Greetings and welcome to the Skechers First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to Skechers. Thank you. You may begin.

Thank you, everyone, for joining us on Skechers conference call today. I will now read the Safe Harbor statement. Certain statements contained herein, including without limitation, statements addressing the beliefs, plans, objectives, estimates or expectations of the Company for future results or events may constitute forward-looking statements that involve risks and uncertainties. Specifically, the COVID-19 pandemic has had and is currently having a significant impact on the Company's business, financial conditions, cash flow and results of operations. Such forward-looking statements with respect to the COVID-19 pandemic include, without limitation, the Company's plans in response to this pandemic. At this time, there is significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic. The dynamic nature of these circumstances means that what is said on this call could change at any time. And as a result, actual results could differ materially from those contemplated by such forward-looking statements. Additional forward-looking statements involve known and unknown risks including but not limited to global, national and local economic, business and market conditions in general and specifically as they apply to the retail industry and the Company. There can be no assurance that the actual future results, performance or achievements expressed or implied by any of our forward-looking statements will occur. Users of forward-looking statements are encouraged to review the Company's filings with the U.S. Securities and Exchange Commission, including the most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all other reports filed with the SEC as required by federal securities laws for a description of all other significant risk factors that may affect the Company's business, financial conditions, cash flows and results of operations.

Thank you for joining us today on what is certainly the most unusual earnings call in our 21 years of being a public company. Our Manhattan Beach corporate offices normally bustling with the team of talented individuals is empty. We are adhering to the work-at-home guidelines with very positive results. I'd like to start by saying that the top priority of our leadership team, as always, is the health and wellbeing of our employees and partners around the world. We are in unprecedented times as the COVID-19 pandemic has impacted the entire world. While we have limited visibility as to when most markets will reopen and what business atmosphere will be like when they do, we see some positive indicators including our extremely strong ecommerce business, the positive sales trajectory of our China business, and reopening of several markets, most notably Germany, Scandinavia and Austria. For this call, we will primarily focus on the current environment and the actions Skechers has and is taking to navigate this crisis. However, we will also cover our first quarter results, as well as the strength of our brand reflected in those results. We first saw the impact of the virus on our business in China in January, where our local management team took aggressive actions to protect our employees, partners and customers, as well as our business. As the impact of the virus spread globally, we began implementing travel restrictions and work-from-home policies in all our offices, closed nearly all Skechers stores worldwide, established the senior management led crisis committee and began actively adjusting operating expenses to preserve cash. We also drew on our senior unsecured credit facility to enhance our liquidity. We are confident that these actions and many others will enable us to successfully navigate these turbulent waters. In addition, we have been actively reviewing inventory balances and production commitment across the globe, making decisions to bring both in line with forecast demand. We believe that our speed of decision-making and operational agility will provide us with the tools necessary to maintain the healthy momentum of the Skechers brand we experienced throughout 2019. Skechers’ fourth quarter sales growth exceeded 23% as consumer demand for our product was an all-time high. We ended 2019 with fourth quarter being our second highest quarterly sales in the Company's history and record annual sales of $5.22 billion. That momentum continued into the first quarter with strong performances that resulted in a 9% increase in our domestic wholesale business and a 9.4% increase in our subsidiary wholesale business. Total first quarter sales were $1.24 billion, a decrease of 2.7% over the same period last year, primarily because of the significantly reduced activity in China for the month of February and March, as well as the shutdown of most global markets by mid-March. Our international wholesale business was down 8.4% in the quarter, but excluding China, it would have increased 6.2%. While there was growth across many markets, the highest increases came from our subsidiaries in Germany, Central Eastern Europe and Japan, and our distributors in Australia, Scandinavia and Turkey. Further, worldwide comparable same-store sales in our company-owned direct-to-consumer business increased 9.8% for the first two months of the quarter, reflecting the strength of our brand. Our North American and European distribution centers both experienced record shipping month for this same period. We believe these key indicators confirm that the global acceptance of our brand was extremely strong as consumers continue to demand comfort, style, innovation and quality at a reasonable price, five key attributes offered throughout the Skechers product line. We are learning that during the crisis consumers still want comfort, quality and value in a brand they trust. We are seeing this in accelerated sales in our company-owned ecommerce platforms which grew over 70% in the first quarter, but have increased in excess of 250% month-to-date. For several of our key international markets, our April online sales are already above their entire first quarter online sales, and we anticipate that the balance will get there by the end of the month. We are also seeing sales of Skechers in our wholesale partners with ecommerce sites among the top three, if not at the top of their footwear brands now being purchased. We are learning from the reopening of the market in China and are highly encouraged by our own results both in retail and online and those of our franchise partners. Our online business grew low-double-digits in January and has returned to mid-single-digit growth in April. Today, nearly all of our stores in China are open and are on a steady rising growth trajectory. In fact, last week, we opened our first new store since the pandemic occurred, a 9,000 square foot outlet store in the northeast of China and it performed extremely well. Along with the strength of our brand and product, we believe there are several inherent factors that are proving beneficial during the pandemic and helping to ensure both, our stability and success, once it ends, the diversity of our product and distribution channels, the solid relationships with our factories and wholesale partners, and our exceptionally strong balance sheet and ample liquidity. Before I turn the call over to John, I would like to reiterate that we are confident in our ability to navigate this crisis. No one was prepared for the challenges of this new normal. We believe we acted and reacted with speed. We believe that our quarterly performance prior to the disruption is a testament to the strength of our product and brand, all of which leads us to believe that when markets reopen, people return to work and customers get back to shopping, Skechers will continue in its position as a leading forward footwear brand. Now, to John.

Thank you, David. First, I hope you are all safe and healthy. Before I discuss our first quarter 2020 results, I would like to elaborate on the steps we have taken to navigate through the unprecedented challenges of COVID-19. Last month, we drew $490 million from our senior unsecured credit facility, which gives us over $1.3 billion in immediately available liquidity. In addition, we have $250 million of additional liquidity available through an accordion feature of that facility. We have also taken a hard look at all operating expenses and have actively reduced all non-essential discretionary spending. This includes curtailing business travel, reducing non-digital global marketing spend and reassessing our store rollout plans. We have also implemented reduced staffing, including furloughing select employees, as well as freezing headcount and compensation levels. Further, we have re-prioritized our capital expenditures to focus only on business-critical and highly-strategic projects. Some projects will continue the pace, while others will be either delayed or placed on hold. We believe that we have adapted quickly to the current market dynamics and are well-positioned to manage through these challenging times. Now, turning to our first quarter results. I will not be detailing all the impacts we have experienced from the COVID-19 pandemic, but it should be clear that there were impacts throughout our entire global operation, and we expect a continuing impact on our business going forward. Sales in the quarter totaled $1.24 billion, a decrease of $34.4 million or 2.7% from the prior year quarter. On a constant currency basis, sales decreased $14.9 million or 1.2%. Domestic wholesale sales grew 9% or $31.3 million, due primarily to the strength in our women's and men's Go, men and women's USA, and our work and street categories. This despite the fact that we lost about two weeks of shipping in the quarter as operations at many of our wholesale customers came to a sudden stop. International wholesale sales decreased 8.4% in the quarter as a 9.4% increase from our wholly-owned subsidiaries was offset by a 38.9% decrease in our joint ventures, primarily from China, which was down 47% and impacted by the significant sales return reserve to keep our franchisee inventories clean with seasonally appropriate merchandise. Our distributor business increased by 1%. Direct-to-consumer sales decreased 4.2%, the result of an 8% decrease domestically and a 2.5% increase internationally. Outside of China, this is clearly where we saw the most significant impact from the pandemic as nearly all company-owned stores seized operations in mid-March. However, illustrating the strength of Skechers brand preceding the closures, our year-to-date direct-to-consumer comparable store sales through February were up 9.8%. Gross profit was $547.7 million, down $4.28 million, compared to the prior year, and gross margin decreased by approximately 220 basis points to 44.1%. The lower gross margins were attributable to international results. There was also a negative impact to gross profit in the quarter related to the acquisition of our interest in our joint venture in Mexico last year. In the quarter, we recorded a onetime non-cash purchase price adjustment in gross profit of approximately $8 million, associated with a step-up in the value of the acquired inventory. Total operating expenses increased by $78.3 million or 18.2% to $508.1 million in the quarter, primarily driven by an increase in labor expenses, the inclusion of Mexico operations and the sizable prior year tax rebate in China. Selling expenses increased by $3.8 million or 5.5% to $74.1 million, primarily due to higher digital advertising expenses domestically. General and administrative expenses increased by $74.4 million or 20.7% to $434.1 million. The increase included $28.1 million associated with our direct-to-consumer business and a net increase of 54 new company-owned stores including 16 that opened in the quarter; $16.2 million related to the inclusion of operations in Mexico, including non-cash charges of approximately $7.8 million related to the acquisition; $7.3 million in China, primarily related to the absence of a rebate comparable to prior year and $9 million related to higher compensation and outside services costs. Earnings from operations decreased 73% to $44.8 million versus the prior year, and our operating margin was 3.6%, compared with 13% in the prior year. Net income decreased 54.9% to $48.9 million or $0.32 per diluted share on 154.7 million diluted shares outstanding, compared to net income of $108.8 million or $0.71 per diluted share on 154.1 million diluted shares outstanding in the prior year. However, adjusted net earnings and adjusted diluted earnings per share were $59.9 million and $0.39, respectively and reflect the impact of negative foreign currency rates and certain purchase price adjustments related to our acquisition of our joint venture in Mexico. Our effective income tax rate for the quarter decreased to 15.3% from 19.5% in the prior year. And now turning to our balance sheet. At March 31, 2020, we had over $1.37 billion in cash, cash equivalents and investments, which was an increase of $335.3 million or 32.5% from December 31, 2019. The increase primarily reflects the drawdown on our senior unsecured credit facility in March, of which $215 million remains available through an existing accordion feature. Our cash and investments represented approximately $8.89 per diluted share outstanding at March 31, 2020. Trade accounts receivable at quarter-end were $796.2 million, an increase of 23.4% or $150.9 million from December 31, 2019 and an increase of 8.1% or $59.6 million from March 31, 2019. The increase in accounts receivable was primarily due to higher wholesale sales, both domestically and internationally, as well as deferred collections from certain franchise customers in China, following the impact of the COVID-19 pandemic. Total inventory was $985.7 million, a decrease of 7.9% or $84.2 million from December 31, 2019, but an increase of 33% or $244.8 million from March 31, 2019. While this level of inventory is clearly higher than we had originally planned before we seized shipments to our wholesale customers and closed our retail stores, we believe the actions we have taken and will be taking to adjust future factory orders will allow us to manage these balances with an eye toward emerging from the current climate with clean energy inventory levels. Total debt, including both current and long-term portions was $699.8 million, compared to $110.4 million at March 31, 2019. The increase primarily reflects the drawdown of our senior unsecured credit facility. Working capital increased $137.7 million to approximately $1.7 billion versus $1.56 billion at March 31, 2019. This was due to our drawdown on the senior unsecured credit facility and increased inventory levels globally, partially offset by lower accounts payable balances. Capital expenditures for the first quarter were $61.3 million, of which $34.4 million was related to the acquisition of an office building in Shanghai and new retail stores in China, $10.9 million related to direct-to-consumer stores and ecommerce investments worldwide and $10.8 million related to our distribution capabilities around the world, as well as general corporate investments. We have thoughtfully reevaluated our capital expenditures for the remainder of the year and are prioritizing only essential and strategic projects. Given the current retail climate, we have dramatically slowed our new store opening plan, at least until we have better visibility into business conditions. We now expect capital expenditures over the remainder of the year to be between 100 and $125 million, primarily reflecting the completion of our first company-owned distribution center in China. This excludes investments in the expansion of our domestic distribution center, which will continue but which will also be financed separately through the joint venture we operate for that location. We will also continue to strategically invest in our ecommerce business, as this is a critical channel for us to evolve and expand our connection with our consumers including the rollout of a new POS system, new website, mobile application and loyalty program. We will not be providing revenue or earnings guidance at this time, as the current environment is simply too dynamic from which to plan results with a reasonable assurance of success. As David said, while the near term is uncertain, we are confident that we are taking the necessary actions to ensure that Skechers will successfully navigate this crisis. Given the strength of our brand, our compelling value proposition and our healthy balance sheet, we believe we are well-positioned to continue growing once the situation normalizes. And now, I'll turn the call over to David for closing remarks.

Thank you, John. I am struck by how unusual this year is. And although we have been operating in this new normal very efficiently, it is still not normal. We are appreciative that we have a dynamic and strong team working remotely both here in the United States as well as around the world, all with the goal of staying healthy and ensuring the continued success of Skechers. The sales trajectory in China and several other markets in Asia with stores now open, is positive. We're also pleased to report that several international markets are now also starting to open including Germany, Austria, Scandinavia and the Netherlands. We're also optimistic in the strength we are experiencing in our ecommerce business worldwide. We believe that when consumers return to work and to shopping, they will be looking for comfort and value. And they know Skechers has been delivering on this front for nearly three decades. Our pre-crisis brand and online strength was extremely strong as evidenced by our results. Our ample liquidity, food and cash management and inventory supply and demand measures taken since mid-March are proving to be a solid foundation as we evolve and adapt. We believe Skechers will emerge more efficient, focused and stronger than ever before. We look forward to reopening our stores globally and to see Skechers’ product on the shelves at points of sales around the world. Now, I'd like to turn the call over to the operator for questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question.

Great. Thank you. And I just wanted to say, I hope everyone associated with Skechers all over the world is doing well and staying healthy. The question is about the online business. Talking about 250% growth month-to-date on skechers.com is a really big number. Can you just tell us what the size is of the Company's total digital business today across all websites, both retail partners and your own, and what is that growing right now?

Difficult to say with the retail partners, obviously because we don't get complete details, and especially on folks like Amazon and third-party sellers on Amazon, while we do get some from our own, obviously customers are here, in Europe and everyplace else. It's fair to say, I believe, if you take China and what we have our own online, what we know about people like Amazon and some European and domestic, that we must be pushing somewhere in the neighborhood of $500 million a year, I believe with the running rates we're going through April, significant, and it's growing dramatically. I think, it shows the demand for the brand. It's always been big in China. As we said, it made up a significant portion of the volume, even this year and a year before. But the fact that we can lap the first quarter’s entire online sales in five groups that we have around -- that we own ourselves, where have our own stores around Europe, here in South America, is pretty significant regardless of size. And it is starting to scale quite nicely. And it does continue to increase. So, we have plans to continue growing the site. We will be in all countries that we operate as subsidiaries, hopefully in the next year to 18 months. So, this only has the possibility to continuing to grow and continuing to compound, even in the current environment. So, we're very positive about it. We think it's great and we continue push forward and bring it out around the world.

Okay, great. So, if I can follow up on that. When we just think about the brick-and-mortar business, do you have an idea of -- because you mentioned Germany, Austria, Scandinavia, a bunch of places, stores are reopening back up in addition to Asia. What percentage of the brick-and-mortar footprint of the Company's total distribution model is closed right now and maybe what percentage opened, do you think?

Outside of China, it’s still all closed, brick-and-mortar. We have not opened anything. We have some third parties opening in Germany and we've gotten quite good results even for Skechers sales. We are in the planning stage for bringing them out. We think it won't be too much longer before we start to bring some out in Germany where they’re starting to open, and Austria where we have some. I think, actually one did open in Austria. But the percentage is, to your question is still tiny. And even in the U.S. and those places where it will be allowed and we can set everything up as far as safety is concerned, we're planning on coming back. So, all of these great results are still with very little brick-and-mortar.

In China, we are close to 100% at this point in time, most stores are open. But not all at full productivity, but most if not all stores are open at this point in time, which is an incredibly good sign to see.

Got it. And really, one last one for me. Can you just talk about how you're thinking about managing SG&A for the year? I mean, John talked about travel, marketing, staffing, compensation, already taken measures to adjust that. But maybe just sort of give us a range for a moment, maybe like how much SG&A might grow or not grow this year, like a ballpark range?

Jay, don't you understand that the big pieces are our brick-and-mortar. You got to tell me when they're going to open, if you really want to know how much I'm going to spend. I mean, that's a significant undertaking as they start to come back. And the more months they don't, the more fallow it is. And there's certainly a lot of projects outstanding. So, I think it's fair to say that from the SG&A perspective, as far as -- all things that we have in our control, we're limiting as much as possible, keeping an eye for when we reopen and certainly investing in our online business. But until we know on a worldwide basis when we're coming back to business with people will be back in the office, when furloughs will end, it's very difficult to give you a ballpark number on what G&A is going to be.

Got it. All right. Thanks so much.

Thanks, Jay.

Thanks you. Our next question comes from the line of Omar Saad with Evercore ISI. Please proceed with your question.

Thanks for taking my questions. Thanks for all the information, guys. I just wanted to actually clarify your comment on the online, that $500 million number you threw out there, David. Is that as the April run rate? It's the $500 million business, which should be 10% of sales or are you alluding to a different framework there?

No. We are talking about the running rate that we're building into through April now and what exists in China, for a somewhat longer period of time. Obviously, we're up 275%. We didn't have that running rate in the first quarter, but we are growing into it now. And also that edge -- remember, we're taking a little poetic license here because we know what we sell to Amazon and what we sell to other people that are big customers that sell online and have ballpark numbers for what it is. When you put them all together, it certainly should have a run rate to-date with everything else being closed in excess of $500 million. I think that might actually be a small number, given the size of Amazon and some of our other customers, both in Europe, here and in South America. And then you add our own site here and our site in China, and you start to get pretty significant numbers.

Got you. Got you. So, maybe you could talk to that a bit more like what are you guys doing at the logistics or investments you need to make to kind of really gear the business more towards digital, even accelerate that side of it as the demand ramps up there? I know it's going be a pretty than kind of mass wholesale shipment orders, I imagine and kind of reconfiguring operations around that. Is that something you can do in a short timeframe?

Well, we've already started. So, if you go back to the old conference calls, we've already broken ground, bulldozers are out in our Moreno Valley facility, that new building will be specifically for online business. We’ve taken an additional 700,000 square feet in Belgium, which is our other big facility, that will also be predominantly for online and the growth that's there. I would go back and tell you one thing from the beginning of your question that you said the focus is shifting and we'll be moving that way. We were planning on moving this way for quite some time. That's in addition to keeping focus on what we continue to do. We don't believe that we won't come back strong in our brick-and-mortar and our wholesale business as we continue to go down. We're not sacrificing or moving away from any of that stuff. This is just something we had seen in the past. We've always believed and we want to get to our consumers any which way they want us to get to them, and online was obviously a growing factor. I guess, we had to do it over again, we would have been a year ahead and maybe even in 10 more countries and even a higher number, as far, but we are in the process. We have our systems in place, we have our systems in place to upgrade our POS and our retail stores for a more significant omni-channel presence as well as our online and distribution capacity to do that in all our big places in the world. And that will be the model for other countries in the world as we roll it out to our subsidiary base.

Anything operationally, like you're seeing in China as you build that business back up again, and the kind of returns that you're learning there that you are in Europe that you can apply in Europe and apply in North America, how the consumer behaves, how they're shopping and how you match that logistically, operationally on your side?

It hasn't changed considerably from a logistics point of view. We've always been expanding. We're still continuing to build our distribution center in China. Right now, we use multiple third parties and even in Europe as it opens. We've always been moving that way. And we have the capacity as you've seen, the way we've grown the business in these different methods, both brick-and-mortar, wholesale, with our subsidiaries, joint ventures and franchisees around the world that we have the capacity to move quickly. We’re not really burdened by slow moving decision making we’re constantly going through. The fulfillment end and the front end where we take the orders, hasn't changed considerably and we continue to modify it and continue to grow. We're actually going to do a new launch for our online probably in May or June, depending on how things develop, which has obviously been planned for more than a year. So, all we're doing is putting our foot on the accelerator in those places that are more heavily growing and concentrated right this minute, but we have the capacity to turn it on everywhere and we plan on doing that hopefully before this year ends.

Thank you. Our next question comes from the line of Kimberly Greenberger with Morgan Stanley. Please proceed with your question.

I wanted to follow up on China and ask in aggregate, so far here in the second quarter to-date, is your total revenue in China back to positive growth or is it that some pockets like ecommerce are positive growth but stores are still negative? If you could just help us understand that. And then, also, just remind us what percentage of revenue -- what percentage of total Skechers revenue does China represent? And then, I had a follow-up on gross margin, but let's start with that one.

Okay. Well, you were right the first time and that our ecommerce business is comping positively, most weeks now is special. The stores are open. And while some may be comping positive in the aggregate, they're back to about 70%, 75% I believe of what they were a year ago and getting -- certainly growing and you see consistently throughout the month as it goes forward. So, they're not quite there. And last year, if I remember correctly -- and John probably jump in, we did about $850 million give or take in China proper of the $5 billion plus that we did as a company.

Hey, Kim. That’s right. David’s memory as usual is spot on. I would add, it's also -- we're seeing different behavior patterns in different channels. So, ecom actually is doing extraordinarily well. It actually weathered the pressures from the pandemic better than the other channels. But, what we're seeing is extraordinarily encouraging is both ecom is on upward trajectory. Retail and the stores that we own and operate is on an upward trajectory. And the sell-through at our franchise partners is also on a positive trajectory. So, while they're not fully back from a consumer standpoint, China is actually showing a lot of really good signs that we hope are replicated across the globe as other markets reopen.

Absolutely, great color. Thank you for that, John. And then, my follow-up is just on the gross margin. You indicated a 220 basis-point decline in the first quarter was due -- it sounded like largely to international. Is that all in China, or is it sort of spread international? And if you could just unpack that a little bit and talk about the drivers in there? Is it margin support, cost inflation, what are the elements that are driving that gross margin decline in the first quarter, that would be helpful. Thank you so much.

Yes. So, first, let me elaborate a bit. That is entirely international. If you actually look at the domestic margins, they are very good this quarter. We were seeing very good trajectory. The domestic wholesale business was doing very well, some positive mix shift there as well as improved pricing, direct-to-consumer prior to the shutdown was seeing some improved pricing. So, the domestic gross margins were actually doing very, very well in the quarter. So, it's entirely attributable to two things really. If the China -- the impact in China and the recovery certainly has been there on a unit level, it's trailing a little bit on the revenue side in particular as many retailers are offering discounts to get consumers back into the store. It's also attributable to the purchase price accounting that we called it out in Mexico, which is -- again, it's a non-cash charge that's rolling through related to the stepped up value of some inventory that was there at acquisition. So, no actual cash outflow but more of an accounting chart than anything else. After that, you saw a little bit of weakness in gross margin in some European markets in particular, as the pandemic began. It started a little bit earlier in several European markets. And that caused a little bit of weakness in March. Overall, though, I would attribute most of it to pandemic related outcomes in China and the purchase price accounting is and again would highlight that the domestic margins were really good in the quarter.

Great color. Thank you so much.

Thank you. Our next question comes from the line of Tom Nikic with Wells Fargo. Please proceed with your question.

Hey, David. Hey, John. Thanks for taking my question. I wanted to ask about expenses. I know, it's sort of difficult to get through this and have all the stores closed. But, you mentioned some select furloughs. Is that just the store employees, did you furlough employees in the corporate offices or DCs or anything like that? And can you let us know when the furloughs began?

Well, furloughs began, I believe at the retail level two weeks after we closed the stores and we had the two-week guarantee and then some of them -- we've kept the number of people. We began furloughs. I think, it's important to note this is a worldwide issue. So, some of it -- or a big piece of it has to do with our foreign where governments had different tax and what they've done as far as furlough and personnel is concerned. In Europe, we have more of a contribution from the government to keep people on payroll and they contribute to it rather than in the United States where they -- rather that we furlough them and they get unemployment to the point that they may not pay for them to come back too quickly. So, we have two different scenarios there. It's safe to say that they’ve been going steadily as we’ve seen what we need, what we don't need, who's working. We have a lot of people that are working very hard. So, it's been consistent and consistent with the demands of the business probably since we closed the stores, both from the office and for the retail.

Tom, I would just double emphasize the notion that none of that really appears in the first quarter results because as David mentioned as the store close, we for the first two weeks of our closure kept everybody on payroll. So, much of what he is describing, which I think as you take a step back is that really we're looking at every expense. There's nothing that we're not going to consider curtailing or holding back if it's feasible. Most of that started in Q2 and it takes different formats in different countries. What we are doing though is we're continuing to pave benefits of people who are on furlough. We've handled this in a manner that allows them to tap into the resources that have been made available through the government in the United States and other programs internationally. And I would just add that really no -- no line of expense is being left unexamined at this point in time. So, we're looking at everything. It's with an eye toward maximizing our cash on hand. And you'll see, over the course of Q2, we'll be making adjustments to that, depending on how the business conditions unfold.

Got it. Thanks for taking my question and best of luck navigating this unprecedented scenario.

Thanks, Tom.

Thank you. Our next question comes from the line of John Kernan with Cowen. Please proceed with your question.

Good afternoon, everyone. Thanks for taking my question.

Hi.

Hey. David and John, can you just talk about the ability to get back up and running outside of China and what the new normal looks like, both with your wholesale partners, your directly operated platform, as well as all your -- within the wholesale channel, the distributors, JVs, franchisees and licensees?

I mean, the one thing I'd point out there is, there is still a core operation capability that we retain right now. In addition to the online business in China, we are still receiving goods. We need to keep the ports clear. So, we're taking in goods. We're also very actively managing the production commitments that we have to bring those plus our existing inventory into line with demand. That's the key activity that we undertook really right away and have been working on diligently ever since. On the wholesale channel, we're waiting to hear about our major wholesale customers and when that will begin taking in goods. We have seen some positive energy in that area recently, as many begin to contemplate reopening their retail base. That's been a very good sign. It's consistent what we're considering in our own retail line. But, it's also clear that other markets in some instances are different at points in the curve. So, what we're starting to see develop is a fairly consistent approach where retail is halted and then it starts to get back up and running and orders need to be readjusted. So, that hopefully most countries end up on a trajectory similar to China, which again at this point is very encouraging, given the trends that we've seen. So, I would say, we're perfectly poised to be able to handle all of that and are ready to, but it needs to be on a case-by-case, almost country-by-country basis. And that's how we're addressing it right now. And then, I would add, there's still some customers we're shifting to actively, a lot of the online players, even some of our wholesale accounts who have online businesses, as David mentioned, we're doing fantastic business through those partners as well. So, there still is some core shipping going on. Although it's clearly not at the levels, that would be the case normally.

Yes. I would just reiterate that nothing is closed. So, it's a matter of scale, in most parts of the world. We do have a couple of distribution centers that are running very minimally just to receive goods that had already left or been made, so that they could receive them and not clog the ports. The only issue will be getting people back quickly enough. We’re fully automated in our big facility. So, that will be somewhat easier. And obviously, we have to work around safety measures because we do practice social distancing, and protective gear, both gloves and face masks in all our distribution centers as well. So, that's going to be the scale piece and the learning curve to get there. But, everything is working. So, we will be shipping as soon as everybody's ready and will be able to scale along the way.

And maybe a quick follow-up to a point John made. It’s on the inventory. It is 33% on the balance sheet. Obviously, there's tremendous dislocation in the market, inventory is up everywhere now. But, just the freshness of that inventory and the ability to get it through the channel, when things get back up and running?

Well, that would depend on how you define the channels and what their capacity is. Physically, we have no issues, and we can. We think there's a demand for it, given what we've done before and what's coming through. We don't have anything we haven't been selling well, and there is some new stuff coming in. So, as our stores open and as our online continues to grow and wholesale business continues, we will make those decisions as we go forward. I think, the benefit we have is like John says, we have different starts in different parts of the world. We have the capacity to move the inventory we have, even if it was originally purchased for someone to another part of the world where its demand is coming earlier and replace it later. So, we're very agile when it comes to that. So, we will take our inventory, our inventory that exists worldwide and start to move it on a worldwide basis as is needed first. So, we think we're going to be in pretty good shape over time as everything breaks loose.

John, I would also add, given the benefit of what we're seeing online, many of our products certainly get the sweet spot of what consumers are looking for right now. Everything from the athletic category to the work category, many lines of which actually provide work footwear for those who are on the frontlines of battling this pandemic, all the way through to the comfort value orientation, we spoke about. This is going to position we think -- there's a benefit of having an online business to business well to understand what consumers are looking for, when the broader retail environment opens up. But, we have the benefit now of our online, our partners’ online, seeing what sells, viewing what's happening in China. And it's given us a lot of entail into how we should manage inventory. And again, I would credit David’s team, our team here on the supply chain side, this is something we got after immediately. When we started to witness the effects of the pandemic globally, we started to work very, very closely and quickly with our factories, with our customers to bring that order flow into line given the inventory we have.

That's really helpful. Thanks, guys. Best of luck.

Thanks, John.

Thank you. Our next question comes from the line of Sam Poser with Susquehanna. Please proceed with your question.

Good afternoon. Thanks for taking my question. I just -- what are your baseline, like, can you just talk about what you're seeing right now? I mean, are you presuming you're shut down through May on as far as retail in the U.S. And how are you thinking about it? And if so, in the second quarter alone, how much -- where you are right now for Q2 on SG&A where -- help us a little bit there. We're in Q2, what is the ranges we should be looking at?

Sam, there's a reason we are not providing guidance at this point in time. And it largely relates to our inability to precisely forecast when, as David points out that retail business comes back online, because that will have two impacts to us. Obviously, it'll impact our own retail business, but it’ll also begin to impact that of our wholesale customers. So, quite frankly, we don't have a plan. We have multiple plans right now. And quite frankly, all of them are in a bit of suspension until we know those retail environments begin to reopen. And, I think it's going to be different pacings for different countries, which makes -- it makes it exceedingly difficult to give you a number or a range because it depends on so many factors and so many different countries so as to not be reliable. What I can emphasize though as what we've already said. We're looking at everything on the spend side. We're going to prioritize only that which is essential and critical at this point in time. We want to continue to take advantage of what we're doing online. But after that it’s going to be contingent upon what both the governments and environment allows us to open.

Well, I'm going to beat the horse one more time here. Can you give us some idea of sort of what you've already chopped? Like, could you give us an idea of okay, we found 25 -- I mean, did you find a certain amount of money that just isn't going to get spent right now in the cutting in the second quarter with everything else sort of up for grabs?

All right, Sam. I will tell you only because I like you. And, but the questions -- the one thing, all -- and everybody's been up to it. Advertising has been cut significantly, at least for April and May where there is nothing happening. So, if you start there and you see it's very serious, and that is one of our larger expenses. So, while we do continue to advertise online and push for online sales to a number of ways, so we obviously don't have as big a presence on TV and print, and that will be significant. So, if your point is to find out if we've taken it serious, I can assure you, we’re serious and there's no expense certainly from a cash basis. And remember, we're managing expenses as well as cash that we're not taking advantage of.

But also, just to remind you that there's a significant portion of G&A base remember that is variable right, the warehousing, the distribution, the labor associated with that, the labor associated with the store. So, there's a lot in that G&A base, we talk about all the time, that is related to variable operations. And since a lot of those operations have been suspended, there's obviously some opportunity there.

Thank you. I have two -- like two or three more questions. Number one, you mentioned that the shipping to some wholesale customers, their online businesses, you started to see people get hungry for it. Does that mean like big family retailers are thinking about buying things that there aren’t -- and if so, are most of those folks billing from the stores, so I mean -- or is this just like you've been talking about them of how they're going to do things once things get started or are you seeing replenishment orders from like online retailers outside of etailers -- online parts of retailers business outside of etailers?

Well, it's probably safe to say that we have anecdotal evidence that those people that are shipping out of their own inventory, especially of Skechers goods that are out there. But, we do still have some customers that are predominantly online that continue to take product, both domestically and around the world. So, we are still delivering some. We are delivering obviously all our own, which grows consistently throughout since the beginning of the year, and even more so now. So, that's pretty consistent. And those that are predominantly online, we continue to fulfill. And as they request, we continue to ship them. That’s the biggest piece. I don't want to get too carried away on order of magnitude and scope. But, we do have the facilities up and running. We continue like John said before receive goods, ship goods to the online community and ship our own online in most places in the world.

Thank you. And then lastly, you talked about some of the safety measures you're taking within your distribution centers, what about safety measures as you reopen stores? I mean, your stores are pretty spread out generally. But, are you going to require employees to wear face masks? Are you going to move some seating around to make sure that you have the appropriate spacing, or have you started to work on those issues for when stores really start to reopen in a bigger way?

We've been working on those issues almost since they closed. So, obviously, we have. And we do follow the CDC. We do follow best practices. And I can assure you, we will be among the leaders in best practices for safety in the stores when we get opened.

And then, lastly, with the potential for store openings and so on, how much of it is going to be driven -- and especially in the U.S. but in other countries as well, by what the municipality or state tells you versus sort of what sort of like in California, would you -- if they told you, you could open stores today, would you be doing it or would you be waiting, given the situation there?

Well, given the situation, it's very difficult to answer hypothetical. I mean, saying that California will let you open, doesn't tell you where you can open? What else would be open in that neighborhood? What you can get to consumers? How you test it? How many stores are in there? Sam, there are so many questions. I would go back to the beginning and tell you, we are certainly guided by municipalities, governments. We certainly follow all guidelines, rules and anything that pertains to safety as far as our own personnel are concerned and we will evaluate every potential opening on its merits when we see that it's done. We are now looking obviously at every place where it's not recommended to be closed or that don't ask you to be close and see if it's in our best interest to open. And when we start to open them, I'm sure you'll be aware.

Thank you very much. And stay safe and good luck.

You too. Thank you.

Thanks, Sam.

Thank you. Our next question comes from the line of Susan Anderson with B. Reilly FBR. Please proceed with your question.

I just wanted to follow up on the inventory. I think that you said you were looking to cut some of the orders that sounded like it was more back half. I was wondering if you could give some more color around kind of the magnitude of what you were looking to cut and if there was anything also for say, second quarter?

We've already made dramatic reductions to our production commitments. That's something we started almost immediately as we foresaw the impacts of the pandemic escalating across the globe. I don't want to quantify it, but I would certainly say that it’s sizable. And what we're trying to do obviously is like everybody else bring, what we have in inventory, as long as the commitments that we are already in production that we are working with our factories to honor with forecast demand. So, a lot of activities, a lot of orders, but we've been very aggressive with that, because we certainly want to make sure that we're poised with clean, appropriate inventory levels when stores reopen, when our customers reopen, so we can continue growing.

I would like to add that we do build a lot of flexibility into our dealings with our factories. We've been doing business with most of them, certainly the largest amount for quite a bit of time. And we're building in some flexibility to scale either up or down as we see things develop. So, we don't have to outguess the situation at all times. So, it's a day-to-day -- so, as John said -- whatever answer he would give you today will not be the same answer he would have to give you tomorrow. So, we like to just give everybody -- the thought process that we are building in flexibility, we can continue from this, but to scale up, scale down or move things out of a longer production cycle or to a shorter production cycle depending on when and how and how well they scale and when they open.

And then, I guess on the promotional front, how are you thinking about promotions or thinking about handling promotions in this environment? Is that a tool that you think you'll need to get more aggressive on to clear inventory or something that you think you'll be able to manage and then maybe just talk a little bit about what you're seeing from a competitive standpoint?

We're definitely seeing that in the evolution of China. What we've tended to see is that they’re a little aggressive early, starting to taper off a bit. In the United States, I wouldn't describe our level of promotion activity at the moment online or what we're advocating for with our partners as out of the norm, at least not materially, so. It's certainly likely that as markets begin to open that similar levels of promotional activity will be required to at least spur customers back into the store. But that that is entirely dependent upon how each market reopens. What I would emphasize though is, we’ve certainly seen some of that in China, but it's tapering off as the market begins to return to normal. And as we see that happen, gives us confidence that while there may be some near term requirements or advisable promotions to put into place, it doesn't in any way diminish the value of the product or the pricing that we had before the pandemic hit. And I think that for us is the most encouraging sign.

Yes. I think this, just like most of the other questions we've answered today is one of -- for us, it’s building in flexibility. So, we don't want to go in with a sort of an idea in stone of what it's going to take. We'll have to see what the marketplace is, see how much inventory is available, not available, which part of the world opens first, and what's the competitive nature is there before we decide. So, we try to be very flexible and very in tune to the marketplace.

Great. That's very helpful. Thanks so much. Good luck with the rest of the quarter and stay safe.

Thank you.

Thank you.

Thank you. Our next question comes from the lines of Chris Svezia with Wedbush. Please proceed with your question.

So, I got a bunch. Sorry. First, just a point of clarification. Ecommerce, David, when you mentioned roughly $500 million run rate, is that your, skechers.com in those marketers that your owned plus Amazon.com Zappos.com or is that just strictly skechers.com?

It was all of the above. And when we said -- it's just to give a scope of numbers, but I think it could be conservative, if you add them all. We don't have all the details. I would think that's pretty much a minimum because the question was specifically, as I remember it for online sales in all venues, whether it's us, third-party. And I'm sure there's a lot more third parties that I'm not even aware of that are selling Skechers online around the world.

Okay, got it. You also, David, mentioned early in your prepared remarks about April and China. And I think you said something about the up mid-singles. Is that your China ecommerce or what was that reference to?

I think that was China. In the aggregate, it was all, the brick-and-mortar. The biggest piece was online and obviously, carries the bulk of it. The stores as we said are not catching up as fast obviously on ecommerce is first, just like it will be here and everyplace else. So, ecommerce is already broken into the positive and its carried most into the positive territory now.

So just to be clear. So, you're saying that your China business in totality is up mid-single for the month of April?

I think we said low to mid. Yes.

Okay. So, it's entirely turned positive, in part driven by the ecommerce stores, still negative year-over-year. Correct?

Store sell-through, I mean, it's very difficult for us because we record the sale on the franchise basis from when we ship it to them. And that's created a positive. I don't know that the sell-throughs have started that we fill the pipeline. As John mentioned, we gave -- we took back some goods and we took a big credit in February, we're making some of that up in April and sales. So, it flows through a different way. I don't want to get too carried away with what it is. I think, if you go online direct to the consumer, whether it's the franchise or us are slightly positive with the big carrier, the big push coming from online and the stores in the 70% or 80% comp to last year on average. Regardless of what we ship those franchises and recorded sale.

Okay. I want to just go to -- just on the G&A for one second. You mentioned a lot of it is variable. Anyway, you can discuss or categorize how much is variable versus fixed in SG&A line?

Well, I mean, look, the reality is, there's costs in there that we can't do anything about, like depreciation and amortization, right? But, those are non-cash. So with our primary focus on cash expenditures at this point in time to ensure ample liquidity for the company, we're not as concerned with items like that. After that, you guys should be able to derive some best estimates of what variable and what's not. But I would also point out that there's some cost categories that we probably would have normally described as fixed, that may not be fixed for a variety of reasons. So, we're looking at everything and I think that's probably the emphasis we make. David gave examples in advertising that obviously we're going to cut back significantly. But, there's other categories that would normally have been fixed that, we're looking at. And if there is a viable path to adjusting those, we'll take that as well.

Okay. Can you describe what those are John by any chance?

Yes. One of them is certainly looking at things like rents and things like those cost categories.

Okay. Got it. Last one for me, just key things real quick. Just on the CapEx side, what about the headquarters in Manhattan Beach? What's going on with that? And stores, I think it was 120, 140 is what you expected to open up globally. What are we looking at now, when you think about stores?

We're not prepared to give a stores number, but obviously it's going to be significantly curtailed. So, part of it depends on how the environment unfolds, part of it quite frankly depends upon what type of environment we emerge into. There may be some really attractive opportunities at some point in time. So, we don't want to give a commitment number. What I would tell you is, we need to wait until we have better visibility into the retail environment before we make those decisions. David mentioned a point though that I think is incredibly important. It doesn't any way disabuse us the appetite to continue to grow and grow at the store level. I think in addition to the ecommerce growth we're seeing, we believe that combination of online and physical solutions for consumers is what works best. And I think it's also because we have the unique ability to grow our brand better than most. As the retail environment continues to shake out from here, there will probably be incremental opportunity and market share up for grabs that we'll want to take advantage of. The corporate headquarters we’re making a decision on and we're still evaluating. That's a phased project. So, we have the ability to throttle in some areas and not in others. But, we're exercising all of that judgment on a case-by-case basis.

Okay. Got it. Okay. Thank you very much and all the best. Stay healthy.

Thanks, Chris.

Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please proceed with your question.

Thank you. Good afternoon. A few questions from me guys. Thanks for the time. First, a follow-up on the inventories and then one on merchandising strategies. You've mentioned sizable reduction to production orders and receipts over the balance of the year. John, is there any way to think about the trajectory of inventory balances for the year?

Well, he doesn't have the sales side yet. How could you do that? I'd like to put them on the spot as well. But inventory management -- so what we said is we're building in flexibility and we can scale it up or scale it down, depending on what the sales side turns out to be in equation. Without guidance, it’s very difficult to tell you where, we stand or what's common, what’s making and what time frame until we really get things moving. And I don't believe, it's something that we would for competitive reasons, just give out on open to the public it’s what all our plans are to be in each territory.

Jim, I would add to that that's all completely accurate. We're certainly not going to want to be in a risk posture on inventory. So, the actions we've taken thus far have been, as David pointed out to build in flexibility, but if anything, to make sure that we're not taking any risks that we don't need to on the inventory side at the moment.

Great. That's helpful. And David, hopefully, this isn't going in direction of competitive sensitive information. But, can you also talk about how you're steering merchandise assortment, trying to balance risk management with newness in the marketplace, in which categories will you go deeper and which categories will you choose to minimize risk? Any thoughts there would be helpful. Thanks.

I think we came into this with a very strong merchandising mix and nothing has really changed. We're just carrying it out and we're going to see what seasons we open up. I think, one thing we've proven over the number of years we've been in business is that merchandising, building it, building the correct products at the correct time is part of our core competency. We continue to develop even in those -- even though these times are difficult. So, like John said, we're being risk averse in this part, but we've got a lot potentially in the pipeline and we'll be -- we'll deal with that on the market back point of view, just like we always do to see what sells and what we have to put to a quicker production cycle and what we have to take down. So, as with everything else, we're building flexibility, we think we have plenty of great products in the pipeline that will sell well, will show well that our customers are looking forward to getting and we will change that production cycle as we move forward and as is necessary.

Thank you. Our final question comes from the line of Jim Chartier with Monness Crespi Hardt. Please proceed with your question.

You mentioned the significant reserve to take back inventory for the franchisee in China. Can you size that for us in terms of the sales and gross margin impact?

I’d rather not size, other than to say it was meaningful. We made again aggressive decision in February that we wanted to make sure that our franchise partners are clean, especially as they emerged from kind of a late winter, early spring environment. So, it was a meaningful amount. The margin impact is not that significant simply because there's the sales side and the COGS side to take out simultaneously. So, it wasn't a significant gross margin impact overall. But, suffice it to say, it was a big number for China. It certainly contributed to their down quarter. But, we felt it was absolutely critical to ensuring that the brand came out in the strongest possible position as the doors opened in China. And I think we're seeing the benefit of that in the trend of sales we mentioned and that's been very encouraging for us.

Okay. And then, can you talk about where the profitability of your own ecommerce business is today relative to the rest of the business, and where do you think you can go over time?

So, it's still relatively strong. We're in early stages of ecom. So, obviously it'll continue to grow. And, we do expect over time, some of the accretion that we actually have in the operating margin today will come down a little bit. But right now, it's an accretive business for us and continues to be. At the moment, it's doing very, very well. So, the accretion is pretty high. But again, over time, like many, we expect there to be some downward pressure on. But, we don't actually expect it to get dilutive, at least not for the foreseeable future.

Thank you. We have reached the end of our question-and-answer session and the conclusion of today's call. You may now disconnect your lines. Thank you for your participation and have a wonderful day.