and welcome to Columbia Sportswear's First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded. I would now like to turn the conference over to your host, Andrew Burns, Director of Investor Relations.
Thank you, sir. You may begin.
Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's Q1 results. In addition to the earnings release, we furnished an 8 ks containing a detailed CFO commentary explaining our results and update relating to the COVID-nineteen pandemic. The CFO commentary is also available on our Investor Relations website, investor.columbia.com. With me on the call today are Chairman, President and Chief Executive Officer, Tim Boyle Executive Vice President and Chief Operating Officer, Tom Cusick Senior Vice President and Chief Financial Officer, Jim Swanson and Executive Vice President and Chief Administrative Officer, Peter Bracken. This conference call will contain forward looking statements regarding Columbia's expectations, anticipations or beliefs about the future.
These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward looking statement subject to many risks and uncertainties and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of these forward looking statements after the date of this conference call to conform the forward looking statements to actual results or to changes in our expectations.
I'd also like to point out that during the call, we may reference certain non GAAP financial measures, including constant currency net sales. For further information about non GAAP financial measures and results, including a reconciliation of GAAP to non GAAP measures and the explanation of management's rationale for referencing these non GAAP financial measures, please refer to the supplemental financial information section in the financial tables included in our Q1 2020 earnings release. Following the prepared remarks, we will host a Q and A period, during which we will limit each caller to 2 questions, so we can get to everyone by the end of the hour. Now, I'll turn the call over to Tim.
Thanks, Andrew. Good afternoon, everyone. A lot has changed since our last earnings call on February 6. I hope that everyone is staying safe and healthy. In recent weeks, I've been frequently asked if this is the toughest environment Columbia Sportswear has ever had to navigate.
I can safely say that we faced bigger challenges when we were less prepared and we persevered. In 1970, following my father's sudden passing, Gert and I were thrust into managing a business we knew nothing about. I was a senior journalism student at the University of Oregon and Gert's previous visits to the Columbia Sportswear Office had been limited to dropping into saying high. It goes without saying that the leadership team left room for improvement in those 1st few years. We faced insurmountable challenges across all aspects of the business.
Interest rates were over 20% and you couldn't buy gasoline at any price. That 1st year, we managed to take a company with $1,000,000 in annual sales and turn it into a company with $500,000 in annual sales. We eventually found our path and built a global brand portfolio company you see today. Given the COVID-nineteen pandemic, this call will have a different format than usual. I'd like to provide an update on how the pandemic is impacting our business, the actions we've taken to mitigate the financial impact and our strategy for the balance of the year.
We'll then quickly review the quarterly results and open the call for questions. As we dive into the details of this unprecedented global health and economic crisis, it's important to discuss our starting point. We entered into this crisis in a position of strength. Columbia Sportswear has been in business for over 80 years. And during our 20 years as a public company, we've achieved a 10% net sales and 12% compound earnings compound annual growth in earnings.
We have a unique brand portfolio that includes one of the largest global outdoor brands, Colombia, that consumers around the world recognize for its highly differentiated innovations and extraordinary value. We also entered this crisis in a position of financial strength. Exiting the Q4, we had a fortress balance sheet of $688,000,000 in cash and short term investments and no long term debt. Our 13% operating margin in 2019 was top quartile in our industry. While we are proud of our history and financial strength, we know that these are unprecedented times.
Even well built fortresses can be penetrated and we're taking steps to strengthen liquidity, preserve capital and reduce costs as we prepare for a prolonged downturn of unknown duration. We are keenly focused on emerging from this crisis in a stronger competitive position. Before discussing the actions we're taking, I'd like to provide some details about the current operating environment and status of our stores. Prior to the outbreak, the Q1 was a continuation of trends we experienced in the Q4 and unseasonably warm winter across most of the world was creating a challenging and promotional environment, particularly in outerwear and winter footwear. We have managed a weather dependent seasonal business for decades, so we were prepared to handle this type of environment.
By late January, we began feeling the impact of the COVID-nineteen outbreak in China. This quickly expanded throughout Asia with reduced store traffic and store closures prevalent across the region throughout most of February. In early March, we began to experience reduced store traffic across North America and Europe before closing all of our own stores in these markets in mid March. Most of our retailer partners and distributors stores across the world followed similar store closure timelines. As of the date of this call, the vast majority of Columbia stores in China and Korea have reopened, although many still operate with reduced store hours.
In these markets, retail traffic trends have been improving, but remain well below pre pandemic levels. Japan had experienced a similar recovery trend to the rest of Asia until early April, when a spike of new cases prompted an increase in store closures. Across North America and most of Europe, our owned stores remain closed as well as the vast majority of our wholesale partners' doors. We continue to evaluate a timeline for reopening stores in phases. In Europe, a small number of stores have already reopened and the first wave of U.
S. Store openings could begin in the coming weeks. This process will likely take time as each market is facing its own unique set of circumstances. It's uncertain how long it will take until foot traffic increases significantly. Turning to our e commerce business, sales initially declined in March across North America as consumers focused on purchasing essential items.
In April, we experienced a sharp recovery as consumers adapted to the new environment. Through the 1st several weeks of April, our U. S. E commerce business was up over 60% year over year. We have also experienced healthy growth in our wholesale partners online businesses.
Footwear is performing very well across both brands with exceptional growth from SOREL. There have also been some surprise bestsellers, including the PSE neck gaiter, which is difficult to keep in stock as consumers look for face mask solutions. For reference, our own e commerce business represented 11% of global net sales in 2019. In the U. S, including our own e commerce site and wholesale partners online business, we estimate that the Columbia brands online penetration was over 80 excuse me, was over 20% in 2019.
With the majority of stores closed, this is obviously a much higher number today and we are leveraging every opportunity we have to connect with consumers online and deliver the innovative product they expect to their doorstep. The pandemic is also impacting supply chain and logistics operations. Starting in February, factory closures in China began to impact raw materials and finished goods production as well as logistics operations. As the outbreak expanded to a global pandemic, our factory partners in Bangladesh, India and Sri Lanka among others have experienced closures and just begun to reopen earlier this week. This remains a dynamic and rapidly evolving environment that will likely affect our ability to timely fulfill some fall 2020 orders and could have longer term implications for many production regions around the world.
We have been working to strengthen the resiliency of our supply chain and believe our strong financial position, our scale and diverse sourcing base remain a competitive strength. Now that I've provided an overview of the environment in which we are operating, I'd like to share what we are doing to minimize the financial, operational and employee impacts. We quickly established a cross functional crisis response team early in the outbreak to work through the evolving operational challenges that the pandemic represents. 1st and foremost, our top priority is to protect the health and safety of our employees, their families, our customers and our communities. We've initiated work from home measures around the world, which have been operating smoothly.
For employees that are returning to the office environment, we are following best practices around social distancing and cleaning to promote a healthy environment. In our distribution centers, we have implemented social distancing policies, installed protective barriers, staggered shifts and taken aggressive measures to clean the facilities. To do right by our employees, we have also implemented catastrophic paid leave and furlough benefits, which vary by business unit and by region. We have also been helping frontline workers and the communities that they serve. Columbia has donated jackets, ring pants and vests to emergency department personnel at several hospitals and healthcare systems.
At Mountain Hardware, the warranty team transitioned to a non medical mask making team while working from home. As previously announced and detailed in our CFO commentary, we have taken a number of actions to provide greater financial flexibility and liquidity. Taken altogether, the company's total available committed and uncommitted credit lines provide $631,000,000 of borrowing capacity of which $525,000,000 is committed. We are confident in our ability to access additional liquidity should the environment require such actions. We continue to evaluate our needs.
We have also taken steps to reduce capital outflows. The company's Board of Directors approved the suspension of the company's quarterly dividend. We have suspended share repurchase share repurchases and reduced planned capital expenditures by approximately $50,000,000 Collectively, these actions are expected to reduce 2020 capital outflows by approximately $130,000,000 In recent weeks, we have implemented several swift cost reduction actions, including minimized discretionary expenditures, reducing demand creation spending, curtailing hiring, reductions of staff and salary reductions. My salary has been reduced to $10,000 the minimum in order to retain healthcare benefits. Continuing independent board members compensation has been reduced by 50% through January 2021 and senior management and executive salaries will reduce between 5% 15%.
Taken together, these actions should lower 2020 operating expense by more than $100,000,000 before incremental extraordinary expenses relating to the pandemic. Given the uncertainty of the situation and impact our business, additional cost containment measurements are under consideration and will continue to evolve. Overall, our near term capital allocation priorities have shifted the focus on maintaining a strong balance sheet in order to provide maximum strategic flexibility and access to additional liquidity if warranted. Within that context, our first priority is to build and preserve liquidity for business operations while we continue to fund high priority strategic initiatives. Our second priority is to limit the risk of financial distress given the pressure currently impacting the retail industry.
We plan to revisit our capital allocation priorities when the business stabilizes and there is a more reliable and predictable flow of cash. Now that I walked you through the current environment and the actions we've taken to mitigate the impact of the pandemic, I'd now like to spend some time on our strategy for the balance of 2020. Our objective is to carefully navigate this environment with our historically disciplined operating approach and emerge from this crisis in a stronger competitive position. First, we will continue to leverage our strengths, starting with the power of our brands. As consumers look to make every dollar they spend count during this downturn, you know that Columbia's reputation for exceptional value and differentiated innovation is as important as ever.
I'm excited about the innovative product we'll be bringing to market in the coming seasons across footwear, apparel and outerwear, including enhancements to our most popular innovation platform, Omni Heat. SOREL, which has been our fastest growing brand in recent years, continues to outperform as consumers seek out their amazing product online. Prana and Mountain Hardwear have reinvigorated their product in strategic directions and I'm confident that they'll be able to unlock growth opportunities when we emerge from this crisis. It's important to note that with all this uncertainty, our retail partners know that Columbia Sportswear will be around to continue selling them great product for seasons to come. We also remain committed to telling our brand's unique stories through demand creation investments.
While we are adjusting our spending to align with the current environment, we are enhancing our digital strategy to efficiently emphasize our most powerful brand stories. We're focusing on key product across unique brand across our unique brand portfolio that we know our retail partners can sell in high volume, including iconic Columbia PFG styles and time tested innovation platforms like Omni Heat. Our footwear initiative will remain an important area of focus for us across both the SOREL and Columbia brands. We will continue to support our footwear product engine and elevate key product launches with marketing support over the balance of the year. It's also clear that this pandemic has increased consumer adoption of online shopping and the ongoing e commerce market share shift has accelerated.
We know that our e commerce businesses are powerful brand marketing engines and the marketplaces where we connect directly with consumers. We continue to invest in our Experience First initiative for X1 and intend for the platform to go live for the Columbia, SOREL and Mountain Hardwear brands in North America prior to the peak holiday sales period. Another key focus for us is optimizing our inventory utilization and to match anticipated demand. As door closures around the world started to mount, retailers quickly switched their focus to cash and liquidity concerns. We have been proactively working with our retail partners to build a comprehensive view of orders, inventory and demand to take a holistic multi season approach to optimizing inventory levels.
Based on anticipated demand across both our wholesale and DTC businesses, we have significantly curtailed purchases of fall 2020 inventory. For any remaining excess inventory, our outlet stores will be a vital part of our clearance strategy. Historically, we have used our balance sheet to drive production efficiencies and capitalize on sales opportunities. This strategy helped drive sales, but also led to slower inventory turns. In the current environment, we are acutely focused on managing inventory and improving turns.
There's no doubt that this pandemic is creating financial pressures for many retailers around the world. We view our ability to manage credit risk as a competitive strength and I'd like to highlight the low bad debt write offs we had during the 2,008, 2009 financial crisis and the period of elevated sporting goods bankruptcies in 2016 2017. I'd now like to quickly cover our Q1 performance. Net sales decreased 13%, primarily reflecting the impact of the pandemic and to a lesser extent lower demand resulting from warmer weather compared to strong sales performance in the Q1 of 2019. In the U.
S, net sales decreased 9% with the steepest decline in March. Retail traffic trends started to decline early in the month before we closed all our own stores in mid March. In our Latin America, Asia Pacific or LAAP region, net sales decreased 22% in constant currency. China, the first market to experience pandemic weakness was down high 40%. In our Europe, Middle East, Africa or EMEA region, net sales decreased 20% in constant currency, reflecting lower consumer demand related to the pandemic and widespread store closures that started in mid March.
In Canada, net sales declined 13% in constant currency. 1st quarter gross margin declined 360 basis points to 47.8%, primarily reflecting COVID related inventory obsolescence provisions and lower DTC product margins reflecting higher promotional activity. SG and A expenses grew 10% year over year in the Q1, primarily driven by increased bad debt expense, higher personnel expense and increased information technology spending. This was partially offset by lower incentive compensation and cost containment measures, including minimizing discretionary expenditures, reducing demand creation spending and curtailing hiring. This results in a Q1 operating loss of $2,000,000 and breakeven diluted earnings per share compared to operating profit of $88,000,000 and earnings per share of $1.07 in the Q1 of 2019.
Moving to performance by brand, Columbia Brand net sales decreased 15% in the quarter, while lower demand related to the pandemic and weather impacted sales, Columbia's innovations continue to receive media callouts and awards, including GQ, Shape and Men's Journal covering our newest products for the season. Given our focus on footwear, it was great to see the Montreal FKT featured in Runner's World coveted spring 2020 shoe guide is one of the best shoes of 2020. On the marketing front, we launched our new outdoor guide collection of stories on our website and Instagram. This collection of custom how to articles delivers down to earth advice for anyone who loves the outdoors and consumers can learn about our innovative technologies and products and prepare to be outdoors. As the pandemic unfolded, our marketing team quickly responded with our hashtag to effort together campaign, which provides the outdoor community with a platform to connect during this unprecedented time.
Consumers can interact with our brand and each other to share their favorite outdoor adventures or tell us about their plans for the future. We're also working to help educate and inspire the outdoor community through our social channels, including live Instagram events featuring some of our sponsored athletes and outdoor enthusiasts. Moving to SOREL. Net sales were down 2% in the Q1 with the decline primarily coming from lower sales of winter utility styles in Europe. In the U.
S, SOREL's brand momentum was clearly evident in the brand's robust e commerce growth as consumers who are stuck at home sought out SOREL's products online. In April, SOREL had weeks where unit sales volumes across the brand's wholesale business and sorel.com were actually up year over year, setting sales records despite significant store closures. Through the 1st several weeks of April, sorel.com has generated nearly 300% year over year growth. Piranha net sales declined 11% in the Q1 as lower wholesale sales more than offset e commerce growth. We were encouraged that the robust e commerce growth we discussed in the last conference call continued into early 2020 prior to when the pandemic took hold.
We remain confident in Piranha's focus, including its message of clothing for positive change and refresh product line. Non hardware net sales declined 2% in the Q1 as a healthy start to the year gateway to lower demand due to the pandemic as the quarter progressed. As previously announced, given the ongoing business disruption and uncertainty surrounding the pandemic, we have withdrawn our 2020 financial outlook. We're modeling a number of downside scenarios and we believe that we have sufficient capital and access to liquidity to manage through the crisis. It's hard to say how this pandemic will permanently change consumer behavior, but in an era when everyone is working from home, trying to avoid crowds and looking for an escape, it certainly seems like getting outdoors and enjoying nature is the perfect solution.
I'm convinced we're going to see outdoor participation grow as a result of this pandemic. Our mission is to connect active people with their passions and we're ready to equip outdoor enthusiasts with innovative footwear and apparel. In summary, while 2020 will take a different path than we originally expected, we're confident in our strategy and ability to weather this storm. Our long term commitment to driving sustainable and profitable growth has not changed. Our strategic priorities remain to drive global brand awareness and sales growth through increased focused demand creation investments, enhance consumer experience and digital capabilities in all of our channels and geographies, expand and improve global direct to consumer operations with supporting processes and systems and invest in our people and optimize our organization across the portfolio of brands.
That concludes my prepared remarks. We welcome your questions for the remainder of the hour.
Thank you. At this time, we will be conducting a question and answer Our first question comes from the line of Robert Rubin with Guggenheim Securities. Please proceed with your question.
Hi, Tim. Hi, guys. Good afternoon.
Good afternoon. Tim, just a couple
of questions. I think the first one is on your order book, your visibility. Can you just talk us through significant cancellations or whatever like how firm is your order book at this point? And when you think about your ability to sort of meet the demand, it ties into the second question, which is like on the inventory that you have on the books today, how much of it are you going to carry old fall inventory of 2019 into 2020? How much of the new 2020 stuff had you gotten in before things locked down?
Can you start with maybe those two questions? Sure.
Well, as it relates to the first one, the current order book we believe is quite solid. We've spent really the last almost 60 days confirming with our retailers where we believe we have issues as it relates to production and where we have solid deliveries available for the customers. We've done a lot of work on this and we believe that we're in good shape on our order book and our visibility on that part is quite good. As I said, we want to maximize our inventories and we're doing that through matching existing demand and also substitutions. As it relates to carryover inventory, as you know, the bulk of our sales are through fairly long historical products and we have good visibility on that merchandise and we have some carryovers that we'll be selling over the next several years.
We're going to be focusing on inventory turns and liquidity, an area where we really never had to manage with the kind of precision we're going to be working with in the future. With the balance sheet we had before, we could make opportunistic buys on certain merchandise and it was very helpful for the company. Now we're going to be focusing very much on inventory turns and on utilization of inventory maximizing that.
Got it. Okay. And then I guess my other question is, as you've focused on your digital capabilities, can you expand upon essentially how you're meeting the demand? Are you being able are you shipping from some of your outlet stores? Or are you just shipping from your distribution centers fulfillment from that perspective?
Can you just maybe elaborate a little bit in terms of how you've pivoted there? Thanks.
Certainly. Well, I just want I want investors to understand that the single biggest investment we're making in 2020 is on improving and enhancing our digital capability, specifically as it relates to e commerce. So our X1 project, which has been ongoing for several quarters now, is the largest capital expenditure we have. We cut others that we thought were less important. This one is critically important.
Our so our digital business is a global digital business and we're shipping from distribution centers almost exclusively around the globe. Certainly in the U. S. And in Canada, we're shipping merchandise only from our distribution centers. But it's important to remember that the company has a number of both pure play digital wholesale customers as well as the fact that many of our customers, our historical customers have big digital businesses and that would include Dick's Sporting Goods, Kohl's, REI, all of whom are having a significant business digitally on our products.
Got it.
Thanks very much, Tim.
Take care.
Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.
Thank you. Good afternoon, everyone. I hope you guys are doing well and your families are safe. Thanks for all the thoughts on the business. Clearly, Tim, you've been very thoughtful about the approach to all the uncertainty.
I guess my question relates to the extent that you might play offense. You have a fortress balance sheet, a lot of reason to believe outdoor participation will increase and perhaps that becomes sticky. Can you talk about demand creation, budget management in areas where you may lean in and invest to capitalize and try to take
share? Certainly, Jim. Well, as you know, the company as I said, I mean to answer Bob's question, we're making a significant investment in our X1 platform. We believe that the use of digital marketing, whether it be specific to a particular initiative or program as a complement to our digital platforms where we do commerce. So today we have industry average conversion rates.
That means that over 90% of the people visiting are leaving with a strong marketing message for the company. So I think for the foreseeable future, our emphasis will be on digital, whether it's included in our own commerce or in the typical Facebook, Instagram and other platforms around the world. And obviously, the ones in China and Asia are different and different in terms of their format. But I'm sure that the bulk of our marketing efforts are going to be going to those very focused areas of marketing.
Thanks. And then question on the bad debt expense recognized in the quarter. Was that related to tangible risks or was that more proactive in anticipation of troubles that may come?
Well, I know Jim is going to explain a little bit more on this, but that's an area that the company has a significant amount of experience. We are very proud of the way our company extends credit. We've had incredibly successful years when others have had large write offs. And I might just let Jim explain a little bit about the details there.
Yes, Jim, appreciate the question. There's no kind of discrete customer looming risk that we're reserving against. It's more of just with regard to the general uncertainty in the marketplace, the liquidity and pressure that there is on retailers and just the higher degree of risk associated with our business. And so as you look at the balance sheet, we've got $28,000,000 in total bad debt reserve relative to $8,000,000 last year. This is by far and away the most significantly that we've reserved from an allowance for doubtful accounts perspective.
I mean, historically speaking, as Tim touched on the prepared remarks, if you go back over the course of the last decade plus where we've had some events along there from a crisis standpoint regarding the financial crisis and some of the sporting goods bankruptcies, even during those years, our write offs of bad debt was in the mid single digit 1,000,000 of dollars.
Very good. Thank you, guys. Take care.
Yes. Thanks.
Our next question comes from the line of Jonathan Komp with Baird.
Tim, I wanted to start and just curious your thoughts more broadly, given the wealth of experience and range of environment you've operated the business. Do you have any broad thoughts on how the consumer might react to all of this? And any differences you're seeing regionally today that would inform your view? And just even from a pricing standpoint, given some of the discounting that might be in the marketplace, how that might impact the brand positioning?
Certainly. Well, I don't think you were calling me old, but I have been around a while. So I'm going to call that knowledgeable. So I mean, these are clearly times without precedent. And so I just know that the counsel of our Board about having a fortress balance sheet just allows me to sleep at night, which is terrific.
We have used our Korean and China businesses to give us some sense of what is likely to happen when brick and mortar stores reopen. And I would say that as we emerge from the crisis daily, we're encouraged that we can see the resurgence of in person shopping and that taken together with the digital shopping, I think is going to we're going to see people more anxious to get outside to spend time outdoors more than ever. So it's quite encouraging. We're also mindful that the way we've conservatively run the business, whether that be product line extensions or credit extensions or whatever are going to allow us to come through at a much stronger position and take advantage of market share opportunities, shelf space opportunities that are going to avail themselves because others who haven't been as careful or have not focused on the right capital structures have not. So we think we can take advantage of those opportunities.
Okay. And then maybe add on or follow-up question, just thinking about the back half of the year, obviously, the Q3 more of a sell in period. So I'm assuming in all likelihood, you'll still see some pretty significant top line pressures. And then the Q4 shifting more to B2C, I'm just curious how you're planning inventory strategically for those quarters and even planning for B2C in light of the limited visibility that's out there today?
Certainly. Well, Q3 frankly is an opportunity for our customers to fill their stores with the fall and winter merchandise. So our expectation is that the visibility that we have there, while it's limited, gives us the ability to feel comfortable with the 4th excuse me, with the Q3. And I would expect that the orders that we have, in fact, we're quite confident the orders we have for that period are going to be kept and it shouldn't be a problem filling those stores. The Q4, as those who follow the company know, is an important holiday period and is also impacted by weather.
And so we're ready for both of those times. And we believe that our supply chain is well in hand and well organized to get us the merchandise that we need and that our customers need to be successful in that in the back half of the year.
Okay. Best of luck in managing through everything.
Thank you.
Thanks, John.
Our next question comes from the line of Alex Barry with Bank of America. Please proceed with your question.
Hi, guys. Thanks for taking my question and I hope everyone is well. I guess just first, just to follow on the digital thread. You mentioned the 1st several weeks of April, e commerce was up over 60%. I guess how sustainable do you think that is?
And how much do you think was driven by some sort of the fiscal stimulus or other one time items? And then can you also just remind us in this environment of the profitability of that channel compared to your store and wholesale business? Thanks.
Certainly. Well, we may not be able to sustain 60% growth, but I think the world is much more accepting of digital commerce today than they were pre pandemic. So our expectations are that consumers are going to be much more willing to shop remotely through digital means, and that will continue to be a bigger part of our business. That's why it really is getting the single most significant investment in capital in the company in 2020. As it relates to profitability, it's we don't break that out by division, but it's a significant component of our future and is a significant business for us, whether it's our own digital business or through one of our customers, whether they be pure play or both a mix of online and offline stores.
So we think, in combination, it will be a a significant growth vehicle for the company and quite profitable for us and for our dealers.
Perfect. That's really helpful. And then I guess just my second one, can you talk through how resilient the Columbia brand has been through prior sessions and whether you expect a potential market share opportunity here from some of your higher priced competitors as the consumer searches for value?
Certainly. Well, the company has been able to grow through almost every prior economic challenge and that would include economic challenges that we don't often think about happening outside the U. S. As an example in Russia, where the company's got a tremendous market position and has grown through many crises. So the brand is quite resilient.
So we expect that not only we'll be taking market share from brands that price above us because of our value proposition, but also when we think about retailers and their allocation of inventory investment into private label, we believe that we can provide a better solution and we'll likely take market share from private label sources as well during this during the recovery.
Great. That's really helpful. Best of luck going forward.
Thank you.
Our next question comes from the line of Chris Svezia with Wedbush. Please proceed with your question.
Good afternoon, everyone. I'm glad you're all doing well. I guess the first question I have is just regarding the SG and A. Maybe if you can just talk about how we should think about the flow of the roughly $100,000,000 decline year over year in SG and A expense. Just how do we think about Q2, Q3, Q4?
And I guess the bad debt expense, dollars 21,000,000 that it's excluded from that. So in other words, right now we're looking, all that excluded from that. So in other words, right now, we're looking all else equal about an $80,000,000 reduction in that, if I'm thinking about it correctly. So if anything more about that would be helpful.
That's correct. So the $100,000,000 reduction in SG and A is before any exceptional SG and A charges such as bad debt. As it relates to the cadence and flow of that $100,000,000 we saw a very small portion of that in the Q1. And I think that steadily builds through the end of the year. I wouldn't say that it's ratable across each of the three quarters.
It will build as actions and as we manage the P and L. There's certain of this I think that Tim touched on as it relates to demand creation. And certainly at a low level of consumer demand that's out there currently, we've pulled back on demand creation quite significantly here in the March, April, May timeframe. And then we'll recalibrate as we get into the back half of the year and certainly shifting those investments where we feel like there's the greatest opportunity.
Okay, got it. And just on the I want to go back to the inventory and the wholesale orders and just some of the comments that you made earlier about so far how you haven't seen cancellations in particular for fall or winter product as of yet and you expect to I guess shift the majority of that product. Is it fair to say that at this point you're potentially anticipating global wholesale to be up in the Q3? Obviously DTC could be impacted depending on how stores open, but how do I unpack that thought process for now? Or are you anticipating some cancellations to ensue or maybe that's potentially a risk depending on how long this goes on?
Just help me out with that a little bit.
Certainly. No, I'm sorry. I didn't mean to be I hope I didn't misstate what I intended to say. We have received fairly significant cancellations since the beginning of the pandemic. So we feel that the residual order book that we have now, which is net of the cancels to be quite solid.
So we think that our Q3 shipments will be largely as we planned today. And we believe that our merchandise coming in from China or sorry, coming in from Asia will be reasonably on time and so that we believe our customers, our wholesale customers will be happy with the deliveries that we've got for them. I just want to make sure that you understood that we've had
I just want to
make sure that you understood that we've had cancellations.
Yes. Chris, maybe one other comment just to add to that to provide some color. As it relates to the inventory production for fall 2020, we were well undertaking our order book for fall 2020 at the point in time where the pandemic had really increased in terms of the pressure. We placed many of our inventory purchases, but on the same token, we still had in the month of March, we really pulled back on that quite heavily. And so there is a significant level of inventory purchases that we've reduced to align with anticipated demand for the fall 2020 season.
Got it. And lastly, just real quick on that. Just how do we think about where inventory, any thoughts about that end as we go through? Is Q2 sort of the peak inventory position potentially and then it begins to slowly go down for Q3? Or how do we think about the inventory increases year over year?
I think it's all going to depend upon the flow of inventory in terms of ex factory and the timing of the manufacturing of the goods. I mean fall 2020 and the timing of those receipts and to what extent those fall into the latter part of Q2 into the third. So being able to kind of time that, I think it would be awfully difficult at this stage. We're keenly focused as Tim touched on inventory management, improving our inventory turns and really getting through this year and exiting the earth as clean of an inventory position as we possibly can. And so on that note, to the degree we do have excess inventory certainly 1st and foremost, we're seeking to match inventory, the supply with the demand that we've got from our wholesale customers.
A lot of our inventory that Tim touched on is carryover based product that's valuable and there's no sense in highly promoting that. And then our use of our outlet stores will certainly shift as we use those more for clearance purposes to really make sure that as we get to the end of this year, we're as in clean a position as we can.
Got it. Okay. Thank you very much. All the best. Thank you.
Our
next question comes from the line of Mitch Kummet with Pivotal Research. Please proceed with your question.
Yes. Thanks for taking my questions. I guess, I'll start with just a couple of follow ups from Svezia. So, Jim, I was surprised to hear you say that on the $100,000,000 expense reduction that it would kind of build through the year, I would have guessed that you'd see the biggest year over year drop in Q2 just based on furloughed employees particularly in your own retail stores. I just wanted to clarify that.
Well, there's going to be there'll be some benefit related to the furlough. We are I think Mitch you may be familiar some of our compensation programs that we've put in place we had a catastrophic pay program in which we continue to pay our retail associates and our distribution center associates for a period of time well into the month of March. And even since then, we've moved into more of a partial furlough program, which we continue to pay those individuals. The demand creation side of it is probably a bit more accentuated in percentage terms in the Q2. But it's really hard to kind of pinpoint.
And obviously, we're not providing guidance today. And as we kind of move along, we've got a clear path to that $100,000,000 from a cost reduction standpoint, but being able to kind of pinpoint that as it relates to the cadence of it through the years, a bit difficult.
Okay. And then on the orders, Tim, I know you guys you gave up the practice of talking about orders a long time ago, but I kind of feel like this is a unique circumstance. So you just mentioned that you've seen a substantial reduction in fall orders. I guess I got a couple of questions here. Could you say what percent of Q3 wholesale is driven by the sell in of your fall order book?
And then can you maybe speak a little bit to that order book? I mean, is it down double digits? I mean, I'm just looking at consensus. I think consensus sales on Q3 has you guys down 6% year over year. I don't know if that's kind of reflective of where you see the order book right now in the selling of those orders.
Yes. It was easier for us to be transparent with investors when the business was mostly almost exclusively wholesale. The reason we stopped giving order book information was because the retail part of the business became so much bigger and it was confusing for our investors when we tried to guide against the retail, I guess, excuse me, a wholesale order book, which was only a portion of the company's business. So I would say that we received significant cancellations. We're in the process of wrapping up matching of orders with existing inventory, new inventory and potential substitutions to be able to give us a full completion on the wholesale order book.
So those mismatched inventory pieces will likely go to our own outlet store business where we had not yet purchased a significant amount of the bulk merchandise. So it's difficult for me to give you a number on wholesale just because it's less significant a portion of the revenue than it once was.
Okay, fair enough. And maybe just one last quick one. On gross margin, how are you thinking about gross margin over the balance of the year? I guess as it relates particularly to promotions, it doesn't sound like your inventory, there's tremendous risk to your inventory, but I imagine channel inventories are high, other people are going to be promotional, you may have to react to that. I'm just wondering if, kind of how much gross margin pressure you anticipate kind of at least over the next couple of quarters particular?
Well, let me just I know Jim is going to give you some more information on this, but if you've noticed some of the value channel folks who have raised capital over the last 60 to 90 days have really been focused on their expectations that there's going to be a glut of merchandise available for their picking and choosing. So we would expect that we would avoid or delay offering merchandise to that channel strictly because the impact on gross margins. So we think we have a solid opportunity with our wholesale business and our own DTC business to manage inventory and gross margin as well. But I know Jim mentioned comments.
Yes.
I mean, I'd just add, I think it's going to be a function of the overall environment from an overall standpoint. And with as much inventories out in the channel and as promotional as it is, we're going to hold our own with the strength of the brands that we have. But there is going to be margin pressure that's there and trying to measure that at this stage, awfully difficult, but probably leave it that niche.
Okay. Thanks. Good luck and stay safe.
Thank you. You too.
Our next question comes from the line of Camilo Lyon with BTIG. Please proceed with your question.
Thanks. Good afternoon, everyone. Thank you for all the detail. Maybe just following up on the last line of questioning. As you think about trying to clear the inventory, you focused and Tim, you said multiple times on the call that you are focused on turning inventory, managing liquidity, which is completely understandable.
Can you talk about the promotional strategies that you're talking with your wholesale partners about? What are your preferences in terms of clearing that excess? Are you taking product back? Are you letting them pack it away? Are there levels of pricing discounts that you will not go past if it means keeping some of the product and margin relatively more stable, but having a longer duration to clearing that inventory.
Anything on that kind of front would be interesting and helpful to assess the ability to clear through the inventory in the time that you're hoping to clear it?
Certainly. Well, I would say based on our historical practice, which is to work with retailers, we would expect that we'll have reasonably the same kinds of discussions and really focus heavily on making sure that the retailers are profitable with our brand, which will in turn give them a higher give us a higher order book next year when they analyze which brands have the highest return for them. As we said, there's our brand is primarily a basic business with significant revenue for our retailers in very well known styles that they've carried for many years. So we would expect that we would balance liquidating inventories at their locations, at our locations together with maximizing gross profit margin. So it'll be a it'll be the normal negotiations that we have with retailers.
But I wouldn't expect that we're going to do any draconian or drastic changes to our standard practices.
Got it. And then as we think about that process unfolding this year, and maybe the packaway component in your discussions, is that something the first part of that question, is it
something that's left to the retailer
in terms of how much spring product they want to keep for the following season in 2021? And are there is it premature to have discussions on what that might look like for you guys internally as you start to plan your production processes for spring 2021? And if there will be a scenario in which you start to order your business up or have to account for the fact that there's too much packaway goods in the marketplace that will then impact that ordering process?
Right. We will start taking orders within the next few weeks from our retailers and extend the order taking process all the way through into July and possibly even into August, which will give us a good visibility on what spring 2021 looks like. There's still lots of time in fall 2021 for there to be liquidation of inventory at full price at our retail at our wholesale partners retail stores. So we'll just have to keep close tabs on it. I might remind you, we get sell through information on our wholesale partners at to about 85% of the total wholesale business in the U.
S. So we have a good visibility of what's happening there. We'll watch that. And again, as I said, the inventory is comprised primarily of merchandise that they've carried for many years and is popular and not expected to be obsoleted.
Fantastic. Just one more if I could on outlets. Could you speak to, if there's a change at all with the clearing strategy, maybe even in terms of the composition of the product with respect to and if you could just remind us, is there any made for product that you make for outlet that you will then turn down and just leave for really to carry the excess product that you have, the excess inventory?
Yes, certainly. Well, as I said, yes, there is made for product and we had not purchased a heavy percentage of the outlet merchandise when we suspended our purchasing in Asia. So the outlets will be primarily a recipient of the unmatched order book once we've concluded all that work. So yes, the outlet stores will have merchandise that they may typically not have had, but it won't be a significant component. But it gives us the ability to manage our total inventory and gross margins in a way that's more profitable for the company.
Great. Thanks so much for the color and really all the best of luck to you guys. Good luck. Thank you.
Our final question comes from the line of Paul LeBlanc with Citigroup. Please proceed with your question.
Thanks. It's Tracy Kogan filling in for Paul. I had two questions. The first is, I was hoping you guys could give us a sense of what your trends have been in China since the stores have reopened. I know you said it's still well below pre pandemic levels, but has it improved or how has it improved by week?
And then secondly, just a follow-up on your clearance strategy or the idea that you'll be clearing any outlets. I wondered if that strategy might change if stores don't reopen as quickly as you expect and might you shift the strategy and maybe clear more online? Thanks.
Certainly. Well, the trends in China and Asia in general have sequentially been improving week on week, but they're still below the 2019 traffic numbers and revenue numbers. But they are improving and we see that consumers are actually going back to stores and they're managing distance between each other well. And many of the stores, including our own and the malls themselves are metering employees coming back. And so our expectation is that the trends the improving trends will continue.
We don't know yet when we'll get back to 2019 levels, but that's within our the visibility that that can happen. As it relates to clearance, it's important to note that the company runs a seasonal business. So we're right now today, we have spring and summer products in the stores. And that when fall and winter comes, those things won't sell very well and we need to have winter products. So there'll be a complete switch over in the inventory of the stores.
The residual that the retailers have on hand, they will need to determine at that time to pack it away or to liquidate it through sales, etcetera. We don't have any plans today to have significant liquidation at our digital sites. And I don't believe that our retailers have plans, those that are pure play or have digital components, I don't believe that they have intention to have high liquidation rates and big promotions as well.
Great. Thank you, guys.
Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the floor back over to Mr. Tim Boire for any closing remarks.
Well, thank you very much for listening in. Obviously, this is a challenging time and we will get through it. The company has a significantly experienced management team and we have the capital and liquidity to provide a great future for the company. Thank you.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.