G III Apparel Group Ltd /De/ Q1 FY2021 Earnings Call

Welcome to the First Quarter Fiscal 2021 Earnings Conference Call and Webcast. My name is Sidney and I will be your operator for today's call. I'll now turn the call over to Neal Nackman, Chief Financial Officer. Sir, you may begin.

Good morning and thank you for joining us. Before we begin, I would like to remind participants that certain statements made on today's call and in the Q&A session may constitute forward-looking statements within the meaning of the Federal Securities Laws. Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in forward-looking statements. Important factors that could cause actual results of operations or the financial condition of the company to differ are discussed in the documents filed by the company with the SEC. The company undertakes no duty to update any forward-looking statements. In addition, during the call, we will refer to non-GAAP net income, non-GAAP net income per share which are both non-GAAP financial measures. We have provided reconciliations of these non-GAAP financial measures to GAAP measures in our press release, which is also available on our website. I will now turn the call over to our Chairman and Chief Executive Officer, Morris Goldfarb.

Good morning and thank you for joining us. Also joining me remotely today is Sammy Aaron our Vice Chairman and President; Wayne Miller, our Chief Operating Officer; Neal Nackman, our Chief Financial Officer; Jeff Goldfarb, Executive Vice President; and Priya Trivedi, Vice President of Investor Relations. I'd like to address the recent events and related protests throughout our country over the past 10 days. We at G-III have maintained a zero tolerance position against racism, inequality and injustices of any kind. We strongly believe that we all need to do our part to make a difference both internally in our company and externally in our communities. We are committing our support to UNCF and other organizations in the effort to help eradicate social and racial injustices. Furthermore, the Coronavirus pandemic has sent shockwaves throughout the world. During these difficult times, the health and well-being of our employees, customers, partners and communities remain our top priority. Let me take a moment to highlight and thank the heart and soul of our company and our greatest asset, a world-class global employee base. They have been working remotely and harder than ever with incredible dedication, drive, compassion and care through this crisis in order to keep us operational. As this pandemic has evolved we thought it's imperative to continue to assist our community at large. We are contributing money to our philanthropic partners to ensure they continue their important work. We have leveraged our supply chain to donate PPE to medical facilities, first responders and police departments in the United States. The challenges we face from this pandemic are significant. G-III is an adaptive and agile organization with an entrepreneurial culture that keeps us flexible in these difficult times, which has allowed us to act very quickly to address a multitude of issues. We had to make some difficult but necessary decisions in response to the disruption caused by this pandemic. As we announced in our prior Coronavirus update press release, we closed all of our retail stores in mid-March. Many of our employees have been working remotely. We implemented significant reductions in pay for our senior management and most of our other employees. Unfortunately, we furloughed a large portion of our employee base. We've also adjusted inventory receipts in response to store closures and have been reforecasting for the balance of the year. A strong collaborative vendor base will afford us the ability to make opportunistic purchases for the back half of this year. These actions combined with our solid balance sheet have strengthened our financial flexibility and liquidity. We are well positioned to weather the current challenges and to demonstrate our leadership position in the fashion industry as we emerge from this crisis. On that note, we continue to reopen our retail stores and are preparing to open our New York City corporate offices. We will do so in a responsible manner with the health of our employees and customers as our top priority. We are following CDC guidelines to ensure we provide a safe, socially distant workplace with ample PPE available for our associates. Our warehouses have remained operational with a reduced workforce, observing strict social distancing and safety precautions in order to receive inventory for online orders and ship product to our retail partners. We began to scale these operations as stores have reopened throughout the country. Now let's look at the first quarter fiscal 2021 results. Considering our retail partners' stores and our own retail stores were closed for half of the quarter, net sales were $405 million, a 36% decrease from last year's $634 million. Non-GAAP net loss per share was $0.75, compared to net income per diluted share of $0.25. Now turning to our own retail segment, I'm pleased to report we finalized our plan to restructure our retail store operations. As we announced this morning, we are restructuring the retail segment and will be closing Wilsons Leather and G.H. Bass stores, enabling us to greatly reduce our retail losses. Accordingly, we've hired Hilco Global to assist in the liquidation of these stores. We've negotiated flexibility with our landlords to allow us to adjust our liquidation timeframes based on store openings. This was a difficult decision to make. We're incredibly appreciative of all the members of the retail team for their hard work and dedication over the years. After completion of the restructuring, our retail stores will initially consist of 41 DKNY and 13 Karl Lagerfeld Paris stores. We plan on returning these brick and mortar businesses to profitability. Additionally, our ecommerce sites, although small and profitable, will include DKNY, Donna Karan, Karl Lagerfeld Paris, Andrew Marc, Wilsons Leather and G.H. Bass. Neal will walk you through the financial details of the restructuring. As for wholesale, we're anchored by our five global power brands: DKNY, Donna Karan, Calvin Klein, Tommy Hilfiger, and Karl Lagerfeld. They'll continue to be the primary sales and profit engine for G-III. We remain focused on leveraging our wholesale expertise to drive long-term growth. Prior to the pandemic, with half the quarter behind us, we were seeing good momentum in our wholesale business, validating our strategy and the strength of our product offerings. As stores closed and our shipping dramatically decreased, we reacted decisively to reduce our inventory exposure. We're being conservative with respect to ordering future inventory and we'll continue to work closely with our retail partners in planning out the rest of the year. Over the last 40 years, we've earned the respect of our vendor base, retailers and licensed stores. We have a well-diversified distribution base across retail channels including department and specialty stores, off-price stores, warehouse clubs and ecommerce sites. We anticipate further closures in brick and mortar retail, but we believe we are well positioned to ultimately retain and increase their business, whether through their brick and mortar stores or their online sites. It is important to remember that we do a significant amount of business through our partners' online sites as well as through our own sites. In some categories, online penetration can reach over 40% of total product sales. We will be actively working with our retailers and dedicating additional resources to further drive sales on their online sites. We're also making significant investments in our own online business. In fact, over the last couple of months for our own DKNY and Karl Lagerfeld online sites, we've seen a significant increase in comparable sales. We ended 2020 with a sizeable and growing wholesale business. Our Calvin Klein brand approached annual sales of $1.1 billion. Tommy Hilfiger was at nearly $500 million in annual sales, and our own DKNY and Donna Karan brands were over $450 million in annual sales. Karl Lagerfeld was at just over $110 million in annual sales. Outside of North America, sales grew strong double-digit, significantly driven by the distribution of our DKNY brand. Overall, we have a great base to continue to build on. We will be patient and make prudent decisions to preserve our liquidity as we get through these challenging times. I'm confident that our solid financial footing and our dedicated management team will enable us to successfully navigate through this crisis. We will exit and strengthen our leadership position as a much-needed supplier in our industry. I will now pass the call to Neal for a detailed discussion of our first-quarter results.

Thank you, Morris. Firstly, let me address the retail restructuring which we announced this morning and includes closing all of the 110 Wilsons Leather and 89 G.H. Bass stores. We are pleased to have reached a deal with our landlords that provide us with the flexibility to liquidate our stores as they begin to reopen. We have hired Hilco Global to assist with the liquidation, which will begin immediately as stores reopen. As a result, the company expects to incur an aggregate charge of approximately $100 million in this fiscal year, primarily related to landlord termination fees, severance costs, store liquidation and closing costs, write-offs related to right-of-use assets, and legal and professional fees. We expect the cash portion of this charge to be approximately $65 million. Now turning to the results of our first quarter ended April 30, 2021. The Coronavirus pandemic has had a significant impact on our first quarter. As Morris indicated, we ended this fiscal year with good momentum. However, in mid-March, we were significantly impacted by the outbreak of the pandemic here in the U.S. and the majority of our retail partner stores, along with our own outlet stores were closed under statewide shutdown orders. With that perspective, let me walk you through our results. Net sales for the quarter ended April 30, 2020, decreased approximately 36% to $405 million from $634 million in the same period last year. Net sales of our wholesale operations segment decreased approximately 34% to $379 million from $571 million. Net sales of our retail operation segment for the quarter were $34 million; approximately 59% lower compared to last year's sales at $82 million. Our gross margin percentage was 30.7% in the first quarter of fiscal 2021 as compared to 37.3% in the prior year's period. The gross margin percentage in our wholesale operations segment was 29.6% compared to 34.9% in last year's quarter and was negatively impacted due to recognizing certain fixed costs, primarily higher effective royalty rates over a reduced sales base. The gross margin percentage in our retail operation segment was 35.9% compared to 45.2% in the prior year's quarter. SG&A expenses were $155 million in this fiscal quarter compared to $202 million in the same period last year. We took a hard look at our SG&A. We had to make some difficult decisions in order to preserve capital. We significantly reduced payroll by furloughing approximately 60% of our wholesale team and 80% of our retail team, as well as implementing significant salary reductions for management and other employees. This is in addition to previous efforts in which we have been reducing headcount in our China offices consistent with our efforts to shift sourcing away from China, resulting in a 50% headcount reduction in our China offices. We are bringing our workforce back in a thoughtful manner as stores open and we ramp up our wholesale operation. We have also reduced other discretionary spending, which includes marketing and capital expenditures. Furthermore, we continue to have conversations with our licensed partners to seek contractual relief. Our efforts have enabled us to reduce our monthly cash expense burn to approximately $35 million. Net loss for the quarter was $39 million or $0.82 per share, compared to net income of $12 million or $0.24 per diluted share in last year's first quarter. Non-GAAP net loss per share was $0.75 for the quarter compared to net income per diluted share of $0.25 in the prior year. Non-GAAP results in this quarter exclude the impact of non-cash imputed interest and asset impairments. For reconciliation to our GAAP results, please refer to our press release issued earlier today. Looking at our balance sheet, accounts receivable were $421 million as compared to $478 million at the end of the prior year's quarter. Inventory decreased approximately 7% to $500 million. Our net debt was down to $285 million from $363 million in the first quarter of last year. Our current liquidity position remains strong and leaves us with significant financial flexibility as we work our way through this difficult disruption. Regarding our guidance, the impact of the pandemic continues to be fluid, making it difficult for us to forecast results for fiscal 2021. Accordingly, at this time, we are not providing any guidance. That concludes my comments. I will now turn the call back to Morris for closing remarks.

Thank you all for joining us today. I've always said that we at G-III are fortunate to have a highly skilled and experienced management team, and this pandemic has really put them to the test. I'm incredibly proud of how well they rallied themselves and their teams to respond and be creative in innovative ways to enable us to manage through the effects of this pandemic. Our ability to quickly respond to changes in the marketplace will enable us to effectively navigate through these challenging times. We have the experience, talent, global alliances, and financial flexibility to manage through this difficult period and to continue to be a leader in our industry. We also believe that as opportunities arise, G-III will be in a position to capitalize on those that we think will fit into our company. We will emerge much stronger and we will prosper. On behalf of the entire G-III organization, I'd like to thank all of our shareholders and stakeholders for their continued support. Operator, we're now ready to take some questions.

I'm here.

Do we have an operator?

And our first question comes from Edward Yruma with KeyBanc Capital Markets. Your line is open.

Hey, good morning. Thanks for taking my question and hope you and your teams are staying safe and healthy. I guess a couple quick ones for me first, on the retail business, maybe on a trailing basis, if that's easier, kind of what were the losses of the piece that you are disposing of? And kind of I know you said that you hope that the remaining piece returns to profitability, but kind of any timeframe around that? Second, Morris, any commentary on the outerwear backlog and maybe a follow-up on your comment on opportunistic inventory purchases in the back half? Thank you.

I'll address the second part of your question first. Our order book for outerwear is down about 30% compared to last year, but we're working to improve that. We actually have the potential to surpass last year's business. Our retailers are back in operation, our factories are ready for additional orders, and the mills have the necessary materials available. If everything comes together, we can exceed last year's performance in the outerwear segment. I'm sorry, I didn't catch the second part of your question that was not related to that.

Yes. So, Edward, regarding retail losses last year, the retail segment lost around $55 million, excluding impairment charges. Most of this loss came from the Wilsons and Bass businesses, as we've mentioned previously. The Donna Karan segment has experienced losses, and the combination of Donna Karan and Karl Lagerfeld has also reported losses, primarily due to efforts to find the right balance. We have a very limited number of stores, but we plan to expand our store base and leverage that business. In the first quarter, we continued to incur losses in the retail segment, likely doubling from the prior year. It's somewhat challenging to predict when this will become profitable. We are not providing guidance for the entire business this year, making it difficult to evaluate the situation at this time.

The second part of your question targeted at me, which was the opportunity buys. We have an innovative entrepreneurial team that lives overseas in an assortment of countries. Their challenge has been to find opportunity buys in fabric. A lot of what we're looking for today are core basics; fashion is not as important this year going forward. But whether it be fleece or denim or some technical fabrics that are common to many vendors, we're finding opportunity buys that we believe we can take advantage of to enhance margin and create a suitable third and fourth quarter business. So that was my reference to opportunity buys.

Thank you. And our next question comes from Erinn Murphy with Piper Sandler. Your line is open.

Great, thanks. Good morning. And I hope you're all staying safe as well. I guess my first question, Morris, is for you. Could you just speak to what you're seeing at POS as your retail partners have started to open stores? And how does traffic or how has that been looking, particularly if there's any major differences between regions?

Sure. Prior to the protests and more specifically, prior to the lootings, business was tracking at about 30% to 35% off; that would be the closest number I could give you throughout the department store sector and even the off-price sector, their business was in the early stages of coming back. Most retailers were surprised that it was as good as it was, and we were on track to recapture what we left off with. Today, the interruption caused additional stores to be closed. The door count, I don't know exactly, but one of our retailers closed approximately 50 additional stores, another one closed 30 stores. So it feels like 20% of the door count was shuttered until there's clarity on what the looting situation is. Some of them will be delayed in reopening because they were completely damaged. There was a lot of damage done to the physical facilities and the looting of inventory. That will take a while to get back into business. Many stores that were shuttered in anticipation of looting will simply open up. It seems like traffic is down about 25% in the stores that are open. Obviously, the size of the basket has grown significantly. It seems as if the shopper that is out there truly is a shopper and not just walking through the stores. They're armed with money and eager to buy. So the sales are driven by greater conversion and bigger basket. We're quite hopeful to give you an idea of what we look like. We have 60 stores in China. For the month of May, they went through the pandemic as we all know, and for the month of May, they comped up low single digits. So we're hopeful that we can follow that pattern, and we believe that there is good life to come.

Thank you for the context. My second question is regarding the furloughed labor. You mentioned that you furloughed 60% of your wholesale labor. How do you plan to bring that labor back, and are you facing competition from unemployment benefits for the remaining retail positions or the furloughed wholesale workers?

So we have a plan to begin to come back to work on the 15th of June. We will start with a skeleton crew. We've polled our associates to see who is willing to come back to work and who has a handicap, childcare or health issue, or simply a fear of coming back to work. We believe we'll open our doors with approximately 200 people that are properly spaced, properly guided with PPE equipment. We have temperature monitors in our lobby. We control five elevators that are exclusively used for G-III. We will permit only four people in an elevator at a time. We'll stagger schedules. I believe we'll figure out what the best formula is. We're coming in with a strategy that, given the problems that we might encounter, could change. The scale of the operation on-site is a valuable number. We may permit some people to work from home for a period of time. Culturally, we're about working on-site, and however long that takes, we will all be together sooner or later. We're looking forward to it. The off-sites have worked incredibly well. We've had committed people that dedicated all their time and probably worked harder from home than they do in the office, and it doesn't go unnoticed. It's appreciated. Most of the people that worked as hard as they did were affected by salary decreases. It wasn't about money; it was about the culture of the company, it was about passion, and it's what we've always advocated. This is a wonderful company to be associated with, I must say. So Erinn, I guess normalcy will come as soon as it arrives.

Thank you. Our next question comes from Matt Gulmi with Wells Fargo. Your line is open.

I think ecommerce is roughly 25% of the business. If you guys can just talk about what you saw at wholesale.com and DTC in the quarter and what you're thinking about as far as the size of the remaining Wilsons, Bass business and like Morris mentioned, it's profitable, but any additional color there or any thoughts on that business going forward?

Let me address your last comment. The size of the Wilsons, Bass business will be limited to a little bit of wholesale with Bass; the rest of the business, the retail brick and mortar, is all going away, all of it. As soon as that door is open, we will go through a process of liquidating our product. We've engaged Hilco Global to assist in that process. Landlords have been great; they have accommodated our timeframe. If we're done quickly, we will shut our doors and go away. Our rent during the period of time that we're liquidating is either a percentage or at a very reduced rate. We will augment the inventory that we sell through to help ourselves on inventory that sits in our warehouse, whether dated or current that was cancelled. So we are done. Again, with Bass Wilsons, the pieces that will remain will be the online piece. There's a royalty that we derive as a licensor for Bass in several classifications. So that just sort of drops down to the bottom line, but there won't be any costs attached to operating those retail. Retail that will remain includes DKNY and Karl Lagerfeld. We're going through a good period; during the pandemic, when stores were closed, our online business was up approximately 60% compared to last year on both Karl Lagerfeld and DKNY, last year was a unique year for Karl Lagerfeld. Karl, this amazing man and iconic designer passed away, and we had amazing business during that period of time. Everyone wanted a piece of memory of Karl. In spite of that, our business this year for this period of time has comped up 60%. Our customers' online business has prospered as well. Some of them doubled their online business. We are the beneficiaries of the growth; we provide product for it. Warehouses have been geared, and we've made accommodations to dropship to the direct customer on occasion and fulfill the needs of the department stores by supplying them with needed online product. Although we are controlled on retail, we recognized the significance of our online business and we believe, in the coming year, we can have our online sales make up as much as a third of our total business.

Okay. That's helpful. And then, if I could just follow up with one more. There's a big focus on denim this year at three of your core brands. Given recent events, I think denim has been speculated as a less popular category as consumers are kind of focusing on things to wear at home or exercise, et cetera. Have your plans changed at all with the rollouts? Are those remain on schedule or kind of how are you thinking about that?

Quite honestly, quite to the contrary. We read the same press, but we're not the recipient of much business in denim. Our business in the denim areas is exceptionally good. One of the early dedications to future inventory that we just worked on was buying a significant amount of denim for the third and fourth quarter. We launched extremely well with CK, Tommy, and we had a softer launch with DKNY that was not intended to be a big business this year. If anything, our denim business is better than we had anticipated, not an area to be concerned about.

Thank you. And our next question comes from Rick Patel with Needham & Co. Your line is open.

I have a few questions about inventory. First, could you discuss the current composition? I'm interested in knowing how much of it is considered seasonal, meaning what you have right now versus what could be stored away for later demand. Secondly, I want to follow up on a previous question and get clarity on your plans for the fall. Given that you're seeing opportunities in outerwear, does that mean you're increasing inventories for those specific categories, or does it imply uncertainty regarding the pace of sales?

Okay. There is this level of seasonal inventory that we're trying to manage our way through as stores are open. There's a level of pack-away inventory that we are dealing with. The pack-away inventory, in many cases, has an order attached to it. We were at the early stage of shipping our swimwear and most of that just went to the sidelines. It was too late to ship swimwear as the store is open. We've gotten orders that relate to resort for our swimwear. So we've solved the problem of inventory. We accommodated the space needed to house what is considered pack-away. The bulk of our issues are kind of fragmented in every area. It depends on the classification. We've always described our business operationally as fragmented by classification. Not all our classifications are equal. Performance in activewear, leisurewear, and areas of business is very strong. That's all anybody has worn for the last three months. Clearly, there are no inventory issues, there have been significant reorders, and that area is virtually clean of inventory, while our inventory strike really exists. We do have a prom business. We do have a social dress business. The first thing we did, as this pandemic occurred and we realized stores were going to be closed and there were not going to be very many social gatherings, we tried to cancel every product we could, but we didn't catch it all. We're sitting with a little bit of social dressing, some career suits and some day dresses, but short of that, we're okay on the inventory side. The pack-aways and something described, we're going to put a ribbon around some of what was created and not fragmented, not sell it off, just bring it back into next year. The product is great; it's first-class product, it's not problem product. We're working towards solving the maybe some of the dress businesses. Our shoe business is good; the casual shoe business is strong. This is a flip-flop era, literally on the descriptive form. The flip-flops are strong, sandals are strong. So we're fine with that. A lot of our handbag business is more casual than has been the stark. We're okay on the inventory side of it; we have a great vendor base that has accommodated holding some piece goods into next year if needed. As Neal has described, we're in great shape as far as cash is concerned; we didn't have to go to markets to borrow. We're in good shape on inventory. As soon as warehouses open, our inventory levels have come down. We have orders to ship and we'll generate more receivables. There's been a little delay in payments from very well-balanced retailers that have no credit issues with. We're looking forward to getting back into business. Sorry, that's a long-winded response as we operate from a distance from our associates; nobody's here to wave me off. So, anything else?

No, it's great. And just to clarify the statement you made earlier on outerwear. I think the order book is down 30, but you see the potential for that business to be higher. Are you planning inventories up for outerwear or do you think that you're just in a position to chase if you see that demand manifest?

It's kind of a better question asked of me, unfortunately, in a couple of weeks. Now, we have this window of opportunity to still execute in the third and fourth quarter that only goes a few more weeks, and we hesitate to be too aggressive. We don't know what's coming our way, and then in the second round, we don't know how quickly all the stores that are attempting to be open will open. As we do the analysis, I'll have a better idea as to how we manage our inventory. The last thing I want to do is have an excess of inventory going into next year. We like the story, we have plenty of cash and we're fine. I don't want to come back to you and say we have plenty of inventory and we're fine. I'd rather be with cash.

Thank you. And our next question comes from Heather Balsky with BofA. Your line is open.

I was hoping. Morris, you talked a little bit about potential consolidation in the industry on the wholesale side and ability to retain those customers. I was hoping you could talk about you over the past few years as you've seen stores close. What you and your partners have been able to do to retain those customers, whether it's online or another store? And I guess, maybe a little more color on how you see the industry and your team over the next year or so, given what's happened, what you think your wholesale base will look like? Thanks. And just throwing in, just also what can we infer margins to some of these were unproductive stores closed?

Thank you, Heather. Having five power brands gives us a significant advantage. When a retailer decides to cancel everything, it stings initially. They take a step back, reassess, and realize they cannot survive without the brands that attract customers when they open their doors. The first things to be adjusted after the cancellations were the brands; they are what bring customers in, whether it's in a club, off-price channel, or a traditional department store. Customers are looking for value in the product; they may not want the cheapest option, but they want reassurance that the product they are buying has intrinsic value often associated with a brand. A large percentage of our orders were reinstated and we're nearly back to normal operations, and the reinstated orders were not at discounted rates. We ensured that did not happen. We have strong relationships with our retailers that go back many years. In most instances, we rank as either the first, second, or third largest vendor to these retailers. There is mutual respect and a shared need to accommodate each other, which keeps us stable on the margin side. The dilution is not as severe as one might expect during this crisis period, which I'm pleased to see. I was understandably concerned going into this, but we're managing. We do face challenges, but the partnerships we've developed since our founding in 1956, some of which are 30 or 40 years in the making, support our longevity. Retailers have considerable reliance on us. Most of the retailers we work with are not high risk. We do not supply products for J.Crew, stage stores, or Forever 21. Our risk mainly lies with Lord & Taylor. We experienced some challenges with J.C. Penney and Neiman Marcus, but nothing severe. The key doors that rely on us do not seem significantly impacted. Macy's is our largest customer, and while there are discussions about decreasing store counts, those particular stores typically do not affect us much. If there is any impact, it can sometimes be beneficial as we assist them with margin support. Historically, those stores have been problematic for us. Dillard's appears to be maintaining their business, and Kohl's is improving as a retailer. I visited Kohl's and noticed how they reorganized their product mix. There is also a Walmart opportunity that we have identified during this period that we are now pursuing. Overall, we are excited about our future in this industry.

Hi, if there's time for a follow-up, Neal, I was just wondering if there was any reserve for future markdowns or markdown dollars in the first quarter gross margin. Just curious if there's anything to note. Thanks.

Yes. We continue to provide markdown support and accruals, and we did that in the first quarter as well.

Thank you. And our next question comes from John Kernan with Cowen. Your line is open.

Good morning. This is Krista Zuber on for John. Thank you for taking our questions. Just a kind of a follow-up on that, the $100 million, Neal, that you outlined for the one-time restructuring for the retail segment restructuring. Just kind of wondering in terms of the cadence or how that will be spread out through fiscal '21? And then, just on the follow-up question with really just sort of in response to the liquidity and cash flow generation, can you provide us with an insight of how the run rate of CapEx could be expected to change? Do you foresee any paydown or the portion of your ABL or your term loan before their maturities in '21 and '22? Thank you.

Sure. With respect to the cadence of the liquidation charges that will hit us significantly in the second quarter and the third quarter. With respect to CapEx, we did about $6 million down from about $13 million in the first quarter. We've really clamped down on nearly all capital expenditures. I expect that will continue to stay that way for a good balance of the year. With respect to paying down the term and the ABL, again, it's very hard to look into the future of the year and what sales will be, what profitability will be, and therefore what cash will be. At this point, I wouldn't suggest that we'd be paying down the term. We look at what we've got on hand and feel very comfortable stepping into what we hope will become the new normal and see business start to rise. Then we'll have a better sense of what we're really dealing with as the year unfolds.

Thank you. And our next question comes from Dana Telsey. Your line is open.

Morris, as you think about the promotional environment going forward, as these stores reopen, what are you expecting and what do you think it looks like? And then just secondly, if I may on digital, given that digital was the only thing that was open during the time period of the store closures, what insights did you take away from digital, whether your own or your wholesale partners, and the margin characteristics and the customers on the insights that you learned from it? Thank you.

Stores are opening with Easter inventory, quite honestly. There's inventory that was staged for an Easter selling period, and those goods are going to be highly promotional. It's time to get rid of it. It's not going to get any better. If we see products that look really, really cheap, it's inventory that should be out of the store. As they replace that inventory with more current goods, we're seeing normalized margins. We're not seeing products that are highly promotional, and sales are quite good attached to it. We don't see this as just gift-giving; this is literally just the stores giving away products. We see it as a profitable period of time, and as soon as the dated inventory is put away, we learned on the digital side that we don't spend enough money to be important on digital, whether it's our own site or our customer site. We've created a budget that we implemented that relates to our customers, and we've gotten pure benefit of it; you see it almost immediately. As I said earlier, Dana, we believe that our overall business as a percentage of sales through digital will be, this year, in the vicinity of a third of our overall business. It is profitable. We're learning a bit on the distribution side; we're trying to find accommodations to not use third-party providers for it because it is costly. We're doing some of the distribution through our own warehouses, and we're searching for a large facility that will accommodate drop shipping directly to the customer. The future is clear. Digital is going to be an important part of our business, and we're hiring for it. We'll have a CapEx budget that we're preparing that is specific to digital, and it will absolutely be a way of life.

Thank you. And our next question comes from Adrienne Yih. Your line is open.

Morris, just to actually follow up on that digital comment that you just made. Pre-COVID, what percent of your digital was your own versus B2B or wholesale digital? And in that one-third, I guess, over the course of the year, what will be your own brands, digital versus B2B? Thank you.

Regarding our own brands, you need to remember that of our power brands, the two that we have autonomy with are Karl Lagerfeld and DKNY. We own those brands and we have the right to do as we need to build site, build products, and service the consumer directly with the use of our brands. With Calvin Klein and Tommy Hilfiger, the flow of product to the consumer is the right of CK on their own sites or our retailers, and we provide the product for both. So, it's hard to disengage the pieces from what we service retailers with and what we do directly through our business. Clearly, the pieces that we do on a direct basis through our own brands, we margin out much better; we get retail margins. But there's clearly an advantage as well to accommodate the needs of Macy's, Dillard's, and Belk on their sites or Nordstrom's. So, again, I'm being cloudy as to the clear dollar separation. Our customers' online sites are significantly larger than our own site, but we're building it. We've hired talent for it. As I said earlier, we're aggressively trying to become significant on the marketing side. Besides the two power brands, Bass is an important brand online, and in spite of the fact they were closing their stores, Vilebrequin is beginning to pick up some pace both domestically and internationally. We operate both sites: the international piece and the domestic side. To finalize it, I'm not giving you a clear picture of the dollar separation, but they will both be significant in the future and as they are today, as I stated, they make up about a third of our business today combined. I'm sure that the pace of our company-owned brands will increase.

Thank you. And our next question comes from Steve Marotta. Your line is open.

Neal, earlier on in the call, you mentioned that international was up double-digit in the first quarter. I want to make sure, a) that was correct, and b) can you remind us what international penetration was in the last fiscal year? Lastly, are there any blueprints from the reopening of international markets that can be applied here in the U.S.? Thanks.

Steve, the international business represents about 15% of our total business. I think with respect to whether or not it's a decent blueprint for us is probably challenging in that it really is a different segmented business than what we have here in North America. So we're learning and exploring that business significantly with DKNY. The business grew significantly last year at double digits. I don't believe that necessarily translates for us back here in North America just because of the again, segmentation of store.

Thank you. And our last question comes from Susan Anderson. Your line is open.

Neal, I was wondering if maybe you could talk about the cost reduction flowing through to the second quarter and the second half of this year. How we should think about that versus the first quarter? And then also, what you're expecting for cash burn in the second quarter versus the first quarter? Thanks.

Yes. So look, the second quarter has begun as the first quarter sort of ended. We had a totally dead month of May. We had a totally dead month of April. Fortunately, we implemented a lot of our cost-cutting quickly, and we started to realize that in April. We continue to see that in the month of May. Now we're hoping that businesses start to open up. As businesses open up, we'll certainly bring back people to fulfill our stores. We will bring back people to work on our wholesale side as far as directly supporting store business. The hope would be that our SG&A cuts start to reduce, and we see top-line growth. We'll bring those both on as we see the revenues coming in.

Thank you. I'm not showing any further questions.

Thank you, operator. So, thank you all for spending time with us today. Stay healthy, stay safe, and stay tuned. We'll talk to you soon. Thank you very much.

Ladies and gentlemen, this concludes the conference call. Thank you for your participation. You may now disconnect.