Designer Brands Inc. Q1 FY2020 Earnings Call

Good morning and welcome to the Designer Brands Inc. First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 worsened 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 fit squarely into our existing long-term strategic pillars. First, delivering everyday 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 everyday value is critical to customers' 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 closeout 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 closeout deals. The combination of offering top quality footwear brands at regular price, special makeup and closeouts 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 the 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 is 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 mirrors 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.

Thank you, Roger, and good morning, everyone. Our first quarter was filled with unprecedented challenges and unexpected changes. Our team has united and taken many immediate actions to navigate the recent volatility and prepare for long-term success. First, I will outline the steps we've taken regarding liquidity and costs, followed by our first quarter results. Please keep in mind that the financial results we mention during today's call exclude certain adjustments recorded under GAAP unless noted otherwise. These non-GAAP measures should be viewed as additional information, not a substitute for or separate from GAAP results. Last month, we modified our $400 million credit facility, which led us to suspend dividends and share buybacks. Since February 1, we increased our borrowings by $203 million, concluding the quarter with $250.9 million in cash. We feel secure about our liquidity and are continuously assessing our needs while engaging with our banking partners to explore alternatives for additional flexibility going forward. Furthermore, we significantly reduced our capital expenditures, planning to spend approximately $25 million to $35 million this year, a substantial drop from last year's $77.8 million as we postponed store openings, nonessential maintenance, distribution center projects, and various business and IT initiatives. In terms of adjusting our cost structure, we lowered expenses across all areas of the company. Payroll expenses significantly decreased after we furloughed certain team members and reduced salaries for the rest of our workforce. Overall, we cut our operating expenses by $26.5 million in the first quarter compared to last year and plan to maintain a disciplined operating expense strategy for the rest of the year. We have also been actively collaborating with our vendors and landlords to renegotiate payment terms. We expect to benefit significantly from recent tax rule changes that allow us to carry back this year's losses for up to five years, including years when the U.S. tax rate was 35%, compared to the current rate of about 21%. Consequently, we are anticipating a substantial cash tax benefit in 2021 due to a refund linked to our 2020 COVID-impacted performance. Ensuring our inventory aligns with current and future demand has always been a priority. The first quarter is traditionally crucial for our retail segments, with Marpril and Septober being our largest selling seasons, contributing roughly 40% of our sales and over half of our operating income. The closure of stores during the Marpril selling period significantly affected our business. To avoid excess aging seasonal inventory, we proactively implemented deeper markdowns and promotions during the quarter, leading to elevated markdowns of around $40 million on sold products. Additionally, we established inventory reserves against a large portion of our unsold inventory totaling approximately $60 million. This inventory reserve practice aligns with the retail inventory accounting method used in our U.S. retail segment, leading to charges at the time as the retail value of the inventory is reduced rather than when the product is sold to customers. Looking ahead, we have made significant cuts to future receipts and taken necessary pricing actions to maintain a cleaner inventory position despite the decline in sales. As Roger mentioned earlier, we ended the quarter in a favorable position. Inventory in unit terms remained flat compared to last year and decreased by 17% in total, including the impact of reserves. Based on sales so far in Q2 and the reductions we've made to receipts, we expect our inventory balance entering the fall to be notably lower than last year, positioning us well for the season. Additionally, if sales trends exceed expectations, we could see positive outcomes since we have already established reserves and the flexibility to respond to emerging trends. Now, turning to our income statement results. In the first quarter, net sales dropped 44.7% to $482.8 million, including $19.4 million in intersegment sales that were eliminated upon consolidation. Total comparable sales declined 42.3% compared to a 3% increase last year. In the U.S. retail segment, comparable sales fell by 42.4% during the first quarter as stores were closed for nearly all of the critical Marpril selling season. Relative to other categories, both kids and athleisure performed better, with kids' comps down only 14.7% as parents continued to purchase replacements for growing children. The athleisure category, responding to consumer demand for comfort, was down 33.2%. Both kids and athleisure are growing strong segments for us, and we recognize that there is considerable opportunity for us to enhance our position in these areas. As customers increasingly shifted towards casual and athleisure wear, this had a corresponding negative impact on dress and seasonal categories, which have historically been strong for us. Adapting to customer preferences, we are tailoring our fall assortments to align with these trends more closely. As Roger pointed out earlier, the strength of our e-commerce business somewhat counterbalanced our adverse store sales trends. We witnessed the highest digital demand penetration in our company's history, effectively functioning as a .com-only retailer starting on March 18. In Canada, comparable sales declined by 32.4% for the quarter due to store closures, although this was somewhat offset by our impressive digital growth, which surged at 348%, accounting for over 55% of total comp sales in Canada, alongside an increase in loyalty members. Canada performed relatively better than the U.S. because of its higher market share in kids and athleisure products along with a smaller digital base to grow from. The successful introduction of our online presence and rewards programs ensured that Canada had a solid infrastructure to rely on during this crisis. Regarding Camuto, we experienced considerable disruptions in our wholesale business, with major customers canceling a significant number of orders, similar to what DSW faced with many of its vendors. Total net sales for Camuto in the first quarter, including DSW sales, amounted to $82.1 million, down 21.5% from last year. Wholesale sales reached $67.3 million in the first quarter compared to $91.8 million last year, including retail segment sales totaling approximately $17 million versus $10 million last year. While not the core strategic reason for the Camuto acquisition, one benefit has been the increase in commission income, which rose 39% in the quarter mainly due to greater activity with our retail segments on exclusive brands. Before the onset of COVID-19, we were progressing well with diversifying our assortment with exclusive brands and transitioning production of those brands to Camuto. We were excited about the early sell-throughs of the Camuto-designed products that arrived at the beginning of the quarter. One advantage of the Camuto acquisition is our capacity to expand exclusive brands within our portfolio. We remain committed to increasing the presence of these exclusive brands in our assortment and will continue moving more production from third parties to Camuto as we progress through 2020. In the first quarter, comps at ABG plummeted by 62%, primarily due to temporary store closures by our retail partners. Our adjusted consolidated gross profit fell by $285 million, resulting in a loss of $26 million for the first quarter, compared to a profit of $259.3 million in the previous year. This decline was mainly due to increased markdown activity and reserves across all segments, alongside higher shipping expenses and significant deleverage in occupancy and fixed distribution costs caused by substantial COVID-19-related sales declines. We expect merchandise margins to start improving in Q2 as we sell through the inventory with the Q1 reserves. However, we anticipate that markdowns will remain high as we liquidate our spring inventory. Additionally, we expect continued deleverage on our fixed costs due to year-over-year sales remaining low, and shipping expenses will stay elevated as customers focus on digital sales rather than visiting stores. Camuto's gross margin was 16.9% in the first quarter, down 770 basis points from last year's level of 24.6%, primarily due to increased inventory reserves, as we expect to sell seasonal inventory at prices below our costs due to order cancellations. However, as we accepted these cancellations, we adjusted our markdown allowance agreements with retail partners to mitigate some gross margin declines on products not canceled. We anticipate significant markdowns beyond Q1 as we clear inventory linked to canceled orders. We have drastically cut fall production to better prepare for the season. As for Designer Brands' operating expenses, our adjusted consolidated SG&A fell by 12.3% to $188.3 million compared to last year as the company took decisive steps to reduce costs amid temporary store closures. Given the considerably lower sales base, our SG&A as a percentage of net sales was 39%, compared to 24.6% last year. Depreciation expense stood at $22.6 million in the quarter, up from $21 million the previous year. Our adjusted operating loss for Designer Brands was $212 million in the first quarter, contrasting with earnings of $46.8 million last year, largely due to the impact of COVID-19 on our gross margin, albeit somewhat offset by reductions in operating expenses. Interest expense for the quarter was $2.2 million, compared to $1.8 million the prior year. Moving on, our adjusted effective tax rate was 38.4% for the first quarter, up from 25.4% last year. This increase was largely due to the ability to carry back current year losses to a tax year with a 35% U.S. tax rate. The total weighted average diluted shares during the quarter was 71.9 million, down from 78.3 million last year. Our reported EPS for the first quarter was a loss of $3 per share, encompassing net after-tax adjustments of $84.1 million or $1.17 per diluted share, primarily related to impairment charges. Excluding these charges, our loss was $1.83 per diluted share for the first quarter. The impairment charges included $84.9 million to write down fixed assets and lease assets at stores where COVID-19 affected cash flows, which were not expected to recover within the remaining lease term. Additionally, we wrote off $20 million in goodwill associated with our first-cost business at Camuto due to expected reductions in cash flows as a result of COVID-19, along with $7.6 million in intangible asset write-downs. During Q1, we opened one store and closed another in the U.S., concluding the quarter with a total of 521 DSW stores. In Canada, there were no openings or closures, leaving us with 145 stores. As a reminder, we withdrew our guidance in March. We will continue to refrain from providing guidance until we have better visibility. We have explored various scenarios with diverse assumptions, consistently noting pressure on our sales and margins. We expect to continue increasing promotional activities, which may further impact our gross margin levels for the rest of the year. We have made considerable strides in reducing our inventory levels and cutting back on receipts, but significant uncertainty remains in the market related to consumer demand. Additionally, we've restructured new payment terms with our vendors to align payments with inventory sales. We are also actively engaging in discussions with our landlords regarding future rent structures, which presents various challenges depending on store traffic levels. We no longer anticipate a positive operating profit from Camuto in 2020; however, we are confident that Camuto will contribute to overall consolidated profitability in the future as they ramp up production of our exclusive brands, enhance their direct-to-consumer business, and smartly expand a select number of national brands with targeted distribution. We believe that brands produced by Camuto will be our main growth engine as we aim for a long-term 30% penetration. Our long-term business strategy remains strong as we continue to be a key player in the footwear industry, adapting our approach to meet evolving consumer demands. We are committed to keeping you informed on all developments as we progress through 2020. Now, we will open the call for questions.

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

Good morning. Thank you for taking my question. I would like to know how the product mix within Camuto Group is expected to change going forward, considering the emphasis on kids' and athleisure products compared to dress and casual dress items.

Yes, this is Roger. Thank you for your question. Camuto has traditionally been recognized as a dress house. Within Designer Brands, we hold about 12% of the women's non-athletic footwear market across all our businesses, and we see ourselves as a leading player in that market. We believe this is an asset, and sooner or later, customers will want to go out to restaurants or return to work, which puts us in a favorable position for when the recovery occurs. In the meantime, we must focus on expanding our presence in the sneaker market. We have engaged resources with deeper expertise in this area and are collaborating extensively outside of Camuto with DSW and our athletic partners. Our model gives us access to 30 million consumers, 80% of whom are female, but we currently capture only a small fraction of their spending on athletic products. There’s a significant opportunity as larger athletic brands seek connections with everyday athletes, not just elite competitors. We are optimistic about the discussions we are having with leading athletic brands. There’s a lot of potential for us in the athleisure market at both Camuto and DSW. While we remain committed to our identity as a dress and seasonal house, we also see great opportunities to increase our athletic market share during this period.

Thank you. Can you discuss the focus on the top 50 vendors and provide some examples? Are you simply reducing labels, or are you taking this to a new level? With brands like Nike, Adidas, Skechers, and even Steve Madden, which have a significant presence in athletics, how do you plan to compete with established players in the market? I know you aim to enhance your athletic offerings with Camuto, but do you prefer to develop your own share at a specific price point, or will you leverage these well-known brands?

I think that's exactly the point. We are focusing on building stronger relationships with top brands. We discussed the 700 or 800 labels we carry and how we help convert those into recognizable brands. While we will no longer play that game, we plan to invest our inventory dollars into around 50 key brands that consumers demand. A significant insight we've gained during COVID is that 85% of our sales are digitally driven. To clarify, when I mention 85%, it means that 20% to 25% of the time customers are on our website, they decide to make a purchase right away. However, our research shows that digital engagement greatly influences their decisions when they visit our physical stores. Thus, having a broader selection from these key brands is vital. For instance, among the top 20 search terms on our website, approximately 18 are major brand names. While seasonal products like sandals and boots may appear, we are actively engaging with all of our top partners as we target these leading brands. We recognize that many competitors are facing challenges, with some closing their doors and declaring bankruptcy, and we see ourselves as a growth destination both online and in our physical locations. That's an important point. Additionally, our athleisure and kids business saw a 17% increase in stores open in May. However, we face challenges with our seasonal and dress categories, which are not performing as well. We are proud of our progress in the athletic sector, and we anticipate significant growth in that area in the latter half of the year.

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?

I won't provide all the details, but I want to share how pleased I am with our performance. In the first five weeks of the quarter, we had moved away from a significant number of promotions we ran last year to encourage customers to visit our warehouses and enhance our margins. During those initial weeks, we observed low single-digit comps across the entire enterprise, with minimal .com comps. However, it was the right approach. Then we encountered COVID, which led to a 49% increase in our digital demand over the following eight weeks. Once our stores closed, we experienced three of the six biggest days in the history of our company, specifically for our .com performance, comparable to Black Friday or Cyber Monday. We managed this transition without any major site issues, fulfilling 80% to 90% of the demand from our warehouses, essentially our stores. I'm very proud of the effort we put in. As for Q2, we're maintaining a .com demand range of about 25% to 26%. As we begin to open more stores, we are still seeing strong online demand.

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. I have a two-part question regarding the productivity of your reopened store. First, could you share more details about the performance of these reopened locations compared to DSW in Canada? Secondly, relating to Sam's earlier question, can you discuss the overall trends in the markets, specifically in terms of revenue for areas where stores have reopened, compared to last year?

Yes. To address the end of that first, we are currently seeing that in stores that have been open for about a month, we are at approximately 80% of the volume we achieved last year. The good news is that this represents significant progress. We started opening stores in the third week of April. In that initial week, we were doing roughly 5% of the business in the first group we opened, and now seeing them closer to 80% is a major improvement. As mentioned, it's been improving by 8 to 12 percentage points each week, and I am really pleased with that. In terms of the U.S. versus Canada, we have been much more aggressive with markdowns in Canada. We didn't manage to reduce as much seasonal product there as we did in the U.S., leading to better comparable trends, but margins have been impacted more significantly. Overall, we are exceeding our expectations regarding the stores 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 finished the quarter with inventories down about 16% to 17% in dollar terms. This is the direction we plan to maintain as we move through the year, though we will keep substantial open orders. I often refer back to 2008, as we have a strategy that proved effective then, particularly regarding our marketing efforts, which we have already launched. You've likely noticed our increased television advertising, which is at an unprecedented level for our company. You'll also hear from us across various digital platforms. Our marketing is ramping up significantly, and we will manage our inventory actively, ensuring we respond quickly when opportunities arise. I believe leveraging our relationships with top brands is essential to our strategy, and I'm feeling optimistic about that. Regarding categories, Jared and I were in the office together for the first time in 13 weeks, and I remarked that it was the first time I wore regular pants instead of sweatpants. We will keep pursuing the athleisure trend, whether through sneakers from established brands or developing our own at Camuto, as this aligns with current consumer preferences, especially in kids' apparel.

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. When we purchased Camuto, they were managing over 30 brands. We have been working on identifying the target customers for each brand, understanding the market for them, and determining the necessary investments for growth. We will not be focusing on 30 brands; it will be significantly fewer. This approach is part of our plan from the beginning, not a response to COVID or market downturns. You will hear us concentrating our efforts on brands like Vince, Lucky, Jessica, JLO, and our exclusive brands as those are the areas where we see growth potential and market opportunities. That will be our core focus going forward.

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 unfortunately had to furlough about 88% of our entire workforce. I'm happy to report that, as our stores are reopening and sales are improving, we have called back roughly 60% of our organization, which is encouraging. As we start to open in the Northeast and other larger markets, I expect that number to increase significantly in the coming weeks. To date, we haven't faced any major hurdles. I'm particularly proud of our investment in ensuring the health and safety of our associates. I believe our brand and American Eagle's have stood out in terms of customer experience, partly due to our collaboration and the relationship between the two companies. We communicated this to our associates, making it clear that we are a very safe place for them to return to work, and we haven't encountered significant challenges in bringing people back.

Got it. Well, thanks for taking my questions. And hopefully we can all get back to a somewhat 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 your prepared remarks, you mentioned that the company has reached agreements with almost all major vendors and landlords regarding overdue payments and future payment plans. Could you provide more details on this? Is it simply a matter of extending payment terms, or has there been a reduction in the total amount you would have paid otherwise? Additionally, you mentioned potential future agreements that could help save money on rent. Could you elaborate on that? Thank you.

Yes, Steve. This is Jared. Thanks for the question. When we first encountered COVID, we reached out to all of our vendors and landlords to request assistance with outstanding payments until we had more clarity on our current financial situation and store reopenings. We received significant support in that regard. Once we had more visibility, we contacted each of our top vendors and landlords to discuss payment plans for the amounts that were due but unpaid. Most were very cooperative, and we have reestablished good relationships, ensuring we are not in default with any major creditors. We are working on repayment plans that will vary by agreement and will be fulfilled over the next few months to a couple of years, depending on lease terms. It's important to note that these were deferrals, not concessions, which I believe relates to your question. We also discussed and reached an agreement with our vendors on new terms for future orders, which align better with our expected inventory needs. This should lead to improved working capital. As we anticipate significant growth with our top 50 vendors, it was an opportune time to have these discussions, and the results have been very favorable. Regarding landlords, we are collaborating with A&G Realty Consultants to evaluate how to renegotiate our rent based on current traffic conditions. Honestly, neither we nor the landlords know the permanent effects of traffic changes at this stage, but it’s clear that it has had a substantial impact and is affecting our occupancy costs unsustainably in the long run. With the assistance of a knowledgeable advisor, we are exploring ways to achieve meaningful relief on this expense.

That's very helpful. 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 closeouts. 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, 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 closeouts.

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. The second big chunk of our assortment is the special make-ups, that allow us to show compare at value. The third bucket are the closeouts. That has fallen down to be 8% to 10% of our business. We’re anticipating that we should double that, or bigger as we move forward. 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. So far this conversations gone really well. We’ve had some really good closeout buys that some of them 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 closeout business in a big way and to be able to pass value under our customer. 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'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, Gabi. You are correct that we are not providing guidance. What I can say is that we had to set aside large reserves due to our retail accounting method. In the first quarter, we do not expect the decline in gross margin for the second quarter to be as significant. However, it will still be affected as we seek ways to clear inventory that we intended to sell but could not. As we move into the fall, where we have optimized our purchases, and as Roger mentioned, we have a considerable amount of inventory available which we will use in a responsive manner if we see positive trends. We anticipate our margin rates to improve significantly, coming closer to normal levels in the fall with one caveat. This is contingent on the level of comparable sales, as our occupancy costs may increase if sales are below 1.5% growth. This will likely continue to be a challenge, but from a merchandise margin standpoint, fall should look much more favorable.

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. As the consumer behavior permanently shifts as a result of what we've all just gone through, that number is significantly higher. 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. We've got to sit down to have the tough conversations with our landlords that are they going to work with us or not. 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. 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. Part of that discussion can be, we are a traffic driver. We’ve found a 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 greater appetite to go after that once we get through this. 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.

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.