Skechers USA Inc  (NYSE: SKX) Q1 2020 Earnings Call Transcript

Skechers USA Inc  (SKX) Q1 2020 earnings call dated Apr. 23, 2020

Corporate Participants:

David Weinberg — Chief Operating Officer

John Vandemore — Chief Financial Office

Unidentified Speaker

Analysts:

Jay Sole — UBS Investment Bank — Analyst

Omar Saad — Evercore ISI — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Tom Nikic — Wells Fargo — Analyst

John Kernan — Cowen & Co. — Analyst

Sam Poser — Susquehanna Financial Group — Analyst

Susan Anderson — B. Riley & Co. Inc. — Analyst

Christopher Svezia — Wedbush Securities — Analyst

Jim Duffy — Stifel — Analyst

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Presentation:

Operator

Greetings and welcome to the SKECHERS First Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the call over to SKECHERS. Thank you. You may begin.

Unidentified Speaker

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

David Weinberg — Chief Operating Officer

Thank you for joining us today on what is certainly the most unusual earnings call in our 21 years of being a public company. Our Manhattan Beach corporate offices, normally bustling with a team of talented individuals, is empty. We are adhering to the work at home guidelines with very positive results. I’d like to start by saying that the top priority of our leadership team, as always, is the health and wellbeing of our employees and partners around the world. We are in unprecedented times as the COVID-19 pandemic has impacted the entire world. While we have limited visibility as to when most markets will reopen and what business atmosphere will be like when they do, we see some positive indicators, including our extremely strong e-commerce business, the positive sales trajectory of our China business and reopening of several markets, most notably, Germany, Scandinavia and Austria.

For this call, we will primarily focus on the current environment and the actions SKECHERS has and is taking to navigate this crisis. However, we will also cover our first quarter results as well as the strength of our brand reflected in those results. We first saw the impact of the virus on our business in China in January where our local management team took aggressive actions to protect our employees, partners and customers as well as our business. As the impact of the virus spread globally, we began implementing travel restrictions and work from home policies in all our offices, closed nearly all SKECHERS stores worldwide, established a senior management led crisis committee and began actively adjusting operating expenses to preserve cash. We also drew on our senior unsecured credit facility to enhance our liquidity. We are confident that these actions and many others will enable us to successfully navigate these turbulent waters.

In addition, we have been actively reviewing inventory balances and production commitment across the globe, making decisions to bring both in line with forecast demand. We believe that our speed of decision making and operational agility will provide us with the tools necessary to maintain the healthy momentum of the SKECHERS brand we experienced throughout 2019.

SKECHERS fourth quarter sales growth exceeded 23%, as consumer demand for our product was at an all-time high. We ended 2019 with fourth quarter being our second highest quarterly sales in the Company’s history and record annual sales of $5.22 billion. That momentum continued into the first quarter with strong performances that resulted in a 9% increase in our domestic wholesale business and a 9.4% increase in our subsidiary wholesale business.

Total first quarter sales were $1.24 billion, a decrease of 2.7% over the same period last year, primarily because of the significantly reduced activity in China for the months of February and March, as well as the shutdown of most global markets by mid-March. Our international wholesale business was down 8.4% in the quarter, but excluding China, it would have increased 6.2%.

While there was growth across many markets, the highest increases came from our subsidiaries in Germany, Central Eastern Europe and Japan, and our distributors in Australia, Scandinavia and Turkey. Further, worldwide comparable same-store sales in our company-owned direct to consumer business increased 9.8% for the first two months of the quarter, reflecting the strength of our brand. Our North American and European distribution centers, both experienced record shipping months for this same period. We believe these key indicators confirm that the global acceptance of our brand was extremely strong as consumers continue to demand comfort, style, innovation and quality at a reasonable price, five key attributes offered throughout the SKECHERS product line.

We are learning that during the crisis consumers still want comfort, quality and value in a brand they trust. We are seeing this in accelerated sales in our company-owned e-commerce platforms, which grew over 70% in the first quarter, but have increased in excess of 250% month-to-date. For several of our key international markets, our April online sales are already above their entire first quarter online sales and we anticipate that the balance will get there by the end of the month. We are also seeing sales of SKECHERS in our wholesale partners with e-commerce sites among the top three, if not at the top of their footwear brands now being purchased.

We are learning from the reopening of the market in China and are highly encouraged by our own results, both in retail and online, and those of our franchise partners. Our online business grew low double-digits in January and has returned to mid-single digit growth in April. Today, nearly all of our stores in China are open and are on a steady rising growth trajectory. In fact, last week we opened our first new store since the pandemic occurred, a 9,000 square foot outlet store in the northeast of China and it performed extremely well.

Along with the strength of our brand and product, we believe there are several inherent factors that are proving beneficial during the pandemic and helping to ensure both our stability and success once it ends, the diversity of our product and distribution channels, the solid relationships with our factories and wholesale partners and our exceptionally strong balance sheet and ample liquidity.

Before I turn the call over to John, I would like to reiterate that we are confident in our ability to navigate this crisis. No one was prepared for the challenges of this new normal. We believe we acted and reacted with speed. We believe that our quarterly performance prior to the disruption is a testament to the strength of our product and brand, all of which leads us to believe that when markets reopen, people return to work and customers get back to shopping, SKECHERS will continue in its position as a leading forward footwear brand.

Now to John.

John Vandemore — Chief Financial Office

Thank you, David. First I hope you are all safe and healthy. Before I discuss our first quarter 2020 results, I would like to elaborate on the steps we have taken to navigate through the unprecedented challenges of COVID-19.

Last month we drew $490 million from our senior unsecured credit facility, which gives us over $1.3 billion in immediately available liquidity. In addition, we have $250 million of additional liquidity available through an accordion feature of that facility. We have also taken a hard look at all operating expenses and have actively reduced all non-essential discretionary spending. This includes curtailing business travel, reducing non-digital global marketing spend and reassessing our store rollout plans.

We have also implemented reduced staffing, including furloughing select employees as well as freezing headcount and compensation levels. Further, we have re-prioritized our capital expenditures to focus only on business critical and highly strategic projects. Some projects will continue apace, while others will be either delayed or placed on hold. We believe that we have adapted quickly to the current market dynamics and are well positioned to manage through these challenging times.

Now turning to our first quarter results. I will not be detailing all the impacts we have experienced from the COVID-19 pandemic, but it should be clear that there were impacts throughout our entire global operations and we expect a continuing impact on our business going forward.

Sales in the quarter totaled $1.24 billion, a decrease of $34.4 million or 2.7% from the prior-year quarter. On a constant currency basis, sales decreased $14.9 million or 1.2%. Domestic wholesale sales grew 9% or $31.3 million due primarily to the strength in our women’s and men’s GO, men’s and women’s USA and our Work and Street categories. This despite the fact that we lost about two weeks of shipping in the quarter as operations at many of our wholesale customers came to a sudden stop.

International wholesale sales decreased 8.4% in the quarter as a 9.4% increase from our wholly-owned subsidiaries was offset by a 38.9% decrease in our joint ventures, primarily from China, which was down 47% and impacted by a significant sales return reserve to keep our franchisee inventories clean with seasonally appropriate merchandise.

Our distributor business increased by 1%. Direct to consumer sales decreased 4.2%, the result of an 8% decrease domestically and a 2.5% increase internationally. Outside of China this is clearly where we saw the most significant impact from the pandemic as nearly all Company-owned stores ceased operation in mid-March. However, illustrating the strength of the SKECHERS brand preceding the closures, our year-to-date direct to consumer comparable store sales through February were up 9.8%.

Gross profit was $547.7 million, down $4.28 million compared to the prior year and gross margin decreased by approximately 220 basis points to 44.1%. The lower gross margins were attributable to international results. There was also a negative impact to gross profit in the quarter related to the acquisition of our interest in our joint venture in Mexico last year. In the quarter, we recorded a one-time non-cash purchase price adjustment in gross profit of approximately $8 million associated with a step-up in the value of the acquired inventory.

Total operating expenses increased by $78.3 million or 18.2% to $508.1 million in the quarter, primarily driven by an increase in labor expenses, the inclusion of Mexico operations and the sizable prior-year tax rebate in China. Selling expenses increased by $3.8 million or 5.5% to $74.1 million primarily due to higher digital advertising expenses domestically. General and administrative expenses increased by $74.4 million or 20.7% to $434.1 million. The increase included $28.1 million associated with our direct to consumer business and a net increase of 54 new company-owned stores, including 16 that opened in the quarter, $16.2 million related to the inclusion of operations in Mexico, including non-cash charges of approximately $7.8 million related to the acquisition, $7.3 million in China primarily related to the absence of a rebate comparable to prior year and $9 million related to higher compensation and outside services costs.

Earnings from operations decreased 73% to $44.8 million versus the prior year and our operating margin was 3.6% compared with 13% in the prior year. Net income decreased 54.9% to $48.9 million or $0.32 per diluted share on 154.7 million diluted shares outstanding compared to net income of $108.8 million or $0.71 per diluted share on 154.1 million diluted shares outstanding in the prior year. However, adjusted net earnings and adjusted diluted earnings per share were $59.9 million and $0.39 respectively and reflect the impact of negative foreign currency rates and certain purchase price adjustments related to our acquisition of our joint venture in Mexico. Our effective income tax rate for the quarter decreased to 15.3% from 19.5% in the prior year.

And now turning to our balance sheet. At March 31st, 2020, we had over $1.37 billion in cash, cash equivalents and investments, which was an increase of $335.3 million or 32.5% from December 31st, 2019. The increase primarily reflects the drawdown on our senior unsecured credit facility in March, of which $215 million remains available through an existing accordion feature.

Our cash and investments represented approximately $8.89 per diluted share outstanding at March 31st, 2020. Trade accounts receivable at quarter-end were $796.2 million, an increase of 23.4% or $150.9 million from December 31st, 2019 and an increase of 8.1% or $59.6 million from March 31st, 2019. The increase in accounts receivable was primarily due to higher wholesale sales, both domestically and internationally as well as deferred collections from certain franchise customers in China, following the impact of the COVID-19 pandemic.

Total inventory was $985.7 million, a decrease of 7.9% or $84.2 million from December 31st, 2019, but an increase of 33% or $244.8 million from March 31st, 2019. While this level of inventory is clearly higher than we had originally planned before we ceased shipments to our wholesale customers and closed our retail stores, we believe the actions we have taken and will be taking to adjust future factory orders will allow us to manage these balances with an eye toward emerging from the current climate with clean inventory levels.

Total debt, including both current and long-term portions, was $699.8 million compared to $110.4 million at March 31st, 2019. The increase primarily reflects the drawdown of our senior unsecured credit facility. Working capital increased $137.7 million to approximately $1.7 billion versus $1.56 billion at March 31st, 2019. This was due to our drawdown on the senior unsecured credit facility and increased inventory levels globally, partially offset by lower accounts payable balances.

Capital expenditures for the first quarter were $61.3 million of which $34.4 million was related to the acquisition of an office building in Shanghai and new retail stores in China, $10.9 million related to direct to consumer stores and e-commerce investments worldwide and $10.8 million related to our distribution capabilities around the world as well as general corporate investments. We have thoughtfully reevaluated our capital expenditures for the remainder of the year and are prioritizing only essential and strategic projects. Given the current retail climate, we have dramatically slowed our new store opening plan, at least until we have better visibility into business conditions. We now expect capital expenditures over the remainder of the year to be between $100 million and $125 million, primarily reflecting the completion of our first company-owned distribution center in China. This excludes investments in the expansion of our domestic distribution center, which will continue but which will also be financed separately through the joint venture we operate for that location.

We will also continue to strategically invest in our e-commerce business as this is a critical channel for us to evolve and expand our connection with our consumers, including the rollout of a new POS system, new website, mobile application and loyalty program. We will not be providing revenue or earning guidance at this time as the current environment is simply too dynamic from which to plan results with a reasonable assurance of success.

As David said, while the near term is uncertain, we are confident that we are taking the necessary actions to ensure that SKECHERS will successfully navigate this crisis. Given the strength of our brand, our compelling value proposition and our healthy balance sheet, we believe we are well positioned to continue growing once this situation normalizes.

And now I’ll turn the call over to David for closing remarks.

David Weinberg — Chief Operating Officer

Thank you, John. I am struck by how unusual this year is. And although we have been operating in this new normal very efficiently, it is still not normal. We are appreciative that we have a dynamic and strong team working remotely both here in the United States as well as around the world, all with the goal of staying healthy and ensuring the continued success of SKECHERS. The sales trajectory in China and several other markets in Asia with stores now open is positive. We’re also pleased to report that several international markets are now also starting to open including Germany, Austria, Scandinavia and the Netherlands. We are also optimistic in the strength we are experiencing in our e-commerce business worldwide.

We believe that when consumers return to work and to shopping, they will be looking for comfort and value, and they know SKECHERS has been delivering on this front for nearly three decades. Our pre-crisis brand and online strength was extremely strong, as evidenced by our results. Our ample liquidity, prudent cash management and inventory supply and demand measures taken since mid-March are proving to be a solid foundation as we evolve and adapt. We believe SKECHERS will emerge more efficient, focused and stronger than ever before. We look forward to reopening our stores globally and to see SKECHERS product on the shelves at points of sale around the world.

Now I’d like to turn the call over to the operator four questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Jay Sole with UBS. Please proceed with your question.

Jay Sole — UBS Investment Bank — Analyst

Great. Thank you. And just wanted to say hope everyone associated with SKECHERS all over the world is doing well and staying healthy.

David Weinberg — Chief Operating Officer

Thanks, Jay. [Phonetic]

Jay Sole — UBS Investment Bank — Analyst

My question is about the — thanks. The question is about the online business. Talking about 250% growth month-to-date on skechers.com is a really big number. Can you just tell us what the size is of the Company’s total digital business today across all websites, both retail partners and your own and what is that growing right now?

David Weinberg — Chief Operating Officer

Difficult to say with the retail partners obviously because we don’t get complete details and especially on folks like Amazon and third-party sellers on Amazon while we do get some from our own obviously customers here in Europe and everyplace else. It’s fair to say, I believe, if you take China and what we have on our own online, what we know about people like Amazon and some European and domestic that we must be pushing somewhere in the neighborhood of $500 million a year, I believe, with the running rates we’re going through April, significant and it’s growing dramatically. I think it shows the demand for the brand. It’s always been big in China. As we said, it made up a significant portion of their volume even in the yesteryear and the year before.

But the fact that we can lap the first quarter’s entire online sales in five groups that we have around — that we own ourselves where we have our own stores around Europe here in South America is pretty significant regardless of size. And it is — it’s starting to scale quite nicely and it does continue to increase. So we have plans to continue growing the site. We will be in all countries that we operate a subsidiary, hopefully in the next year to 18 months. So this only has the possibility of continuing to grow and continuing to compound even in the current environment. So we’re very positive about it, we think it’s great and we continue to push forward and bring it out around the world.

Jay Sole — UBS Investment Bank — Analyst

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

David Weinberg — Chief Operating Officer

Outside of China, it’s still all closed our brick and mortar. We have not opened anything. We have some third parties opening in Germany and we’ve gotten quite good results even for SKECHERS sales. We are in the planning stage for bringing them out. We think it won’t be too much longer before we start to bring some out in Germany where they are starting to open and Austria where we have some. I think actually one did open in Austria, but the percentage, to your question, is still tiny.

And even in the US in those places where it will be allowed and we can set everything up as far as safety is concerned, we’re planning on coming back. So all of these great results are still with very little brick and mortar.

John Vandemore — Chief Financial Office

Jay, in China we are close to 100% at this point in time. Most stores are open there. They’re not all at full productivity but most, if not all, stores are open at this point in time which is an incredibly good sign to see.

Jay Sole — UBS Investment Bank — Analyst

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

David Weinberg — Chief Operating Officer

Jay, don’t you understand that the big pieces are brick and mortar, you got to tell me when they’re going to open if you really want to know how much I’m going to spend. I mean, that’s a significant undertaking as they start to come back and the more months they don’t, the more fallow it is. And there’s certainly a lot of projects outstanding.

So, yeah, I think it’s fair to say that from the SG&A perspective as far as — all things that we have in our control, we are limiting as much as possible, keeping an eye for when we reopen and certainly investing in our online business. But until we know on a worldwide basis when we are coming back to business, when people will be back in the offices, when furloughs will end, it’s very difficult to give you a ballpark number on what G&A is going to be.

Jay Sole — UBS Investment Bank — Analyst

Got it. All right. Thanks so much.

John Vandemore — Chief Financial Office

Thanks, Jay.

Operator

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

Omar Saad — Evercore ISI — Analyst

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

David Weinberg — Chief Operating Officer

Yeah, we’re talking about the running rate that we’re building into through April now and what exists in China for a somewhat longer period of time. Obviously, we’re up 275%. We didn’t have that running rate in the first quarter, but we are growing into it now. And also that adds — remember we’re taking a little poetic license here because we know what we sell to Amazon and what we sell to other people that are big customers that sell online and have ballpark numbers for what it is. When you put them all together, it certainly should have a run rate to-date, with everything else being closed, in excess of $500 million. I think that might actually be a small number given the size of Amazon and some of our other customers, both in Europe, here and in South America. And then you add our own site here and our site in China and you start to get pretty significant numbers.

Omar Saad — Evercore ISI — Analyst

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

David Weinberg — Chief Operating Officer

Well, we have already started. So if you go back to the old conference calls, we’ve already broken ground. Bulldozers are out in our Moreno Valley facility. That new building will be specifically for online business. We’ve taken an additional 700,000 square feet in Belgium, which is our other big facility that will also be predominantly for online and the growth that’s there.

I would go back and tell you one thing from the beginning of your question that you said the focus is shifting and we’ll be moving that way. We were planning on moving this way for quite some time. That’s in addition to keeping focus on what we continue to do. We don’t believe that we won’t come back strong in our brick and mortar and our wholesale business as we continue to go down. We’re not sacrificing or moving away from any of that stuff. This is just something we had seen in the past. We’ve always believed and we want to get to our consumers any which way they want us to get to them and online was obviously a growing factor.

I guess if we had to do it over again, we would have been a year ahead and maybe been in 10 more countries and had even a higher number as far. [Phonetic] But we are in the process, we have our systems in place, we have our systems in place to upgrade our POS and our retail stores for a more significant omnichannel presence as well as our online and the distribution capacity to do that in all our big places in the world. And that will be the model for other countries in the world as we roll it out to our subsidiary base.

Omar Saad — Evercore ISI — Analyst

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

David Weinberg — Chief Operating Officer

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

Omar Saad — Evercore ISI — Analyst

Got it. Congrats on all the brand momentum.

David Weinberg — Chief Operating Officer

Thank you.

Operator

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

Kimberly Greenberger — Morgan Stanley — Analyst

Okay, great. Thank you so much and thanks for all the detail on the call today. We really appreciate it. I wanted to follow up on China and ask in aggregate so far here in the second quarter to date is your total revenue in China back to positive growth or is it that some pockets like e-commerce are positive growth but stores are still negative? If you could just help us understand that. And then also just remind us what percentage of revenue — what percentage of total SKECHERS revenue does China represent? And then I have a follow-up on gross margin, but let’s start with that one.

David Weinberg — Chief Operating Officer

Okay. Well, you’re right the first time and our e-commerce business is comping positively most weeks now, it’s special. The stores are open and while some may be comping positive in the aggregate, they’re back to about 70%, 75% I believe of what they were a year ago and certainly growing and you see consistently throughout the month as it goes forward. So they are not quite there.

And last year, if I remember correctly, and John probably jump in, we did about $850 million give or take in China proper of the $5 billion plus that we did as a company.

John Vandemore — Chief Financial Office

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

Kimberly Greenberger — Morgan Stanley — Analyst

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

David Weinberg — Chief Operating Officer

Yeah. So first let me elaborate a bit that is entirely international. If you actually look at the domestic margins, they are very good this quarter. We are seeing very good trajectory. The domestic wholesale business was doing very well, some positive mix shifts there as well as improved pricing. Direct to consumer prior to the shutdown was seeing some improved pricing. So the domestic gross margins were actually doing very, very well in the quarter. So it’s entirely attributable to two things, really. Yes. The China — the impact in China and the recovery certainly has been there on a unit level. It’s trailing a little bit on the revenue side in particular as many retailers are offering discounts to get consumers back into the store. It’s also attributable to the purchase price accounting that we called out in Mexico, which is, again, it’s a non-cash charge that’s rolling through related to the stepped-up value of some inventory that was there at acquisition. So no actual cash outflow, but more of an accounting charge than anything else.

After that you saw a little bit of weakness in gross margins in some European markets in particular as the pandemic began. I mean it started a little bit earlier in several European markets and that caused a little bit of weakness in March. Overall though, I would attribute most of it to pandemic related outcomes in China and the purchase price accounting again we’d highlight that the domestic margins were really good in the quarter.

Kimberly Greenberger — Morgan Stanley — Analyst

Great color. Thank you so much.

Operator

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

Tom Nikic — Wells Fargo — Analyst

Hey, David. Hey, John. Thanks for taking my question.

David Weinberg — Chief Operating Officer

Hi

Tom Nikic — Wells Fargo — Analyst

I want to ask about expenses. I know it’s sort of difficult to —

David Weinberg — Chief Operating Officer

Yeah.

Tom Nikic — Wells Fargo — Analyst

Get through this and have all the stores closed. But you mentioned some select furloughs, is that just the store employees that you furlough, employees in the corporate offices or DCs or anything like that? And can you just let us know when the furloughs began?

David Weinberg — Chief Operating Officer

Well, the furloughs began, I believe at the retail level two weeks after we closed the stores and we had the two-week guarantee in some of them. We’ve kept a number of people when we began furloughs. I think it’s important to note, this is a worldwide issue. So some of it or a bigger — big piece of it has to do with our foreign where governments had different taxing and what they’ve done as far as furlough and personnel is concerned. In Europe, we have more of a contribution from the government to keep people on payroll and they contribute to it rather than in the United States where they — rather that we furlough them and they get unemployment to the point that they may not pay for them to come back too quickly. So we have two different scenarios there.

It’s safe to say that they’ve been going steadily as we’ve seen what we need, what we don’t need, who is working. We have a lot of people that are working very hard. So it’s been consistent and consistent with the demands of the business probably since we closed the stores, both from the office and for the retail.

John Vandemore — Chief Financial Office

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

Tom Nikic — Wells Fargo — Analyst

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

David Weinberg — Chief Operating Officer

Thanks, Tom.

Operator

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

John Kernan — Cowen & Co. — Analyst

Good afternoon, everyone. Thanks for taking my question.

David Weinberg — Chief Operating Officer

Hi.

John Vandemore — Chief Financial Office

Hi, John.

John Kernan — Cowen & Co. — Analyst

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

John Vandemore — Chief Financial Office

I mean the one thing I’d point out there there is still core operation capability that we retain right now in addition to the online business in China, we’re still receiving goods. We need to keep the ports clear. So we’re taking in goods. We’re also very actively managing the production commitments that we have to bring those plus our existing inventory into line with demand. That’s a key activity that we undertook really right away and have been working on diligently ever since.

On the wholesale channel, we’re waiting to hear about our major wholesale customers and when they will begin taking in goods. We have seen some positive energy in that area recently as many begin to contemplate reopening their retail base. That’s been a very good sign. It’s consistent with what we’re considering in our own retail line. But it’s also clear that other markets in some instances are as different point in the curve. So what we’re starting to see develop is a fairly consistent approach where retail is halted and then it starts to get back up and running and orders need to be readjusted so that hopefully in most countries end up on a trajectory similar to China, which again at this point is very encouraging, given the trends we’ve seen. So I would say we’re perfectly poised to be able to handle all of that in are ready to. But it needs to be on a case by case almost country-by-country basis and that’s how we’re addressing it right now.

I would add, there is still some customers we’re shipping to actively. A lot of the online players even some of our wholesale accounts who have online business as David mentioned, we’re doing fantastic business through those partners as well. So there still is some core shipping going on, although it’s clearly not at the levels that would be the cased normally.

David Weinberg — Chief Operating Officer

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

John Kernan — Cowen & Co. — Analyst

Got it. Maybe a quick follow-up to a point John made. Just on the inventory, it is up 33% on the balance sheet, obviously there is tremendous dislocation in the market. Inventory is up everywhere now. But just the freshness of that inventory and the ability to get it through the channel when things do get back up and running.

David Weinberg — Chief Operating Officer

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

John Vandemore — Chief Financial Office

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

John Kernan — Cowen & Co. — Analyst

It’s really helpful. Thanks, guys, and best of luck.

David Weinberg — Chief Operating Officer

Thanks, John.

John Vandemore — Chief Financial Office

Thanks, John.

Operator

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

Sam Poser — Susquehanna Financial Group — Analyst

Good afternoon. Thanks for taking my questions. I just for the — what are your baseline like based on what you’re seeing right now, I mean are you presuming you’re shut down through May as far as retail in the US. And I mean, how are you thinking about it and if so in the second quarter alone, how much — where you are right now for Q2 on SG&A? Where — I mean, help us a little bit there. In Q2 what is the ranges we should be looking to have?

David Weinberg — Chief Operating Officer

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

Sam Poser — Susquehanna Financial Group — Analyst

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

David Weinberg — Chief Operating Officer

All right. Sam, I will tell you only because I like you.

Sam Poser — Susquehanna Financial Group — Analyst

Yeah.

David Weinberg — Chief Operating Officer

And — but the questions are there [Phonetic]. The one thing you know all — and everybody has been up to it, advertising has been cut significantly at least for April and May, where there is nothing happening. So if you start there you see it’s very serious and that is one of our larger expenses. So while we do continue to advertise online and push for online sales through a number of ways so we obviously don’t have as bigger presence on TV and print, and that will be significant.

So if your point is to find out if we’re taking it serious, I can assure you we’re serious and there is no expense certainly from a cash basis. And remember we’re managing expenses as well as cash that we’re not taking advantage of.

John Vandemore — Chief Financial Office

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

Sam Poser — Susquehanna Financial Group — Analyst

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

David Weinberg — Chief Operating Officer

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

Sam Poser — Susquehanna Financial Group — Analyst

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

David Weinberg — Chief Operating Officer

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

Sam Poser — Susquehanna Financial Group — Analyst

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

David Weinberg — Chief Operating Officer

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

Sam Poser — Susquehanna Financial Group — Analyst

Thank you very much and stay safe and good luck in all these. [Phonetic]

David Weinberg — Chief Operating Officer

You too. Thank you.

John Vandemore — Chief Financial Office

Thanks, Sam.

Operator

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

Susan Anderson — B. Riley & Co. Inc. — Analyst

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

John Vandemore — Chief Financial Office

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

David Weinberg — Chief Operating Officer

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

Susan Anderson — B. Riley & Co. Inc. — Analyst

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

John Vandemore — Chief Financial Office

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

David Weinberg — Chief Operating Officer

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

Susan Anderson — B. Riley & Co. Inc. — Analyst

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

David Weinberg — Chief Operating Officer

Thank you.

John Vandemore — Chief Financial Office

Thank you.

Operator

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

Christopher Svezia — Wedbush Securities — Analyst

Good afternoon, gentlemen. [Speech Overlap]

David Weinberg — Chief Operating Officer

Hey, Chris.

Christopher Svezia — Wedbush Securities — Analyst

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

David Weinberg — Chief Operating Officer

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

Christopher Svezia — Wedbush Securities — Analyst

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

David Weinberg — Chief Operating Officer

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

Christopher Svezia — Wedbush Securities — Analyst

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

David Weinberg — Chief Operating Officer

I think we said low to mid. Yes.

Christopher Svezia — Wedbush Securities — Analyst

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

David Weinberg — Chief Operating Officer

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

Christopher Svezia — Wedbush Securities — Analyst

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

John Vandemore — Chief Financial Office

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

Christopher Svezia — Wedbush Securities — Analyst

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

John Vandemore — Chief Financial Office

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

Christopher Svezia — Wedbush Securities — Analyst

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

John Vandemore — Chief Financial Office

We’re not prepared to give a stores number, but obviously it’s going to be significantly curtailed. So, part of it depends on how the environment unfolds, part of it quite frankly depends upon what type of environment we emerge into. There may be some really attractive opportunities at some point in time. So, we don’t want to give a commitment number. What I would tell you is, we need to wait until we have better visibility into the retail environment before we make those decisions.

David mentioned a point though that I think is incredibly important. It doesn’t in any way disabuse us the appetite to continue to grow and grow at the store level. I think in addition to the e-commerce growth we’re seeing, we believe that combination of online and physical solutions for consumers is what works best. And I think it’s also because we have the unique ability to grow our brand better than most. As the retail environment continues to shake out from here, there will probably be incremental opportunity and market share up for grabs that we’ll want to take advantage of. The corporate headquarters we’re making a decision on and we’re still evaluating. That’s a phased project. So, we have the ability to throttle in some areas and not in others. But, we’re exercising all of that judgment on a case-by-case basis.

Christopher Svezia — Wedbush Securities — Analyst

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

John Vandemore — Chief Financial Office

Thanks, Chris.

Operator

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

Jim Duffy — Stifel — Analyst

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

David Weinberg — Chief Operating Officer

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

John Vandemore — Chief Financial Office

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

Jim Duffy — Stifel — Analyst

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

David Weinberg — Chief Operating Officer

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

Jim Duffy — Stifel — Analyst

Great. I’ll leave it at that. Thank you, guys.

Operator

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

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

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

John Vandemore — Chief Financial Office

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

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

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

David Weinberg — Chief Operating Officer

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

James Chartier — Monness, Crespi, Hardt & Co., Inc. — Analyst

Great. Thank you.

Operator

[Operator Closing Remarks]