Guess? Inc  (NYSE: GES) Q4 2020 Earnings Call Transcript

Guess? Inc  (NYSE: GES) Q4 2020 Earnings Conference Call
Final Transcript

CORPORATE PARTICIPANTS:

Carlos Alberini — Chief Executive Officer and Director

Susan Anderson — B. Riley FBR — Analyst

Katie Anderson — Chief Financial Officer

ANALYSTS:

Janine Stichter — Jefferies & Company — Analyst

John Kernan — Cowen & Company — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Janet Kloppenburg — JJK Research Associates — Analyst

Omar Saad — Evercore ISI — Analyst

PRESENTATION:

Operator

Good day everyone and welcome to the Guess? Fourth Quarter Fiscal 2020 Earnings Conference Call. On the call are Carlos Alberini, Chief Executive Officer; and Katie Anderson, Chief Financial Officer. During today’s call, the company will be making forward-looking statements including comments regarding future plans, strategic initiatives, capital allocation, and short and long-term outlook including potential impact from the coronavirus outbreak. The company’s actual results may differ materially from current expectations based on risk factors included in today’s press release and the company’s quarterly and annual reports filed with the SEC. Now, I will like to turn the call over to Carlos.

Carlos Alberini — Chief Executive Officer and Director

Thank you, operator. Good afternoon and thank you all for joining us today. It was only a few weeks ago that we were very excited about our performance and a great year that we were closing, excited about our team’s accomplishments, and very well positioned to have yet another great year. Unfortunately, today we are in the middle of an unprecedented time in our history. Our hearts go out to all those impacted by the events unfolding. Today, we reported our fourth quarter and year-end results and we were very pleased with our performance. With a solid Q4, we closed a strong year for Guess?. We grew revenues, increased operating earnings, and increased adjusted EPS by almost 50%. Our free cash flow was $133 million and we ended the year with $285 million in cash. This liquidity positions us well to navigate through the current crisis.

I have just celebrated my first year back with Guess? and I am very proud of what we have accomplished during this past year. I want to thank our team for doing a great job. In addition to great financial performance, we made significant changes to upgrade and reorganize our leadership team, we managed our capital well, and we developed our long-term strategic plan, which we shared with you last December. I still believe that the opportunities that we identified in this plan for our company remain in place for the long-term and we continue to make good progress on the key strategic initiatives that we shared with you.

As everyone, several weeks ago, we were challenged with the extremely difficult situation presented by the virus outbreak. Our team responded quickly and strongly to the initial signs in China and since then, we have been actively managing the entire situation in all regions affected. We consider the situation extremely serious and of enormous proportion and have been working diligently with our teams around the world to protect our people, customers, and partners and mitigate risks to preserve the health of our company as effectively as we can. Of course, we hope the crisis will be resolved in the near-term, but unfortunately, based on recent developments, we believe that things will continue to get more challenging before they get better. We are encouraged, however, by the renewed activity that we are seeing in China. Our offices are open, most of our stores have reopened, and while we still have a long way to go to return to normal conditions, our business is starting to show some signs of recovery. We hope that other markets affected follow a similar or even better trajectory to normalcy. As you all know, our business has an extensive global reach and most of the areas affected by the outbreak are markets where we have significant businesses. Until a few days ago, the markets most affected were Greater China, South Korea, Japan, and Italy, but during the last week, we have experienced a rapid acceleration of the outbreak that has impacted most of Europe and the U.S. and Canada. As a result, we have temporarily closed the majority of our stores in these regions. I strongly believe that we are dealing with the crisis in a very effective way. We have been extremely proactive and our management team has jumped in to manage this crisis with a commitment, determination, and sense of urgency that I had never experienced before in my career.

We activated a global crisis management team as well as regional and local teams to monitor, react to, and manage specific situations by geography and country. We are leading our business with strong discipline controlling inventories well and adjusting our expense structure to adapt to this unprecedented circumstances. We focus first on our people to ensure their safety and protect their health. We provided flexibility, banned travel, limited large in-person meetings, and communicated constantly among the teams. Regarding our business, we first focus on our inventory planning and supply chain management. We are strategically reducing our inventory commitments considering the demand deceleration. This is clearly a dynamic process and it will require daily monitoring and active communication with our teams and vendor partners.

Next, we focus on our expenses, our goal was to reduce our cost rapidly, but responsibly to mitigate the business deceleration that we are experiencing now and into the future. We have reduced or canceled discretionary spending and aggressively lowered variable expenses to adjust to the revenue decrease. Regarding capital expenditures, we have canceled or postponed capital projects that we don’t consider mission critical today. Next year, we will celebrate the 40th anniversary of our company and the Guess? brand. We are very proud of what our founders and our entire team have built over the years. We are very proud of our strong culture. This is a culture of never giving up, a culture where people matter most and one where if we fall 10 times, we get up 10 times and we are very proud of our resilience and our capacity to respond swiftly, but strongly in times of crisis and unprecedented circumstances like the present one.

In closing, the results that we reported today highlight the benefits of our global reach, our diversified business model, and the strength of our brand. Our proactive and disciplined approach to manage this crisis reflects the extraordinary commitment and dedication of our management team during a challenging time. With that, let me pass it to Katie to give you more details on the financial results. Katie? Thank you, Carlos. Good afternoon. This is my first earnings call since I joined the company in December. As we were closing the year, I too was excited about sharing our great results with you on this call. Now, here we are in the midst of an unprecedented global crisis, but I have to tell you, I’m really grateful to be here at Guess?. It normally takes years to get to know an organization and to fully understand and integrate with the leadership team. Responding to this evolving situation, I feel like those years have become weeks for me here. It’s in extreme circumstances that you learn about the true character of people and the culture of a company. What I have experienced with this team is a unique spirit of collaboration, urgency, and pride. This is a deep culture with an inherent drive to win. As Carlos said, we finished our fiscal year strong with a great fourth quarter. We beat EPS expectations, continued rightsizing inventory levels, and generated substantial cash flow resulting in a healthy balance sheet. The strength of our business in Europe enabled us to more than offset softness in Americas Retail and Asia and grow earnings in the quarter. Coronavirus did not significantly impact our business during the fourth quarter as the outbreak began towards the end of January. However, the situation has escalated rapidly since then and will no doubt have a significant negative impact on our Q1 and full year financial results. We currently have a large portion of our stores closed all over the world and cannot reasonably estimate the impact this will have on consumer demand, our supply chain, and our financial results in the future. It is for this reason that we are not in a position to issue guidance for the first quarter and fiscal year 2021. That said, I still want to give you some additional insight into how we performed during the fourth quarter and fiscal year 2020. Before I begin, please keep in mind that during this conference call, our comments reference certain non-GAAP or adjusted measures. GAAP reconciliations and descriptions of these measures can be found in today’s earnings release. Fourth quarter revenues were $842 million, up 1% in U.S. dollars and 2% in constant currency. Our European business delivered double-digit top line growth more than offsetting declines in the Americas and continued softness in Asia. Total revenue was slightly below our expectations driven by our performance in Asia. Every other segment either met or exceeded our guidance. For the year, we grew revenue to $2.6 billion, up 3% in U.S. dollars and 5% in constant currency. Gross margin for the quarter expanded 360 basis points versus prior year mainly benefiting from higher IMUs as a result of our supply chain initiatives and logistics efficiencies in Europe. Adjusted operating margin in the fourth quarter was 12.1%, up 290 basis points from prior year and slightly above the high-end of our guidance. Adjusted operating earnings for the fourth quarter were $102 million, an improvement of $25 million and over 30% versus last year. Adjusted SG&A as a percentage of sales increased by 70 basis points primarily driven by higher performance-based compensation. For the full year, adjusted operating earnings were $150 million, a $35 million and 30% increase to prior year. Our fourth quarter adjusted tax rate was 16.5%, down from 22.7% last year, driven by a mix of statutory earnings. Adjusted diluted earnings per share was $1.22, $0.10 above the high-end of our guidance, mainly driven by a lower-than-expected tax rate. This represents a 74% increase to prior year EPS of $0.70. For the full year, adjusted EPS was $1.45, an almost 50% increase to prior year. The increase in adjusted EPS includes the impact of accretion from the convertible debt transaction and share repurchases of $0.22 for the quarter and $0.14 for the year. Now let’s move on to segment performance starting with Americas Retail. Revenue for the quarter finished down 4% in both U.S. dollars and constant currency, in line with our expectations. Comp sales for the quarter, including e-commerce were down 3% in U.S. dollars and constant currency driven by negative traffic trends. Operating margin for this segment was 6.4% for the quarter, down 240 basis points from prior year as IMU improvements were more than offset by increased promotional activity at the end of the holiday season and deleverage on negative retail comps. Moving on to Americas Wholesale. In Q4, revenues declined 3% in U.S. dollars and 4% in constant currency primarily due to the timing of shipments. This was in line with our expectations. Operating earnings were flat to last year driven by higher gross margin offset by higher expenses and lower revenues. This segment had a strong year with revenue growth for the full year of 9% in U.S. dollars and 10% in constant currency and operating margin expansion of 160 basis points resulting in operating earnings growth of 19% versus the prior year. Turning to Europe, where we had an exceptionally strong quarter and year. Fourth quarter revenues grew 13% in U.S. dollars and 16% in constant currency, finishing above our expectations. This growth was driven by an increase in wholesale revenues, new store openings, and positive sales comps including e-commerce of 1% in U.S. dollars and 3% in constant currency. Our business in Europe was showing great momentum coming into the new year. We saw significant margin expansion in this segment with operating margin up 790 basis points over prior year. We’ve been very successful in improving IMU as well as rightsizing logistics costs. We also benefited from sales leverage and lower retail markdowns. For the year, this segment grew operating earnings by 130%. Moving to Asia, fourth quarter revenues were down 28% in U.S. dollars and 26% in constant currency. Comps including e-commerce were down 26% in U.S. dollars and 25% in constant currency. This is the only region with sales that fell below our expectations. We saw softness across all of our major markets, within Asia including China, Korea, and Japan. Operating margin for the Asia segment contracted 200 basis points for the quarter versus prior year. This was a result of deleverage from negative same-store sales partially offset by lower markdowns and higher IMUs. Now let me talk about our cash flow and balance sheet. Inventories were $393 million, down 16% or $76 million US dollars and 14% in constant currency versus prior year. This was an improvement to our decrease of 5% in Q3 and in line with our expectations. We made significant progress on inventory this year. We ended the year in a clean position and our ownership was in line with our expectation. Free cash flow for the year was $133 million, an increase of $161 million versus a negative $28 million last year. If we exclude the impact of the $46 million European Commission fine paid in the first quarter of fiscal year 2020, our free cash flows improved by over $200 million. This improvement was driven by better operating performance, a decrease in capital expenditures, and better management of inventories and working capital. Total capital expenditures were $62 million versus $108 million in the prior year. During the year, we redeployed capital and returned incremental value to our shareholders through significant share repurchases while reducing our dividend by 50%. In aggregate, our total shares purchased during the fiscal year amounted to 16.7 million representing over 20% of our shares outstanding at the beginning of the year. We ended the year with cash and cash equivalents of $285 million compared to last year’s $210 million. We gain comfort in the fact that in addition to our strong cash position at year-end, we also had access to over $250 million in undrawn credit facilities. We will of course continue to monitor our cash position as we navigate through this situation. In closing, I have been in this role just over 100 days. As I shared with you during the Investor Day in December, I was looking for three main things in this job, I wanted to work at a brand that I believe in with smart people who want to win and a place where I can add value. During the last few weeks, I have become more aware of the power of the Guess? brand globally. I’ve had the chance to work with the team of people that I truly admire and this same team has demonstrated to me that I can certainly add value working with them. I want to thank you all for welcoming me so warmly and let you know that despite the current challenges we are facing, I am very excited to be part of this journey together. With that, I conclude the company’s remarks and I will open up the call to your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Susan Anderson from B. Riley FBR. Your line is now open.

Susan Anderson — B. Riley FBR — Analyst

Hi, good evening. Thanks for taking my question and nice job on the quarter. I guess you know, I know it is tough because it’s a pretty — hey Carlos. I know it’s a very fluid situation, but I don’t know if there’s any color you can give on kind of the pattern that you saw in China during the store closures and how that has evolved now that things are opening up and I guess I’m curious too was the impact kind of consistent across the country or worse in the more impacted areas?

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you, Susan. Yeah, of course, you’re absolutely right, this is a very fluid situation and just to tell a little bit of the history of how we are in this position today. Just one advantage that we have as a company is that we are truly very global. We have a big global region. As soon as this started in China, we saw it very clearly. Of course. we didn’t have any idea of how significant this was going to be globally, but we saw a very rapid series of events that impacted China. We had to close about 127 stores. That is a very significant number out of about 170 that we own. The government in most of those provinces and cities was very, very forceful in really leading the people and the communities to really be very disciplined and and in some areas even when we didn’t close stores, we saw a significant deceleration in the business because people were not going to shop. The stores that remained open, which were only a few, saw a significant decline in traffic and then when you know even if we had some business, the business became only a fraction of what it usually is. Overall, all of that resulted in revenues being down to also a fraction in general and for the whole region we, of course, the area of Wuhan was much more affected than others but the stop in revenues was pretty general across the country. We also saw similar trends in Hong Kong, Macao, not as severe in Taiwan. We have seen some improvements in terms of the trends versus — in the last few weeks, compared to the bottom, but of course, those are only certain signs of improvement that nothing compared to what — the kind of business that we used to do. We feel that the great thing about all this is that now people are back to more of a normal life, it is not completely normal, but we hear that the subways are operating at full capacity. We hear that restaurants have a lot more traffic, we hear that they are opening parks, they are opening museums and of course that’s the way to begin and I think that the important thing to me here too is that that fear factor that impacted how the business was negatively hit is now much less severe. People are much more confident that the government this under control and as a result, they are acting with a lot more comfort in conducting their lives.

In other markets in Asia like Japan, Korea, just we saw somewhat of a different pattern. We definitely saw a significant decline in revenues, but not as extreme. The government’s dealt with the situations in a different way. I think that Korea is a great example. There has been a very quick and swift response from the government with testing being available in mass. I’m sure that everybody is reading the same reports, but this was very effective and there was no need for a lock down like what we saw in China and I believe that they have the situation very much under control. They were very well prepared and organized. We started to experience some deceleration in comps after we saw this in China and you know I’m going to kind of like to take you all the way through what we see today. So, and that deceleration in comps in Europe and in Americas was very notable, just we saw a business that we closed in Europe that was very healthy when we closed the year and then all of a sudden as we went into a New Year in February you know this decelerated relative to the trends that we had experienced even in January. The same thing happened in the Americas and we think that probably the lack of travel and tourism started to impact our businesses in other parts where the Chinese consumer probably had a pretty significant impact especially considering the Chinese New Year and all those people just going through different parts of the world. And also as the news kept on growing around the outbreak, we think that, that may have created some of this initial fear factor for local consumers as well. So we saw a deceleration in business. In the last couple of weeks, that deceleration of comps in Europe and Americas has increased further, not to the degree that we saw in China, but pretty significantly and very notable and then of course, it came the Italy issue and the lock down of first the northern part of the country and then extend into the entire country. Then we saw it in France and Spain, Poland, Germany, Austria, I mean the list goes on and we ended up closing the majority of the stores in all these countries and regions. And then, as this was happening, you know, we continued to see more deceleration in traffic in U.S. and Canada and based on that and based on being good corporate citizens and being aware of how important it was to minimize exposure, we made the decision to close our stores in the U.S. and Canada temporarily until March 27th. We want to protect our employees, our communities, our customers where we operate. So we think that we operate today in a very volatile environment, very difficult situation, but we feel that we are doing what we can to control what we can control and that’s what we are focusing most of our efforts.

Susan Anderson — B. Riley FBR — Analyst

Great, that’s very helpful. Thanks for all the details. I guess maybe if I could just follow up on the operating margin in Europe in fourth quarter, some very nice improvement there. Obviously, everything is kind of off the table for now, but I guess, can you maybe talk about that improvement that you saw in fourth quarter, how much it was leverage at the new DC [Phonetic], how much IMU and I guess if we hadn’t had this incident, you know how much of that would be I guess repeatable as we kind of went through the next few quarters? Thanks.

Katie Anderson — Chief Financial Officer

Yeah, hi, Susan, it’s Katie. Yeah, so we had great success in operating margin in Europe, it was over up — or 790 basis points over prior year. So, most of that was IMU improvement and then right-sizing logistics. As you know, we had a lot of issues with logistics in Europe in the past and we fixed a lot of those and we continue to fix those. We also had some sales leverage from our momentum in the top line there as well as lower markdowns in prior year.

Carlos Alberini — Chief Executive Officer and Director

And that was a big thing because on markdowns as you remember we had ended the year with a less than desirable inventory position. So, at the time we took some extra markdowns just to really level the inventory ownership that we had and we had this plan that we were going to reduce our inventory position, which we did I think very effectively and also we were able to avoid any extra charges that impacted margin the year before. So we picked up a pretty nice change in margin improvement.

Susan Anderson — B. Riley FBR — Analyst

Great. That’s all very helpful. Thanks so much you guys. Good luck with everything and stay safe.

Carlos Alberini — Chief Executive Officer and Director

Thank you, Susan.

Operator

Our next question comes from Janine Stichter from Jefferies & Company. Your line is now open.

Janine Stichter — Jefferies & Company — Analyst

Hi, everyone, good evening. Just a few questions around the expense structure. Hi — you mentioned pulling back on discretionary spending obviously in the environment that we’re in, can you just give us some sense of the potential magnitude of expense reduction maybe what percent of your SG&A is variable and how much you could pull back on if we’re in this status quo for quite a while and then kind of same question on capex, you mentioned pulling back on some non-critical projects, how should we be thinking about capex for the year and then maybe just a sense of what your maintenance capex levels look like? Thank you.

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you, Janine. I’m going to start and then Katie, I’m sure will have a lot to add here, but just as I just mentioned, we are trying to focus on all those things that we can control. The slowdown of our business in China early on I think gave us a great look into and an opportunity to learn about what we can do and the things that are impacting a crisis of this nature and how fast can things escalate so quickly. It’s pretty incredible. So this knowledge I believe that really enabled us to react very quickly, very early on when we saw the signs of the slowdown in other regions and unfortunately, we have a great leadership in China. That team really was very proactive and came up with a lot of innovative and creative ways to really deal with the crisis and so we are learning and applying a lot of that into the way we are managing the crisis in the other regions. The first priority for us has been people. I know that you’re asking about expenses, but I just want to make sure that everybody understands, we consider that our top priority as I’m sure most companies and we want to make sure that we protect them and that we protect the communities where we operate. We have facilitated working from home, we have banned travel, I mentioned that during my prepared remarks, we have closed stores and we feel that this is primarily a human crisis that we are just dealing with.

The second big priority has been to protect our balance sheet and our financial position and we have been diligent in reviewing on all types of costs and this goes to your question about what is that we are looking at? Of course, store expenses is a major part of our cost structure and in many cases of that P&L, there are a lot of expenses that are somewhat variable and we have been looking at all those and trying to right size the total expenses to really adjust to the business or the traffic that we are seeing coming or anticipating. We are looking at back office expenses. That’s also a relatively sizable number in our P&L and cost structure and then on capital, we are looking at many areas that represent projects that are either new stores or remodels or even capital projects inside that plan that we think that we can either postpone, cancel or reschedule or just eliminate completely. Another big area where we are spending our time in and trying to look into is inventory buys. As you know, inventories, we are in a fashion business. So having good control of inventory is very important. The good thing we have here is that because we have several channels, we can use inventory in a very synergistic way and that’s where we are trying to plan what we do with inventories in the future. We have of course anticipated cuts and we are buying six months to nine months out and in many cases, we also have flexibility to cancel things that may already been in the works. So a lot of time spent on that.

And then just of course, this is a big — we have 1,700 stores, worldwide, about 1,200 of those we operate directly and so looking at the store portfolio is supercritical. We are somewhat fortunate here. I think we have reviewed with you during Investor Day that we have a lot of the stores and leases that become renewable within the next two or three years depending on the different regions, but the numbers are pretty big. In U.S. and Canada, that number is like 75% within the next three years. Roughly about two-thirds in Europe and about 90% of the leases that we have in China becomes renewable [Phonetic] during that time. So we have a lot of flexibility here to either just terminate those leases or just looking at renegotiating terms based on the potential business that we see for each of those locations. So we intend to use this flexibility to close underperforming stores of course and negotiate better terms. We believe that landlords have the responsibility to deliver spaces and environments for us to conduct business in a positive way with our consumers and customers and if that is not being delivered, of course, we see that as an opportunity and as a situation to be able to renegotiate. If conditions are impaired, it gives us that opportunity. We have used this type of approach in China and we have been relatively successful with the negotiations with landlords.

So to conclude, just to me this crisis is of major proportions, but when you look back, there is one big takeaway and that is, I think in order to be successful is you have to have good people and you have to have people that really care and are passionate and I think that we are fighting just everybody is using this term invisible enemy, but that is exactly what it is. This is a threat to society and I think that we are at war and that’s the way we are approaching this. I strongly believe that the difference between winning and losing here will be about the people that are fighting the war. I believe in leadership, good planning, preparedness, and execution and this is why I think China is winning this war and so is South Korea. They have strong leadership within their governments. They were prepared with testing and a clear strategy and they are executing those plans very well and I strongly believe that we have exactly the same at Guess? starting with Paul Marciano, he is not in this call, but he has been incredible during this times of crisis with us. He had incredible vision and extraordinary leadership and we developed a plan with the team, we set the strategy right away and we have been executing and adjusting very effectively. And in addition, our teams all over the world have been phenomenal. In China, I mentioned our leader there is a star and this has set the tone for the model which we followed in other countries and regions. We did the same in South Korea. We have a very strong team in Europe and in our headquarters, but also in key European countries and this great leaders are really helping us executing very well. And our team in Los Angeles has been tremendous also. Fabrice has been tirelessly working on all of this, we have, we are just in the middle of developing plans and of course those plans are changing by the minute and Katie, she made a comment about being welcomed here. I want to give her a big credit because she has been very instrumental in this fight too in only a few weeks being here. And last, I just want to say that, to me, this is also about communication. We have been communicating, learning from each other’s ideas and supporting each other non-stop. Both Paul and I have been doing videos. We have been writing emails and personally connecting with the team members to keep our entire organization connected, inspired, and focused on the right priorities, which I think is everything that we can do to really continue to control what we can control. So let me tell you something if I’m going to war, I’m going with this team. I think it’s a difficult time, but I’m very hopeful that we’re going to see this in history and hopefully that will happen very soon.

Katie Anderson — Chief Financial Officer

So — and Janine, I’ll go back to your — go back to SG&A as well. It’s hard to estimate exactly how much we can adjust SG&A given the situation and as Carlos said, we’re looking at everything. We’re looking at supply chain and distribution costs, we’re looking at marketing, we’re looking at corporate expenses, consulting, meetings and in a situation like this, even what you would normally consider fixed costs are maybe not fixed. Carlos mentioned rent. If the landlords can’t provide us with an environment that we can do business, then we’re going to have to talk about that. So we’re considering everything to try to reduce G&A and we’re taking this very seriously and we want to protect the long-term of our company and capex is the same. Our maintenance capex is pretty small, but everything’s on the table at this point.

Janine Stichter — Jefferies & Company — Analyst

All right. Thank you. It’s really helpful color and best of luck to you guys with everything and stay healthy.

Carlos Alberini — Chief Executive Officer and Director

Thank you, Janine, you too.

Janine Stichter — Jefferies & Company — Analyst

Thank you.

Operator

Our next question comes from John Kernan from Cowen & Company. Your line is now open.

John Kernan — Cowen & Company — Analyst

Good afternoon, Carlos and Katie. Congrats on the nice [Speech Overlap]. So inventory is a situation I think a lot of people are also concerned on just the modeling of gross margin across the retail ecosystem. There is obviously going to be a lot of spring and summer inventory in the channel when things do normalize. How do we think about the ability to clear this and what’s going to be left among your competitors and also within your own stores and wholesale partners. Just any detail on how to think about inventory buying and the markdown structure that’s going to go into getting back to lower levels of inventory throughout the channel? Thank you.

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you, John. Yes, so let me start with the year-end because you know just we worked very hard last year to really clear inventories and as you know, we closed the third quarter with inventories down about 5% and at the time, we were hoping that we were going to be able to close the year with inventory down in the double-digits and frankly we did — I think the team did a great job. We ended up with inventories down 16% represent $75 million of a reduction in inventories with business that had grown so. So we felt very good about that and this is a fortunate event because who would have known that this was going to come, but to start this year with a clean inventory position I think is supercritical with respect to the question you’re asking. So what we are doing is looking at our ownership today. Like I mentioned before, if we see things that are not being delivered on time or just we would be very, very careful with not taking the orders that we don’t think that should be taken. So that should help us alleviate the inventory situation in light of the decelerating demand, but then we have opportunities now to really move the development cycle into the future. So then it releases pressure from all the inventory that is supposed to be coming during the next weeks and months and that is one of the big things that we are doing. So something that we were going to develop in the month of June may now be developed a few weeks later and that creates like a month of open to buy under normal circumstances.

And in addition to that, we are carrying the quantities based on what we think could be the impact of something like this though this is a very fluid process, I mean we are looking — moving or looking at this every single day and also, we are reducing the assortments because we think that, that is the best way to really limit the risk and put our inventory dollars within less programs. So that’s kind of like the way we are approaching it. It’s, as you know, we not only have a retail business that is very significant, we also have a wholesale business. The wholesale business especially in Europe has been just growing and again we had a very strong backlog and now we are looking at and trying to anticipate because obviously that business is also going to get just impacted by all this. So we are trying to anticipate, okay, how would we think that we could service all those clients without just creating a potential excess inventory on our end or on their end.

John Kernan — Cowen & Company — Analyst

Excellent, that’s helpful. Just back to the liquidity questions and obviously there’s concerns — we can all see that in the markets with where the valuations are. How long can the industry withstand stand no revenue in some regions. What it is the liquidity situation of your wholesale partners and your own liquidity position, like what gives you the confidence that you can withstand say three months of almost no revenue in North America and Europe. Could it get to that?Obviously, there is e-commerce, but much of your business is still done in stores and in your wholesale partners. So just the confidence level on liquidity going forward I think would be helpful to everyone on the call and investors as well.

Katie Anderson — Chief Financial Officer

Yeah, thanks, John. Here’s what I can tell you. So we ended the year with $285 million in cash and access to over $250 million of available borrowing and we actually have since then drawn down over $200 million of that just as a precautionary measure given the circumstances. So we have a lot of money in the bank. I mean or we have a decent amount of money in the bank. On the expense side, we mentioned, we’re aggressively managing expenses, cutting as much as we can, capital really controlling costs. As you saw in the press release, we postponed the decision to declare a dividend and we’re considering — everything is on the table even taking advantage of government funding programs that are helping companies impacted by this crisis. So we’re looking at everything to help us manage our liquidity. This is a fluid situation. We hope it’s temporary, but I assure you we’re reacting swiftly and appropriately and we consider this very serious.

Carlos Alberini — Chief Executive Officer and Director

And I would add to that, you asked about our wholesale accounts. I mean, in many cases those receivables have insurance behind them. So in terms of what we are owed, we feel that there is a certain level of security there, but also you know just we are going to be watching what we do with each and every one of those accounts, we value them tremendously. You know just the same kind of access to governmental programs that we may have, they will have as well and these are becoming very prominent, by the way. So we feel, I mean, obviously we are not taking this lightly and please don’t take that, but I would say that we are going to look at each and every one of those relationships and be very careful with how we manage. I think that I’d like to go back to the China example because I think that the key thing here is for people to really start going back to normalcy. You know just a feeling that there is a normal life in front of us and and you know if a country like China with so many people was able to control this and put everybody back into a more normal routine, we believe that most countries are going to have an opportunity to do the same and if that happens, then you know just the length of the crisis will be significantly shorter which is what we need for the customer to start thinking, okay, just life is going back to normal. Now I can go back to the way I used to live my life. So that’s our hope. Obviously, it is hopeful thinking, but we think based on what we have experienced in China that this is a realistic expectation in the next few weeks and when you look at our position you know just like Katie just said, we definitely have ample flexibility here from a financial standpoint and we are doing everything we can to really reduce any exposure or risk.

John Kernan — Cowen & Company — Analyst

That’s very helpful, Carlos and Katie, thank you. Best of luck and stay healthy and safe.

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you. You too, John. Thank you.

Operator

Our next question comes from Dana Telsey from Telsey Advisory Group. Your line is now open.

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon, everyone. Carlos, as we go —

Carlos Alberini — Chief Executive Officer and Director

Hi, Dana.

Katie Anderson — Chief Financial Officer

Hi, Dana.

Dana Telsey — Telsey Advisory Group — Analyst

Hi, Katie. Hi, Carlos. As we’re going through these times that would not even be imaginable even a year ago and you think about SG&A with occupancy and payroll being so important, how tight you’re managing them, where is the bigger opportunity. Is there more opportunity to reduce occupancy, more opportunity to reduce payroll? How do you see it and is this also an opportunity to further optimize the store fleet in your mind?

Carlos Alberini — Chief Executive Officer and Director

Yeah, so I’ll start with that. I have to say Dana, we are not discriminating here at all. We are looking at every single piece of the expense structure and those two buckets that you mentioned are huge for us, both payroll and occupancy. So we are looking at everything and trying to minimize as much as we can. We also just think that this may be an opportunity to figure out how to do things more efficiently too — just — so we are looking at everything and really there is no stone that we are leaving unturned here. With respect to the store portfolio, I think I mentioned but just — we do see this as a great opportunity to really challenge ourselves on every decision on stores that we have leases that we have that maybe were marginal before and now with this deterioration in consumer traffic are even more than marginal. So then we will definitely don’t hesitate and take the decision to close those locations as well and then I’m sure that this, obviously this is impacting everyone that is in retail. So I’m sure that landlords are going to be more open to really provide different terms if they want to keep a healthy tenant like we are. So we think that there is a lot of work to be done here in front of us, but we are working diligently and looking at every opportunity and those two are huge opportunities, but there are many others too. So we are looking at every single — we have a complex business and we have many locations and we have different headquarters and groups and so forth and this doesn’t stop in the U.S. by the way, we are looking at every single organization and every single operation and line item in — all over the world.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you. Stay healthy.

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you, Dana, you too.

Operator

Our next question comes from Janet Kloppenburg from JJK Research Associates. Your line is now open.

Janet Kloppenburg — JJK Research Associates — Analyst

Hi, everybody.

Carlos Alberini — Chief Executive Officer and Director

Hi, Janet. How are you?

Janet Kloppenburg — JJK Research Associates — Analyst

Hi, congrats on — good, I’m good. I hope you guys are. I wanted to ask a question because we are hearing, Carlos, that business as you’ve indicated is getting back to normal in China. Obviously not — it’s not a boom, but but better and given your disappointing numbers there in the fourth quarter, I was just wondering maybe if you could talk a little bit about that. I know it was a difficult year in Asia, in China, maybe you could talk about the outlook for China and why the fourth quarter was disappointing and I also wondered if you could just address the licensing revenues, which had a nice quarter. I thought that was encouraging and as far as Europe goes, given the popularity of your brand there, I’m just wondering what your digital capacity is there and how much business you see transferring to that channel and if you foresee any disruptions on the digital fulfillment side which some companies are experiencing right now. Thank you.

Carlos Alberini — Chief Executive Officer and Director

Okay. Thank you, Janet, well — so starting with China, you are absolutely right, we were disappointed with our performance in the fourth quarter. Just. In fact, that was the only business where we didn’t make the numbers and our guidance as we — when we guided back in — at the end of the third quarter for the fourth quarter and we had a tough fourth quarter. I think that a lot of it was driven by some of our own issues. I think we discussed it when we work together before and even when we released third quarter numbers that we thought that we had an opportunity with product, especially just being a lot more kind of like surgical with the design and fit and the direction that we have with product. So the same thing impacted us in the fourth quarter. I think that part of the issue too was that because we started the year I’m talking about last year with a lot of excess inventory, I think that we tried to use some of that excess to continue to feed our demand throughout the year and end the year in a better place and frankly in some cases, those designs were probably somewhat dated, the customer had already seen them and was not that interested in buying them. So all that impacted us and as a result of, but we had a tough online business with Tmall which had been a big driver of our business in the fourth quarter of the year before, both Double 11 and Double 12 were somewhat disappointing, Double 11 much more. Then we learned some things and we did some things better, but Double 12 was still disappointing relative to our initial expectations.

In terms of the outlook, it’s very difficult to say. I mean we are in that very, very — completely strange situation right now and I couldn’t even begin to tell you what to think about the next month, let alone three months from now. Hopefully, things are going again to continue to correct, but I want to say that maybe others are seeing things going back to normal. I think I just want to make sure that everybody understands that for us, they are very far from being normal. I mean just yeah, better than five weeks ago but very far from being normal. So don’t think that we are now back to a healthy business there at all. With respect to licensing, we were very happy because we have a couple of new licenses that have done really well lately. One is the fragrance. It performed really well and an overall the year just, I mean we were up about 3% I think in total licensing and you know you a lot of this business was because it was a new business impacted our fourth quarter. And then with respect to digital, we continue to be super excited about this. We did cut a lot of projects, but one that we did not cut is the sales force implementation because we see a big opportunity especially with what’s happening to really continue to grow our e-commerce business, which is very underdeveloped compared to others in the industry. So we think that there is a big opportunity here. Obviously, all the things that are impacting customer behavior should eventually help the e-commerce business. We haven’t seen that yet. I mean, definitely the deceleration in business was not nearly as severe and dramatic as what we saw with the stores in our digital channels, but we are not seeing a significant increase, but we hope that over time this business continues to be a lot more promising and we expect to take full advantage of that opportunity. So we continue to see that just. I think we shared some numbers with you, I think that our e-commerce business represents only like 10% of the total business and we can see doubling the penetration very easily.

Janet Kloppenburg — JJK Research Associates — Analyst

And one more question if I may —

Carlos Alberini — Chief Executive Officer and Director

And this before we talk about changes in consumer demand. Sorry.

Janet Kloppenburg — JJK Research Associates — Analyst

Sorry, wondering — no, I’m sorry, forgive me. I was wondering if you or Katie could talk about your visibility on your forward wholesale orders and what degree of risk you have there as the wholesalers in both Europe and America try to reduce their inventory flows. Thank you.

Carlos Alberini — Chief Executive Officer and Director

Yes. So I’ll start. You know I just — this is kind of early. I think to be completely honest with the obviously retail is the best leading indicator for us. I mean we have that advantage that we can see what happens in retail, but because normally the wholesale business will follow what happens at retail, right and so it’s early for us to even start speculating what could happen. I mean, obviously we are closed in Italy, we have been closed for over a week. So our clients, our customers so, so definitely that is going to impact the business. As I mentioned before, our backlog was incredible. I mean, just, we were up double-digits again just this has been over three years now with an incredible business season after season after season, but this is game over in many ways. We are going back to a completely different set of paradigm. So I think we have to think very differently and it will be impossible for us to even attempt to give you a number and this is partly why we didn’t think that we will be in a position to give — provide guidance today for both the first quarter and for the full year.

Katie Anderson — Chief Financial Officer

And in terms of AR, we have good — Carlos mentioned that we have good insurance coverage going forward. So we gain comfort in that as well.

Janet Kloppenburg — JJK Research Associates — Analyst

And Katie, you talked a little bit about government assistance, I’ve been following that pretty closely. Are there some firm assistance programs out there that you would be able to tap into or you just talking about what it looks like from the stimulus bill?

Katie Anderson — Chief Financial Officer

Well, we’re following across the world. We’re already taking — there are some programs in Europe for example that we’re already taking advantage of, but these are kind of coming out real-time, so we’re all over it and making sure that we can take advantage when we can.

Carlos Alberini — Chief Executive Officer and Director

And you know we had some opportunities in China as well. And in some cases, you know this benefits may have different forms and come in different flavors. You know it could be a deferral of taxes, it could be the elimination of taxes, it could be social cost that could be absorbed by the government and so forth.

Janet Kloppenburg — JJK Research Associates — Analyst

Okay, thanks so much and really lots of luck.

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you, thank you, Janet.

Janet Kloppenburg — JJK Research Associates — Analyst

Very tough times.

Operator

[Operator Instructions] Our next question comes from Omar Saad from Evercore ISI. Your line is now open.

Omar Saad — Evercore ISI — Analyst

Good afternoon. Thanks for taking my question and thanks for all the information. I know it’s really challenging kind of environment to forecast and predict. [Speech Overlap] Of course and great end to the year, by the way, nice quarter and frankly, it kind of gets lost with everything else going on. Can you talk about maybe you could talk a little bit more about the curve you saw — you’ve seen in China, the decline and then kind of stabilization and obviously it sounds like things aren’t anywhere near getting back to normal there, but there’s been some uptick towards return to normal and then maybe kind of compare and contrast that to what we’ve seen in other markets, whether it’s Korea or Japan or Italy, North America, other parts of Europe. Do they seem to be following a similar curve because we’re I guess for eight or nine weeks in China now. As we try to do our best job triangulating and formulating a rationale for how long this might last kind, any kind of [Indecipherable] different curves would be helpful. Thanks.

Carlos Alberini — Chief Executive Officer and Director

Yeah. Thank you. Omar. Well you know just this is a moving target here, but let me tell you what we have been able to see. In the case of China, I think is somewhat of an extreme in terms of how quickly the government jumped in and also nobody knew anything until all a sudden we knew and the country was stopped kind of thing. So, during the first few weeks of that process, just we saw a very, very extreme drop in our revenues, we were closing most of the stores and then just things and people were in their homes. So there was no activity. I mean, I’m sure we all saw those pictures and videos of Shanghai with nobody in the street, right. So all that is exactly what we saw on the commercial activities on our end. Then at some point, China became more kind of like okay. Now people are — the cases slowed down, new cases just the government felt that they were more in control of the crisis and then there was an opportunity for people to really consider going back to their cities. You know, remember that this was Chinese New Year, they extended the Chinese New Year. So a lot of people couldn’t even get back to work until they could travel to those cities and I think that they did it in a very orderly way, but when that started happening, then we started seeing just the revitalization [Phonetic] of those cities and markets and but that has been slow and so I think that is somewhat an extreme case, but maybe there are some other examples, like that. Just, I don’t know maybe Italy could look like that. Italy definitely went into a very similar situation where the whole country stopped and is still stopped, but then you have an example as Korea and Japan in those cases you’ve noticed and I think I mentioned this before they did not close the country — the engine, definitely, we saw the impact in our numbers of deceleration of customer traffic, but was not nearly as severe. I would say like half as severe and we continued to see something similar in that pattern. So it’s very difficult to to pick the model and oh this is going to apply to the U.S. and this one, this other model is going to apply to France, I mean it’s just very difficult to see. The one thing that we know now is that a lot of the countries in Europe, for example, have taken that Italy route and we think that that may be a very good way to deal with this situation because the key is to stop people from interacting and keeping people in their homes. So then the risk of contagion and exposure is minimized. So, and I think that everybody in the world now is aware of that and they are doing it and I think that that is applying to America as well.

Omar Saad — Evercore ISI — Analyst

That’s helpful. Thank you. Can you talk a little bit about the role e-commerce played in China in some of these markets through this period. Has it been — has probably hasn’t seen the same level of declines, but did you see a big fall off. Did that come back before some of the store spending came back. Maybe help us think about how consumers may or may not be using e-commerce given the scenario we’re in.

Carlos Alberini — Chief Executive Officer and Director

Yeah, I think that the deceleration in e-commerce was also noticable everywhere. So it’s not that people go home and they start shopping for handbags and jeans. So I think that — and we have seen that kind of like across the board, you mentioned China, we have good connections with some of the companies like Alibaba and we hear that this has been kind of like across the board other than for essentials and basic items. We — since then, we continue to see some on and off-type of business, not nearly as severe. You take a region like Europe, our business is still just kind of like a much healthier business than what we saw in some of the countries where things had to be locked down. So overall less of an impact, but very significant and just said since you mentioned e-com, I just realized I would never answer Janet’s question about the disruption in facility. So, so far, our business has been serviced fully. We have in Italy that services our e-commerce business in Europe and that has been operational for all the time and of course we are making it a priority that we can service our customers within the guidelines that we expect for that business and that has worked well. Now we are dealing with more of a skeleton type of team, but still being able to service the business as we would expect and our business here in the U.S. and in Canada has not suffered any disruption with respect to servicing that business as well.

Omar Saad — Evercore ISI — Analyst

Thanks for all the color. Good luck. Best of luck.

Carlos Alberini — Chief Executive Officer and Director

Yeah. Thank you, Omar.

Operator

And we have no further questions at this time and I would like to turn the call back over to Carlos for closing comments.

Carlos Alberini — Chief Executive Officer and Director

Yeah, thank you. I just want to thank you all again for taking time to really join us on this call. You know, it’s a very special time and we appreciate your interest in our story and our point of view. We will continue to lead our organization through this challenging times with relentless commitment and determination. You have our promise on that. We are very confident that we’ll see this through. We are in a good position as a company and we have the resources and a great team with the experience and the passion that I think are necessary to win in this kind of challenging times. So we hope this crisis will be history soon. I said it before and we look forward to keeping you informed about our progress. Thank you so much.

Operator

[Operator Closing Remarks]