Steven Madden, Ltd. (SHOO) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 and Full Year 2020 Steve Madden Limited Earnings Conference. [Operator Instructions]. I would now like to hand the conference over to Ms. Danielle McCoy. Ma'am, you may begin.

Thanks, Dmitris, and good morning, everyone. Thank you for joining our fourth quarter and full year 2020 earnings call and webcast. Before we begin, I'd like to remind you that during our call, we may make certain forward-looking statements as defined in the federal securities laws regarding our expectations or predictions about the future. Generally, these statements relate to projections involving anticipated revenues, earnings or other aspects of the company's operating results. Because these statements are based on current assumptions and expectations, they involve known and unknown risks, uncertainties and factors not within the company's control. And as such, our actual performance and results may differ materially from these statements. Our annual report and other reports filed with the SEC from time to time include detailed discussions of the risks the company faces, and we urge you to refer to these. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the company's business operations and results. Such forward-looking statements with respect to the COVID-19 pandemic include, without limitation, statements with respect to the company's plans and response to this pandemic. At this time, there is still significant uncertainty about the duration and extent of the impacts of the pandemic. Due to the dynamic nature of these circumstances, statements made on this call regarding the company's response to the COVID-19 pandemic could change at any time. Any forward-looking statements represent our judgment as of the time of this call and cannot be relied upon as current after today's date. We disclaim any intent or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required under applicable law. The financial results discussed are on an adjusted basis, unless otherwise noted. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release. Joining the call today are Ed Rosenfeld, Chairman and Chief Executive Officer; and Zine Mazouzi, Chief Financial Officer. With that, I'll turn the call over to Ed.

Thanks, Danielle. Good morning, everyone, and thank you for joining us to review Steve Madden's fourth quarter and full year 2020 results. While the COVID-19 pandemic continues to have a negative impact on our business, we were pleased with our results in fourth quarter, which exceeded our expectations and showed strong sequential improvement from third quarter. Overall, 2020 was, in many ways, the most challenging year in our company's history, but we relied on our strengths and agile business model, a strong balance sheet and our talented and resourceful employees to successfully navigate the crisis. We continued investing in our brands and our digital capabilities while reducing expenses in other areas, and we utilized our test-and-react strategy and speed-to-market capability to quickly adjust our product mix to align with changing consumer preferences. We also made significant progress on our ESG initiatives. Let me briefly touch on the highlights. First and foremost, our top priority since the crisis began has been protecting the safety and wellbeing of our employees and the broader community. And I'm proud of the steps we took to safeguard the health of our employees and our customers, including proactively closing our stores earlier and keeping them close longer than most of our peers and how we supported our communities through donations of medical-grade masks to hospitals, non-medical face coverings to homeless shelters, meals for health care workers, financial assistance for organizations combating hunger and more. Second, when the severe impact of COVID-19 became clear, we moved quickly to implement a number of measures to preserve liquidity and enhance financial flexibility, including suspending dividends and share repurchases, cutting operating expenses, capital expenditures and inventory receipts and putting in place a new $150 million asset-based revolving credit facility. While some of the expense savings were temporary in nature, a meaningful portion will have an ongoing benefit, including $25 million in annual savings from the restructuring we implemented in July and $14 million of rent expense savings in 2021 compared to 2019. Overall, these actions enabled us to generate strong free cash flow through the crisis, and we ended 2020 with no debt and $287 million in cash and short-term investments. Based on our strong financial position, we announced today that the company's Board of Directors approved the reinstatement of our quarterly cash dividend of $0.15 per share, and we also plan to resume share repurchases in future periods. Third, we also took swift action to address the rapidly changing marketplace. In terms of product, we utilized our test-and-react strategy and industry-leading speed-to-market capability to quickly adjust our merchandise assortments to align with changed consumer preferences, successfully leaning into more casual and comfortable styles while deemphasizing dressier products. And with respect to distribution, we significantly accelerated our digital commerce initiatives, increasing investment in that area even as we pulled back spending in other parts of the business. We added high level talent to the organization, invested in our data science capabilities, ramped up digital marketing spend, launched our new try-before-you-buy payment option, rolled out buy online, pick-up in store to all U.S. full price retail stores, introduced new enhanced delivery and return options and more. Overall, our company-operated e-commerce revenue grew nearly 50% in 2020 on top of 58% growth last year, including 55% growth in our Steve Madden e-commerce business on top of a 51% increase in the prior year. Importantly, company-operated e-commerce profit margins also expanded meaningfully for the third year in a row. And fourth, the challenges we all faced in 2020 emphasized to us our responsibility to all our stakeholders and the opportunity we have to create positive change for our people and our communities. In addition to the COVID-19 relief efforts I mentioned earlier, we made donations to Black Lives Matter, the NAACP, the Trevor Project and more. And in December, we announced a partnership with the Fearless Fund to provide 50 women of color entrepreneurs free enrollment to their 12-month Get Ready Venture program, which provides training and mentorship to build the knowledge and skills needed to gain access to capital. We also made progress in lessening our environmental impact by, among other things, introducing new Steve Madden shoe boxes that are 100% recyclable; partnering with industry trade group, FDRA, on a pre-consumer waste management project; piloting a new shoe takeback program in our stores; and increasing the use of recycled and renewable materials in products across our business. This spring, we're excited to be launching COOL PLANET by Steve Madden, a new brand offering fashion footwear using recycled, renewable and other environmentally-preferred materials. For every pair of COOL PLANET shoes sold, we will plan to tree in partnership with One Tree Planted, a nonprofit organization dedicated to reforestation efforts around the world. Overall, we are committed to meaningful and measurable improvement in the impacts we have and to being transparent about our actions. In July, we published our first sustainability report, which outlines our overall corporate social responsibility roadmap and how we intend to ensure that CSR and sustainability are embedded in everything we do going forward. And we look forward to updating you on our progress when we publish our next report later this year. Overall, our company was tested like never before in 2020, and I couldn't be prouder of how our teams responded and all they were able to accomplish. As we look to 2021, our focus remains on creating trend-right products and getting it to market quickly, deepening connections with our consumers through enhanced marketing, driving our digital commerce agenda, expanding in international markets like Europe where we have strong momentum and lots of runway, and efficiently managing our inventory and our expenses, all while working to create positive change for our people and our communities. And while we are cautious on the near-term outlook due to continued headwinds from COVID-19, we are confident that the steps we have taken during the crisis combined with the strength of our brands and our business model, leave us well-positioned to capitalize on market share opportunities and create value for our stakeholders over the long term. I would now like to introduce Zine Mazouzi, who became our Chief Financial Officer on January 1. Zine has been a key member of our executive team since the beginning of 2018 when he joined us as Chief Accounting Officer and Senior Vice President of Finance and Operations. His strong financial, operational and leadership experience, combined with his deep understanding of footwear accessories and retail, make him a tremendous asset as we drive toward an accelerated recovery and a return to profitable and sustainable growth. I also want to thank Arvind Dharia, who was our CFO for the past 28 years, and congratulate him on his retirement from that role. Arvind was instrumental in building Steve Madden into the company it is today, and I am extraordinarily grateful for his partnership over the past 15 years that we work together. I also want to thank Arvind for agreeing to serve the company in an advisory capacity through the end of 2021. With that, I'll turn it over to Zine to review our fourth quarter and full year 2020 financial results in more detail.

Thanks, Ed, and good morning, everyone. I would like to start off by saying that it has been a great pleasure to be a part of the Steve Madden team over the last couple of years. I'm excited and honored to take on my new role as CFO and look forward to meeting and connecting with many of you as the year unfolds. Turning to our results. In the fourth quarter, our consolidated revenue decreased 15.9% to $353 million compared to prior year revenue of $419.6 million. Our wholesale business declined 16.2% to $263 million compared to $313.8 million in the prior year period. Wholesale footwear decreased 19.7% to $187.3 million, and wholesale accessories and apparel declined 5.9% to $65.7 million. While COVID-19-related impacts clearly continue to pressure this business, we were pleased with the sequential improvement compared to the third quarter. In our retail segment, revenue decreased 14.9% to $86.1 million as our brick-and-mortar business remained under significant pressure during the quarter. However, our strong e-commerce momentum continued with revenue increasing 36%, including 51% growth in our Steve Madden e-commerce business. We ended the quarter with 218 company-operated retail stores, including 66 outlets and 7 e-commerce sites as well as 17 company-operated concessions in international markets. Due to local government orders, we had to reclose 1/3 of our stores during the fourth quarter. As of today, approximately 34% of our stores in Canada remain closed, but the balance of our stores worldwide have reopened. Although our operation remained reduced by approximately 25% on average. Turning to our licensing and First Cost segments. Our license and royalty income, which is now included in total revenue, was $3 million in the quarter compared to $3.1 million in last year's fourth quarter. First Cost commission income, which is also now included in total revenue, was $0.9 million in the quarter compared to $1.6 million in last year's fourth quarter. Consolidated gross margin in the quarter increased 40 basis points to 38.2% compared to 37.8% in the prior year. Wholesale gross margin declined 90 basis points to 28.3% compared to 29.2% last year due to the closeout of excess inventory resulting from store shutdowns and order cancellations earlier in the year. Retail gross margin rose 400 basis points to 65.6% compared to 61.6% in Q4 last year as we saw higher margins in both e-commerce and stores, primarily due to less discounting. Operating expenses for the quarter decreased 13.2% to $109.2 million compared to $125.7 million in last year's fourth quarter, reflecting the company's expense control measures. Operating income for the quarter totaled $25.6 million or 7.3% of revenue compared to last year's fourth quarter operating income of $33 million or 7.9% of revenue. Our effective tax rate for the quarter was 13.3% compared to 6.3% in the same period last year. Finally, net income attributable to Steve Madden Limited for the quarter was $21.8 million or $0.27 per diluted share compared to net income of $32.2 million or $0.39 per diluted share in the fourth quarter of 2019. Now I would like to briefly touch on full year results. Total revenue for 2020 decreased 32.8% to $1.2 billion from $1.8 billion in the prior year. Net income attributable to Steve Madden Limited was $51.8 million, $0.64 per diluted share for the year ended December 31, 2020, compared to $162.8 million or $1.95 per share for the year ended December 31, 2019. Moving to the balance sheet, our foundation remains strong. And as of December 31, 2020, we had $287.2 million of cash, cash equivalents and short-term investments and no debt. Inventory totaled $101.4 million, down 26% compared to the prior year figure of $136.9 million. Our CapEx in the quarter was $1.1 million. As Ed mentioned, the company's Board of Directors reinstated a quarterly cash dividend of $0.15 per share. The dividend will be payable on March 26, 2021, to stockholders of record as of the close of business on March 16, 2021. Looking forward, while we are confident in our long-term positioning and optimistic about our prospects as conditions normalize, we are cautious on the near-term outlook due to headwinds that include supply chain disruption, higher freight costs, the nonrenewal of GSP, store closures and reduced store traffic and hours of operation. In particular, we expect supply chain disruption, primarily related to congestions and slowdowns at the ports, to negatively impact Q1 revenue by approximately $30 million. Including this impact, we currently expect Q1 wholesale revenue to decrease high-single digits and retail revenue to increase mid-single digits on a percentage basis compared to last year's first quarter. Given the continued uncertainty related to the COVID-19 pandemic, we're not providing full year revenue and earnings guidance at this time. Now I'd like to turn it over to the operator for questions. Operator?

[Operator Instructions]. Your first question comes from the line of Erinn Murphy with Piper Sandler.

I guess my first question, Ed, it's for you, on your e-commerce business, it sounds like you've made a lot of progress on the margins. Could you just kind of remind us where they're compare to the overall business today? And then maybe taking a step back, how big is your e-com business today? And does the growth prospects kind of influence or change your views on kind of an appropriate physical footprint over time? And then I've got a couple of follow-ups.

Sure. Yes. We're really pleased with the progress we've made in improving the profitability of the owned and operated e-commerce business. We've had pretty substantial increases each of the last few years. I think we were up about 350 basis points in 2020 over 2019, and so that business now is contributing in the high teens in terms of profit. Now of course, that excludes any corporate allocation, but the contribution of that business itself, again, in the high teens, and we think that there's potential for further expansion in '21 and beyond. In terms of the size of the business overall, it's about $133 million in 2020, the owned and operated e-commerce business. And yes, certainly, I think all of us are reevaluating our physical footprint in light of the growth of e-commerce overall. I still think stores certainly have a place, and I think that we do see the benefits of the omnichannel model and how the stores and e-commerce work together to serve our consumers. But I do think we'll have to continue to evaluate how many stores we need going forward as the e-commerce business continues to grow.

Great. That's super helpful. And then I guess my second question is around your wholesale business and kind of what you're seeing from your key retailers thus far in spring. I'm just curious if you can give us any color around the order book or what's kind of trending right now in terms of the footwear side of your business? And then if you could just dig a little bit more into the supply chain disruptions, how long could that be with us as we look forward over the next 3 to 6 months? Is that kind of the time frame you're thinking about some of the pressure there?

Sure. Well, look, I think we -- as we talked about in the last call, the retailers all plan their businesses down for spring of 2021 compared to '19. I think on the last call, we talked about down 15% to 20% overall. Of course, subsequent to that, we had the third and most significant surge in COVID, so I think if anything, those plans got pushed down even a little bit further on an overall basis, so maybe more like down 20%. But the biggest issue right now is what you alluded to in the second part of your question, which is the supply chain disruption. So we're -- it's a big challenge. And it's -- there are a number of places in the supply chain where there are challenges, certainly, the biggest one is the congestion at the ports. But we're seeing lead times that have -- that are extended by as much as, I would say -- or even an average of like 3 to 4 weeks. And so it's -- for a company that turns their inventory as quickly as we do and really operates in sort of a just-in-time model, it's pretty challenging, and it's having an impact. And as Zine alluded to in the prepared remarks, we're looking at about a $30 million revenue impact in Q1 from the supply chain disruption. And most of that is in the wholesale business. In terms of how long that's going to last, look, I don't know that I have much better information than you do on that. There are folks that are -- that believe that it's going to be around April-May time frame we're going to see that get back to normal. But I've seen others speculate that this could be an issue into the summer, so we'll just have to keep monitoring it and trying to manage through it.

Our next question comes from the line of Camilo Lyon with BTIG.

Just following up on the supply chain discussion, Ed, how do we think about the impact on Q2, which is typically more of a reorder quarter for you? So what is this delay really -- how does that progress through Q1 and into Q2? And how do we think about that affecting your business? And then separately from that, I'd love to get your thoughts on, does this change how your design timelines unfold with the anticipation and expectation that we get to some sort of return to socializing events next -- in the back half of this year? Are you already starting to plan the assortments to cater towards more dress and going-out occasion type of footwear? Or are you waiting for more of the order patterns to unfold to reflect that?

Yes. Okay. So in terms of how the supply chain disruption impacts Q2, look, some of the -- or a good chunk of the goods that we would have otherwise delivered to wholesale customers, say, in March, we do believe will go out in Q2. So there is some benefit as things move out. But to your point, we do a lot -- we get a lot of reorder business in Q2. And then of course, we also don't know, as I said, to Erinn, how long this is going to go, and how much is -- if there are a product that would have gone out in June that get pushed into July, for instance. So we'll just have to keep watching that. In terms of the product mix. Look, we do certainly anticipate that in fall, there's going to be more people getting out more, hopefully, going to events and out to dinner and concerts. We'll have to see where we are there. But certainly, it should be further along than we are today. And so we're -- that's obviously top of our mind as we think about the product mix. We're already -- one thing I'll say is, we're seeing some pretty surprisingly good performance in terms of sell-through on some of our dress styles right now. Now it's a smaller percentage of the overall mix. The penetration is lower, but the stuff that we have out there is selling through. So we do see a customer that's looking for that, and I think we remain a destination for that. So as that part of the business recovers, I think we'll be positioned well.

Great. And then if you can just give us some shape to how we should expect to see the gross margin line unfold, understanding that there's probably more costs from a supply chain perspective that are going to hit in Q1 and maybe into Q2? And help us understand how we should think about the turn on of higher-priced goods, maybe more boots and booties and dress shoes in the back half as the recovery takes hold -- take shape?

And yes, look, I mean, we're not providing guidance, right? I'm not going to get too specific here, but I guess I'll say, as you think about the first half, if you're comparing to last year, on the one hand, last year, of course, when we had the shutdowns, we took some pretty significant inventory reserves, which impacted -- which negatively impacted gross margins, so we don't anticipate having to anniversary that, of course. But on the other hand, there are some significant headwinds to gross margin in the first half year. And so you mentioned one of them, which is the supply chain disruption and the impact that's going to have. Another, somewhat related one is, I'm sure you've heard from others that freight rates are up dramatically, and so that's a headwind, too. And then the third one I would point to is the nonrenewal of GSP. So unless until GSP is renewed, that's a headwind for us and we make a little over half of our handbags now in Cambodia, so that's a significant impact to our accessories margin. Hopefully, when we get into the back half, these issues will all be behind us.

Our next question comes from the line of Janine Stichter with Jefferies.

Thanks for all the color on the gross margin. I wanted to dig a little bit more into the retail gross margin. You've been playing back on those promotions for some time now, so curious if that's something you still see ongoing opportunity for? And then maybe if you could just comment on the inventory in the channel. I think it's been very lean and maybe even a little bit too lean for a while now, how you see that unfolding as the year progresses and how you think that impacts the broader promotional environment?

Yes. That's been a positive story for us that we've been able to, to be less promotional in our retail segment, and that included both -- certainly in fourth quarter, both our e-commerce business and our stores, and that's continued into Q1. And so I think you'll see continued gross margin improvement in that segment in the first part of the year as we move. Throughout the year, we start to anniversary some of those increases. So probably less improvement as we go throughout the year. In terms of inventory in the channel, yes, we would say, particularly, if you think about our brands, that the inventory in the channel is light. And I think, at the moment, a good -- a lot of the reason for that is the supply chain disruption. So it's been a little frustrating for us because we've got some spring styles that we feel very, very good about overall. And we -- the customer is really responding to them. So we've got some sneakers that are phenomenal. In the sandal category, we're doing really well. We've got flat sandals that the customer is really responding to and even dress sandals, anything with this big jewels on it, oversized embellishment, wovens. We've got a lot of different things happening, but unfortunately, we're just not able to get enough of it into the stores and up on folks sites right now because of the supply chain disruption.

Okay. Great. And then on the wholesale gross margin, just wanted to clarify, was the -- disposal of the excess inventory, was that the entirety of the decline? And are you completely done with that now?

Yes. In fact, we estimate that, that accounted for about 120 basis points of gross margin pressure in wholesale. And I think overall, we were down 90, so that was the story there. And yes, that's essentially -- I mean there's a couple of dribs and drabs, but it's -- that's essentially behind us.

Your next question comes from the line of Laura Champine with Loop Capital.

It's really on your early thoughts about back half and maybe the easier to answer part of that is, how late can you set your plans for orders for inventory amounts for the back half leading into holiday? And what are your initial thoughts on what we can expect for demand patterns?

It's a good question. There's obviously still so much uncertainty due to the COVID-19 and how quickly the vaccine gets distributed and what impact that has on shopping behavior. We're certainly planning for the back half to be -- to see healthier demand than the first half, but still planning it down to '19. We think we can be -- if we're looking at '19, we're hearing from our wholesale customers that the majority of them are planning that the fall business down to '19, very wide range. I've heard some folks are planning only modestly down and then some folks talking about down 15% to 20%, so there's a range. Again, this is an overall number. This is not our business with them. On the other hand, in our retail segment, I think that given the strength in our owned and operated e-commerce, we can be up versus '19 in the back half.

Are you prepared if we do see a surge in event, just kind of a bounce back pent-up demand for fashion footwear? How can you successfully chase -- how late can we successfully chase product into holiday if it shapes up to see even perhaps some growth on top of '19?

Well, look, I think that's something we do better than anybody. That's really been the hallmark of our company is our speed to market and how quickly -- once we identify a trend, how quickly we can chase into it. And particularly in fall, we're doing more out of Mexico, which even increases our speed to market. The only caveat, of course, is all that we're dealing with on the supply chain here. So at the very moment, we're not as fast as we usually are, but certainly, by fall, hope to hope that's behind us.

Our next question comes from the line of Sam Poser with Williams Trading.

Hope everybody's safe and well. The -- what about airfreight? And could you also give us some idea of how your direct-to-consumer business is running quarter-to-date thus far to just give us some color on sort of how to think about it?

Yes. So look, in a normal environment, if we were having a lot of port congestion and slowdowns, we would probably be putting a lot more products on airplanes. But the challenge is, airfreight is up over 100% airfreight rates from where they were a year ago. And so we are flying some goods, but we have to be judicious about that as well, given how expensive that is right now. In terms of our retail business, so far this year, we are running positive to last year in our retail segment overall. So obviously, still negative in bricks-and-mortar, but very strong growth in our owned and operated e-commerce.

And then when you think about your e-commerce asset for -- I know you're not guiding the full year, but when you think about your e-com business for the full year, I mean, are you looking at another growth like you've seen over the last 2 years in 2021?

I think we expect the momentum -- to continue having strong momentum there and to see strong growth. I would say not -- we do expect the growth rate to moderate, though, just given the tough comparisons from last year. I mean there were periods of last year, obviously, where it was the only channel that was open. And as we do expect the bricks-and-mortar business to recover somewhat, that will lead into that e-commerce business a little bit. But again, still should see nice growth.

Okay. And then lastly, I just want to -- I might have missed it, I probably did miss it, can give us what the gross margin was for wholesale footwear and accessories in the quarter?

Sure. Yes. I don't think we did give that, but I'd be happy to. Let me just pull that up here. Wholesale footwear was 27.7%; wholesale accessories and apparel, 29.8%.

And then in your guidance -- sorry, 1 more -- in your guidance for Q1 -- in the revenue guidance for Q1 with the wholesale revenue down high singles, are you thinking about that with footwear being more impacted than accessories because of accessories and apparel given the addition of your apparel business and so on?

Well, I do think that the decline in footwear will be -- versus the prior year will be -- it will be down a little bit more than wholesale accessories and apparel. I think that's mostly just a function of -- the apparel business, we've already anniversaried that. I don't think that's the issue. I think that we've talked about how we've been pleasantly surprised with our performance in bags. And so we've got the private label bag business doing quite -- doing very well. And Steve Madden handbag business is doing well, and I think that's what's driving the accessories and apparel outperforming shoes a little bit.

And I got -- sorry, I got 1 more. What about the business to your -- to the Walmarts and Targets of the world? What are you seeing there in that big chunk that has been open pretty much the whole time?

Yes. Not surprisingly, the trend there is better than in the balance of the business. So in Q4, our private label business, the trend was better than the branded business. But going forward, I think that we expect that to start to revert back to sort of normal penetration.

Your next question comes from the line of Tom Nikic with Wells Fargo.

Ed, on the last few calls, you've spoken about some dynamics in the off-price channel and a lot of pack-away product and stuff like that. I was just wondering if you could sort of give us an update there, what's happening in that channel? Is there sort of still significant disparity in the outlook between off-price and your full price channels?

Yes. We did ship a fair amount of that COVID inventory into the off-price channel in Q4 for pack-away. So -- and we talked about how that had an impact on the gross margin in wholesale in Q4. It also will impact revenue a little bit in Q1 because, obviously, all that pack-away inventory is for spring, and so they don't need as much new spring this year. But I think once we get into Q2, that should pretty much be behind us.

Got it. And then just a quick follow-up on the cost structure of the business. You spoke about some of the cost savings that will persist post-COVID, and I think it totaled almost $40 million. And I would imagine there's like some other areas of reinvestment, maybe in like digital and things like that, but -- so when we kind of think about the SG&A line in '21 relative to, let's call it 2019, pre-COVID levels, like -- I mean we're probably not thinking $40 million lower, but we're probably thinking somewhat lower than 2019. Am I thinking about that correctly?

Yes. I think you are. I think that the -- just to elaborate on that, I think that the offset to the savings that we talked about when comparing '21 to '19, the big one would be marketing. We do continue to increase marketing investment in our brands. We were up in 2020 in marketing, even with the revenue being down so significantly, and we are planning to further increase in '21. So marketing is probably up $15 million in '21 compared to what it was in 2019. And then as you point out, there's also -- as our owned and operated e-commerce business has grown, keep in mind, that's the highest variable cost business that we have. So there are variable costs associated with that, that are up. But other than that, I think you're thinking of -- you're really thinking about it the right way.

[Operator Instructions]. Your next question comes from the line of Susan Anderson with B. Riley.

Nice job managing the quarter, especially with all the stores closing again. I guess just a follow-up on the e-com business and the increasing penetration in 2020, just curious your thoughts on 2021 and do you think this is, I guess, the new norm? Are you expecting that to dial back at all as consumers go back to wholesale stores and then also your own stores?

Yes. It's a good question. Look, I think -- for the most part, I think this change in shopping behavior is going to be sticky. I think that it's likely that the overall penetration in '21 ticks down slightly from where we were in '20. We won't have months at a time with no business happening in stores, hopefully, but nevertheless, the penetration in '21 is going to remain substantially above where it was in '19. And I think that -- and it will continue that way going forward.

Great. And then just on the GREATS business, I'm curious how that's done in this environment, especially given the more casual nature there?

It's been somewhat challenging, I would say. I think that GREATS -- it is sneakers, but GREATS was impacted pretty negatively by COVID. Number one, we were not -- we did not move forward with our plans to expand the distribution, as we talked about, that really got delayed a year into some of the new wholesale accounts. But also, while the products are sneakers, that core Italian leather sneaker that they do is really a product that a lot of men wear to the office or when going out for night on the town, and so I do think that there was some pressure on that business due to COVID. What we have seen recently though is we've been introducing some new products, and we're pretty excited about the consumer response to some of the newness. We had -- the biggest one was a slipper that we introduced in Q4, which, pretty much overnight, became like 20% or 25% of the business every day. But we continue to introduce -- we introduced a runner and also a lot more of the sustainable products, and we're really -- now really telling the story of our responsible manufacturing, and the consumer is really responding to that. So I feel good about the direction we're headed there.

Great. And then did you say you're expecting to expand that distribution this year? Or is that a 2022 thing?

Yes. We will be putting it into some new wholesale accounts this year. I'll be honest with you, it's not the expansion plan that we had for 2020 prior to COVID. I think we'll probably go a little bit slower, but we will be shipping some new wholesale accounts.

Your next question comes from the line of Jay Sole with UBS. That question has been withdrawn. Your next question comes from the line of Paul Lejuez with Citi.

This is Kelly Crago on for Paul. I guess I just wanted to dig in a little bit more around the category performance in the fourth quarter. And then also get into a little bit about the penetration of some of your biggest categories in '20 versus historical levels?

Yes, sure. In Q4, I think the strongest category by far was really the casual boots, most notably, lug sole boots, combat boots, chelsea -- we had some chelsea boots that were also very good. But that was really the, I think, far and away, the best category for us. And I talked about a little bit earlier, as we moved into spring, some of the success we're seeing with sneakers, sandals, et cetera. In terms of the category penetration for the year, look, I think the biggest headline is that dress shoes were down substantially. The penetration, probably only about 2/3 of what it normally is. And we're continuing to see the penetration down considerably in Q1 this year versus the prior year. Although, as I said earlier, the products that we do have are selling, not surprisingly, slippers at a higher percentage of the mix than normal. And as I said, the casual boots were up versus the prior year.

Got it. And then just on the first quarter sales guidance, if we were to back out the supply chain disruptions on your wholesale business, are you -- is it fair to assume that, that wholesale business would be kind of flattish in the first quarter?

Yes, flat or even modestly up if you didn't have the supply chain impact.

Got it. And then when we think -- you talked about the back half of the year and not getting back to F '19 levels, and thanks for the color around the first quarter, but as we think about the second quarter which is what primarily when the biggest lockdown related to COVID were, how should we think about sales levels maybe relative to F '19?

Look, we're not providing guidance. We wanted to give you the color around Q1. So I'm not going to get into specifics of future quarters. And frankly, there's so much uncertainty given COVID-19 and then compounded by the supply chain disruption that I don't think we'll get into that. Certainly, I can tell you we'll be up over last year's Q2, though.

Got it. And then just lastly, just given all the disruption in the retail environment, are there any M&A opportunities that you're seeing out there?

Yes. We continue to keep our eyes and ears open. There's nothing to report at the moment, but it's certainly something that we're open to. And obviously, we have the balance sheet strength and the wherewithal to do something if we find the right opportunity.

Your next question comes from the line of Jay Sole with UBS.

This is Mauricio Serna on behalf of Jay Sole. Just wanted to ask you, could you tell us a little bit on how your current -- like the sales, how does that look in terms of like the categories? I mean how does that look in terms of cash flow, comfort versus the fashion dress category? And also if you can talk a little bit more about the size of your wholesale e-commerce business? You talked about the size of your own website, DTC e-com, but I wanted to know a little bit about the size of the wholesale portion.

Sure. Yes. I think the first question is about the category. So yes, I think the -- in terms of the top categories right now, sandals, and I'm repeating myself a little bit here, but sandals, both flat sandals and dress sandals, sneakers, doing very well. And dress shoes is a lower penetration, but strong sell-through on the ones that we have. And of course, in the first part of the year, we're -- we've been still selling these casual boots, obviously slowing down now, but that was very important in January, certainly. In terms of the wholesale e-commerce business, we estimate that it was about -- of the wholesale business, about 32% of it was e-commerce in 2020. So that was up pretty dramatically from about 18% the prior year.

Got it. And also, if you could provide us a little bit more detail on like the puts and takes on the gross margin. You mentioned there was a 20 -- 120 bps headwind from the inventory disposal, but maybe if you could talk a little bit more like any other factors that impacted and have any of those continued into the first quarter?

Yes. So that was -- just to clarify, that was on the wholesale side, 120 basis points. We also had a negative impact from freight in Q4, and that will continue into Q1. But again, absent the disposal of the COVID inventory, we were actually up in wholesale, and we, of course, had the 400 basis point improvement in retail in Q4. And I indicated that I think we can be up again in retail in Q1.

Your next question is a follow-up question from the line of Sam Poser with Williams Trading.

With the delays -- I mean just to be clear, you expect second quarter to be much stronger than first quarter, but you'll have those orders shift over, but there -- you talked about the fill-in orders that normally occur, it came up in an earlier conversation. Could you color -- can you give us a little color on sort of how to think about it? And of the goods that are coming in, the outside of the $30 million, I mean, are you seeing good initial results on that stuff that could drive fill-in orders or the fill-in orders, too, could be delayed and just stopped because of the supply chain problems?

Okay. So we think it's a $30 million impact to Q1. I want to be straightforward about the fact, the majority of that, at this moment, we think is moving out into Q2. These are wholesalers that moved out, but there's a good chunk of it, could be 40% that we think is lost, whether it's cancellations or product that we needed -- that we could have used in our retail or e-commerce business that didn't -- that was not here and couldn't sell, so therefore, can sell-through. And then, as we talked about, when we go into Q2, I don't think there's any way I can quantify this for you, but I just want everyone to have an understanding of the fact that when goods hit the floor later, there's a shorter selling window, and it's typically going to mean fewer reorders in Q2. So I don't know exactly what that's going to look like, but that is a potential impact. Why is it particularly frustrating for us because we think we have really good product that the customer really likes. And I talked about all the things a couple of times that the customer is really responding to right now, but we don't have enough of those items in the stores as the supply chain disruption.

So I mean -- so you're just sort of -- in a sense, you're taking advantage of what you take advantage of in the first half of the year, but you're sort of holding on. And I would assume outside of logistic focus in the first half of the year, you're really gearing up to make sure that you are completely ready to go for the back half. Is that like sort of just -- you're not going to -- you're going to do anything you can to avoid getting over your skis in the front half of the year to make sure that the back half is set to go. Is that a fair way to think about it?

Yes. We never throw in the towel on any season, but we are going to continue to manage the inventory and -- as we always do. And we're not going to take a ton of risk and buy tons of speculative inventory. And you've known us for a long time, Sam, we're always willing to sacrifice that last dollar of sales or maximizing that last dollar sales in an effort to manage -- have the appropriate inventory level and manage downside risk.

At this time, there are no further questions. I would like to turn the call back over to Mr. Ed Rosenfeld.

Great. Well, thank you, everybody, for joining us this morning. And I hope everyone stays healthy and safe, and we look forward to speaking with you on the next call. Have a great day.

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