Earnings Call Transcript - SHOO Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Q1 2020 Steve Madden, Ltd. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Ms. Danielle McCoy, Director of Corporate Development and Investor Relations. Thank you. Please go ahead.

Danielle McCoy, Director of Corporate Development and Investor Relations

Thanks, Jimmy, and good morning everyone. Thank you for joining our first quarter 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 limitations, statements with respect to the Company’s plans and responses to this pandemic. At this time, there is significant uncertainty about the duration and expense of the impact of the COVID-19 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 on an adjusted basis unless otherwise noted. A reconciliation to the most directly comparable gap financial measure and other associated disclosures are contained in our earnings release. Joining the call today is Ed Rosenfeld, the Chairman and CEO of Steve Madden. With that, I'll turn it over to Ed.

Ed Rosenfeld, Chairman and CEO

Thanks, Danielle, and good morning, and thank you for joining us today. To all those listening, I hope you and your loved ones are healthy and well. The COVID-19 pandemic is obviously having a profound impact on people and communities around the world. At Steve Madden, our hearts go out to all of those who have been affected whether as a patient, family member, or a friend. We also want to express our gratitude to the healthcare workers and first responders on the frontlines of the fight against COVID-19 as well as to all the other essential workers. Since the crisis began, our top priority has been protecting the safety and well-being of our employees and the broader community, and I'm proud of both the steps we've taken to safeguard the health of our employees and our customers, including closing all our U.S. stores on March 15 and how we’ve supported our communities through donations of medical grade masks to hospitals, non-medical face coverings to homeless shelters, meals for healthcare workers, financial assistance for organizations combating hunger, and more. Beyond that, we have been laser-focused on taking the right steps to ensure the long-term viability and strength of our business, including maintaining and enhancing our strong financial position, so we can weather the storm as well as positioning the Company to win going forward in what is sure to be a significantly changed retail landscape. We entered this crisis with an exceptionally strong balance sheet with $228 million in cash and marketable securities and no debt as of March 10, 2020. Nevertheless, when the severe impact of COVID-19 became clear, we quickly took a number of precautionary, but significant measures to preserve liquidity and enhance financial flexibility. We suspended our quarterly cash dividend and our share repurchases. We significantly scaled back all non-essential operating expenses, capital expenditures, and inventory receipts. We made difficult decisions concerning our people, including furloughing a significant portion of our employees as well as temporarily reducing the salaries of all remaining employees with salaries greater than $100,000. Finally, we drew down the maximum $50 million from our existing credit facility, and we began the process of securing a new, larger asset-based revolving credit facility. We're well down the path on that effort and hope to close on the new ABL within the second quarter. These measures, when combined with our already rock-solid financial foundation, leave us well positioned not only to navigate this crisis but also to play offense when conditions normalize. Now, let me turn to our first-quarter results and current business trends. After a strong 2019, we got off to a good start to 2020. Through early March, we were on track to exceed our internal forecasts and analyst expectations for the first quarter on both the top and bottom lines, and we were very optimistic about the balance of the season due to the outstanding early reads we had on spring products, particularly in our Steve Madden women's footwear business. Then, of course, everything changed, stores closed, and our business materially weakened. For the quarter, consolidated revenue declined 14% and diluted EPS decreased 62%. Looking at our business by segment, in wholesale, as of March 10, revenue for the quarter was trending up low-single digits on a percentage basis. But with the vast majority of our customers halting almost all deliveries for the back half of March, we ended the quarter with a 13% decline in wholesale revenue compared to the prior year, including a 15% decrease in wholesale footwear, and a 5% decrease in wholesale accessories and apparel. In retail, revenue through the first two months of the quarter was trending up mid-single digits on a percentage basis, including a low-single-digit comparable store sales increase. But after a sharp decline in March, we ended the quarter with retail segment revenue down 16% versus the prior year period. Turning to the current quarter, in April and May, wholesale revenue is trending down approximately 75%. The majority of our shipments the last two months have been private label products to the mass merchants that have kept their stores open throughout the crisis. Branded wholesale revenue has been modest. We expect branded wholesale revenue to start to build slightly in June, with more meaningful improvement beginning in July. In our retail segment, revenue quarter-to-date is down nearly 60%. Virtually, all our sales have been in the e-commerce channel, which has been a real bright spot. In the last three weeks of March, we saw pressure on our e-commerce revenue as customers pulled back their spending on fashion and focused on essentials. But beginning in April, we experienced a strong rebound and have since seen outstanding year-over-year growth. Our e-commerce revenue was up approximately 75% for the quarter so far. Bricks-and-mortar retail revenue quarter-to-date has been minimal as all our retail stores, with the exception of one joint venture store in China, have been closed most or all of the quarter. We opened our first 15 stores in the United States on May 20. We plan to open another 8 stores in the next couple of days, which will leave us with 23 stores open and 106 stores still closed in the U.S. Outside the U.S., we have 38 stores open and 49 stores remain closed. Now, let's look to the future. We cannot minimize the challenges we are facing. Clearly, our organization is being tested like never before, but my confidence in our ability to get through this and emerge a strong and thriving company is unwavering, and it's a function of our unique advantages for the Company. First and foremost, we have an extraordinarily strong balance sheet, which is important not only because it allows us to sleep at night knowing we can endure whatever comes at us until the crisis is over, but also because it positions us to play offense as we move ahead, in contrast to some of our competitors who may be constrained in how they can invest or compete going forward. Second, we think brands will be increasingly important going forward and we have some of the strongest in our industry, particularly our flagship Steve Madden brand. Steve Madden had tremendous momentum coming into the crisis and we've continued to see strong demand for the brand and its products during the crisis and the channels that have been opened. We were also encouraged by how the brand performed during past economic shocks. During the financial crisis and the years that followed, Steve Madden was a significant outperformer and took meaningful market share as the brand's strong price value proposition and its offering of designer styling at accessible price points became even more compelling for consumers. Speaking of value, as we think about the retail landscape going forward, it's clear that mass merchants and other value-price retailers are positioned as likely share gainers. Unlike many of our branded peers, we have significant access and exposure to the mass channel through our private label business. In 2019, we had over $300 million in combined revenue with the two largest mass merchants, and we are working closely with each of them to explore opportunities to further expand our relationship as they seek to press their advantage and capture additional market share going forward. The other channel that's a clear beneficiary and share gainer in the current environment is digital, and we also like how our position there. Prior to the crisis, we were on a strong upward trajectory in our company-operated e-commerce business with 2019 revenue increasing nearly 60% and profitability up about 170% versus the prior year. As I mentioned earlier, that business has accelerated further during the crisis and is currently running up approximately 75% for the quarter-to-date period. We are leaning in aggressively to our e-commerce growth initiatives, including increased investments in digital marketing as well as tests of new features like try-before-you-buy, free one-day delivery and same-day delivery for $5. Finally, we think our proven business model will help us to mitigate risks in this uncertain environment and serve as a key advantage relative to the competition. As the industry works through the fallout from the crisis and the resulting glut of inventory in the market, our industry-leading inventory turns of approximately 8 times a year should enable us to right-size inventory ahead of our peers. History has shown us that when the large wholesale customers are seeking to manage their own inventory sounds, they tend to rely on vendors that can be nimble and work close to the season, which plays to our core strength and speed to market. We are clear about the near-term challenges we face. We are confident that we are well positioned to navigate the crisis and to restore momentum and return to profitable growth when conditions normalize. Before I turn it over to Danielle to walk you through the financial performance in Q1 in more detail, I want to take a moment to thank our employees for their extraordinary efforts during the crisis, which has inspired me with their dedication and resilience in the face of adversity, and they have my sincere gratitude. Now I'll turn it over to Danielle.

Danielle McCoy, Director of Corporate Development and Investor Relations

Thanks, Ed. For everyone joining the call today, I hope that you and your families are staying safe and well during this challenging time. In the first quarter, our total revenue decreased 13.6% to $359.2 million compared to prior year total revenue of $415.8 million. Our wholesale segments declined 13% to $302.7 million, compared to $348.1 million in the prior year period, driven by significant order cancellations in the latter part of March due to the impact of the COVID-19 pandemic. Wholesale footwear revenue declined 15% to $235.1 million, and wholesale accessories and apparel revenues declined 5.4% to $67.7 million. As of March 10th, prior to the impact of COVID-19, each of those segments were trending up low single digits for the quarter compared to the same period last year. In our retail segment, revenue decreased 15.8% to $52.9 million due to the closure of all our brick-and-mortar stores for the back half of March. Despite a downturn in our e-commerce business the last three weeks apart, as customers shifted spending from fashion to essentials, our e-commerce revenue was still up mid-teens for the quarter. As Ed mentioned, e-commerce bounced back strong beginning in April. We ended the quarter with 224 company-operated retail stores, including 62 outlets and 8 e-commerce stores, as well as 30 company-operated concessions in international markets; a total of 155 stores remain closed at this time. Turning to our Licensing and First Cost segments, our licensing royalty revenue, which is now included in total revenue, was $2.2 million in the quarter compared to $2.5 million in last year's first quarter. First Cost commission income, which is also included in total revenue, was $1.2 million in the first quarter of 2020 compared to $2.4 million last year. Consolidated gross margin in the quarter was 37.2% compared to 38.9% in the prior year. We took $11.7 million in inventory reserves as a result of the COVID-19 pandemic, which impacted consolidated gross margin by approximately 330 basis points. Wholesale gross margin was 32.5% compared to 34.5% last year due to the COVID-19 inventory reserves. Retail gross margin was 59.8% compared to 58.5% in 2019, due to a benefit recognized in connection with the modification of the Company's loyalty program, partially offset by the COVID-19 inventory reserves. Operating expenses for the quarter increased to $119.3 million or 33.2% of total revenue, compared to operating expenses of $116.8 million or 28.1% of total revenue. Excluding the newly acquired GREATS and BB Dakota businesses, operating expenses were down compared to the prior year. It should also be noted that while we took significant action to reduce payroll and scale back non-essential operating expenses, most of these actions did not go into effect until the second quarter of 2020. Operating income for the quarter totaled $14.2 million, or 4% of total revenue, compared to last year's first-quarter operating income of $45.1 million or 10.8% of total revenue. Our effective tax rate for the quarter was 15.2% compared to 22.6% in the same period last year. Finally, net income attributable to Steve Madden, Ltd. for the quarter was $13 million or $0.16 per diluted share compared to $35.1 million or $0.42 per diluted share in the first quarter of 2019. Moving to the balance sheet, our financial foundation remains strong. As of March 31st, 2020, we had $245.4 million in cash and marketable securities and $29.1 million in debt. Inventory totaled $102.3 million, down 11.3% compared to the prior year figure of $115.3 million. Our consolidated inventory turns for the last 12 months ended March 31, 2020, was 8 times, and our CapEx in the quarter was $3.3 million. During the quarter, we repurchased approximately 879,000 shares for $29.1 million, which includes shares acquired through the net settlement of employees' stock awards. As mentioned in our 8-K released on March 30th, we have since suspended share repurchases as well as our quarterly cash dividend in order to maintain ample liquidity and financial flexibility during this uncertain environment. However, we remain committed to returning cash to shareholders and expect to resume both share repurchases and the quarterly cash dividend once the environment normalizes. Lastly, given the significant uncertainty related to the COVID-19 pandemic, we withdrew our 2020 revenue and earnings guidance on March 18th and will not provide guidance at this time. Now, I'd like to turn it over to the operator for questions.

Operator, Operator

Our first question comes from Camilo Lyon with BTIG. Your line is now open.

Camilo Lyon, Analyst

Thanks. Good morning, Danielle. And how are you guys? Hope you guys are safe and well. Thanks for the detail. Ed, I was hoping, if you could give us an update on your current inventory position, both owned and retail? And any comments you could provide on overall channel inventory, and then I have a follow-up please.

Danielle McCoy, Director of Corporate Development and Investor Relations

Sure. The straightforward answer is that we have some extra inventory, and there's also excess inventory in the channel, which is a situation facing every vendor and retailer in the industry right now. When a season comes to an abrupt halt without notice, it naturally leads to excess inventory. The positive aspect is that we are likely in a better position than many vendors and brands, primarily due to our inventory turnover. We turn our inventory eight times a year, while the wholesale channel turns it around ten times a year or even faster. Therefore, we expect to have less excess inventory compared to our peers and should be able to align it with sales trends relatively quickly.

Camilo Lyon, Analyst

Could you discuss how your fall orders are progressing and how you’re managing your inventory purchases? Additionally, regarding your approach to addressing excess inventory, has there been a shift in how you're distributing your goods now? What potential effect could this have on the selling season? Will your inventory continue to flow beyond when it typically would, possibly extending the selling seasons?

Danielle McCoy, Director of Corporate Development and Investor Relations

Yes, we are experiencing a delay in the arrival of some spring and summer goods. The deliveries for the fall season will be, on average, about a month later than usual. As a result, we and the retailers plan to extend the spring and summer selling season before moving into fall. While I won't provide specific numbers for the fall, it is generally understood that retailers are taking a conservative approach, and their open-to-buy levels are down. Our key retailers have indicated that we are expected to perform better than our competitors, but this means our planned decline is smaller than what they anticipate overall, even though it is still a decline.

Camilo Lyon, Analyst

I just want to clarify that if orders are coming in at a negative rate as expected and everyone is trying to reduce their inventory levels, along with the uncertainty around demand for fall and the holiday season, what conversations are you having with your factories? Are you staging inventory? Are you taking steps to build to order, or creating any speculative inventory? How are you approaching this situation considering what happened in March, April, and May regarding early cancellations, and it seems like some of those cancellations have been reinstated for the spring season? How should we view the overall situation and your plans in light of what appears to be a significant decline in orders for the latter half of the year?

Ed Rosenfeld, Chairman and CEO

Yes. Look, we're buying according to those plans for fall. So, I think our fall inventory should be in line. The inventory issue is really the spring goods, and we're obviously working through that, of course with our factory partners, but also working through that on our end as to the plans for disposing of that inventory. And our goal is to be through all that seasonal inventory by the end of the year, that's the plan.

Operator, Operator

Thank you. Our next question comes from Matthew Degulis of KeyBanc Capital Markets. Your line is now open.

Matthew Degulis, Analyst

Good morning, everyone, and thanks for having me on. I hope everyone is staying really safe. So, I view Steve Madden as a very social event-driven business. Customers want to look good and on-trend and reach for a pair of Steve Madden. So my question is, what can Steve Madden do to meet consumer needs and wants when there are very few social events on the calendar? Any major shifts in product categories or channels is what I'm getting at?

Ed Rosenfeld, Chairman and CEO

Yes, it's a good question. And look, one of the things that you've heard me say over the years and something that we think is the strength of our brand is that we are not known for one category or type of footwear. We're known as the on-trend player and the player that provides whatever product is of the moment, and we have the permission from the customer to play in all categories. So, we're not the sandal player or the boot player or the dress shoe player. We do whatever is trend right at the moment. And so, we let the customer tell us where she wants to go and then we deliver the right products in that category. And that's what we're going to continue to do going forward. I think over the last few years we've already been in a trend of increased casualization, and we responded very well to that. In fact, Steve Madden has grown throughout that period. The way we did that was by taking fashion sneakers from low single digits as a percentage of sales to about 30% of our sales over the course of a few years. And so, that trend continues or if there are other changes in consumer preferences we'll evolve the product assortment accordingly.

Matthew Degulis, Analyst

Thanks. And one follow-up, is it a good strategy to chase into these categories driven by your supply chain, or are you better served by being conservative across the board?

Ed Rosenfeld, Chairman and CEO

Well, I don't think, I think that chasing actually is a reflection of being conservative because in my mind when we use the word chase, that means we don't make a big commitment upfront. We see what's working and then we quickly respond to it and we utilize our speed-to-market capability to quote unquote chase into those trends. So I think to your point, no, we're not going to make big bets on categories upfront with big inventory purchase commitments, but we never do that, and that's the benefit of our model.

Operator, Operator

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

Erin Murphy, Analyst

Great. Thanks. Good morning and hope you both are doing well. I guess my first question is just around the reopening. Ed, I know it's very early days, but can you just talk about what you've seen in the last week from traffic conversion once you have opened pockets of stores; do you have any key geographic differences as well?

Ed Rosenfeld, Chairman and CEO

Sure. It's only been a week since we opened 15 stores in the U.S., which represents just over 10% of our store base. We don’t have a lot of information yet, but sales have been down about 60%. However, the last two days have shown significant improvement, with sales down around 40%. We hope to see that trend continue, but I advise caution in drawing conclusions based on just one week of results from a small portion of our stores. Regarding traffic and conversion, traffic has been weaker than the 60% decline, while conversion rates have improved. Notably, we opened a store in Orlando, which is typically a high-volume location for us, but it has been our weakest store so far, likely due to a major attraction in Orlando being closed and not generating traffic. Our strongest location has been in Atlanta.

Erin Murphy, Analyst

Got it. That's helpful. Thank you. And then I guess just, as you reopen stores, can you just talk about how easy it's been to pull back your labor? I know you furloughed a significant piece of your labor. Are you having to compete with the unemployment benefit? And then just what other expenses are you having to encourage you to try to create the safest environment possible for consumers coming back to your stores?

Ed Rosenfeld, Chairman and CEO

It's a good question. We have had some employees who have elected not to come back for various reasons. But generally speaking, we've been able to get the stores open and on-time with our schedule and have the appropriate staffing levels. In terms of expense, obviously, we're spending money on PPE. There's training for the employees on the new safety measures and protocols. We do have to make sure that we have the appropriate staffing in the stores because we're asking more of the store employees there. We're cleaning and disinfecting every two hours. There are additional protocols around return products or products that are tried on etc. We're obviously monitoring the occupancy in the store. So typically, if you were seeing this kind of sales declines that we're seeing, you might be able to scale back more on labor in the store, but that's not possible, given all that we're asking of the store associates.

Erin Murphy, Analyst

Okay, that's helpful. And then just last question for me, it's just around the off-price channel. I'm just curious, I think that business traditionally for you has been made for. I'm curious what the appetite is for product if you go into the back half from the off-price channel? Thank you.

Ed Rosenfeld, Chairman and CEO

Yes, I think it's a bit early to make definitive statements. Those discussions are ongoing, so we don’t have a clear picture of what to expect moving forward. However, I believe your question raises a valid point. We do anticipate that off-price channels will have plenty of opportunities for buys or closeouts, which may lead to a decrease in upfront orders for a certain period.

Operator, Operator

Thank you. And our next question comes from Sam Poser with Susquehanna. Your line is now open.

Sam Poser, Analyst

Good morning. I hope everyone is doing well. Thank you for taking my question. I have a few inquiries. Firstly, you have historically excelled at identifying current fashion trends after observing markets and understanding what's happening. However, considering the travel limitations and the challenge in pinpointing trends, how are you approaching the identification of future trends heading into the fall?

Ed Rosenfeld, Chairman and CEO

Yes, we've significantly increased our testing, especially on our own website. I would say the volume of tests is as high, if not higher than ever before. We're even putting items on preorder before production starts to begin gathering insights, and we are indeed receiving some very positive feedback on new products. Overall, things are progressing well.

Sam Poser, Analyst

Thank you. When considering how fall is shaping up, is there a significant difference between brands like Women's Steve Madden and Blondo, which are among the most popular, compared to others in the portfolio like Dolce Vita or Anne Klein? It seems there could be a major disparity in performance, with some potentially down 40% while others remain flat. How do you foresee this playing out from a general brand perspective?

Ed Rosenfeld, Chairman and CEO

Without commenting on the sample, the illustrative numbers you've suggested, I do agree again with your thought process. Yes, I think that the retailers are going to really lean on the brands that had momentum going in, and the brands that are really important to them and that drive sell-through for them. So we certainly anticipate, as I mentioned earlier, that Steve Madden is going to do better than whatever the Company or department averages in terms of the plan decline, meaning the brand. We have some smaller brands that may be more in line with the overall or even weaker.

Sam Poser, Analyst

Thanks. And then lastly, can you give us an idea of what your e-commerce penetration was last year and what you anticipate that being, sort of where are you focusing on a more normalized level and specifically how you're moving marketing around, what results you've seen and how much more work you have to do and how much that may generally cost to do that.

Ed Rosenfeld, Chairman and CEO

Sure. So our e-commerce penetration last year in our wholesale business it was high teens as a percentage. In our retail segment, it was high 20s as a percentage. So we're in your own 20% e-commerce penetration for the overall company in 2019. It's going to be considerably higher than that this year. I'm not going to speculate about where exactly that's going to land, but certainly it will be significantly higher. And we think much of the changing in e-commerce will probably be sticky. We think some of the habits formed in the pandemic will be lasting and there will be permanent changes to consumer shopping behaviors. So we're planning for a higher level of e-commerce penetration. In terms of investments, one thing I want to point out is while we've scaled back our overall marketing plans for the year relative to our original forecast marketing is still planned up for us this year and that's because we really do continue to lean into our digital marketing initiatives and the marketing that we're doing to support our e-commerce business. In fact, we accelerated that marketing spend during the crisis. We've seen some of our competitors pull back there, but we've really leaned in and are seeing some very strong returns there.

Sam Poser, Analyst

Just to clarify, just to make sure I got this, you said 20%. Does that mean last year you did about $357 million in owned digital business?

Ed Rosenfeld, Chairman and CEO

No, no. I said, okay, so we have a wholesale segment and a retail segment. So in the retail segment, which is 18% of our business, high 20s, I think it's 28% of that business was done on our owned e-commerce channels. But our wholesale business accounts for 82% of our business. And of those sales, I think high-teens I believe 18% went to e-commerce retail like Amazon consumers.

Sam Poser, Analyst

Does that include some of the Macys.com too or is it just…

Ed Rosenfeld, Chairman and CEO

Yes, it includes all products that we believe went out the door and through an e-commerce channel. Some of it's estimated because some of them you don't have perfect information about what went to brick-and-mortar and what went to e-com. So when you….

Sam Poser, Analyst

It did about $90 million in owned e-commerce. That's about right. Okay. I just want to clear. And I mean, if you think about $90 million last year and you think about where you'd like to see that, let's say in 2 to 3 years. What do you think because you're going to get some acceleration right now?

Ed Rosenfeld, Chairman and CEO

It's going to be considerably bigger, but I'm not going to put a number on it.

Operator, Operator

Thank you. Our next question comes from Susan Anderson with B. Riley FBR. Your line is now open.

Susan Anderson, Analyst

Hi. Thanks for taking my question. I was wondering if you could give some more color on the private label business during this time. It sounds like they were the only one taking shipments. I guess I was curious, did this business perform better or worse or kind of in line with your expectations during this time? Because I think a lot of the mass retailers also had noted that apparel and footwear was also weak.

Danielle McCoy, Director of Corporate Development and Investor Relations

Yes, so it's a good question. So in terms of the retail sell-through on the private label products with the mass retailers, when the crisis first hit, sort of mid to end of March, we were seeing a significant decrease in our retail sales performance with those retailers. So our sales were down about 50% there. Again, they were seeing very strong overall sales. But as you pointed out, it was really I think customers were flocking to those retailers for essentials and packing up the fashion. As we got into April and May, we've seen gradual improvement virtually every week. Now we're right in line in terms of sales with where we were a year ago with those retailers.

Susan Anderson, Analyst

Great. And then, I guess, how are you working with your wholesale partners, I guess, particularly department stores just have to clear the inventory once the stores do open? It sounds like there were a number of cancellations. So are you expecting a ton of inventory to be cleared and will you have to provide markdown money? Then I was also curious how your wholesale partners, particularly those stores that were closed, the online business, how that's done during this time period. I guess, have they been able to sell-through a lot of your product on their own website?

Ed Rosenfeld, Chairman and CEO

Yes. So, in terms of online performance with our wholesale customers, yes, in almost every case, we've seen a very significant increase in their online business. Now, we have to point out that it has not been enough to offset the impact from the store closures. So on an overall basis, we've still been down, but the increases in online with the key customer have been very significant. In terms of how they are managing through their inventory, look, they’ve been selling it online. Many of them have been more promotional than normal online. Anticipate, there's going to be an increased promotional activity in the stores as well as they are now reopening, at least for some period of time, not going to get into the details of the markdown money discussion. But I think you can assume that for the spring season, when they canceled massive amounts of goods on us, our willingness to provide markdown support is different than normal.

Susan Anderson, Analyst

Great. That's helpful. Lastly, as consumers, particularly younger ones, begin to go out more, are you noticing any pickup in fashion items? Do you anticipate any pent-up demand in that area, or do you think consumers will remain cautious and not go out much?

Ed Rosenfeld, Chairman and CEO

Well, we definitely are seeing some very strong demand for some of our products. And they pointed out it was doubly disappointing that we had this crisis this season because of the very strong early weeks that we had on spring products, but much of those products have continued to have very strong demand throughout the crisis online and now that the stores are reopening. So we've got some really strong products, particularly in the sandal category. Some very strong flat sandals, platforms, wedges, etc. that are in good sellers and good wedge sneakers. We do have a number of products that are working. There are some signs of pent-up demand which are helpful in driving some business.

Operator, Operator

Thank you. Our next question comes from Tom Nikic from Wells Fargo. Your line is now open.

Tom Nikic, Analyst

Hey, good morning. Thanks for taking my questions and hope you're both staying safe. I know that the cost-saving measures that you implemented probably wasn't enough to really affect Q1. Is there any indication or help you can give us, as to how we should think about operating expenses for Q2 like, I mean, maybe how much of a decline we should be modeling or anything like that?

Ed Rosenfeld, Chairman and CEO

Well, given that we're not providing guidance, I'm not going to give a specific operating expense number, but I can try to give you some context that might be helpful. The first thing is, we have variable expenses which run 3.5% to 4% of sales. So you can apply that to your revenue assumption, and there will obviously be some savings there in Q2 given revenue will be down. For the year, we've taken about $25 million out of our forecast in discretionary expenses. So that's things like bonus, travel, marketing, although I will remind you again that marketing is still up year over year. It's just up not as much as we originally planned again because of the digital marketing initiatives that we're continuing. That's $25 million for the year, which is pretty much all in the back nine months. The last thing is that, about 70% of our expenses are historically are in what we call the fixed category. But in an environment like this even expenses that you traditionally look at as fixed, you have to in some sense become variable. For instance, salaries is something that is normally fixed, but we've already had about a $16 million savings in payroll in April and May due to the furloughs and the temporary salary reductions that we instituted. And that number will grow because we are not at this point bringing back everybody from furlough or restoring the salaries. I hope that's helpful.

Tom Nikic, Analyst

That is helpful. Thank you. And then a follow-up on sort of, I guess, following up to Sam's question about e-com. Your e-com growth this year will probably be pretty strong, and I think you talked about the 75% growth quarter-to-date. As far as like an infrastructure and I guess logistics and fulfillment perspective. Do you feel like you have the capacity and capabilities that you need? Or do you think that there will be some incremental investment that you need there?

Ed Rosenfeld, Chairman and CEO

I really feel good about how we're positioned there. As you know, this has been an initial key initiative for us for the last few years, and we've been seeing very strong growth in e-commerce. We've made a lot of investments, and we really positioned ourselves to continue growing. As you know a couple of years ago, not quite two years ago, we implemented the free two-day shipping. We've been able to do that because of the fulfillment network that we have, which includes our multiple warehouses in California, New Jersey, Texas, etcetera, Florida. Also because we utilize our stores and fulfill products from our stores, and in fact, while this hasn't been the case recently, due to the unusual environment, but in normal times, we fulfill the majority of our products, or having sold the majority of our products from our stores. That enables us to get products to folks quickly and cost-effectively. I do feel good about our position there. I think it's scalable.

Operator, Operator

Thank you. Our next question comes from Laura Champine with Loop Capital. Your line is now open.

Laura Champine, Analyst

Thanks for taking my question. I really appreciate the information about how sales are tracking by segments. I know that on your own retail side, you only got a handful of stores open. But if we look at your wholesale doors, what percentage of those stores do you think are open today? And what's your expectation for more of a full opening?

Ed Rosenfeld, Chairman and CEO

Yes. So if we put the mass merchant aside, because they've obviously remained open throughout the crisis. I would say on average, if you look at our wholesale customers right now, it's about 50% of the doors are open. But that those numbers are climbing each week. Over the next month, I would assume that we're going to have the vast majority of our wholesale customer doors open.

Laura Champine, Analyst

Got it. And this is just a housekeeping thing, but on your retail segment, the gross margin benefited from a change in the royalty program can you spell that out what it was and if you can quantify that’s helpful? Thank you.

Ed Rosenfeld, Chairman and CEO

Yes, sure. So we made a change to the loyalty program, moved away from a points-based system to a new system where there were various benefits including promo codes that folks get after they purchased for their next purchase. We had some points liability on the balance sheet and those points went unused when we changed, when we converted the program. We recognized a benefit to gross margin. That benefit was about, let me see here, 310 basis points to the retail gross margin in Q1. As we pointed out, we also took inventory reserves in Q1 related to COVID 19 that offset some of that. Was that it or was there a follow up there?

Laura Champine, Analyst

Is there, how much did the inventory reserves impact gross margin for retail, how much of that was offset?

Ed Rosenfeld, Chairman and CEO

Yes, 110 was the offset in retail.

Operator, Operator

Next question comes from Ross Licero with Telsey Advisory Group. Your line is now open.

Ross Licero, Analyst

Yes, good morning. Thanks for taking my questions. Just wanted to see, you said the e-commerce channel was up 75%. Can you give any color on the profitability you're seeing on that channel right now?

Ed Rosenfeld, Chairman and CEO

No, I don't think that again at this moment. I will say we have been more, we remain profitable there, but we have been more promotional than normal. And as you've seen out in the market with brands and retailers, we have increased the level of discounting and promotional activity given the excess inventory that we have and frankly just the competitive situation in the market. But we hope to return to more of a full-price posture online, later in the summer.

Ross Licero, Analyst

Okay, great. And then just regarding the store portfolio, can you give a little color on the opportunities that you're seeing for refinements? Whether it's to close stores or take advantage of some of the rent opportunities out there and how negotiations are going with your landlord?

Ed Rosenfeld, Chairman and CEO

So look, I think you can assume that we were already taking a hard look at our store portfolio and evaluating whether or not we wanted to get out of some of our underperforming locations. You can assume that this environment only makes us more inclined to close stores unless we can get a much more attractive rental arrangement. So you will see us be a net store closer this year at this moment, I can't say how many, because it's a fluid situation. In terms of our discussions around rent, on the stories that remain open, look, we're in dialogue with our landlords. Those discussions are ongoing because they're ongoing. I can't think too much about the content of those discussions. I think somebody said once said negotiations are like mushrooms, they grow in the dark, and I think that applies here. So probably best not for me to discuss them publicly, but we're hopeful that we'll be able to come to an arrangement with our landlords that they got some relief.

Operator, Operator

Our next question comes from Chris Svezia with Wedbush Securities. Your line is now open.

Chris Svezia, Analyst

Good morning everyone. Thanks for taking my questions. Glad you're well. Just going back to the inventory for a moment, Ed, maybe just some more color about how you plan or how you're thinking about moving these spring/summer inventories between off-price, your own outlet stores when they open. Any thoughts holding some inventory inventories potentially bad just because maybe it's core items, etc., there's no point in putting down the marketplace, just how we think about that? As really Q2 the high watermark for year-over-year inventory. How should we think about that?

Ed Rosenfeld, Chairman and CEO

We will need to utilize all available strategies to move our inventory. This includes promotional efforts on our website, in our stores, and through our wholesale customers both in-store and online. We will also shift some products to off-price channels, specifically to our outlet locations. We are committed to taking all necessary actions to sell through the inventory. While I believe our situation is not as severe as others due to our rapid inventory turnover, it's possible that we will retain some core products into next year. Our primary objective remains to sell through this year's seasonal products.

Chris Svezia, Analyst

And when do you expect to have more of your stores open? Is there any sort of set process plan? Are you thinking by July, you'll have all your stores open? I'm just sort of what's your thought process behind that?

Ed Rosenfeld, Chairman and CEO

Yes. Look, again, it's a very fluid situation. We're opening some more at the end of this week, and I think from here provided, of course, that the virus itself doesn't start moving in the wrong direction in terms of new cases. You will see stores opening pretty much every week, from here on out. I'd like to think that over the course of the next month, we'll get the majority of our stores open. I certainly don't think that we'll have 100% of them open at the beginning of July, given the store footprint that we have, but there will be gradual reopening each week from here.

Chris Svezia, Analyst

Okay. And just following up on my prior question, just the inventory is really key to the high watermark for inventory year-over-year in terms of growth there?

Ed Rosenfeld, Chairman and CEO

I can't say that for sure, and I prefer not to make any predictions about quarterly inventory at this time.

Chris Svezia, Analyst

Okay. Final thing, just on your comment about June, you expect from a brand perspective to start shipping more products and July to be more meaningfully. Just what's the basis behind that? I know it's not year-over-year growth. I'm just trying to understand, is that just a product that was supposed to be shipped or just how should I think about what drives that improvement in July?

Ed Rosenfeld, Chairman and CEO

Yes. Well, that's based on our discussions with our wholesale customers and the orders that they're giving us. Keep in mind when the crisis first hit, most of these wholesale customers, again, putting the folks that remained open aside, but most of the wholesale customers essentially stopped everything and canceled all their spring orders. But we worked with them to then get orders reinstated and all of them have reinstated some portion of their orders and they keep in mind for the most part, or for most customers it's a fraction of the original amount but still they've all reinstated some orders and that's the basis for how our forecasting by month.

Operator, Operator

We have a follow-up from Sam Poser with Susquehanna. Your line is now open.

Sam Poser, Analyst

Thanks for taking my follow-up. Can you discuss two things? Can you elaborate on the expected increase in promotional activity now that the stores have reopened? How should we view gross margin pressure for Q2 and Q3 compared to Q1, considering the anticipated promotional activity in both your wholesale and retail businesses after reopening?

Ed Rosenfeld, Chairman and CEO

Well, again, since we're not providing guidance, I don't think I can provide too much or I'm not going to provide specific guidance around the gross margin. But look, I think it is going to be a promotional environment and there is pressure on gross margin that we should expect to see going forward due to some of that promotional activity. I will remind you that we did take the inventory reserve in Q1 of nearly $12 million. So, we've accounted for what we believe, we'll have to – product that we believe will have to sell below cost, and I should point out that that includes not only the inventory that was on our books at the end of Q1, but also inventory that was in the factories or products that were in the factories, both complete and in process that we thought we had exposure on. But again, that accounts for anything you think you're going to sell below cost. There will still be an impact to the gross margin from products going out at no margin or very low margins.

Sam Poser, Analyst

We can expect more pressure on gross margins in Q2 compared to Q1 due to the deeper impact of the crisis, which began during that quarter instead of just a few weeks into it as in the first quarter.

Ed Rosenfeld, Chairman and CEO

You've gotten all you're going to get out of me on this one, Sam.

Sam Poser, Analyst

All right. There were some indications last year and even in February that the dress shoe business was showing signs of recovery. Can we conclude that those signs of recovery have disappeared at least for now?

Ed Rosenfeld, Chairman and CEO

Well, what I would say is, we had very strong reads on dress shoes early in the season pre-crisis. A lot of it's a very good reads on opened-up dress shoes, but also some on pumps and some closed-up dress shoes. As we went into the crisis with most of our wholesale customers, we did see that category slowdown as you might have expected, given everybody stay at home. We've still seen some pretty strong demand on our own website. So, I think we clearly have products that folks respond to and we remain a destination for that product.

Operator, Operator

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn it back over to Ed Rosenfeld for any closing remarks.

Ed Rosenfeld, Chairman and CEO

Great. Well, thank you very much for joining us on the call today. We look forward to speaking with you on the second quarter call. And in the meantime, stay safe and be well.

Operator, Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program and you may now disconnect.