Good day, and welcome to the PVH First Quarter 2020 Earnings Conference Call. At this time, I would like to turn the conference over to Ms. Dana Pearlman to read the Safe Harbor statement. Please go ahead, ma'am.
Thank you, operator. Good morning, everyone, and welcome to the PVH Corp. 1st Quarter 20 20 Earnings Conference Call. This webcast and conference call is being recorded on behalf of PVH and consists of copyrighted material. It may not be recorded, rebroadcast or otherwise transmitted without PVH's written permission.
Your participation in the question and answer session constitutes your consent to having anything you say appear on any transcript or replay of this call. The information to be discussed includes forward looking statements that reflect PVH's view as of April 1, 2020, of future events and financial performance. These statements are subject to risks and uncertainties indicated in the company's SEC filings and the Safe Harbor statement included in the press release that is the subject of this call. These risks and uncertainties include PVH's right to change its strategies, objectives, expectations and intentions and its need to use significant cash flow to service its debt obligations. Significantly, at this time, the COVID-nineteen pandemic continues to have a significant impact on the company's business, financial condition, cash flow and results of operations.
There is significant uncertainty about the duration and extent of the impact of the pandemic. The dynamic nature of the circumstances means what is said on this call could change materially at any time. Therefore, the operation of the company's business and its future results of operations could differ materially from historical practices and results or current descriptions, estimates and suggestions. PBH does not undertake any obligation to update publicly any forward looking statement, including, without limitation, any estimates or suggestions regarding revenue or earnings. Generally, the financial information and projections to be discussed will be on a non GAAP basis as defined under SEC rules.
Reconciliations to GAAP amounts are included in PVH's Q1 2020 earnings release, which can be found on www.pvh dotcom and in the company's current report on Form 8 ks furnished to the SEC in connection with the release. At this time, I'm pleased to turn the conference over to Mr. Manny Tirico, Chairman and CEO of PVH.
Good morning, everyone. Joining me on the call is Stefan Lawson, our President Mike Schafer, our Chief Operating and Chief Financial Officer and Dana Perlman, our Treasurer and Senior Vice President of Business Development and Investor Relations. I'd like to take a moment and address all that is going on around us. Most recently, we have seen our country ripped apart by the lethal effects of systemic racism. This has caused too many instances of social injustice in our country.
At PVH, we are guided by our purpose, which is to drive fashion forward for good. And one of the best ways we can do this is to fight for racial equality within the walls of our company, throughout our industry and in society at large. We are creating forums for listening and learning. We are also updating our talent acquisition practices and training development programs to create new opportunities for growth so that we can increase the representation across all levels and support our black associates for success in attaining leadership positions across our company. Furthermore, the coronavirus pandemic has dramatically impacted our business over the past few months, impacting every region of our business.
The health and well-being of our associates, consumers, partners and the communities where we operate remain our top priority. Throughout our almost 140 year we have been faced with many challenges, and I'm confident that we will successfully navigate this backdrop as well. We have strong financial discipline, a healthy strong balance sheet with $1,800,000,000 of overall liquidity and a wide range of global growth opportunities driven by Calvin Klein and Tommy Hilfiger. Our brand and our people are our 2 greatest assets, and they were both on full display during the Q1. Our associates and business leaders truly demonstrated their passion, dedication and agility, and I would like to thank each and every one of them for helping drive our business forward despite the challenges that COVID-nineteen pandemic presented.
From working to first efficiently close stores and then putting plans in place to successfully reopen stores around the world. To those in our warehouses that have kept our businesses moving forward and those working from home in which truly defeat and I cannot thank everyone enough for their resilience and commitment. Our iconic Calvin Klein and Tommy Hilfiger brands has continued to experience excellent consumer response over this period, demonstrating strong brand health and loyalty during the crisis. Each brand attracted new consumers visiting our sites for the very first time with good conversion and strong purchasing behavior over this period. Operating a diversified portfolio of brands with strong geographic has always been one of our strong suits.
But now more than ever, we have benefited from the diversification of our business. For example, the foresight and expertise we gained from our Asia teams have been incredibly valuable as we navigated the coronavirus across other regions. This helped us get ahead of key decisions such as adjusting our marketing campaigns, the ways to engage with consumers and drive our digital business during the temporary store closures, as well as how to safely and most effectively reopen our stores once restrictions were lifted. Additionally, we were able to reallocate resources to better support what was open during this period, focusing on how to best view our own and operated e com sites and also working with our 3rd party digital partners. These competitive advantages, our people, our brand and our diversified business model are what gives me great confidence in the long term health of our business.
And now moving on to the Q1 financial results. We entered 2020 with strong brand health and increasing momentum across Tommy Hilfiger and Calvin Klein in the majority of regions where we operate. Unfortunately, COVID-nineteen had a significant impact on our business during the Q1 as our stores and our wholesale partner stores were closed for over 6 weeks on average during the quarter. This resulted in revenue in our own stores being down 50% to 65% depending on the region, while our wholesale revenues declined about 40% as shipments to our wholesale partners were dramatically reduced across all markets. Our digital businesses, both our own and with our wholesale partners, had outstanding performance and became our number one most critical channel for business during the quarter, with our European digital businesses being the strongest outperformer of any of our markets.
On the operating margin side, our gross margins and SG and A rates were under significant pressure as well. While we tackled every expense line, including marketing and made difficult decisions relating to payroll expense, most of these measures didn't get enacted until the end of the quarter. In addition, we recorded about $100,000,000 in reserves for future inventory markdowns and accounts receivable write offs. Given this operating environment, we have also been addressing our inventory levels to reflect the current demand picture and are working closely with our suppliers in the event of any meaningful shipping disruptions or delays. Additionally, during the quarter, our licensing partners were significantly impacted with business disruptions as well.
We will continue to work closely with our licensing partners throughout the year as we are planning for their businesses to experience similar pressure to what we are seeing in our business. With our long term vision in mind, we took prudent and proactive measures to strengthen our balance sheet, preserve our liquidity and improve our financial strength to come out of the COVID crisis as a stronger company. Overall, we ended the quarter with $1,800,000,000 of liquidity. Our CFO, Mike Schaeffer, will discuss the specific steps we took to strengthen our financial position in his comments. As we navigate through the recovery phase, we will continue to evaluate how we can further strengthen our balance sheet, optimize our businesses and identify efficiencies, which will allow us to operate smarter and ultimately enhance our operating margin profile, which we believe will drive enhanced long term returns for our stockholders.
I believe that these actions in totality will position us to successfully navigate the COVID-nineteen pandemic and emerge in an overall stronger competitive position. Before I hand things over to Stefan to go through our region and brand initiatives, I would like to thank Dan DeBrita, who served as CEO of Tommy Hilfiger and PVH Europe for all his contributions to the company over his many years of service. I also want to congratulate Martijn Hedman on his promotion, and I am confident that Martijn will successfully lead Tommy Hilfiger and PVH Europe into the future as we capitalize on significant future growth opportunities for our business. And with that, I'd like to turn it over to Sven.
Thank you, Manny. And when giving you all an update today from our regions of brands, I would like to start with, as Manny mentioned in his introduction, that this has been a very different kind of quarter where all of our brands and regions have been heavily impacted by the COVID crisis, with our stores and our wholesale customer stores closed for 6 weeks on average during the quarter. Mike will later on the call share more details on how the numbers came out and give you an indication of Q2 trends. What I would like to share with you is how we are successfully navigating our brands and regions through the different phases of this crisis. What our key learnings have been as well as sharing some of the green shoots that we're starting to see when gearing up to drive an accelerated recovery and to win with our brands and consumer post COVID.
From a regional perspective, our regions came into this crisis at different times. Asia and and China, in particular, came in 1st and also recovered 1st. Then Europe was hit, closely followed by
North America.
Starting with Asia and China. They have provided us with the best learnings for the recovery phase in our other regions. Currently, all of our stores in China are open. Since China started to reopen, we have seen strong week over week improvements across the board. For example, our reopened stores are now approximately flat to last year and our digital business up triple digits for both cabin and toilet.
We're experiencing very strong conversion and higher units per transaction in stores and lower overall traffic trends. To drive transactions during the store closures, we offered virtual clienteling and engaged with VIP shoppers through WeChat. We live streamed our brands to connect with consumers, which led to significant sales growth versus a typical day. Then Europe followed closely after Asia, where we have also seen strong week over week improvements. Currently, about 85% of our stores are open, and trends are very encouraging.
We're planning for the U. K. Market to reopen early next week. As we reopen stores, we have experienced strong conversion and favorable full price trends with less promotions than planned. We have faced lower overall traffic trends that have improved more in smaller cities versus big cities as consumers are shopping closer to home.
We have applied a data driven approach to be able to offer targeted promotions to increase sellouts while also keeping margins relatively stable. Overall, we believe that Europe's recovery will be about one calendar quarter behind the transfer scene in China. For wholesale, our fall order books that were up midteens pre COVID are now down low to midteens for each of our brands as we work with our partners to consolidate product seasons to better match demand and to end the year as clean on inventory as possible. And lastly, North America. Stores here were the latest to reopen, and we will be at 85% reopened by next week.
We are pleased to see how the consumers are coming back. In our own stores, small doors are performing very well. Our domestic consumers are over indexing, and it will be critical to target that domestic consumer for the remainder of the year as international consumers are traveling much less, and we don't expect this trend to materially improve this year. Our wholesale partners saw business improve with the introduction of curbside pickup and ship from store. Digital conversion is significantly higher than last year, and we are attracting a lot of new consumers shopping our sites.
We believe that the recovery in North America, we've followed a slightly slower recovery trajectory than Europe, and we expect that promotions will be elevated. Also similar to Europe, our wholesale partners stopped accepting shipments in March, which has been a headwind to the business, and we have only seen replenishment orders start flowing again. Across regions and brands, when we were hit by the COVID crisis, we had a very strong focus on the short term navigation through the immediate crisis. The health and well-being of our teams and consumers, cash preservation, expense reduction and inventory decisions to adjust to the current demand fabrics, consolidating future collections and packing away certain core items where we can achieve strong margins in upcoming seasons. In parallel to hunkering down from a cash cost and inventory perspective, we redirected our focus early on to demand creation to where the consumer was shopping.
We have supercharged our e commerce channels across all brands and regions, both owned and operated, and we are collaborating very closely with Tmall, Zalando and Amazon, among others, in ways that moves us to where the consumer is going, both in terms of live events, product launches as well as connecting our inventory from our bricks and mortar stores to serve our own e commerce as well as partner platforms. What is exciting to see is that our consumers have expressed a strong demand for our brands across all digital platforms. A few examples. Our own digital businesses had excellent performance during the Q1. Calvin's digital revenues were up 40% and Tommy's own digital business up over 60% with triple digit increases in the 2nd quarter to date.
Our Calvin North America e Commerce business turned a quarterly profit for the first time in ck.com's history. In Asia, we furthered our partnership with Tmall by featuring a virtual exhibit for our CK1 product drop, and our CK1 Timor Club Day saw a strong consumer demand in seltzers. In Europe, we accelerated the rollout of connected e commerce with Zalando and about you, and our shift from store penetration reached double digits for Zalando in April May. North America, our Amazon business, benefited from significant growth in Prime memberships, and this month, we will participate in their summer sales for softlines as they move their Prime Day to October. In the product assortment across brands and regions, we have seen the consumers in an accelerated way going towards casual essential products.
There is a big increase in demand for our essential categories like underwear, loungewear, T shirts, hoodies, athleisure, activewear as well as jeans. All these categories are core strengths of both brands. We have redirected big product introduction and product collaborations to e commerce and done some of them purely digital. Our CK1 launch had an Instagram reach of 57,000,000 people. We also launched our Tommy Jeans Looney Tunes capsule in a livestream partnership with Tmall, achieving over 45,000,000 impressions.
Lastly, this crisis has made it clear that our product lead times have come down across the board to better match inventory to the current demand trends. Our marketing has also been redirected towards social and digital to reflect the time we are living in. For Calvin, we hosted monthly livestream sessions on WeChat using local talents in the campaigns. Calvin's recently launched its Pride 2020 campaign, ProudInMyKVINS, across social, digital and e commerce in over 20 markets. Initial sell through is strong, and the campaign and collection had a +89% increase in average comments proposed.
At Tommy, we livestreamed our spring collections with the ability for consumers to purchase directly from the event for Wear Now product. Tommy also hosted 4 celebrity livestreams on short video platform, Douwin, which secured 1,500,000 views and helped us convert both new and existing consumers to purchase. All our brands have refocused on engaging with the consumer in a more interactive way than any time before. I would also like to take a step back and give some global brand highlights, starting with Calvin. Calvin Klein began the Q1 with strong brand health, including very strong global awareness.
The Calvin Klein lifestyle is truly resonating with consumers during this time, particularly our underwear and Wear Now offerings. We adapted our marketing message to reflect this through our At Home in My Cabins campaign. Our efforts were successful as we saw significant growth in new consumers shopping our sites, and we continue to focus on new consumer acquisition as well as retention and conversion. For example, our CK1 launch, which is our replay of the iconic genderless collection from the 1990s, catered to the younger consumer and now represents 10% of our CK Underwear sales in Asia. Before the COVID crisis hit, we had already started the work with setting the forward looking brand direction for Calvin Klein.
And I'm pleased to share that the team has completed this work, and we are looking forward to take you through it in detail at a later time. So now I would just like to share that the Evolv brand direction is built around going back to the iconic DNA of the brand and reconnecting it to the consumer and culture of today. It's focused on Calvin Klein's unique strengths as one of few authentic global brands and will be a very strong foundation to drive consumer engagement and profitable growth for the years to come. The response from our own teams and external collaborators has been very strong. Moving on to Tommy Hilfiger.
Tommy entered 20 20 with a strong underlying momentum. I would like to start with welcoming Martijn as our CEO for Tommy Hilfiger Global and PVH Europe. Mark Heine has been the copilot behind the Tommy Hilfiger brand and business success over the last few years, and he's a very strong leader and value creator. Tommy Hilfiger was recognized in the top 20 on Vogue's business index for the top 50 luxury brands, which ranks brands across consumer sentiment, digital presence, omnichannel performance, sustainability reporting and financial performance. We also had exceptional sell through of collaboration launches throughout the quarter, including Tommy Jeans, Looney Tunes capsule, which shows that our differentiation is a true advantage, especially in a market like China.
Moving on to heritage. We are pleased to close on our sale of the Speedo business to Pentland in April for approximately $170,000,000 and we will look for additional opportunities to streamline and or access businesses that are noncore plus. Our heritage brands business was under significant pressure, although the online businesses from our wholesale partners was a partial offset. The cash realization trend that's being accelerated by COVID that's working for us in both Calvin and Tolling is working against us in the more formal where to work product categories and heritage. We are addressing these challenges by managing inventory levels more prudently, lowering our cost base, evaluating our store portfolio and reviewing additional ways to optimize and streamline the business.
Finally, as Manny mentioned, navigating through this crisis has made us even more aware of the many unique strengths we have to build on coming out of COVID. We have 2 of the most iconic brands in the market globally in Tommy Hilfiger and Calvin Klein, both with very strong global awareness as well as big strong consumer bases around the world. We also have a very strong multichannel presence in North America, Europe and Asia, and we are increasingly matching our reach towards where the consumer is voting to shop. And the crisis has made us move faster and get even closer to the consumer. And what we have realized navigating through the immediate crisis is that many of the key learnings from doing the crisis work are very tightly connected to what it will take to win post COVID.
Overall, we see that the COVID effects on our business reflects big accelerations of existing underlying consumer market trends. An increased focus on e commerce, product relevance and consumer engagement will be core priorities as we are driving towards an accelerated recovery. And with that, I would like to turn it over to Mike.
Thanks, Stefan. I want to briefly touch on the Q1 2020 results, then move on to the current state of the business. As expected, our business was significantly impacted by the COVID-nineteen pandemic as the majority of our stores in our wholesale partner stores were closed for 6 weeks on average during the quarter. As a result of the widespread store closures, revenues from our retail stores were down resulting in an overall decline of 41% in our global wholesale revenues. Our directly operated digital e commerce businesses were fully operational during the quarter and we experienced strong revenue growth in all regions, up 40% versus the prior year with double digit to triple digit revenue increases during the period, while our stores were closed.
This growth in e commerce partially offset declines in our brick and mortar and wholesale revenues. Overall, our reported revenue was down 43%. Tommy Hilfiger revenues were down 39% with international down 32% and North America down 51%. Calvin Klein revenue was down 46% with international down 40% and North America down 54%. Heritage revenues were down 47%.
In addition to the revenue decline, our results were under significant pressure in the quarter due to a 90 $7,000,000 increase in accounts receivable write offs and inventory reserves and a significant deleveraging of expenses. We continue to pay certain retail associates for all and most of the time our stores were closed and the measures we are taking to reduce expenses didn't take effect until the end of the quarter. The unprecedented revenue and earnings decline as a result of the pandemic resulted in a loss per share on a non GAAP basis of $3.03 for the Q1. On a GAAP basis, due to the pandemic and reduction in our market cap, we took non cash goodwill and intangible asset charges of 933,000,000 dollars Also we took non cash impairment charges totaling $16,000,000 related to store assets and $12,000,000 related to an equity method investment. Moving on to the current state.
Our Q2 and full year 2020 results will continue to be significantly negatively impacted by the COVID-nineteen pandemic, and we expect that our revenue decline in the 2nd quarter will be more pronounced than the Q1. The duration and extent of the pandemic remains highly uncertain. Our results could be impacted in ways we are still not able to predict today and as a result, we are not in a position to issue more detailed guidance for the Q2 or for the fiscal year. We are continuing with our phased reopening of our stores in the U. S.
And around the world. By mid June, over 85% of our stores will have reopened globally. Although most of the stores are operating with reduced hours and occupancy levels, while sales remain down across all regions on a year over year basis, traffic and sales trends are improving each week. 2nd quarter to date, we're seeing same store sales for our brick and mortar stores that have reopened, running about down 25% for North America, down 20% for Europe and down 25% for total Asia with China flat and China was the 1st country to close and the 1st country to reopen with the pandemic. All in second quarter to date for our total direct to consumer business, including stores that were closed for a portion of all of the second quarter to date and are directly operated digital commerce sites, we are running about down 65% for North America, down 25% for Europe and down 11% for total Asia, but China is up 25%.
Additionally, most of our wholesale customers have now reopened the majority of their locations across all regions. However, due to the significant levels of inventory that remain in stores, the majority of our North American and European brick and mortar wholesale partners stopped accepting shipments beginning in March, which has not materially improved into the Q2. In response to the pandemic, we are taking every precaution to reduce our expenses and working capital. These actions started in mid April and are continuing into the Q2 and the rest of the year. We are reducing payroll costs, including salary and incentive comp, furloughs, decreased working hours and hiring freezes as well as taking advantage of applicable government relief programs.
We are eliminating or reducing other discretionary and variable expenses, including marketing, travel, consulting and creative and design costs. We are also tightly managing inventories, including reducing and canceling inventory commitments, redeploying basic inventory items to subsequent seasons and consolidating future seasonal collections, as well as negotiating extended payment terms with our suppliers. I want to emphasize that our priority has been on cash flow and liquidity. We ended the quarter with $1,800,000,000 of liquidity, including cash of approximately $800,000,000 $1,000,000,000 of available borrowings under our revolving credit facilities. As previously announced, we moved quickly to reinforce liquidity units in response to the pandemic.
We suspended share repurchases under our stock repurchase program in March, following approximately $110,000,000 repurchases we completed in the Q1 and we suspended our cash dividend beginning with the 2nd quarter. We entered into a new 2 75,000,000,364 day revolving credit facility and issued an additional €175,000,000 of 3.5 percent, 8 percent senior notes due 2024. Importantly, we obtained a waiver of the leverage and interest coverage covenants under our senior credit facilities through and including the Q1 of 2021. We are cutting capital expenditures to approximately $190,000,000 in 2020 from $345,000,000 in 2019, with capital expenditures only for minimum requirements in our retail stores and for projects currently in progress related to our systems and warehouses. Additionally, we closed on the sale of our Speedo North America business to Pentland Group Plc, the parent company of the Speedo brand in April for proceeds of about $170,000,000 We will give guidance quarters in the year once there is more clarity on the impact and duration of the COVID-nineteen pandemic.
And with that, operator, we will open it up for questions.
Thank We'll now take our first question in the queue. It comes from Erinn Murphy from Piper Sandler. Please go ahead. Your line is now open.
Great. Thanks. Good morning to everybody. I guess my first question is on the wardrobe composition on the other side of COVID-nineteen. You referenced in the script kind of good trends with athleisure comfort.
Curious how durable you see that? How is denim performing, particularly with your expectations? And then on the heritage business, does it still make strategic sense in a post COVID world?
Yes. So Aaron, when it comes to the cash utilization trend in product, it's a trend that we saw pre COVID, and we see the COVID effect accelerating that. And everything we see in the data and how the consumer is shopping is saying that, that trend will continue. And it's core to it's what excites us there is that the big casual product categories like underwear, T shirts, hoodies, including veterans, those are all core to our 2 big brands.
I guess on the Heritage side, Aaron, I need to say is we're taking a hard You can see that in the decision to sell the Speedo business, which was a good business, but this didn't fit strategically when we were moving the company. And I think we'll take a hard look at continuing to prune the heritage business back and look for streamlining opportunities in the future, we're not seeing the return on our investment and return on invested capital. So I think we will continue to be aggressive in that area.
Okay. That's helpful. And then I guess my second question is just around with the strength of digital, have your views around the retail footprint of your own retail, have those evolved? And do you expect to be kind of a net closer or a net opener of stores over the next few years? And then just any comments on tourist stores, because I know there's a bit heavier hit.
Where do you see that role going forward?
I think when we look at the store portfolio, I think we're taking a hard look at how that needs to develop. And I think those stores that were 6 months ago, 4 months ago, cash flow positive, marginally profitable, I think those stores with the pressure that's been put on from the pandemic and the shift to digital is really pointing to the need to reevaluate those stores and look to streamline the portfolio. And I think that will continue both particularly here in the United States and I think to some degree in Europe as we look at that portfolio. In Asia, where we are underdeveloped from a wholesale point of view, China, just about every market in Asia, we've got a good brand positioning, but there seems to be brick and mortar opportunity there. So I think there will be a net opener, and I think in the more mature markets, we'll probably be a net closer over time.
The second question, as you could imagine, we're seeing tremendous results, positive results in our permanent population stores, smaller cities, cities that really driven by stores that are really driven by the consumer in that geographic market, both here in Europe, Asia and in North America. And we're being dramatically hurt by tourist location stores. And just think about the biggest, Orlando, Las Vegas, Guam in Asia, Hong Kong, that market that drives off of it in Europe, Paris, Milan, London, those stores which are big profit producers. Without that international tourism, those stores are down significantly more than the overall averages. And our permanent population stores across the board are much closer to flat to up and down slightly.
Thank you. We'll now take our next question from Bob Drbul from Guggenheim. Please go ahead. Your line is open.
Hi. Good morning, everybody.
Just from the perspective of inventories, I was wondering if you could give us your view on the progression towards supply demand getting back in balance both within your business, but also within many of your customers, just in terms of like a timeline or how you really see it playing out? And then the second question is just can you talk a little bit about distribution around door closures and wholesale door closures and how you're approaching that sort of as you think through the rest of this year and into next year?
Yes. I'm going to make Mike speak to the inventory question, and I'll
come back on distribution. So Bob, in each region, we had this period of closure. Goods were in the pipeline, goods were flowing and you see that in our inventories. Our inventories are not reflective of the Q2 demand. And there are our balances are reflective of goods that will be liquidating throughout the year.
Our expectation is that we will get cleaner each quarter as we move through the year, But we will carry some goods over, basic core spring product, white T shirts, underwear that don't change from that will not have significant change and we believe can sell next year, we will carry pack and hold and put into our spring sort of next year. So and that number is going to be, let's call it, around $250,000,000 So in effect, I don't think you will see the inventory truly reflect the mantle sometime in the first half of next year.
I think, Bob, when you think about distribution, you're clearly watching it closely. Distribution meaning that we know the wholesale channel, the department store channel that we sell into globally, Europe and North America specifically, is under tremendous pressure. And I think inevitably, we're going to see store closures and contraction of business. We've already seen bankruptcies and we'll be repurposing of real estate and consolidation. And I think it's clear to us that this is not an environment where you want to get too far ahead of these sales from an inventory point of view and a demand point of view for fall.
We're being very cautious how we're buying fall. Based on what we're seeing in our order books, we're not planning on excess replenishment within season. As Mike said, we've got plenty of core to support the most profitable sides of our business, that underwear basic business, that basic sportswear those businesses, plenty of inventory to support that and to meet the demand. But when it comes to fashion sportswear and things like that, we're really buying very, very tightly. And that's going to continue as we watch both the virus impact, but also just the inevitable acceleration that the virus has caused us to close the ban.
So we'll see how that all plays out. Next question?
Thank you. We'll now take our next question from Michael Binetti from Credit Suisse. Please go ahead. Your line is open.
Hey, good morning guys. Thanks for
all the detail. I think Manny, you said it related to your comment that calvin dot com just turned profitable. As we look at your overall digital business, I know you've been ramping up your digital chops in recent years, but in the past, I think you really relied on your wholesale partners to capture the digital consumer for you and all the spending that it takes to drive traffic to those sites and the digital CapEx that goes with it.
Can you talk a
little bit about how equipped you think you are today if the output of this whole period is the consumer engaging directly with the brands online after this? How does your digital business overall influence your gross margins, SG and A and operating margins?
I think 1st quarter profitability, the digital business, both our own sites and our pure play digital plays with our key partners like Tmall, Amazon, Zalando, those wholesale partners, pure play, those are some of our most profitable businesses. And while we some of the efficiencies that we've built into our own e comm business and scale, which has really turned those businesses much more profitable for us. So really, the e comm business had no negative impact at all on our profitability in the Q1. That profitability impact was really driven by the reduced sales volume, the expense initiatives that really began late in Q4 as the stores closed. And we continue to pay people for a month before we started to furlough and take other initiatives hoping that this will be quicker.
So I think you'll see those start to become more aligned as we get to the second half of the year, the expense ratios. And our margins were impacted by the reserves we took, in total $100,000,000 a big portion of that towards margins for future markdowns that we are anticipating in the 2nd Q3. So think that's what had much more of an impact on our profitability margins and the loss that was generated. And then finally, I would just say that as this demand curve on e commerce continues, we are seeing our profitability significantly improve in that channel of distribution, both from a direct to consumer where we are doing everything, selling directly and particularly where you're working with our 3rd party players that by far is our most profitable business.
I guess just as a follow-up
to that. At scale, is that business going to be your own digital business? At scale, is that going to be a positive to your long term margins? I know at a certain point, it's going to be very highly variable cost structure. But I guess and I do want to ask one follow-up.
I'm curious about the you've heard a number of wholesalers packing away inventory. You said, Mike, dollars 250,000,000 What's the response from the factories while they're seeing you and your peers packing away inventory, which inevitably means they're going to have capacity issues over the next year? Do you need to support them in any way to make sure the capacity is there when you need it? And do they need to start taking physical assets out
of the system for the new normal? How should we think about that?
Okay. So you want to take the second part, Mike? On the suppliers? On the suppliers and how we're trying to support them and what Yes.
Look, we are working with our suppliers in every way shape and form to keep them healthy, to keep them on track. Our supply base in general consists of bigger players rather than smaller players. So there is some stability in that mix. We do have a financing program that allows us some flexibility with our vendors as well. So it is there is pressure in the whole supply base as people have been canceling orders and
demand was down.
We now see our and demand was down. We now see our factories back to pretty much a normal level of they're open, but still dealing with social distancing and some of the issues around the pandemic, so less efficiency. And they just continue to make adjustments to try to work in the new world and we're doing everything we can to help.
And communication is key. We're communicating upfront so we can adjust, modify, do whatever they can, trying to work together. But I don't believe it's going to require us any significant material support above and beyond what would be in a normal course.
Question on e commerce, the distribution choices we will make going forward will follow where the consumer is going. And we see big opportunities both for owned and will continue to improve our profitability in those channels as well as our continuous improvements in execution And that's something that I mentioned in my notes that we are very pleased to see how our teams across the world are leaning into e commerce. And as you know, it's about continuous improvements on multiple parts. And we see both the demand being there and us increasingly profitable tapping into that demand.
Next question.
We'll now take our next question from Jay Sole from UBS. Please go ahead.
Great. Thanks so much. Just to follow-up on the comments about gross margin and sort of the $97,000,000 on inventory and accounts receivable that was taken, the charge that was taken this quarter and also the fact that on SG and A, some of the actions that you took came at the end of Q1, so we didn't see a whole lot of those impact in Q1.
Can you just give us a little
bit more directional color on how you see gross margin in 2Q playing out and how you see SG and A dollars trending in Q2 relative to where they land in Q1?
On the gross margin front, I think we're going to see a leveling off year over year. We should see it based on the response that we're seeing, the favorable response that we're seeing as we open our stores and not needing to be as maybe as promotional as we anticipated. We're encouraged by that, and we think that there's a positive impact that we see overall compared to Q1 from a margin perspective. And then in addition, if you think about our business from a gross margin point of view, the mix of business in the second quarter in particular that will shift more so to a retail model given the fact that wholesale in the second quarter will be under more pressure, that will also have a positive impact on margins overall, offset by the world and the promotional nature just in general, what should be out there as everybody is clearing spring, summer inventory through the Q2 into early Q3.
And on the expenses, it was spread between the prior year and this year, as you said, was only we didn't have a full quarter of savings in Q1. In Q2, you will see that spread get large. We'll see additional savings as we get the full quarter of the benefit that we've done a partial
quarter.
Got it. Okay. Thank you so much.
We'll now take our next question from Dana Telsey from Telsey Advisory Group. Please go ahead. Your line is now open.
Thank you. Good morning, everyone. Regarding the topic of product lead times that Stephane mentioned, how do you frame that in terms of the target and what it means for margin and inventory levels going forward?
Thanks, Dana. Stefan is going to talk to that.
Dana, thank you for the question. It's an important one and one that's being very clear coming out of the crisis work that we will continuously have to improve the lead times. And as you know, there are multiple components on lead times. There is lead times connected to core replenishment that can get us down to 1 to 2 months replenishment. And then there is read and react capabilities to seeing when demand trends take off to then react to those versus being bought upfront.
So we are working and then there are the overall product development lead times that have to come down and will come down. And both in Calvin and Tommy and the Heritage division, we're working with digitalizing the supply chain and the sourcing and product development. So that will cut lead times. So we'll come back later on with specific targets, but it's very clear that it's a combination of those three activities.
And then I'm just going to add that this is an area where Stefan has been working with our product teams, our sourcing teams and our logistics teams. And I think pre pandemic, we were very optimistic about being able to demonstrate some of those benefits going into the second half of twenty twenty. Unfortunately, those benefits that will be there, I think, are going to get masked from a financial perspective this year because of all the noise around the pandemic, because of the issues and the need to carry excess inventory and so as not to stop the channels with excess goods. But I think as we get into 2021, we really could start to see some of the benefits that Stephanie has brought to the company, working with our teams very closely to really get those benefits on lead times that should enhance margin and hopefully over time reduce our inventory carrying. Next question.
Thank you. We'll now take our next question from Heather Balsky from Bank of America. Please go ahead.
Thank you for taking my question. I appreciate it. There are a lot of questions with regard to the reshaping of your distribution footprint given the COVID crisis with wholesale closures being accelerated and the shift online being accelerated. Can you help us just from a bigger picture, think about what this all means from a growth algorithm perspective, where wholesale is a pretty high EBIT margin channel, but e commerce sounds like it's strengthening. And just how you're thinking about it?
No, Heather, I think Stephan said really well is we need to move where the consumer is moving. We need to go where the consumer is shopping. Trying in the midst of this crisis to try and give you and our investor group specific guidance about sales growth and what will be shrinking, what will be growing, what if we could do it, we'd be giving guidance right now. It's just It's just a it's coming at us very fast. We're reacting to it very fast.
We're using common inventories in wholesale, retail and the digital channel. We're not silos like we had been in the past, but we can use inventories across channels. And I think that's allowing us the flexibility to react. And it's also built in a level of conservatism at least for the next 6 to 9 months, that we just can't be chasing goods or growth the way we might have in a different time frame or a different economic situation. So I'd love to give you more color.
I'd like to have more color exactly what's going to happen. But I think in some ways, this is going to be how agile every we can be, our competitors are going to be in order to react what's going to be coming at us from the wholesale department store channel, what's going to be coming out of the in the brick and mortar retail channel and having the system capability and logistics capability to take advantage of the growth on digital, which this year will grow from 2019, which we thought we had a good year, we grew about 12% of our business. This is going to be a significant growth for us driven by the demand and also driven by the pressures that we're seeing in the native channel.
Yes. Just to build on what Ben just said as well, it's the consumer we have to start with the consumer, and the consumer shops across all channels increasingly. So there is an e commerce piece, and there is a bricks and mortar piece, and there will continue to be a bricks and mortar piece. We see when we open up our stores again that the consumer is coming back slightly ahead of our internal forecast. And so for us, it's going to be about the omnichannel approach to say in a shopping region, how is consumer shopping across digital and physical channels.
And to Manny's point, we're going to match what where the consumer demand is. Thank you.
We'll now take our next question from Jaeme Merriman from Bernstein. Please go ahead. Your line is open.
Good morning. Thank you. Stephan and Manny, you both talked about being where the consumer is. And it sounds like in the quarter, as you emphasized those omni channel capabilities, you set up some capabilities like ship from store and curbside pickup relatively quickly. I'm just wondering, are there systems investments that still need to be made to support those omnichannel activities over the longer term?
And how should
we think about those? Thanks.
Just to start answering your questions, it's you're right. This quarter, the crisis drove us to move faster on connecting digital with physical stores. And we were pleasantly surprised on how fast we can move on that. And one big aspect was to connect the inventory in physical stores to serve our digital channels. So when it comes to investments, again, we anybody in this everybody in this industry has to continuously invest to into those capabilities.
When it came to the ship from store capability, it was a lower investment and faster impact than what we initially expected. But over time, we will have invest in those capabilities, coming back again to where the consumers go. Yes. Look, I would just add
we had to give guidance on CapEx is $190,000,000 In there are the investments on the capital side that we're making on e commerce, omnichannel, chicken store, all those pieces. And those were really redeployed. We basically have moved investments that we would have made in other areas into that sector.
And I think that redeployment will continue into future periods that again, the $195,000,000 is significantly lower than our historical cap spend. But I think if you're thinking about our cap spend, it will be in line with what our historical leverage has been in dollars and as a percentage of sales. Next question?
Thank you. Our next question comes from Matthew Boss from JPMorgan. Please go ahead.
Great. Thanks. Lonnie, maybe any material difference in demand recovery from here that you're planning for as we think about Europe versus the U. S. Based on what you've seen so far on reopening?
And with that, what's the level of promotional activity that you're seeing necessary to drive demand in Europe versus the U. S. Today?
Okay. Let's talk about the promotional level. As always, the promotional level is lower in Europe than in the United States. And I think that this hasn't changed that. We're seeing in Europe very strong full price selling across the board And in our full price stores and in our other channels, we really targeted our promotions very efficiently.
In the U. S, when we initially opened, we came out of the box very strong from a promotion point of view. We weren't anticipating even higher promotions than what actually is happening in the stores today. We have since backed off of that initial promotional cadence. And since we're doing on our POS basis, that gives us the flexibility.
As we saw demand exceed our expectations, we have pulled back on the promotional cadence overall. I would compare the promotional cadence in the U. S. To be slightly more than it was this time last year, but not nearly as promotional as we thought it was going to be going forward. So I hope that gives you some color.
That's great color. Best of luck.
Okay. And I think we're going to take the last question. Right now, it's just about it's after 10 and we're going to try to get back to business. So last question, operator?
Thank you. We'll take our last question from Omar Saad from Evercore. Please go ahead. Your line is now open.
Thanks for squeezing me in,
Manny. Glad to see you guys are well. Two quick questions. Number 1, it's a bit of a technical question. So when I think about the stores that were opened in the first quarter versus the Q2, are stores and kind of the percentage versus the total overall possible store hours, if you will, is that percentage going to go up or down in 2Q?
My assumption is stores are less open in 2Q overall versus 1Q, but I want to kind of get confirmation from that. And then second question, Stefan, I was really curious, I knew you talked about Calvin Klein, the work you guys have done there on the brand, hinting at the DNA harkening back to the kind of iconic DNA. Maybe a little bit more information insight around that. Are we
talking about Brooke Shields?
Are we talking about Marky Mark? Would appreciate your color there. Thanks, guys.
I'll give Stefan a chance to put the marketing campaign together. But we're all kidding aside. Thanks for the question, Omar. On clearly, as we go through the Q2 with the stores, if you take the month of February out of the equation, we're going to be significantly more open in the Q2 than we were in the Q1. As you recall, Right now, I think it's the same in all our disclosure.
We're about 85% open mid June. So by the end of this weekend, about 85% of our stores will be open. Store hours are less. I think that store hours on average are probably down 15% to 20%, a ballpark number to give you a sense that it's cut. It's also store capacity is down.
So we can only let so many people in at a time. And in some locations, we have lines outside the store. All of those things are impacting us. Where our store traffic is down significantly more than our sales traffic. And I think that's driven by a couple of things.
Consumers customers that are out and shopping are out and shopping with a purpose. They need something. They're out there. They're shopping. They're not just browsing.
They're shopping. And secondly, I think we're being very effective on how we're converting customers. We're offering strong value in our products, which we really saw in February and coming out of the Q4, we saw tremendous momentum in our spring product globally at Calvin and at Tommy Hilfiger. And that momentum as the customers come in and they vote it voting, they're really hitting that target. I think Stefan is not going to give a as you know, in the Calvin Organization, we don't announce marketing campaigns way ahead of time until they're ready to be announced.
But I think we'll give you just a flavor of what we're trying to do. Yes.
Just coming back to what I shared earlier, it's what the team has done really well is to go back and decode the Calvin DNA covering some of those talents that you mentioned. But what they do from there is to they make sure that they understand what made the brand iconic and resonate and become a $10,000,000,000 brand. And then they connect those components, those DNA components to the consumer and culture today. You will see it gradually coming out. You see it in social media.
You will see it in collaborations. You will see it in an increased focus on modern essentials. If you think about it, Calvin's brand philosophy Calvin was 20 years ahead when he focused on the essential products. One thing Calvin kept back kept coming back to what's the meaning of each product, what's the intent behind each product. It's never been more relevant today.
So you will see it. As Manny mentioned, you will see it over time.
Thank you, everyone. I really appreciate you taking the time on this call. We look forward to speaking to you in August with our Q2 results. Everyone, please stay safe and healthy. Have a great day.