This concludes our -- this concludes our question-and-answer session. I would now like to turn the conference over to Roger Rawlins for any closing remarks.

Thank you. Thanks, everybody for taking the time to call in and look forward to, hopefully, someday, getting to see all of you in person. But thanks for your interest in our business. Have a great day.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.