Apr 30, 2020
Operator
Ladies and gentlemen, thank you for standing by. And welcome to the Hanesbrands' First Quarter 2020 Earnings Conference Call.
At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session.
[Operator Instructions] Please be advised that today's conference maybe recorded. I would now like to hand the conference to your host, Mr.
T.C. Robillard, Chief Investor Relations Officer.
Please go ahead, sir.
T.C. Robillard
Good day, everyone, and welcome to the Hanesbrands' quarterly investor conference call and webcast. We are pleased to be here today to provide an update on our progress after our first quarter of 2020.
Hopefully, everyone has had a chance to review the news release we issued earlier today. The news release, updated FAQ document and a replay of this call can be found in the Investors section of our hanes.com website.
On the call today, we may make forward-looking statements, either in our prepared remarks or in the associated question-and-answer session. These statements are based on current expectations or beliefs and are subject to certain risks and uncertainties that may cause actual results to differ materially.
These risks include those related to the impact of the Covid-19 pandemic, as well as related measures to combat the pandemic taken by governmental or regulatory authorities on our business and operations, as well as the business and operations of the consumer, our customers, suppliers, business partners and labor force. As well as those risk detailed in our various filings with the SEC which may be found on our website, as well as in our news releases.
The company does not undertake to update or revise any forward-looking statements, which speak only to the time at which they are made. Unless otherwise noted, today's references to our consolidated financial results, exclude all restructuring and other action related charges and expenses.
Also please note that unless otherwise stated, all prior year comparisons are to 2019 results that have been rebased to reflect the Exhibit C9 Champion program at target and DKNY intimate license. Additional information, including a reconciliation of these and other non-GAAP performance measures to GAAP, can be found in today's press release.
With me on the call today are Gerald Evans, our Chief Executive Officer; and Scott Lewis, our Chief Accounting Officer and Interim Chief Financial Officer. For today' call, Gerald and Scott will provide some brief remarks, and then, we'll open it up to your questions.
I will now turn the call over to Gerald.
Gerald Evans
Thank you, TC. Good morning and thank you for joining our first quarter earnings call.
Given the uncertainty in the market, we understand that investors are more focused on how our business is positioned to perform in both the current and post pandemic environments. Well, we'll discuss our first quarter results including our better than expected in order performance through mid-March, our focus for today's call will be on our current business trends, our cost reduction initiatives; the creation of a new business line for cloth mask and personal protection garments and our substantial liquidity position, which we believe provides ample capital cushion even under a prolonged shelter-in-place scenario.
This combination maximizes our operating flexibility in the current environment, strengthens our long-term earnings growth profile and positions us to take advantage of current and future opportunities. Before I speak to the quarter's results, I want to recognize the efforts and sacrifices being made by Hanesbrands' employees around the world.
They have allowed us to continue to serve our customers and consumers during these uncertain times. They're also the driving force behind Hanesbrands' established reputation for corporate citizenship and social responsibility.
As an organization, we have committed to help fight this global pandemic, which includes shifting our manufacturing to produce cotton facemask. Our employees are our greatest asset, which is why I would like to personally thank each one of them for their contributions.
Turning to our results. The first quarter was marked by two radically different periods as the global spread of the coronavirus accelerated in March.
We experienced an unprecedented sudden drop in sales and profit late in the quarter. Although, we have seen orders resumed in April.
Our global shipments and sales essentially stopped in the last two weeks of the quarter, as our customers reacted aggressively to the shelter-in-place announcements by delaying or canceling their orders. This above reaction by our customers more than offset the strong revenue and profit performance across our businesses through the second week of March.
Particularly within US Innerwear and US Activewear. Through mid-March US Innerwear revenue was down less than 1% over prior year, well ahead of our initial forecast as our turnaround initiatives were gaining momentum.
During this period, point of sale at our Top 7 customers which is where we focused our new innovations or revitalization efforts increased 3% in both basics and intimates. And our market share improved meaningfully in basics bras and shapewear.
And in US Activewear, revenue through mid-March was up mid to high single digits driven by Champion. For the quarter, our cash flow performance was strong and ahead of our plan despite the sudden COVID-19 related falloff late in the quarter.
Inventory reduction initiatives timely, supply chain actions and strong working capital management delivered a year-over-year improvement in cash flow from operations of more than $100 million. In the quarter we estimate that COVID-19 impacted revenue by approximately $181 million, operating profit by approximately $86 million and earnings per share by approximately $0.20, adjusting for the COVID related impact, first quarter revenue would have increased 1.6% on a constant currency basis, operating profit and operating margin would have been consistent with prior year and earnings per share would have increased 14%.
Make no mistake; the COVID-19 environment is a true challenge. However, we are encouraged by our pre-COVID performance and underlying business trends.
This underscores the health of our brands, the building momentum in our US Innerwear business, the continued consumer demand for Champion and the strength of our cash flow model. Given the long-term stability of our categories, we're confident, our business can return to these performance levels in time.
We have seen orders resume in April as consumers and retailers have begun to adapt. Online growth has rapidly accelerated each week, reaching triple-digit growth rates across a number of our customers, online platforms, as well as our own champion.com and maidenform.com sites.
Consumers are also buying our categories at stores within the mass, hypermarket, and dollar store and drugstore channels. The basics reset at a large mass retailer are progressing and we have back-to-school orders from some of our large customers.
Over our 120 year history, we have faced a number of significant challenges. Each time, we've adapted our model, improved our position and emerged a stronger company, and we expect to do the same in light of this recent challenge.
Given the uncertainty around the reopening of global economies, as well as the level of consumer spending, we have modeled a number of financial scenarios. These range from a late May reopening of retail doors to an early July reopening.
And we even ran a stress test scenario that assumes doors do not reopen until early October. As a result, we developed a pandemic strategy designed to maximize our operating flexibility under any of our modeling scenarios, while also strengthening our long-term business model and positioning us to take advantage of opportunities.
This strategy consists of four initiatives. One, support our current customers.
Two, reduce cash based expenditures. Three, ramp new revenue opportunities.
And four, ensure we have ample liquidity even under our conservative stress test scenario. Touching on each of these initiatives.
First, we're supporting our existing customers that remain open in a safety first manner. We're starting to see a new baseline of orders within this customer set and we're focused on aligning our inventory and production to be able to meet their back-to-school and holiday plans.
The second initiative is to reduce cash-based expenditures. We have reduced our CapEx to critical needs as well as suspended share repurchases.
We're aggressively managing our working capital. We've taken a number of timely actions to reduce inventory.
We're working with our suppliers to extend our payable terms and many of our largest customers continue to pay on schedule. We have also implemented approximately $200 million of cost reduction initiatives.
The majority of these savings are from the temporary salary reductions and furloughs that began in mid-April. The remainders are a mix of discretionary spending areas including media and marketing.
However, we are continuing to invest media and marketing dollars within the digital channels as the pandemic is driving further penetration of online shopping. The third initiative in our pandemic strategy is to ramp our mask and protective garment business.
We believe this has the potential to be a substantial contributor of incremental profit and cash flow over the next several years. Our ability to quickly shift our manufacturing operations to produce new products underscores the competitive advantages of owning our manufacturing network that is balanced across hemispheres.
We are currently manufacturing reusable facemask for the US government, as well as launching a Hanes branded consumer program for several customers. Combined, we believe these programs can generate well over $300 million of sales in 2020.
Looking forward, there is an expectation that the COVID-19 pandemic will result in more widespread mask usage by consumers and businesses globally. Over the past several weeks, we have seen a strong influx of inquiries across a number of geographies from governments, retailers, large corporations and individual consumers.
Based on the current interest from potential customers, as well as the anticipated change in consumer behavior around the world, we believe our mask and protective garment business could be a sizable revenue opportunity with growth potential over the next several years. And the fourth initiative in our pandemic strategy is to further strengthen our substantial liquidity position.
While this may prove to be overly conservative, we want to be prudent and proactive given the unpredictability of the virus. Subject to market conditions, we intend to secure approximately $500 million in debt financing with the proceeds used to repay our revolver, thereby increasing our liquidity to nearly $1.6 billion.
We believe this level of liquidity provides us with an ample capital cushion even under stress test modeling scenarios. So in closing, our brand positions are strong.
Our supply chain continues to create substantial value. The combination of our pre-COVID performance and the addition of a new protective garment business points to a strong growth profile once the environment stabilizes.
And we are a strong cash flow generator with ample liquidity. We believe all of these positions us to once again emerge from a challenging environment as an even stronger company, one that is well positioned to take advantage of opportunities.
And with that, I'll turn the call over to Scott.
Scott Lewis
Thanks Gerald. Despite the unprecedented rapid fall off in consumer demand in March due to the global pandemic, we are still able to reduce the inventory by 12% over prior year, improved cash flow from operations of more than $100 million and demonstrate that we have the right turnaround plan in place for U.S.
Innerwear. In addition, we identified and ramped a new business model in less than 30 days in the midst of the crisis.
These are all indications of the strength and the flexibility of our business model. Turning to our results, first quarter sales declined 12% over prior year to $1.32 billion with foreign exchange rates accounting for 135 basis points of a decline.
Excluding the COVID related impact; we estimate first quarter sales would have increased 1.6% over prior year on a constant currency basis. Adjusted gross margin of 37.6% decreased approximately 300 basis points over last year, and more than half of decline due to the impact from COVID-19 and foreign exchange rates.
Remainder of the decline was driven by the expected transactional FX and mix related headwinds. Adjusted operating margin of 4.8% declined approximately 520 basis points.
Although the decline was due to the estimated $86 million impact in COVID-19 which includes an accrual for anticipated bankruptcies of approximately $11 million or $0.03 per share. Interest and other expense declined $12 million to approximately $43 million due to lower average debt balances throughout the quarter.
Restructuring and other related charges were approximately $29 million. Recall that the majority of our four year supply chain restructuring actions and program exit costs were planned for the first quarter.
Our full year restructuring and other related action plans remain unchanged. In the quarter, we repurchased approximately 14.5 million shares with the vast majority purchased in February.
For the remaining three quarters of the year, we expect average diluted shares of approximately 353 million. Adjusted earnings per share were $0.05.
Our GAAP earnings per share were a loss of $0.02. Excluding the estimated $0.20 per share impact from COVID-19, adjusted EPS would have increased 14% of our prior year.
Now let me take you through our segment performance. In each of our segments revenue and profits trends were at or above our expectations due early to mid-March.
This performance, however, was more than offset by the sudden COVID-19 related falloff particularly in the last two weeks of the quarter. As our customers postponed or canceled orders and reaction to shelter-in-place orders around the world.
Looking at the pre-COVID-19 trends in our segments, our US Innerwear segment performed well above our expectations through second week of March, as revenue was down less than 1% over prior year. During this period, we were experiencing solid trends across all channels including strong basics outperformance within the test stores of a large mass retailer.
We believe our pre-COVID-19 performance including point of sale and market share trends demonstrate our innovations and intimates revitalization efforts are working. Turning to US Activewear, through second week of March, revenue was tracking up mid to high single digits compared to prior year and was ahead of our expectations.
A strong performance during this period was driven by continued demand for Champion as well as growth in our other Activewear brands led by sports licensing in the mass and mid-tier channels and seasonal Activewear in the online channel. Switching to our International segment.
The timing of the coronavirus impact varied by country and region. On a constant currency basis, revenue through February increased at a low single digit rate in nearly all of our main geographies.
Growth in Latin America and Australia was innerwear driven. Our Europe's growth over this time was led by Champion.
Touching briefly on our global Champion business excluding C9, constant currency revenue for the quarter declined over the prior year both domestically and internationally. Adjusted for the estimated COVID-19 related impact global Champion sales would have increased approximately 7% over prior year.
Turning to cash flow and the balance sheet, we delivered a strong cash flow performance in the quarter. Cash flow from operations improved about a $111 million over prior year, it was ahead of our forecast.
This strong performance was driven by previously planned inventory reduction efforts, continued working capital discipline and timely actions taken within our manufacturing network including planned capacity reductions as well as our ability to manufacturing face masks. With respect to our balance sheet, inventory declined approximately $270 million, or 12% compared to last year.
We ended the quarter with nearly $1.1 billion of cash on hand and leverage was 3.6x on a net debt to adjusted EBITDA basis as compared to 3.5x last year. Our current liquidity position is strong.
However, given the unpredictability of COVID-19, we want to be prudent. Therefore, we have taken two proactive steps to maximize our operating flexibility and further strengthen our substantial liquidity position.
First, we closed on a 15 month covenant Amendment on our senior secured credit facility, which includes the suspension of our leverage covenant till the end of the second quarter of 2021. And second subject to market conditions, we intend to secure approximately $500 million of debt financing with the proceeds used to repay our revolver, therefore, increasing our liquidity to nearly $1.6 billion.
All these precautions may prove to be overly conservative, we want to ensure that even under our stress test scenario, we had a significant capital cushion and that we're able to maximize our operating flexibility and be well-positioned to take advantage of opportunities. Due to the uncertainty and unpredictability of the COVID-19 pandemic, as well as the current lack of visibility in our business environment, we are not providing second quarter or full year 2020 guidance at this time.
However, I would like to share a few thoughts to help frame some of our key levers within our business model. Currently stores that represent approximately half of our sales are closed.
We have modeled several different financial scenarios driven by the timing of these doors reopening. In our base case, we assume these stores gradually reopen beginning in late May and our downside scenario we assume doors begin gradually reopening in early July.
We even ran a stress test scenario that assumes these doors do not reopen until early October. Each one of our financial modeling scenarios indicate that the second quarter is expected to be the low point for revenue, profit and cash flow and that we're able to generate positive cash flow for the second half.
Some of the other key assumptions that are consistent across our various modeling scenarios include, our mass revenue comes primarily in the second quarter. We had a high 30% in decremental operating margin, a tax rate of 14.5%, extended payment terms of roughly half of our receivables balance and a net neutral effect from working capital.
So, in closing, we're in a strong position to navigate the COVID-19 environment. We have taken a number of proactive steps in terms of costs and cash flow management, identifying and ramping new source of revenue and further strengthening our substantial liquidity position, all of which we believe maximize our operating flexibility, strengthens our long-term business model and positions us to take advantage of current and future opportunities.
And with that, I'll turn the call back over to TC.
T.C. Robillard
Thanks, Scott. That concludes our prepared remarks.
We'll now begin taking your questions, and we'll continue as time allows. I'll turn the call back over to the operator to begin the question-and-answer session.
Operator?
Operator
[Operator Instructions] Our first question comes from the line of Omar Saad with Evercore ISI. Your line is now open.
OmarSaad
Thanks for taking my question. Good morning, gentlemen.
Congrats on a decent quarter given the backdrop. I appreciate all the information.
I'm going to ask my question a little bit more on the offense versus the defense side of the equation, and I was pretty interested in some of your commentary around the e-com trends you're seeing especially Champion.com as well as the masks program. Maybe on the e-commerce side you could give your thoughts in terms of the traffic, how sticky you think it is there, where we are on the Champion website, apps loyalty program, hanes.com too, maybe give us a little update there, what's happening on the Hanes site.
And then just a little bit more color on the masks program. It sounds like you think it's both in near and maybe a more medium or long-term opportunity, and some color there in terms of what you're able to do, what types of customers you'll be working with and it's -- the number you put out there for this year is that all government programs like a $300 million numbers that all government programs or that includes in consumer as well.
Thanks.
GeraldEvans
Sure, Omar. Good morning.
This is Gerald. Let me take you through that.
We are - as we came out of April out of March and April, we did see orders resume with our consumer - in the doors that we're opening. We did see consumer behavior began to normalize where we were selling products.
And we've seen nice improvement in trends in our doors that are open across the mass channels and dollar stores and so forth. And importantly online to your specifically to your question.
We've seen strong increase in sales across our categories and I'm talking to you really globally here. We've seen generally a doubling of sales over the last few weeks to a normal level on our online sites.
And in the case of champion.com for example, we've seen a tripling of rate and we're getting the rates that are at the Black Friday or Cyber Monday rates. So we see a real strength coming in.
And to -- hanes.com as well as has been delivering extraordinary results and maidenform.com as well that we just ramped last year. So we're very pleased with how they're performing.
We do think that the effort we've put into building direct businesses is paying back for us right now. And we're on course and I think that we're all convinced it is going to be an increasingly important part of our businesses as we go forward.
So we're very pleased with that. It tells us the consumers out there and they're looking for our products.
And I think specifically in Champion that's a great example. This is some of the brick and mortar outlets went down, they found our site and they've been buying very aggressively in that channel looking for the brand they love.
From the standpoint of the mask program, we are very pleased with the mask program as well. We got in initially as a way to supplement a shortage of supply working with a government consortium and much of the number that we discussed in the call was that program which we ramp very rapidly now and we're distributing to the government.
We have though identified an opportunity for a consumer program as well. We've been getting questions from some of our retailers and so forth.
So we're launching a Hanes Mask Program right now. So there's is a modest amount of volume and the number we quoted which is that program as well.
But looking forward, we think there's potential for this business to not only be a permanent business, but to be a bigger business over time. We see the changing in consumer behavior.
We see the fragmentation in the supply base and we're getting lots of inquiries from governments around the world. This is just not an American thing, this is a global a - global need, we're getting it from governments, we're getting it from businesses as they begin to think about opening up and we're getting it from retailers wanting to reach consumers.
And there's an online possibility here as well. So these are the kind of categories that when they emerge as that we think we're uniquely qualified to take in and manage and frankly drive sales and margin.
When we look across at the opportunity bring a trusted brand like Hanes in combination with innovation and run it through our large scale production and sell it through our international network really tells us this is a business to build upon.
Operator
Our next question comes from Susan Anderson with B. Riley FBR.
Your line is now open.
SusanAnderson
Hi. Good morning and thanks for taking my question.
Nice job managing the business and the cash flow in this environment. And I was wondering if maybe you could touch on the production side of things.
It sounds like you're kind of running your plans based on supply. So I guess is that mean you're opening for a few weeks and then shut and then how does that kind of flow through the P&L?
Are there any costs that way on the system I guess to start and stop? And then it sounds like digital is off to a strong start, I don't know how much detail you can provide just on the C9 launch on Amazon.
I am sure it's clouded by the environment, but any thoughts there would be great. Thanks.
GeraldEvans
Sure. Thanks for that, Susan.
On the supply chain side, we saw the -- as we saw the March sort of abrupt end of sales or this locked down of markets come. We took very aggressive action taking down our supply chain to keep our inventory in line and as you can see from a strong cash flow in our inventory positions, inventory was an important part of delivering that cash flow.
That did create some additional deleverage in the quarter, about $12 million of variances did come through as we took the time to take that down and protect the cash flow. We since now pivoted our supply chain to making masks in many cases, as well as we have a demand adjust in some of our facilities to protect the facilities and the production, so that as we see demand ramping back up, we're prepared to ramp back up into that back-to-school period and like everything else, we're planning a number of scenarios to ensure that we're ready to service the businesses around the world as they ramp up.
The cash flow was an important achievement for us. We came in over in a $100 million, lower in usage this year than last year on cash flow and if you look at that on a 12-month basis now that would put our operating cash flow at over $900 million, which was the objective we set up in our 2018 Investor Day.
So, a very important milestone, speaks very strongly to this underlying strength of the business as we emerge from this pandemic. From the standpoint of C9, we did launch C9 mid-March, so just not too long ago now, and it's off to a good start.
We launched it fairly smaller with them -- on a small basis with Amazon. We've seen it perform, I think we're both very pleased with where it is and we'll see how it ramps, it did get a little masked by all the other noise in the market.
but I think it's performing up to expectations at this point.
Operator
Our next question comes from Jay Sole with UBS. Your line is now open.
Jaysole
Great. Thanks so much.
I just got a question about the inventory. Obviously, inventory down 12% is a good sign.
Within the innerwear obviously there's not a lot of markdown risk because it's very basic items except maybe some of the intimate apparel that's kind of seasonal has some colors that are seasonal, but can you just walk us through the Activewear segment, gear for sports knights alternative like what kind of maybe -- what percentage of the inventories more seasonal in that business and then maybe international thinking about bonds, some of the other parts there that maybe we don't talk about as much. What kind of actions might you have to take in Q2 to sort of move through that inventory and get clean to have a strong rebound in fiscal 2021?
GeraldEvans
Yes. And the initial actions we took were to take the supply chain down immediately in mid-March.
But what I would say beyond that as we look over the horizon, we've been thoughtful as we look in the Activewear business into a narrowing our offering, working specifically with the customers that we think will reopen and ensuring that we have the sets for them, but we're not taking any risk on overhang. We don't believe the products going to be sold, while we are not producing it at this point in time.
So we don't feel that we're going to have a lot of Activewear overhang or seasonal overhang as we look to the next season. In the instance of our bookstore business and so forth, we produce that to order for the accounts; we produce small run productions to meet the individual needs of the bookstore.
So we again, we feel that we're well positioned there in inventory. And as we look at our global businesses and I'll use bonds as a great example, that is a business that is heavily retail in our own stores, as well as online and we flow goods frequently through that model.
So as a result, we don't hold a lot of one specific line at any point in time and we made the appropriate adjustments. So we think we're well positioned from an inventory standpoint to ramp back up without having any real trailing inventory to deal with of any significance.
Operator
Our next question comes from Jim Duffy with Stifel. Your line is now open.
JimDuffy
Thank you and good morning. You guys spoke to orders for back to school.
Could you generalize the degree to which these are below prior year or prior expectation? And then a point of clarification on the $200 million spending reductions.
Did any of this amount get captured in the first quarter?
GeraldEvans
Yes. Hi, Jim, this is Gerald, let me take the first, and I'll let Scott talk about the second part of that question on the savings.
From the standpoint of looking at back to school, as we noted in our comments about half of our doors are open at this point in time certainly the mass channels and so forth are open and the dollars stores, and they are very actively planning back-to-school with us, it's a fluid situation at the standpoint of the entire account base that we have because some are still shut down at this point. But the ones that are open are very actively planning for back to school; we're in dialogue with the ones that are still closed and looking at multiple scenarios with those accounts as well.
And as I noted in one of my prior comments, we're aligning our production under various scenarios to build a ramp up to take advantage of that. So early days to know exactly how big back-to-school will be in total, but I think with our key customers that are open we're expecting a good back-to-school and we'll plan with the others as they ramp back up.
Scott, do you want to take the second part of that question.
ScottLewis
Yes. Sure.
Good morning, and thanks for your question. Yes.
We are very focused on reducing cost in this environment especially cash base expenditures, and to your point that we've already identified over $200 million of cost reductions this year. We did see a little bit in the first quarter, but the vast majority of those cost saves will be in the second quarter and we'll continue on depending on the extent of the duration of the COVID-19 virus and the store openings and when they come back on.
The discretionary spending focus right now as we are reducing that in every place that we can, especially very focused on media and marketing reducing spending in those areas.
JimDuffy
Really not much and none in the first quarter.
ScottLewis
Very little in the first, but again most heavily in the second quarter.
Operator
Our next question comes from Paul Lejuez with Citi Research. Your line is now open.
KellyCrago
Hi. Thanks for taking my questions.
It's Kelly Crago for Paul. I'm just curious about your exposure to some of the weaker customers out there in the department store channels, we've heard some topics, and some stores might not reopen at all.
So what is your exposure to some of those bigger department store channels, how are those discussions going with your customers there. And then secondly on mask gown program, could you give any color on the margin profile there?
Thank you.
GeraldEvans
Sure. Let me let me start with the customers.
We constantly monitor our exposure with all our customers as well as we're in conversations with them. As you know, we sell across all channels of trade and some are open -- some are not open at this point in time.
And so, we feel we have adequately covered our exposure at this point in time and we'll continue to stay in touch with our customers certainly as we assess our liquidity models. We're very thoughtful about pressing on their receivable side as well to make sure that even in the lowest scenarios where we're well covered.
So we feel we've adequately covered it from the channel standpoint. From the profile of the mask business and so forth, I'm not sure if you're asking me to size or the opportunity.
We see that the -- the profile of it going forward there is a very large consumer usage opportunity that's emerging, there's always been more in the medical side and so forth. But what we see is consumer behavior changing that on a global basis and in fact it's a mandate that's emerging for some of these markets to reopen its consumer usage.
So, we like what we see there and the margin profile we think is we've run it through our mass production capabilities could be in line with the corporate average.
Operator
Our next question comes from Tiffany Kanaga with Deutsche Bank. Your line is now open.
TiffanyKanaga
Hi. Thanks for taking our questions.
Considering the now suspended leverage covenant of 4.5x net debt to EBITDA, do you anticipate exceeding that threshold in the coming quarters and maybe if you can give a little more color around where do you see the most flexibility remaining to preserve cash beyond the measures you've already successfully implemented?
ScottLewis
Yes. Sure.
Good morning and thanks for your question. Actually earlier this week, we put in place a temporary amendment to our senior secured credit facility that suspends our leverage covenant until the third quarter of 2021 with the current challenging and uncertain environment.
We felt like we were in the -- we wanted to do that now and help us with maximizing our operational flexibility as we manage through the crisis. The covenant does contain some additional financial covenants like maintaining minimum liquidity balance and EBITDA levels, but we're very confident that we'll maintain compliance with these covenant requirements over that period.
Like Gerald mentioned earlier, we ran several different scenarios including a stress test model which had a prolonged shelter-in-place with stores not reopening until October and we made that covenant threshold even under that stress test financial scenario. And while this may be -- this precaution may be truly over concerned about getting the amendment, we feel like this step is necessary and gives us flexibility and allows to take advantage of opportunities as we move forward.
Operator
Our next question comes from the line of Michael Binetti with Credit Suisse. Your line is now open.
KCKatten
Hi. This is KC Katten on for Michael.
Thank you so much for all the color today. I know you talked about a couple of different scenarios about reopening timelines, but if you look to the back-to-school orders you have so far and speak with your retail partners.
What is your outlook for what the ramp is, consumer spending could look like post reopening? Like are there any big differences you see between the ramp up what the Innerwear side could look like relative to the Activewear side that it sounds like today maybe you're seeing a bigger snapback on the Champion trend, I guess, any color there would be helpful.
GeraldEvans
Well, the opening is really into two ways is when the markets reopen to you and then the second part of it is then when you -- when the consumer spending ramps back up accordingly. We've considered both of those in our scenarios.
Certainly, there's an element of the business when you talk about back-to-school quite a bit of it is actually done in the channels that are opening. And we're seeing nice sort of recovery in POS there week to week already.
So we feel good about that back-to-school and those will be well-positioned and we anticipate that we'll see some opening up of some other of these channels at least and as you heard in our scenarios by late or early July at the latest which would still reach that back-to-school period. So that does give us a ramping into that back-to-school period that we would count on.
We're generally saying that our basics categories rebound the quickest and the seasonal items like a Champion or something will place as the next season places. So they would place into the fall, I mean, in that August, September period as well.
And so we feel good that our categories tend to rebound over time. We've seen consistent usage as we've always said about our categories.
And we think that we will recapture that lost ground as the markets open back up.
Operator
Our next question comes from John Kernan with Cowen. Your line is now open.
JohnKernan
Good morning, everyone. Thanks for taking my question.
Just wanted to ask on the gross margin. Obviously, there was some pressure in the first quarter which was not surprising as inventory looks fairly clean on the balance sheet and given your commentary around it, you feel pretty good about the position there.
I'm just wondering how we should think about the gross margin outlook for Q2 and the rest of the year. Do you have additional reserves you're going to have taken; you feel like you're well reserved and how much pressure maybe in 2Q can you help us frame versus what you saw in Q1?
Thank you.
ScottLewis
Yes. At this point, as far as the rest of 2020, we're not giving guidance at this point with the uncertain environment.
As we think about inventory and where we are, again, we think we're in good shape as far as the reserves that we have in place at the end of the quarter.
Operator
Our next question comes from Heather Balsky with Bank of America. Your line is now open.
HeatherBalsky
Hi. Good morning.
Thank you for taking my question. First, you touched on POS in earlier question, I'm just curious in terms of your innerwear business in particular, if you could shed some light on what the trajectory and POS is look like over the past few weeks?
And kind of where you are in terms of getting back to the baseline pre-COVID business in the -- in particular that channel? And then separately could you touch on also the e-commerce launch of Champion on Walmart, the decision that went into that and kind of how you see that evolving?
Thanks.
GeraldEvans
Let me -- from this first part of that POS, certainly, we've seen as I noted in my comments, we've seen consumers and retailers begin to adapt as we work out of March and April. And we've seen as the government incentives are coming to the market as well that we've seen a ramping back of POS and improvement week on week.
So, we like the trends we're seeing there and of course in the online channel, we've seen extraordinary POS strength beyond what we have typically seen. So, generally where things are open, what we like where the trends are going and we're seeing it.
As I noted particularly across as we look at basics, we see some good performance there. But as you've heard me also say.
The consumer is finding Champion online and they are going out and finding that as well. Walmart.com and the listing of Champion that was a deliberate focus with Walmart to stage our Champion business on that website.
There were a number of third party sellers that were selling them and positioning the brand, we felt inappropriately and we were better positioned to position our brand and an offering by working directly with Walmart. So that's -- that got our walmart.com.
End of Q&A
Operator
I'm showing no further questions in queue at this time. I'd like to turn the call back to T.C.
Robillard for closing remarks.
T.C. Robillard
We'd like to thank everyone for attending our call today. And we look forward to speaking with you soon.
Have a great day.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
You may now disconnect.