Macy's Inc

Please stand by. We're about to begin. Good morning, everyone, and welcome to the Macy's Inc. first quarter 2020 earnings call. Today's hour-long conference is being recorded. I'd now like to turn the call over to Mr. Mike McGuire, head of investor relations. Please go ahead, sir.

Thank you, Alan. Good morning, everyone, and thanks for joining us on this conference call to discuss our first quarter 2020 results. With me on the call today are Jeff Gannett, our Cameron & CEO, and Felicia Williams, our interim CFO. Jeff and Felicia have several prepared remarks to share, after which we'll host a question and answer session. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick follow-up. In addition to this call and our press release, we've posted a slide presentation on the investor section of our website, nacythink.com. The presentation summarizes the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance I do have one housekeeping item to share. We'll be releasing our second quarter results and posting the associated earnings call on Wednesday, September 2nd before market opens. This is a couple of weeks later than our typical day, and that is due mainly to the delayed timing of this current call. At that time, we'll be providing an update to our in addition to the second quarter earnings report. So please mark your calendars. Keep in mind that all forward-looking statements are subject to the state proper provisions of the Five Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in the company's filing with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as other views in our earnings release and our presentation, located on the investor section of our website. As a reminder, today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call, and it will be archived on our website for one year. Now I would like to turn this over to Jeff.

Thanks, Mike, and good morning, everyone, and thank you for joining us. So I want to start by briefly touching on the restructuring that we announced last week, and I'll give you an update about what we're seeing in the business as our surgery opens. Felicia will walk you through our final first quarter results, and I will give you a quick update on the Polaris strategy, and then we're going to open up the line for your questions. As you know from our previous communication, COVID-19 significantly impacted Macy's as our stores were closed from March 18th through May 4th. As we reopened stores, sales started out strongly than we initially modeled. However, with the recent COVID developments, We do anticipate a gradual recovery now that most stores are open. Macy's Inc will be a smaller, more leveraged company for the foreseeable future. We have taken a series of actions over the past three months to get the company on a stable financial day. We cut our weekly cash burn rate, including significantly reducing payroll through the furlough process. Can you guys hear me?

We can hear you now, Jeff.

Okay, great. Did you hear Felicia from the beginning?

Yes, we stopped at the furlough process.

Okay, great. Apologize, guys. So we cut our weekly cash burn rate, significantly reducing payroll during the furlough process. We refinanced for liquidity. It gives us the flexibility we need to navigate through the next several years. And last week, we took the painful but necessary action to align our cost base with anticipated sales. This included reducing our corporate and support headcount by approximately 4,000 colleagues, as well as reductions in staffing levels across the stores, customer service, and supply chain network. I want to express my deep gratitude to the departing colleagues for their service and their many contributions to Macy's Inc. We said goodbye to some really strong retail talent. Beginning next week, we will welcome back most of our remaining furloughed colleagues, It's been a tough few months for our organization, but I'm glad that we have a culture of resiliency, and I know that our colleagues will come back together to support the business recovery. So Felicia's going to take you through the details of the first quarter, but as we are now well into the second quarter, I want to give you a sense of how business is looking. Nearly all of our stores reopened. In fact, only six Macy's brand stores remain closed. As mentioned earlier, initial sales trends as stores reopened were stronger than we modeled with a few encouraging signs. In most stores, we saw steady, modest improvement in sales on a weekly basis. Digital sales remained strong in each market as our stores reopened, and our customers were very happy to be back in our stores. Both customers and colleagues have adapted to the new health and safety standards. So we felt momentum as we worked through the second quarter, and we've seen this in Macy's, Bloomingdale's, and the Blue Mercury brand. But I want to remind you that there's still a high degree of uncertainty in the market that causes us to take a conservative approach the back half of the year. Three things in particular that I will call out for you. First, the COVID-19 pandemic is still in full swing in some parts of the country. And while we do not expect another national shutdown, we do anticipate a regional impact as consumers are encouraged to stay home. Most of our stores are currently on reduced hours. and will remain flexible to meet demand. The health and safety of our colleagues and customers is our top priority and we have a resurgent game plan in place that will guide us if we need to temporarily close a single store or a regional group of stores. I want to recognize our stores team for the incredible flexibility and resilience they've shown throughout this crisis. I have a high degree of confidence in their ability to work through any future disruptions. Second, While our stores have reopened, many of the malls in which we operate are closed or may be reclosed in areas with COVID-19 resurgence. And in malls that are open, many of the other stores and services remain closed. This does impact our store traffic. Third, we are seeing that our large urban and flagship stores are opening more slowly than the earlier stores. There are two reasons for this. First, these stores are located in dense urban areas that were most affected by the pandemic. And second, the virtual disappearance of international tourism spending, which we do not expect to recover anytime soon. So overall, our stores remained open, reopened stronger than we modeled. The weekly improvement that we were seeing that started to model modulate. Our stores are now running down about 35% and based on where the pandemic may or may not go, we are taking a conservative view and pulling that trend through the back half of the year. If trends improve, we will react aggressively to meet customer demand. Conversely, the digital half of our business has shown very strong performance. and we expect them to continue at a healthy double digit growth rate through the back half of the year. By all metrics, sales, traffic, conversion, mobile engagement and new customer acquisition, we're pleased with the results of our digital business. And it's encouraging to see that the newly acquired customers coming into the brand through dot com are younger and more diverse than our core customers. We're working hard at strategies to retain these new customers and over time convert them to Omni shoppers, which are our most valuable customers. Beauty, furniture, and soft home sales have been particularly strong online. And we're also seeing improvements across all areas of the business, including many pockets of ready to wear. I also want to provide you a brief update on our dot com organization. As you recall, in February, We announced that we would be closing our San Francisco office and consolidating the digital team into our New York and Atlanta facilities. While everyone has been working remotely since mid-March, we have continued with the dot-com restructure and rebuild. We appointed a new head of digital in late March, Matt Baer, a strong leader with extensive retail e-commerce experience. Matt has hit the ground running and is pulling together a very strong team that is a mix of experienced native colleagues, and new acquired talent. So with that, I'm going to turn it over to Felicia to take you through the quarter and give you a sense of how we're looking at the remainder of the year. Felicia.

Thank you, Jeff, and good morning, everyone. As Jeff noted, we are reporting our full first quarter financial results inclusive of impairments, which were excluded from our previously reported results. I will touch on these impairment charges in just a moment. As previously discussed, the story of the first quarter was dictated by the COVID-19 pandemic. Its effects have been far-reaching, and we will continue to feel its impact on our results for the foreseeable future. To summarize the first quarter, we delivered sales of $3 billion, a decrease of 45.4% on an owned plus licensed possible basis, as our stores were closed from March 18th through the end of the quarter. We generated credit revenue of $131 million, down 24% from last year. Growth margin was 17.1%, down more than 21 percentage points from last year, and includes an approximate $300 million inventory write-down, primarily on fashion merchandise. We recorded nearly $1.6 billion of SG&A expense in the quarter, and improvement of 24% from last year, given the store closures and our furlough of colleagues. But this is an increase of 15 percentage points on a rate basis compared to last year. We also recorded asset sale gains of $16 million in the quarter versus $43 million in the first quarter of 2019. Additionally, we recognize impairment and restructuring costs of more than $3.2 million. net interest expense of $47 million and a tax benefit of $576 million, representing an effective tax rate of 13.9%. Summing it all up, we saw $630 million of adjusted net loss in the quarter versus income of $137 million last year. Adjusted EPS was a loss of $2.03 in the quarter compared to income of 44 cents last year of which asset sale gains represented EPS of about 4 cents and 10 cents respectively. There are several items which I want to call your attention. First, let me briefly touch on the impairment charges we took in the first quarter. As we've said, the COVID-19 pandemic has impacted many aspects of our business including causing a sustained decline in our market capitalization and requiring us to update our long-term financial projections. These impacts required us to test for impairment, our long life assets, goodwill and other indefinite lives and tangible assets during the quarter. As a result of these tests, approximately $3.1 billion of goodwill impairment was recognized. The vast majority of the Goodwill impairment related to our Macy's reporting unit, while the remainder was associated with our Blue Mercury reporting unit. In addition, we recognized approximately $80 million of long-life asset impairment that was primarily related to the group of stores that we anticipate closing over the next couple of years. I want to remind you of the financial implications of the restructuring Jeff just discussed. As we shared, we expect the assets we put to better align our cost base with our anticipated near-term sales performance as the business recovers from the impact of the pandemic. The savings we expect are related entirely to a reduction in headcount, both in our corporate and management areas, as well as in our stores, call centers, and distribution operations. If the business recovers to levels above our expectations, we will be in a position to layer in additional headcounts, but for the near term, we are planning these as permanent reductions to our cost base. As such, we are expecting expense savings of approximately $365 million this year and approximately $630 million on an annualized basis. Additionally, We expect to incur approximately $180 million for these restructuring activities, largely related to severance, of which the majority will be in cash. These costs will be reported as restructuring charges in the second quarter of this year. In addition, the anticipated savings from this restructure will be additive to the $1.5 billion in annual expense savings we are targeting by year end 2022 through our Golaris strategies. Recall that at our investor day in February, we said that the right sizing of the organization and expense base through Golaris would allow us to better balance top line and bottom line growth. Accordingly, some of the targeted savings, which now totals approximately $2.1 billion, will be taken to the bottom line, allowing us to stabilize and then grow our profitability. and some of the savings will be invested back into the business, allowing us to drive growth through our strategic initiatives. Lastly, we are benefiting from the CARES Act. As you know, the Act provides payroll tax credit for employee retention, deferral of payroll taxes and several income tax provisions, notably the allowance for carryback of certain operating losses. Given the income tax impact we foresee from the CARES Act, Our current annual effective tax rate estimate is between 35% and 38%, and this excludes the impact of the impairment and restructuring charges. As you all recall, we withdrew our 50-20 guidance in March as the COVID-19 pandemic really began to take hold. Given that we continue to operate in an unprecedented environment and that there remain many unknown and uncontrollable factors impacting consumer behavior and the retail landscape, we are not providing new guidance at this time. However, I would like to share some of our current thinking as it relates to the rest of the year. We have modeled and will continue to model various scenarios for the back half of the year. Ultimately, we are taking a conservative approach to our forecasting. While we are not planning for a severe lockdown if COVID-19 were to occur in the fall, we are mindful of what we are already seeing in certain parts of the country. As such, we have planned for an ongoing but slow recovery that may be impacted by regional flare-ups here and there. And while we have been pleased with our historic performance as they have reopened, We remain cautious about unpredictable headwinds in the back half of the year. For example, our flagship and urban center stores, which have only recently reopened, are at higher risk for limitations on operations. And these doors are disproportionately impacted by the decline in international tourism that Jeff mentioned. We saw a 50 basis point drag on comps from the international tourism drops in the first quarter, and we are assuming no international tourism sales for the remainder of the year. In 2019, international tourism accounted for just over 4% of our sales, so the impact is quite significant. Taking all of this into account, we expect our comp performance to improve sequentially each quarter, bearing in mind that the second quarter started off with no stores open and did not have all stores fully open until the middle of the quarter. In the second quarter, we expect roughly six to seven percentage points of comp improvement over the first quarter, with stores exiting the second quarter at approximately 35% down, as Jeff said. Taking into account strong digital growth, We expect comps to culminate in the third and fourth quarters with the total company down in the low to mid-20s range. This reflects significantly lower sales than we expected in the pre-pandemic 2020 scenario we shared with you in February. But these comps also reflect the resilience of our brand through this crisis and position us well for the future. We expect our digital business to continue to outperform In the first quarter of this year, we saw digital sales penetration of approximately 43%, and we currently expect that our annual digital penetration will average in the mid 40s. While we saw a low single digit reduction in year-over-year digital sales in the first quarter, we expect a high team increase in the fall season as customers continue to shift to online shopping as the pandemic continues. As such, we are projecting a low to mid-season increase in full-year digital sales. The associated delivery costs from the mixed shift towards digital are expected to further add to a slow recovery in gross margins despite expectations for merchandise margins to improve quarter over quarter. Our outlook on merchandise margins has improved from when we last spoke, and as a result, We now expect growth margins to improve in the second quarter from first quarter levels, with improvement in each quarter thereafter. We are well positioned from an inventory perspective for the back half of the year, and we plan to enter the third quarter in a clean inventory position. We've been committed to clearing our clean seasonal inventory, and we've seen strong sell-throughs on our clearance merchandise. So, given all of the moving pieces, gross margin rates in the fall season are expected to be lower than fall last year by mid-single-digit percentage points. With regard to SG&A, even with our aggressive action to slow our weekly cash burn rate and our recently structuring measures, this year we expect to see elevated levels of SG&A as a percent of our lower sales base. For the fall season, this could be low to mid single-digit percentage points higher than last year. And to help you better think about interest expense, we are anticipating approximately $300 million for the year due to our secured debt financing and expected utilization of our new asset-backed facilities. Finally, as previously discussed, we anticipate that income from our credit portfolio profit share will be negatively impacted by higher consumer bad debt trends, potential consumer credit tightening, and the loss of benefit from the government stimulus ending in July. The effects of the COVID-19 pandemic have had and will continue to have far reaching effects on our company and the retail environment overall. I am proud of the quick and decisive actions we have taken as a company to mitigate many of these challenges. We are taking a prudent approach for the remainder of the year and while we have positioned ourselves well to weather the pandemic, we anticipate that we'll continue to feel the impact of its continued headlines. With that, I'll turn it back over to Jeff. Thank you, Felicia.

So before we open up the line for questions, I do want to give you a sense of how we're looking at the Polaris strategy that we announced in February, including work you can expect from us in a detailed update on September 2nd. So Polaris is the right strategy for us, but the COVID-19 pandemic intensified and accelerated customer behavior shifts that were already underway. And the sales impact has caused us to rethink where best to invest our resources. So there are parts of the strategy of Polaris that we will likely accelerate, that we will accelerate. The digital is certainly top of the list, personalization, having a very flexible and efficient supply chain. There's parts of the strategy that we will continue, but perhaps refocus tactics like loyalty. We launched Loyalty 3.0 in February, as well as our merchandise category role. And there are parts of the strategy that we will top, including our plans to expand off mall in new formats. We'll give you all these details in our second quarter earnings call, again, on September 2nd. So in closing, Macy's Inc. and Macy's and Bloomingdale's brand have a long history and have weathered many crises Spring 2020 will certainly go down as one of the most challenging seasons in our company's history, but along with this challenge comes opportunity. We've known for some time that the U.S. is over retail, and as we see the competitive landscape shift, we know that there is opportunity for us to pick up market share. And with the actions that we've taken over the past few months, particularly the refinancing and last week's organizational restructure, we're ready to compete. With that, we're going to open up the line for your questions. Thank you in advance.

Thank you, sir. If you'd like to ask a question on the phone, you can do so at this time by pressing star 1 on your telephone keypad. Please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, everyone, that's star 1 to ask a question, and please do limit yourselves to one question. We'll take our first caller, Matthew Boss with JP Morgan. Please go ahead, sir.

Great, thanks. So, Jeff, maybe relative to the negative 35% comps at brick and mortar that you're seeing today, What's the range between your top 150 doors relative to maybe the neighborhood stores? And is it your mall-based and tourist flagship location that's leading you to hold the negative 35% store comps for the back half of the year at this time?

Yeah, thanks, Matt. So what I just first off say, the situation is really fluid. And it changes, you know, day by day. You know, most recently as an example of that, look at kind of our stores in Texas Arizona, and Florida. So based on kind of the COVID surge in those particular states, we've seen a noticeably worse trend in brick and mortar in those states versus where we started and what we were gradually getting better to. Conversely, in those particular states, the dot-com business is improving. But in aggregate, to your question, I see a couple things happening. So first off, there's regional differences in just kind of the performance of our stores. So the heartland is the strongest. The coasts that were most affected by the pandemic are the ones that are coming back more slowly. And your question about mall grade, what's interesting about this versus previous times is that our neighborhood stores are performing our best. You would expect some of that because they are not as trafficked as some of our more popular magnet or flagship stores. So when you think about social distancing, communities have been very focused on those neighborhood stores for years. They go there for basics. And it's just a comfortable place for them to shop versus in the past where they would take some of their shopping trips and go into regional malls. And when you look at kind of the magnitude of the flagships, many of these stores have reopened, certainly, but many of the services, particularly restaurants, theaters, entertainment, some specialty within those magnet malls have not reopened. So that's affecting some traffic. And when you look at the magnets and you look at the flagships, that's where the tourism business is really being done, both domestic, which is definitely curtailed, as well as international tourism, which has disappeared. So, you know, when those things, I would tell you that the short-term effect on some of these magnets and flagships is on the lower side of the recovery, but we still have Thank you for joining us today. So we're staying flexible to what we learn every day.

Great. That makes sense. And then maybe just to follow up on gross margin. So if inventory is realigned to demand exiting the second quarter and top line trends stabilized by late 2021, or I think you said maybe even into 2022, I guess what's a reasonable timeline to target for gross margin? to get back to where we entered the pandemic, meaning I think 2019 you were 38.2% gross margin. How long would it take to get back to a gross margin similar to what we saw before the pandemic in your view?

Alicia, do you want to take that one?

Yes. Hi, Matt. Matthew, it's nice to meet you virtually. And so I, you know, we have, as Jeff discussed, because we are modeling a slow recovery. We talked about the fact that we may not get back to our normal environment until the end of 21, possibly entering in 2022. And as you can imagine, modeling and predicting beyond the current year is very difficult given the headlines that I outlined earlier. And so I wouldn't, I can't tell you precisely I wanted to get back to that 38.2% level, but I can tell you that reiterating that for Q2 growth margin, we are expecting to improve relative to Q1 and then get sequentially better thereafter for Q3 and Q4. It's just too soon for us to give you any definitive projections beyond the fall of this year.

Great. And now what I've added to that is that We'll give you an update on this, on gross margin, on our Q2 call. But obviously, the penetration of digital has certainly increased as a penetration of our total business. And so we've got lots of strategies about how we cover that. But we certainly have lines of sight on historical gross margin levels, and we're very committed to getting back there.

Okay.

Sounds good. Thanks, Jeff.

All right. Next, we'll go to Oliver Chen with Challenge. Hi, the merchandise margins momentum was encouraging. What was driving that and what are your thoughts for inventory planning as we think about 3Q and 4Q and what you're planning in your scenario analysis as well as you monitor the promotional environment at competitors? Thank you.

Hi, Oliver. Yes, our merchandise margins improved in the second quarter. We're seeing improvement in the sales needs of our clearance merchandise in our last act category. If you recall, Oliver, in the first quarter we took a $300 million write-down on inventory primarily related to fashion merchandise. We reversed that as we go into the second quarter to allow our normal pricing and promotional activity to occur. and so we have been pleased with the sales through of the clearance merchandise which really drove the improvement in our merchandise margins. As we enter the back half of the year, we are really confident that our stock-to-sales ratio will be in line in the back half of the year and with our inventory down in line with expectations. I'm sorry, I'm getting a lot of feedback, sorry. We have appropriate receipt levels in line with our fashion expectations and so we really expect to enter the third quarter with clean inventories and newness and freshness for the customers.

For Jeff, regarding the consumer environment and the evolving of stimulus payments as well and as you monitor unemployment, what are some factors that you're looking at in terms of what's in control with you planning your business and how much the stimulus may have helped in the near term?

So I think as Felicia said in her comments, when you look at the stimulus checks, and we certainly think that that helped our business both online as well as in our stores as they reopened. So we're watching that carefully. We're obviously watching the unemployment rates carefully. We're watching all the customer behavior. I think one of the encouraging things about what's happened to our business during COVID is the amount of new customers that are coming into our brand. So you particularly see it online. And what we're seeing is a younger, a more diverse, and a customer that has slightly lower income than our core customer. So our big opportunity is how do we hold on to those customers beyond that first transaction? How do we get them to be an omni-channel customer over time? And so we're very focused through our marketing and personalization technique to see that behavior.

Thank you.

All right, we'll take our next question from Chuck Brom with Gordon Haskett.

Hey, thanks. Good morning. Chuck, just wondering if you could elaborate on your comments that the recent flare-ups, and I believe in probably Arizona, Florida, Texas, have impacted traffic. Just wondering if you could just speak to that a little bit.

Yeah, so what I'd say, Chuck, is that there's really two weeks since Governor Abbott made the comment about it being safe to stay inside. We definitely saw, you know, Texas was one of the first markets that we reopened. So when we opened on May 4th, Texas was that first state that we really saw widespread. You know, we were open before most of them all, but we were right there when the state was reopened. And as you heard us comment, you know, in previous calls, actually on your fireside chat, What we commented on was that where we expected it to be at a low level, it actually came down 50%. And based on what we were seeing in Texas and Georgia, which were really the two states that we opened first, that we saw like a three to five point sequential improvement in that trend each week. And that was humming along. And then when you look at about two weeks ago when Governor Abbott made that comment, we saw about a 15 point drop. in our Texas rate, our brick and mortar sales rate based on that. Now it's modulated, it's coming back a little bit, but you know, that's what we're watching carefully is just, and you saw that in the digital business went up, it didn't cover the full gap between that 15 point of where brick and mortar was and where it became, but it did cover some of it. So that's what we're watching carefully to see, you know, where the pandemic is going. and, you know, while we're not, I think, we're not anticipating a national shutdown, but we do expect regional flare-ups that, you know, we don't know fully where they're going to go yet.

Okay. Thanks a lot. That's helpful. And then on the digital part, you spoke to the style of this question, but obviously getting some new customers into Macy's brand, I'm curious, you know, what steps you're taking today to try to convert them to permanent members to Macy's?

So when you look at all of what we're doing, we'll just talk about digital for a second, because that's how they're really coming in. is using whatever they bought. We have personalization techniques about we're looking at other cohorts that behave like they do and what they purchase, and we're starting to see that content in emails, direct messaging to them. We're really focused on, I think just our digital experience has gotten much better for all customers, and it's certainly more attractive to our new customers. So if you look at the content of our PVP pages, If you look at our checkout operation, it has been better. Our click-through rates have been better. Our sell-through rates have been better. We're really focused on having more of a seamless checkout. We're clearly giving these customers and all of our core customers all the fulfillment options of an omnichannel retailer. So right now, in 2019, we had about 9% of our digital demand was being satisfied through Box and Boss. That has gone up dramatically as a result of curbside, and we expect that our stores will fulfill about 30% of our digital business as we go through the fourth quarter. So the opportunity to get these new customers with more transactions online and then also starting to give them reasons to come into stores. So with these customers, we're really focused on items like backstage, since that's got a – You know, when you look at the value construct of that and you look at the breakdown of that business demographically for us, it fits the profile of many of these new customers that are coming in. And because we have backstage in so many of our store units, we're talking about that. So those are some of the examples of what we're doing to make sure these customers, we get them for a second, third, and, you know, lifelong relationship.

That's helpful. Thanks, Jeff. Our next question will come from the line of Bob Gribble with Guggenheim.

Hi, good morning. Just a couple of follow-up questions on the inventory side.

In terms of, you know, vendor support or how you're addressing and, you know, getting the inventories aligned to where you want them, are you, you know, utilizing a lot of vendor support? Are you, is a lot of it moving to, you know, to backstage? Are you using last back?

Can you just, you know, elaborate a little bit more in terms of how you're approaching and getting to that more normalized level?

Bob, do you mean more normalized load of inventory?

Yes, exactly.

Yeah, and so if you think about what happened as we closed our stores and then began to reopen, as Jeff said, we started to divert store inventory or store fulfillment into our e-commerce facilities to handle the increased digital demand. But at the same time, as the stores reopened, We accelerated curbside where we could, and we were really using the store inventory for fulfillment as well. And so as you think about the second quarter and what was happening on the other side, we were aggressively taking down receipts in the month of May and then again in June. And given the pricing and promotional activity that we took, particularly in the clearance and fashion and AH Merchandise, and the ability to get some really nice sales rooms as our stores reopen, combined with the receipt takedown, we actually were able to manage very well through our inventory positions in the store, such that we anticipate buying back into replenishment and newness beginning in the month of July. And so Bob, what I would say, big picture, our vendor partners have been amazing and tremendous, as Jeff said, In the stronger categories of beauty, furniture, and soft home, we have had some amazing partnership with our brand vendors as we're clearly trying to service our shared customer base. So as I said, we feel really good about the actions we've taken in the second quarter to really balance where we're fulfilling, how we're using our store inventory, how we manage the receipts in order to give us a high degree of comfort that we will enter the back half of the year with clean inventory.

Okay. And then my follow-up question is on, can you just talk about the performance of the credit business, your expectation on credit revenue or, you know, what you're seeing, you know, throughout the portfolio?

Yeah. And so for the first quarter, our penetration rate was 46%, which is the same 46% that it was last year. But we're watching trends closely, Bob, because as our stores were closed, our new account activity was down significantly. And as we look at modeling our credit portfolio profit share, we are watching a number of factors, but mainly bad debt trends because they tend to have a delayed impact on our portfolio. and then also watching the banks as they make decisions about consumer credit tightening and then to the point that there was some benefit which is hard to measure from the unemployment checks that people received as well as the government stimulus package. We're thinking that that had benefit for the spring and it's hard to anticipate, one, whether the government will renew those stimulus packages in the back half of the year and if they don't, how would that impact consumer spending and consumer behavior? But as we look at those metrics and many other metrics as you can imagine, we are cautious about consumer spend, consumer behavior, upticks and bad debt, aging of consumer portfolios over the different categories, credit categories. that we would say that we would face some headwinds, particularly as we clear the back half of the year and go into 2021. Okay, great.

Thank you very much, Michelle.

Okay, next we'll go to Omar Saad with Evercore ISI.

Thanks, Jeff. Thanks, Felicia, for taking the question. A couple areas I'd love to get a little bit more detail. First, on the 3,900 corporate headcount reduction, Thank you for joining us. Is it just an across-the-board move, or does it reflect kind of a corporate restructuring and how you're going to reallocate the organizational structure going forward, given the ongoing changes and acceleration of changes? And then I have one follow-up.

Thanks. So, yes, when you look at the 3900, it was about over 20% of the corporate headcount after we took the cuts from Polaris that we announced in February. So it was significant. And I would tell you that there was not an area of the company that we didn't touch. But to your question, there were certain areas in which we said, hey, these are areas that we have to be best in class. So we really looked at, you know, when you think about the vision of the company and you say that, you know, our focus has been to fortify and grow our omni-channel advantage. And that's enabled by digital, by leveraging our brand banners when you think about Macy's and Bloomingdale's. from Off Price to Luxury. And so we really looked at, okay, what are those pieces of business that we want to be best in class at? So, you know, best in class merchandising capability, which includes our private brands and that protects our fashion leadership and our unique ability to curate fashion online. We really wanted to fortify, you know, simple and convenient interactions on our digital platforms and in our stores. So making sure that the digital The full omnichannel experience for our customers continues to get better. So we wanted to make sure that we were investing in that. And that was created, those two things, with really this laser focus on cost reduction and our opportunity to reinvest where the customer values it. So what you would see in the kind of the complexion of the 3900 was obviously digital was not affected much, but other areas of the company where we don't have to do bets in class took deeper cuts. And so all of them extremely painful. We really focused on spans of layers. You'd see a disproportionate amount in the, you know, the vice president and above range, as well as a higher percentage at the, and when you look at the manager and the director level, and not nearly what on the colleague, you know, the customer facing colleagues, we really tried to keep those as intact as possible. Now those are, we're elastic to sales. And so when we have a lot of flex, you know, colleagues, we have colleagues that can go, it can expand hours. So wherever the volume goes, we have opportunities with those colleagues. But, you know, the bulk of our cuts, the 3,900 was really at the corporate level, as well as some of our regional leadership. And it was really at the levels that I was talking about.

That's helpful. And then I also wanted to ask, I appreciate that you guys are giving an early view on the second half, the minus 20 to 25. It's helpful context. But if we think about stores running at down 35, your size of e-commerce business is growing, and we think about bridging that gap, it seems like you're expecting, like you mentioned, some of the flare-ups in the second waves. Is it more that's what's causing the kind of subdued forecast relative to maybe what current trends could build over the second half? or is it more do you have a view on a lack of demand as consumers aren't going to work and wearing fashion as much and the career business and other wearing occasions aren't materializing?

You know, when you look at the composite of our sales, it definitely has shifted. So what I'd say is that it's the pandemic mostly that is affecting what I would say is our total trend. And I think that will subside over time. and what I'm, you know, at the department store, we have a unique ability to basically really accelerate those categories that are in favor. And so when you think about, you know, home stores having a golden moment right now, I think every retailer is talking about that. When you look at how well Big Ticket is performing, people are looking around their house and looking for opportunities to update. So having, you know, full service opportunities in Big Ticket suits a retail brand like Bloomingdale's and Macy's. Soft home categories have been extremely strong Beauty is just still very, very strong. And when you look at the apparel categories, what's interesting is you've heard everybody talk about kind of active and casual. Those are stronger than they've been historically. And then you've got categories, dress categories or dress-up categories, suitings or dress shirts or social dresses that have definitely taken a hit, luggage has taken a hit. Those categories are going to be compressed for a while, but not forever, I don't believe. And when you look at the emerging categories like what we've seen online, we've got lots of vendor-direct categories that are new that we're going to expand and have a brick-and-mortar presence in. So we're looking at, as a department, our opportunity to react to where the consumer is going on this. So to the base of your question, I think the trend's are not a shift against categories the departments store sell. I think it's really about the pandemic and how can we make up what will drop in brick and mortar. We're going to make up a chunk of that through our digital business. We think this is going to be the most powerful digital fall ever. This is going to be the most, you know, we're going to do more business on digital than ever. And it's going to test our entire fulfillment network. And that's what we're laser focused on right now. but I do believe brick and mortar will come back and I think to Matt Boss's question the idea about the flagships and the magnets that's really where when you think about the bulk of our sales in brick and mortar as well as the profitability of those sales I think that's short-lived but I do think they're going to come back robustly over time as well.

Thanks for the insights.

All right and next we'll go to William Reuter with Bank of America.

Hi, good morning. I was just curious over the next year, based upon your expectations of declining sales, what you expect working capital in 2021 and also in the fourth quarter, assuming that your sales expectations are correct.

I'll take that one. And can you just repeat the last part of what you said? I'm sorry, I'm getting a little bit of feedback.

Sorry, I was wondering what your expectations of working capital based upon, you know, the demand levels that you've assumed in your prepared remarks in the fourth quarter and then assuming, you know, the commentary about 2021 continuing to be somewhat challenging, if we would expect that working capital could still be a source of cash next year.

You know, I want to, I will say, will definitely give you more on the outlooks beyond the fall in the second quarter when we go through the update with you guys in the second quarter. You know, big picture, I would say, we're managing and thinking through many factors as you think about our working capital position and the pace at which we are really trying to lean into some really strong inventory management in the back half of the year. We're in this situation where, as I said, we're being conservative, but we also need the ability to flex up to the extent that we see sales pick up and lean into receipts and categories that do well in the fall and going into holiday. And so we need to give ourselves some flexibility there. You know, if you think about our working capital, part of the equation now is our ability to access double the amount of liquidity that we had last year with our new asset-backed facility, which gives us a lot more flexibility to make different decisions about how we manage the business going into the back half of the year and as we go into 21 and 22. And so although I can't give you specific guidance at the moment on our projected working capital, I would like to give you a sense of how we're thinking about the back half of the year and indicating that we do have some flexibility if we need to because of one, with respect to how we're managing our inventory, and two, just by the nature of the facility that gives us an opportunity to draw on it and then pay it down as needed.

Okay, and then just a quick follow-up. When I look at your current liquidity, it looks extremely strong. However, you've recently taken some actions which potentially would increase your ability for additional liquidity actions in terms of securing some other real estate or assets. Do you feel like the current liquidity situation is sufficient or will you potentially be looking for other opportunities to enhance liquidity throughout the remainder of the year?

Pamela Nagler Okay. It's a great question and I would say big picture we are very pleased with our nearly $4.5 billion of new facility. We were able to leverage the strength of our asset portfolio. It was a somewhat complicated deal, as you know, but extremely cost effective. When we look at the totality of our liquidity situation, this financing has given us the flexibility and the liquidity to really fund our business and operating needs really for the foreseeable future, and that includes paying down. The two powers that are coming up at the end of fiscal 20 and fiscal 21. If you take a step back and just, you know, really briefly, it was important to us that over the past several years, we have been aggressively managing our capital structure by paying down debt. And over the past three years, we have retired almost approximately $2.7 billion in public debt through buyback and tenders. and so the fact that we were able to use some highly valuable unencumbered assets to structure this nearly $1.5 billion of liquidity gives us a lot of confidence that we have, as I said, sufficient liquidity to run the business in the foreseeable future. But having said that, I think we still have, if needed, we still have our remaining portfolio assets to do another deal. And we are always, as part of our capital structure thinking and modeling, that's never 100% off the table. But given where we are today, I would say we are in a really good flexible liquidity position.

Thanks so much. Good luck.

Thank you.

All right. We'll go now to Carla Casella with J.P. Morton.

Hi, good morning. This is Sarah Clark on for Carla Costella. I'm just wanting to go back to the real estate piece. Are you all considering any more real estate sales?

Let me take that. So when you look at, let's talk about what we talked about in February, which was a natural progression of what our real estate strategy has been We at that point mentioned that we would have $100 million in real estate gains in 2020. We don't anticipate anything above that level in 2020. We're going to make sure that we know the value of these real estate assets during normal times and is it the right market to sell all of them. We're obviously looking at every piece of our real estate against our overall retail strategy, how that brick-and-mortar site fits into our brick-and-mortar strategy on a national level and our entire omni-channel journey and how a brick-and-mortar affects the overall We're always mindful of that. But throwing all that in, our stores remain profitable, and so we're not going to – the $100 million, it won't be higher than that, and we'll give you an update at the second quarter if we see any modulation from that. But for your modeling, don't think about it as higher than the $100 million of gains that you had built in from our February conversation.

Great. That's super helpful. All from us. Thanks.

All right. We'll next go to Heather Bowski with Bank of America.

Hi, thank you for taking my question. I guess with everything going on, you announced 125 store closures at your investor day. How are you thinking about your footprint today, especially with the shift to, or the accelerated shift to online? Thanks. Yes, Heather, hi. As we think about 125 announcements, we probably have about another 95 to close against our original timeline. Today, we are reopening those doors and we do expect them to generate cash despite what is happening with the pandemic. At the moment, there's really too much uncertainty to commit to any definitive level of store closings. As you can imagine, we are modeling all of our store closing metrics and really all of our stores are a part of those performance metrics watch list and closing model decisions. So we will consider whether we are going to close additional stores and it's, you know, in my mind, Heather, it's probably a question of timing, not just a question of how many. But as we continue to go through that analysis, we will update and provide additional information We're just really in the process of still assessing.

The other thing I would add, Heather, to what Felicia just said is the competitive landscape and how does that affect our calculus. So obviously when you look at the competitive landscape from kind of off price all the way through luxury, there's been lots of changes. We don't think those changes are fully done. Any decision we're making is with that in mind as well.

Thank you.

All right, and next we'll go to Dana Telsey with Telsey Advisory Group.

Good morning, everyone. As you think about the business, what did you see differently, Jess, in terms of performance in Bloomingdale's versus Macy's Digital and Bricks and Mortar as the Bricks and Mortar reopens? And then of the 3,900 employee reduction, how much is Bloomingdale's and how much is Macy's? Is there a percentage? May I have a quick follow-up?

Thank you. Yes. So let's start with the Bloomingdale's. Bloomingdale's also had about the same percentage, as I quoted, and so to Omar and his question, so it was about the same. So there was, and it was very similar in terms of what we protected and what we went more aggressively after. As to the conversation about how Bloomingdale's trend has been in business versus nature, it's remarkably similar. When you think about every single category, the big difference, if there is one big difference, is luxury. If you think about the luxury business right now, as it reopens in this country, you see huge demand. Part of that is because they have more limited access on their websites, and part of it is because you have a lot of domestic tourists that buy that content that would go to other countries to do so are now buying it here. So we're seeing big surges in the luxury business as Bloomingdale's reopens. But outside of that, the composite about Reggie Ware is a little weaker. Home Store is really a huge beauty strong across both banners. Those are consistent.

And then holiday will be coming up before we know it. Black Friday and the five days before Christmas are all about people gathering and it's not as much social distancing. How are you thinking about holiday planning?

Yeah, so hey, thank goodness we have the 10th biggest website in the country and that we have a huge ambition to grow faster in a customer-centric way, eliminate friction, but we'll do a lot of business on our website. And so we have that as an outlet. We do think that, you know, and what we can do, we have a very strong game plan about how we're going to keep this trend of digital going. But when you look at the stores, I would tell you that it's a big concern of ours about when you think about a Black Friday, when you think about the 10 days before Christmas, you know, what does that mean in terms of traffic if people are nervous about gathering with crowds? And so we're looking at Everything is on the table right now. We're working with our merchant and our marketing teams on options within the marketing calendar to reduce pressure points on big volume days. And we're learning a lot from the reopening of our stores. Most of our stores will not have an issue. but our biggest magnet stores during the Black Friday timeframe is the piece that we're looking at. So how do we, in a planful way, how do we kind of even out demand? What does that mean for the whole cyber week timeframe? Are there opportunities for us to pull some of that demand earlier? We do think that people are gonna jump on Black Friday earlier and earlier in the calendar. And so we expect it to start in full force after Halloween in the competitive cycle. So we're looking at that carefully. We're looking at store hours carefully on all of that. So very top of mind for us. But, you know, our safety valve on this is how big can we get the digital business. And then we obviously have a very developed on the fulfillment network about how we satisfy that demand. You know, curbside pickup is going to be a big secret weapon for us this holiday season. We didn't have last holiday season. Thank you for joining us. If they wanted to buy something online and have it shipped to a store or it's being pulled from store inventory, that's at your service. We've been able to really keep the social distancing there with line control right at that main door. So if they do come into the building, we're going to be able to protect even the most nervous customers with crowds and their concerns about that. So that's how we're looking at it. But it's still a work in progress and We'll have more for you on the September 2nd call.

Thank you.

It looks like we have no further questions at this time, so I'd like to turn it back over to our speakers for any additional or closing remarks.

Thank you, everybody, for your questions and your interest in Macy's Inc., and look forward to giving everybody a more robust update on the Polaris strategy. on our September 2nd call. So I'll look forward to sharing our story then.

Thanks, everyone.

And that does conclude today's conference. We thank everyone again for their participation.