Oxford Industries Inc. (OXM) Q2 2020 Earnings Call Transcript

Oxford Industries Inc.  (NYSE: OXM) Q2 2020 earnings call dated Sep. 03, 2020

Corporate Participants:

Anne M. Shoemaker — Vice President – Capital Markets and Treasurer

Thomas C. Chubb — Chairman, Chief Executive Officer and President

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

Analysts:

Kelly — Citi Research — Analyst

Rick Patel — Needham & Company — Analyst

Edward Yruma — KeyBanc Capital Markets — Analyst

Susan Anderson — B. Riley FBR — Analyst

Steven Marotta — C.L. King & Associates — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Presentation:

Operator

Greetings and welcome to Oxford Industries Second Quarter 2020 Fiscal Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

I would now like to turn this conference over to your host, Ms. Anne Shoemaker, Treasurer of Oxford Industries. Thank you. You may begin.

Anne M. Shoemaker — Vice President – Capital Markets and Treasurer

Thank you and good afternoon. Before we begin, I would like to remind participants that certain statements made on today’s call and in the Q&A session may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results of operations or our financial condition to differ are discussed in our press release issued earlier today and in documents filed by us with the SEC, including the risk factors contained in our Form 10-K and first quarter 10-Q. We undertake no duty to update any forward-looking statements.

During this call, we will be discussing certain non-GAAP financial measures. You can find a reconciliation of non-GAAP to GAAP financial measures in our press release issued earlier today, which is posted under the Investor Relations tab of our website at oxfordinc.com.

And now I’d like to introduce today’s call participants. With me today are Tom Chubb, Chairman and CEO and Scott Grassmyer, CFO. Thank you for your attention. And now, I’d like to turn the call over to Tom Chubb.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Good afternoon and thank you for joining us. Before I start, I would like to wish you and your families my personal best for your health and safety during these difficult times. I’d also like to pause just for a moment to thank our incredible people for all they are doing to delight our customers under such difficult circumstances.

Our strategy at Oxford is a simple one, to own brands that make people happy, to delight our customers with memorable experiences and products they love. During 2020 we have faced a myriad of new challenges. Nonetheless every day we are finding ways to successfully execute this strategy. In order to do this in the current environment, we’ve leaned heavily into our advanced digital capabilities. The investments we made in our e-commerce channel over the past several years allowed us to capitalize on the accelerated shift to online spending. Each of our brand, Tommy Bahama, Lilly Pulitzer and Southern Tide, positively contributed to the 52% year-over-year increase in e-commerce sales in the second quarter. Lilly Pulitzer was the standout, up an extraordinary 142%. The Lilly product collection this summer was very strong and in many ways offered exactly what the customer was looking for, fun, happy, easy-to-wear apparel. The collection was highlighted by very effective digital marketing to which we shifted more resources in the quarter.

A non-comp flash sale in June also added to the success of Lilly’s second quarter results. Historically, the Lilly website offers sale items only five days a year. To ensure excellent inventory control, an additional two-day flash sale was held in the second quarter, which generated $15 million from sales at a solid 40% margin. Even absent flash sale, Lilly Pulitzer’s e-commerce business grew 74% over last year.

We continue to invest in our digital platforms and evolve our digital capabilities, including upgrades and redesigns of websites, enhance search engine optimization and enterprise order management systems. We believe the accelerated shift to online shopping brought on by the coronavirus health crisis is likely to continue. While bricks and mortar will continue to be a key part of our distribution strategy, we believe our e-commerce channel will be stronger, bigger and a more critical component to our overall strategy coming out of this crisis.

In contrast to our e-commerce business, consumer traffic in bricks and mortar locations was understandably very challenged in the quarter, driving meaningful revenue decreases in our stores and restaurants. In addition to operating under restricted hours and limited capacity, important markets which rely heavily on fly-in tourists such as Hawaii, Las Vegas and New York City were pressured even further. Despite the temporary headwinds we are currently experiencing, we believe our modest physical footprint holds true competitive advantages for us. Across all of our brands, we have only 187 full-price stores and restaurants with most located in premium, off-mall locations such as lifestyle centers, iconic resorts and resort towns and prestigious street fronts. Our beautiful stores and restaurants engage our customers and immerse them in our brands and function as an important guest acquisition tool for us.

While we look forward to the time when the store traffic improves, we are taking advantage of this opportunity to judiciously prune underperforming and non-brand enhancing locations. By the end of 2020 we will have closed approximately 10 locations, including five, which closed in the first half. At the same time, we are also making some exciting additions to the line-up this year.

We have already opened a Marlin Bar at Dania Pointe near Fort Lauderdale and converted two existing Tommy Bahama locations on Las Olas Boulevard in Fort Lauderdale and St. Johns Town Center in Jacksonville into Marlin Bars.

In the back half of the year, we plan to open Marlin Bars at Fashion Valley in San Diego and Lahaina on Maui. During the pandemic our Marlin Bars with their casual bar and dining concept and outdoor seating have been a bright spot. Every day we are serving existing customers and attracting new customers to the brand. We strongly believe in the Marlin Bar strategy and are optimistic about the role the concept will play in our future growth strategies.

Southern Tide, which has just begun its foray into owned retail, now has two stores, both in Florida, with another opening in the Destin area this fall. While it is difficult to fully assess performance under current conditions, the results that we have seen so far are encouraging.

Lilly Pulitzer has done an outstanding job leveraging their bricks and mortar locations by adding a concierge level of service for their customers with private appointments and curbside pickup. Their talented store associates are also assisting with customer service calls, further blurring the line between our online and store channels. Our wholesale channel, which we have been strategically pruning prior to the pandemic and represented approximately 30% of our revenue in 2019, has been significantly impacted by current conditions in the consumer marketplace and the weakness of many retailers going into the COVID crisis. Our wholesale sales in the second quarter were less than half of what they were a year ago. As part of our plan to focus on only the strongest partners in this channel of distribution, we meaningfully reduced our exposure to department stores, which made up only 11% of our total revenue last year. We are expecting sales reductions in this channel to continue through the back half of the year and are addressing this trend by very carefully managing our inventory levels.

Across all channels, our sourcing, planning and merchandising teams have done an extraordinary job and our inventory levels are in very good shape as is the rest of our balance sheet. Cash flow was quite strong in the second quarter as we made significant expense reductions related to employment across the enterprise and reductions in occupancy costs. We ended the quarter with a strong liquidity position with over $30 million in net cash and over $250 million of availability under our credit facility.

In March, I outlined our priorities for this year as; one, the safety of our people and our customers; two, protecting the integrity of our brands; and three, preserving liquidity. These have been the right things to focus on during this crisis. But it is also important to remember that while dealing with the issues at hand, we haven’t lost sight of our future and what a future we have at Oxford. With the strength of our brands, the resilience of our people, an enviable balance sheet and the competitive advantage as mentioned earlier, we look forward to returning the Company to growth and resuming our long-term track record of generating increased value for our shareholders in 2021 and beyond.

I’ll now turn the call over to Scott with more details on the second quarter and our plans for the back half of 2020. Scott?

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

Thank you, Tom. As Tom discussed, our sales in the second quarter were significantly lower year-over-year. The 36% decrease was driven by lower sales in our retail, restaurant and wholesale channels, partially offset by an increase in e-commerce. Our gross margin was 55% in the quarter, down from 60% in the second quarter last year. We were modestly more promotional across our brands, including the addition of successful Lilly Pulitzer flash sale and we took inventory markdowns across all operating groups.

We’re pleased with the cost-reduction efforts taking across Oxford as SG&A decreased 19% or $28 million. It’s important to note that in the second quarter we incurred $10 million on an adjusted basis related to credit losses, including the Tailored Brands bankruptcy, inventory markdowns and fixed asset and operating lease impairments. Our adjusted loss for the quarter, which included these charges, was $0.38 per share.

Managing inventory is a critical component of ensuring the health of our brands and we have inventory levels that are appropriate for our plans for the second half of the year. We ended the quarter with inventory 3% lower than last year, despite the significant sales decline. As Tom mentioned, preserving a high-level liquidity is essential during these uncertain times. We have ample liquidity to meet our ongoing cash requirement, reflecting the strength of our balance sheet entering the pandemic, as well as the recent actions we have taken to mitigate the COVID-19 impact.

During March 2020, as a proactive measure to bolster cash, our cash position, we drew down on our $325 million asset-based revolving credit facility. With strong cash flow, we ended the second quarter with $65 million of borrowings, $97 million of cash and unused availability of $257 million. As we move into the back half of the year, we’ll continue to face the challenges and uncertainties created by the pandemic.

In our third quarter, which is typically our smallest quarter of the year, we’re expecting the year-over-year decline in bricks and mortar traffic to be slightly less pronounced than it was in the second quarter. In addition, our Lilly Pulitzer flash sale, which has been a bright spot in the third quarter, is expected to be significantly smaller as some of the inventory that would have been available for the September event was pulled forward into the non-comp event in June. As a result of the reduced traffic, a smaller flash sale and continued softness at wholesale, we expect year-over-year revenue to decline in the third quarter at a rate similar to that of the second quarter.

For the month of August, e-commerce continued with strong positive comps. We continued to see year-over-year decreases in brick and mortar and wholesale with modest sequential improvement. For the fourth quarter, while we don’t anticipate a significant rebound in bricks and mortar traffic and wholesale, we believe we will move closer to break-even and expect to return to profitability in fiscal 2021. Our dividend is an important component of our commitment to our shareholders. Our Board has declared a quarterly dividend of $0.25 per share.

Thanks for your time today and we’ll now turn it over for questions. Laura?

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Paul Lejuez with Citi Research. You may proceed with your question.

Kelly — Citi Research — Analyst

Hi. This is Kelly [Phonetic] on for Paul. Thanks for taking our question. I just want to [Phonetic] dig into inventory a little bit more. It was down 3% but that’s much less than what you were expecting as your [Phonetic] sales to be down in the back half year. So I was just wondering if you could talk about the health of the inventory or how much of that may carry a markdown risk. How you plan on ending inventory at the end of the third quarter and any color by brand?

And then just secondly, if you could talk about the order book for the back half of the year, this fall and then how that’s shaping up for spring. Thank you.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Okay. On the inventory Tommy Bahama’s inventory is slightly up year-over-year and they did not conduct a typical end of season clearance event which has actually moved to this weekend. So it’s kind of shifted out. So I think that will help Tommy’s inventory get back below last-year levels. And linear closed inventory a little bit higher than we’d like. We’ve taken appropriate markdowns and that’s mostly replenishment type inventory. So the pipeline cut-off levels are a little bit high, but they will work down. Its inventory was long-life and it is replenishing as — which is our [Phonetic] accounts, the wholesale accounts move the goods. So we feel good about our inventory and we have taken appropriate markdown. So inventory levels, yeah, maybe a little bit higher than ideal, but properly marked down.

Then Lilly will have another September flash, which they always have. But it will be a bit smaller than last year because we did the June flash, but that will again move inventory down some. But with the sales decrease, if — I think our actions on minimizing the input of inventory have allowed us to stay a little bit lower than last year versus significantly above last year. And while we have taken some markdowns, I think it’s been relatively modest compared to some others in the industry. So I think we’re in good shape there.

Kelly — Citi Research — Analyst

And just on the order book.

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

And then the order book going forward, I think the comments that we made about the sales expectations for the third and fourth quarter reflect what we’re seeing there. Beyond that if you get into 2021, I think it’s a little early to say yet where that’s going to shake out. We’ll certainly have more about that in December.

Kelly — Citi Research — Analyst

Okay. Great. Thank you.

Operator

Our next question comes from the line of Rick Patel with Needham & Company. You may proceed with your question.

Rick Patel — Needham & Company — Analyst

Thank you. Good afternoon and hope everyone is well.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Thank you, Rick.

Rick Patel — Needham & Company — Analyst

A question on e-commerce. So, do you believe the acceleration in the e-commerce segment represents a permanent change in the way your customers are shopping? And if that is the case, how are you thinking about your store footprint going forward? I know you’re moving forward with the Marlin Bars strategy, but curious if we should expect even more closures for your other locations beyond this year.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Well, Rick, we feel very, very good about e-commerce. As you know, we’ve been on that bandwagon for a long time. We’ve had great growth in e-commerce even pre-COVID and it’s profitable growth for us. As you know our e-commerce channel is very profitable. So we like seeing growth there. I do think the shift is likely to be long term. I don’t like to use the word permanent because nothing seems to be permanent these days. But I definitely think that’s the direction that things are going. So as we go into ’21, I would expect e-comm to be a significantly larger portion of the business than it was in 2019 and that’s a good thing for us.

We do think that bricks and mortar are still a very important part of the future in our brand. We’ll be very selective about locations. And what we’re really doing now is as we’re coming up on renewals or other opportunities to exit leases, we’re looking very hard at them and there will be, I think over the next couple of years, we will continue to probably trim some here and there. But we will also add stores as we’re doing even now in the right circumstances and in the right locations. And as you called out and pointed out, I think particularly Marlin Bars are something that we’re interested, either in new locations or in many cases, as we’ve done on a couple of this year, it could be a conversion of an existing store location into a Marlin Bar.

Rick Patel — Needham & Company — Analyst

And a question on the outlook for 2021. So I appreciate that it’s next to impossible to forecast anything with high conviction right now. But just curious about how you’re approaching the year. Do you see it as a normal year like 2019, but perhaps with a bit of conservatism or do you see the potential for a hockey stick like recovery where the business will reach a new high? Just — I’m just curious about what the assumptions are behind expectations for profitability next year.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Well, I think the way that we’re going to plan it and buy into it, Rick, is we’re going to buy into it fairly conservatively and that potentially gives us some upside if there is a real sort of hockey-stick rebound in the consumer market. But I think it’s the smarter way to play it rather and protect against the downside as we’ve really played this year and particularly the back half of this year that we were able to influence. And so I would expect us, while it’s way too early to say a whole lot about ’21, I think it’s reasonable to assume that it will be smaller than ’19 and that we will — but that we will believe we will be on a growth trajectory again. So we’ll start from a take a step back in the starting point, but be on the growth trajectory.

Rick Patel — Needham & Company — Analyst

Thank you very much and all the best this fall.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Okay. Thanks a lot, Rick.

Operator

Our next question comes from the line of Edward Yruma with KeyBanc Capital Markets. You may proceed with your question.

Edward Yruma — KeyBanc Capital Markets — Analyst

Hey. Good evening, guys and thanks for taking the question. I guess first on kind of linear and the longer-term view there. I know you took the charge-offs at Tailored Brands and maybe there are some even kind of acceleration longer-term secular trends away from suiting. You’ve managed that for cash flow historically. How do we think about the business in the medium term? And then as a follow-up, with Tommy Bahama clearly very destination focused, are there ways you can pivot the assortment to be maybe more appropriate for the current environment? Thank you.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Yeah. Thank you very much, Ed, and thanks for being on. And with respect to linear the first thing I would say is, look, we’ve got a terrific team there. They’ve worked very, very hard, and they continue to work very hard and they are the best in their sector at what they do. That said, it is a very, very challenged segment of an apparel market within the customer base that they serve which is largely department store and big box oriented. And they had a couple of customers, actually three, in the last couple of weeks in Tailored Brands, Stein Mart and Lord & Taylor that all filed for bankruptcy.

So they have got that challenge and then they have got their key product category being tailored clothing, basically men’s suits, that certainly has big challenges during the coronavirus, but even prior to that had some sort of secular challenges with just the ongoing casualization in the country. So their challenges are quite big at this time and we’re working very, very hard with them on what the path forward is for that business. But again, I’m glad you remembered it and called it out. What we’ve been doing for a number of years now is managing that business for cash flow and that will be the priority going forward with linear is really maximizing cash flow from that — from that business. And I expect in December, we will be able to tell you some more about that. But we will continue with that focus on really cash flow.

Edward Yruma — KeyBanc Capital Markets — Analyst

And then on Tommy?

Thomas C. Chubb — Chairman, Chief Executive Officer and President

And on Tommy, yeah. So the — I think Tommy has a lot of products that work really, really great in the current environment and that are working really, really well. So their performance products that have really come on in the last couple of years and, Ed, I know that you are personally familiar with them, but as an example the chip shot short, which is a hybrid short made out of a quick drying performance wicking material that you can wear in the ocean and then walk out on the beach and by the time you get up to the pool side bar or a restaurant, it will be — it will be dry and look appropriate to wear into that restaurant. And even though people may not be in resorts as much right now, that type of product is really fitting what they want right now.

Another great example is the Palm Coast Polo, which I believe we introduced about a year — a little more than a year ago, and it quickly vaulted to being one of our best-selling products and it has stayed there ever since and that’s just an absolute winner. We’ve got some performance wovens coming in both short sleeve and long sleeve that are getting a great reaction from the wholesale markets that have seen those sort of [Phonetic] come in next year. We recently introduced a really terrific bottom that’s similar to some others that you might see in the marketplace from some big athleisure providers. But, it’s called the IslandZone pant. That’s sort of again a performance fabric.

And when you read performance what you can translate that to is easy to wear and easy care. And those are things that are really, really popular right now and I think will continue to be. I don’t think we’ll go backwards on that. Really across all of our brands, we’re really leaning into those trends hard. And Tommy Bahama has always been about easy to wear. It hasn’t necessarily always been as much about easy care, but that has come on really strong in the last couple of years and we’re going to continue to push in that direction.

In women’s for holiday this year, we’ve got a whole capsule of perform — women’s performance athleisure type product that I think is going to be a big winner for us. So I don’t think Tommy has any trouble at all translating into that environment and we’re leaning into it really hard right now and it’s working where we’ve got those products and we’ve got a lot of them now they are really checking out.

Edward Yruma — KeyBanc Capital Markets — Analyst

Great. Thanks so much, guys.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Yeah, thanks, Ed.

Operator

Our next question comes from the line of Susan Anderson with B. Riley. You may proceed with your question.

Susan Anderson — B. Riley FBR — Analyst

Hi. Good evening. Thanks for taking my question. I was wondering if you could talk about the performance across the geographies, I guess, Florida, Hawaii, California. And I think you mentioned Hawaii, New York and Vegas were pressured. So maybe if you could just give us some color on kind of just the variety of differences and performances across those geographies.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Yeah. So, I’ll give you some general things. Really there’s stuff that’s kind of all over the place and it’s a little bit hard to summarize. But I would say if you look at Hawaii that market is fundamentally shut down right now. Due to travel restrictions tourists can’t come in. There are restrictions on people that are there. So that market is and has been fundamentally shut down. So that’s obviously a challenge in Tommy Bahama in particular where Hawaii is a big state for them. That’s an extra bit of weight that’s been — they’re carrying right now. Overall, we believe it’s a competitive advantage to have the strength that we have in Hawaii. But at the moment, it’s an additional burden.

Then you look at California and they’ve currently got a ban on indoor malls being open. And I think we’ve got eight of those, roughly, stores that fall into that category. And so those can’t be open at the moment. And then of course, New York City is just a very tough situation, all the way around and we remain closed in New York City.

Then, on the flip side, you look at some of the drive-to markets. And a great example for us in the Southeast is the Destin market which is down on the Florida Panhandle, the so-called Third Coast down there. That’s a popular drive-to beach destination that’s driven primarily by rental houses, not so much by hotels. And, boy, that’s what people want right now. They want to be able to load up the family in the suburban and go down to a nice house somewhere and just camp out for the week there. And that market has just been terrific for us.

Another one that’s been really interesting is Palm Springs where we have a Marlin Bar and people drive over from LA and other parts of Southern California. Normally this time of year they would equip doing that until October. So — but this year they got nothing better to do. They’re not flying anywhere. So we’re seeing really good results there.

Jupiter, Florida is another one that’s been a really strong market and I think that’s a lot of snowbirds from the Northeast that just never went home. We’ve got a new Marlin Bar that opened in Jacksonville, Florida at the St. Johns Town Center which is kind of where you go if you were staying at Ponte Vedra and you want to get out shopping for the day. And that Marlin Bar opened maybe two or three months ago, no?

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

In June, yeah.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Yeah, June, and it’s just been — I mean they are knocking the cover off the ball there. It’s been fun to watch that one. So it’s really those drive-to kind of vacation destinations and places where people who are fleeing from some of the other parts of the country have sort of set up shop where we’re really thriving right now.

Susan Anderson — B. Riley FBR — Analyst

Great. That’s really helpful. And then I guess maybe I wanted to get your thoughts how you’re thinking about fourth quarter. I think typically you would have the resort line now and obviously consumers would be thinking about going on vacation or going someplace warm, especially in the colder northern states which may not happen this year, particularly consumers may not get on a plane. So I guess how are you thinking about your product line-up? Are you changing it out all for fourth quarter?

And then I guess just getting back to kind of more normalized sales, do we need at least domestic tourism to kind of come back, I guess?

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Well, I think for fourth quarter we definitely adjusted the merchandise mix a good bit, I think, in all of the brands and have shifted — we haven’t totally abandoned our normal approach, but we’ve shifted more heavily to the types of products that people like right now. And what’s been selling over the last couple of months, as you would expect, are things like shorts, T-shirts, polo shirts, maybe some light [Phonetic] sweaters, a lot of that athleisure type products. Swim has been doing really well during the summer time. Beach chairs, we have not been able to keep in stock in Tommy Bahama. And I think a lot of that’s people buying them for the backyard. So there are a lot of things that work and we made adjustments to the assortment to accommodate that in the fourth quarter on the assumption that people still will not be traveling quite as much as they were.

And then as things normalize and you’re seeing a lot of it now, again I can’t underscore how strong it is in some of these markets like Destin where I think people that in past summers would have been taking a trip to [Indecipherable] something or Provence and instead they’re staying at home and then, just driving to beach location. It’s the same in a lot of the New England. Beach areas are not dissimilar.

So there — I think there are plenty of avenues for us to play into this and I think we’ve been doing a good job of it and again have adjusted our fourth-quarter plans to the sort of assumption that people will not be traveling as much.

Susan Anderson — B. Riley FBR — Analyst

Great. That’s helpful. And then I guess lastly, just on the — it sounds like there is still maybe part of the [Phonetic] inventory that you’ll need to go through in third quarter. How are you thinking just the promotional environment in the third quarter across the brands versus second quarter?

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Well Lilly will have a little bit smaller flash sale than they normally have because they actually did part of it early and there were a whole variety of reasons that they did that. But they pulled a bunch of that inventory early into second quarter, had a very successful flash sale, there will be one at some point during the third quarter. We’re not going to call the name out yet or the date out yet, but it will be a good bit smaller than in past years. And then Tommy, as Scott I think mentioned in his comment, ordinarily does a pretty significant online clearance and in stores in June, July. That’s been pushed out into the third quarter. So I guess a little less in Lilly and a bit more in Tommy.

And then overall, we’re not really planning to be a lot more promotional. We’re shifting some things around a little bit doing things a little bit differently, but we’ve tried to manage the inventories so that we don’t have to be highly promotional.

Susan Anderson — B. Riley FBR — Analyst

Great. That’s helpful. Thanks so much. Good luck. [Speech Overlap]

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Okay. Thanks very much [Phonetic], Susan.

Operator

Our next question comes from the line of Steve Marotta with CL King. You may proceed with your question.

Steven Marotta — C.L. King & Associates — Analyst

Good afternoon, everybody. Tom, considering that your customers can come to you in Hawaii and other destinations, I’m assuming you’re trying to go to them from a digital marketing standpoint. Can you talk a little bit about how you’re engaging the customer and keeping the brands top of mind for them and converting digitally?

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Yeah, so as you saw our e-commerce results in the quarter were really, really strong with 52% year-over-year growth. Lilly was the strongest. And I think that’s because they have been strong in digital marketing for years. That’s been a — one of the — really their — I guess arguably their primary marketing vehicle has been digital marketing and they are quite adept in — at it, leaned into it, a lot of it’s social media driven with a lot of paid social this year that we’ve been doing and it’s worked for them.

Tommy historically has depended a lot more heavily and they are really good at this. They do a great job of using the stores, not only to sell merchandise in the stores, but as a big customer acquisition vehicle, but ultimately helps fuel e-commerce. And obviously that’s been challenged a bit this year with the stores closed for a while or more than a bit that’s been challenged this year with stores closed for eight weeks or so and then a gradual reopening in traffic still way down. So Tommy is pivoting towards digital and I think doing a good job of driving in that direction. But there — that has not been their primary method in the past and the way that it is in Lilly. And then in the smaller brands, I think they’re probably somewhere in between and doing a great job as well. And then, across all brands, of course we’re sharing all the marketing techniques and all and helping them to also [Phonetic] learn from each other.

Steven Marotta — C.L. King & Associates — Analyst

That’s helpful. And my follow-up question is, Scott, as far as the expense reductions go in the second quarter, can you talk a little bit about what’s permanent and I guess theoretically what could potentially flex as you recoup some sales? But thinking about the permanency of some of the expense reductions would be helpful.

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

Yeah. And also in the second quarter, May, the stores were in essence shut down. So you had a lot more furloughed employees. But we think we will be at least 10% lower year-over-year in SG&A in Q3 and Q4. So I think that’s more of the permanent piece of it. So about 10% down in Q3 and four, maybe a little higher than that, but in that general range.

Steven Marotta — C.L. King & Associates — Analyst

Thank you. That’s helpful.

Operator

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. You may proceed with your question.

Dana Telsey — Telsey Advisory Group — Analyst

As you think about the e-commerce business, and I think it was around 23% of sales last year, where do you see that going and how do you see that even for next year? And while you’ve talked about e-commerce being profitable growth with shipping costs from what we’re hearing now of potentially surcharges for the fourth quarter, how are you thinking is that blend of profitability in e-commerce this year and the impact on earnings? Thank you.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Okay. I’m going to let Scott handle the second part of that question in a minute. I’ll take the first part and it’s hard for me to quantify exactly how big I think e-commerce is going to be next year, but I’m very confident in saying it will be a much bigger piece of the pie in ’21 than it was in ’19. Hopefully it will be smaller than it is in ’20 because that’s really been the primary channel for a long time. But I think you — look ’19 to ’21, you see a big step up. And longer term, in my mind, it’s not hard at all. I don’t know exactly how many years but for it to be half our businesses done online doesn’t strain my imagination at all and we think that’s a good thing. We’re thrilled about that.

I’ll let Scott talk a little bit about some of the profitability profile and the impact of shipping charges.

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

Yeah, I mean e-commerce the gross margins do end up being a little bit lower because you do have the freight cost and the picking, packing costs. So it does end up being a little bit at the lower margins to start with.

However, kind of growth rates what you have there, which you’re going to grow that way in stores you’d be opening additional retail units and we’re kind of getting this growth on a platform. And, yeah, you have to continue to invest in the platform. But with our average ticket value and our high gross margins, it’s still a very, very profitable business to us and I think it can continue to be very profitable in the future.

Dana Telsey — Telsey Advisory Group — Analyst

Is there any difference by brands?

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

On the —

Dana Telsey — Telsey Advisory Group — Analyst

[Speech Overlap]

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

Not a huge difference. The average tickets are pretty similar and the gross margins are pretty similar.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Yeah, pretty similar.

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

And you just — for every box you’re sending out, you’ve got a lot of gross margin dollars there. So if tipping costs you another couple of bucks, it’s going to dilute your gross margin a little bit, but it doesn’t really move it a huge amount. It’s very different than somebody that’s got an average $20 ticket in a box and then 50% gross margin. A couple of bucks kills them at [Indecipherable] high or mid 70%s gross margin, you get a lot of dollars to work with.

Dana Telsey — Telsey Advisory Group — Analyst

And can you remind us how big was the Lilly flash sale for the third quarter last year? How much did it contribute to the top line?

K. Scott Grassmyer — Executive Vice President – Finance, Chief Financial Officer and Controller

Yeah. It was about $31 million. Yeah. So it was a huge sale. So we’ll still have — still be a very nice sale, but we did $15 million in the second quarter. So some of — so we did still a little bit from the third quarter sale. We will still have a meaningful sale, but just won’t be at that $31 million level.

Dana Telsey — Telsey Advisory Group — Analyst

Got it. Thank you.

Operator

Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn the call back over to Mr. Tom Chubb for closing remarks.

Thomas C. Chubb — Chairman, Chief Executive Officer and President

Okay. Thank you, Laura. And thanks to all of you for your interest and your continued support. Stay safe and we look forward to talking to you again in December.

Operator

[Operator Closing Remarks]