Macy's Inc

NYSE:M

Earnings Call Transcript 2020-Q1

[Operator]

Please standby, 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.

[Mike McGuire, Head of Investor Relations]

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 Gennette, our Chairman and 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 have posted a slide presentation on the Investors section of our website, macysinc.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 hosting the associated earnings call on Wednesday, September 2, before market open. 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 Polaris strategy in addition to the second quarter earnings report. So please mark your calendar.

Keep in mind that all forward-looking statements are subject to the Safe Harbor provisions of the Private 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 filings 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 others used in our earnings release and our presentation located on the Investors 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’d like to turn this over to Jeff.

[Jeff Gennette, Chairman and Chief Executive Officer]

Thanks, Mike, and good morning, everyone. Thanks for joining us. 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 stores are reopened. 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 18 through May 4. As we reopened stores, sale started out strongly than we initially modeled. However, with the recent COVID development, we do anticipate a gradual recovery now than most stores are opened. 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 basis. We cut our weekly cash burn rate, including significantly reducing payroll through the furlough process.

Can you guys hear me?

[Felicia Williams, Interim Chief Financial Officer]

We can hear you now, Jeff.

[Jeff Gennette, Chairman and Chief Executive Officer]

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

[Felicia Williams, Interim Chief Financial Officer]

Yes. We stopped at the furlough process.

[Jeff Gennette, Chairman and Chief Executive Officer]

Okay, great. I apologize, guys. So we cut our weekly cash burn rate, significantly reducing payroll during the furlough process. We refinance for liquidity that 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 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 can take you through the details of the first quarter. And 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 trend 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 remain strong in each market as our stores reopen, and our customers were very happy to be back in our stores. Both customers and colleagues have adapted to the new health and safety standard. So we felt momentum as we work through the second quarter, and we’ve seen this sin Macy’s Bloomingdale’s and the Bluemercury brands.

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 in 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 maybe reclosed in areas where COVID-19 – with COVID-19 resurgence. And in the malls that are open, many of the other stores and services remain close. 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 have 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 in 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 this 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 brands through Dotcom are younger and more diverse in our core customer.

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 add.

I also want to provide you a brief update on our Dotcom 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 Dotcom 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 experience Macy’s 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?

[Felicia Williams, Interim Chief Financial Officer]

Thank you, Jeff, and good morning, everyone. As Jeff noted, we are reporting our full first quarter financial results, inclusive of impairment, 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 comparable basis, as our stores were closed from March 18 through the end of the quarter. We generated credit revenue of $131 million, down 24% from last year.

Gross 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, an 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 recognized 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 $0.44 last year, of which asset sale gains represented EPS of about $0.04 and $0.10, 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 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-lived assets, goodwill and other indefinite live intangible 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 Bluemercury’s reporting unit. In addition, we recognized approximately $80 million of long-lived asset impairment that was primarily related to the group of stores that we anticipate closing over the next couple of years.

Secondly, I want to remind you of the financial implications of the restructuring Jeff discussed. As we shared, we expect the actions 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 the levels above our expectations, we will be in a position to layer in additional headcount. But for the near-term, we are planning these as permanent reduction through 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 tact. These costs will be recorded 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 Polaris strategy. Recall that at our Investor Day in February, we said that the rightsizing of the organization and expense base for Polaris 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 will recall, we withdrew our 2020 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 remains 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 recur 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 store 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 opened and did not have all stores fully opened until the middle of the quarter.

In the second quarter, we expect roughly 6 to 7 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 quarter, with the total company down in the low to mid-20 range. This reflects significantly lower sales than we expected in the pre-pandemic 2020 scenario we shared with you on February. But these comps also reflect the resilience of our brands 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 teens 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 teens increase in full-year digital sales.

The associated delivery cost from the mix shift towards digital are expected to further add to a slow recovery in gross margin, despite expectations for merchandise margin to improve quarter-over-quarter. Our outlook on merchandise margin has improved from when we last spoke. And as a result, we now expect gross 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 spring seasonal inventory, and we’ve seen strong sell-throughs on our clearance merchandise. So given all of the moving pieces, gross margin rate 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 actions to slow our weekly cash burn rate in our recent restructuring 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 facility.

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 effect of the COVID-19 pandemic has had and will continue to have far reaching effects on our company and the retail environment overall.

I’m 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 headwind.

With that. I’ll turn it back over to Jeff.

[Jeff Gennette, Chairman and Chief Executive Officer]

So 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 the work you can expect from us in a detailed update on September 2.

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 in Polaris that we will likely accelerate, so 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 pause, including our plans to expand off-mall and new formats. We’ll give you all the details in our second quarter earnings call again on September 2.

So in closing, Macy’s, Inc. and Macy’s and Bloomingdale’s brands have a long history and have weathered many crisis. 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 sometime that the U.S. is over retailed. And as we see the competitive landscape shift, we know that there’s 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.

And with that, we’re going to open up the line for your questions. Thank you in advance.

[Operator]

Thank you, sir. [Operator Instructions] We’ll take our first caller, Matthew Boss with JPMorgan. Please go ahead, sir.

[Matthew Boss, JPMorgan]

Great, thanks. So, Jeff, maybe relative to the negative 35% comp at brick-and-mortar that you’re seeing today, what’s the range between your top 150 doors relative to maybe the neighborhood’s doors? 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?

[Jeff Gennette, Chairman and Chief Executive Officer]

Yes. Thanks, Matt. So I just first off say, the situation is really fluid. And it changes day-by-day. 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 state, we tend to noticeably worse trend in brick-and-mortar in those states versus where we started and what we would gradually get better, too.

Conversely, in those particular states, the Dotcom business is improving. So – but in aggregate to your question, I see a couple of things happen. So first off, there’s regional differences in just kind of the performance of our stores. So the heartland is the strongest. The coasts are that were most affected by the pandemic are the ones that are coming back more slowly.

And to your question about kind of mall grade interesting about this versus previous times, is that our neighborhood stores are performing our best. So that, you would expect some of that, because they are not at traffic at some of our more popular magnet or flagship stores.

So that 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.

When you look at kind of the magnet of flagship, these – many of these doors 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 has really been done both domestic, which is definitely curtail, as well as international tourism, which has disappeared. So, when those things – I will 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 huge faith in the malls over the longer-term.

And as we mentioned, if stores trends improve, we are ready to react to it very quickly. We’re taking a conservative view in terms of how we’re funding our resources. At the moment, businesses shift and change, we’re on top of it. So that’s an either direction. But I’m very hopeful that it’ll be better than the down 35%, but we wanted to make a prudent approach to how we – expense the business in our planning. So we’re staying flexible to what we learn everyday.

[Matthew Boss, JPMorgan]

Great. That makes sense. And maybe just a follow-up on gross margin. So if inventory is realigned to demand exiting the second quarter and top line trend 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?

[Jeff Gennette, Chairman and Chief Executive Officer]

Felicia, do you want to take that one?

[Felicia Williams, Interim Chief Financial Officer]

Yes. Hi, Matt – Matthews. It’s nice to meet you virtually. And so I – we have – as Jeff discussed, we – because we are modeling a slow recovery, we’ve talked about the fact that we may not get back to our normal environment until the end of 2021, 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 didn’t – I can’t tell you precisely when we could get back to that 38.2% level. But I can tell you that reiterating that for Q2 gross margins, we are expecting to include relative to Q1 and then get sequentially better their assets for Q3 and Q4. It’s just too soon for us to give you any definitive projection beyond the fall of this year.

[Matthew Boss, JPMorgan]

Great.

[Jeff Gennette, Chairman and Chief Executive Officer]

And Matt, I would add to 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’re – we’ve got lots of strategies about how we cover that. But we certainly have lines of sight on historical gross margin level and we’re very committed to getting back there.

[Matthew Boss, JPMorgan]

Okay, sounds good. Thanks, Jeff.

[Operator]

All right. Next, we’ll go to Oliver Chen with Cowen.

[Oliver Chen, Cowen and Company]

Hi. The merchandise margin momentum was encouraging up. What was driving that? And what are your thoughts for inventory planning as we think about 3Q and 4Q what you’re planning in your scenario analysis, as well as, as you monitor the promotional environment competitors? Thank you.

[Felicia Williams, Interim Chief Financial Officer]

Yes. Hi, Oliver. Yes, our merchandise margins improved in the second quarter. We’re seeing improvement in selling of our – in the sell-throughs 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. The reverse that as they 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 starting to get a lot of feedback, sorry. We have appropriately seek levels in line with our fashion expectations. And so we really expect to enter the third quarter with clean inventory that newness and freshness for the customers.

[Oliver Chen, Cowen and Company]

For Jeff, regarding the consumer environment and the evolving 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 to stimulus may have helped in the near-term?

[Jeff Gennette, Chairman and Chief Executive Officer]

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 brands. And 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 omni-channel customer over time? And so we’re very focused through our marketing and personalization technique to see that behavior.

[Oliver Chen, Cowen and Company]

Great. Thank you.

[Operator]

All right. We’ll take our next question from Chuck Grom with Gordon Haskett.

[Chuck Grom, Gordon Haskett Research Advisors]

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

[Jeff Gennette, Chairman and Chief Executive Officer]

Yes. So what I think, Chuck, is that there’s really two weeks since Governor Abbott made the comment about it being safe to stay inside. We definitely saw – Texas was one of the first markets that we reopened. So when we opened on May 4, Texas was that first state that we really saw widespread that we were opened and performed most of the malls, but we were right there when the state is reopened.

And as you heard us comments in previous calls, actually on your fireside chat, what we commented on was that 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 the two states that we opened first, that we saw, like a 3 to 5 point sequential improvement in that trend each week. And that was humming along.

And then when you look at that two weeks ago, when Governor Abbott made that comment, we saw about a 15 point drop in our Texas rate, or brick-and-mortar sales rate based on that. Now it’s modulating, it’s coming back a little bit. But that’s what we’re watching carefully is just inside in the digital business went up. It didn’t cover the whole gap between that 15 point, where brick-and-mortar wasn’t where it became, but it did cover some of it.

So that’s what we’re watching carefully to see where the pandemic is going. And then, while we’re – I think, we’re not anticipating a national shutdown. But we do expect regional flare-ups that we don’t know fully where they’re going to go yet.

[Chuck Grom, Gordon Haskett Research Advisors]

Okay. Thanks, Jeff. That’s helpful. And then on the digital front, you spoke to this Oliver’s question, but obviously getting some new customers into the Macy’s brand. I’m curious what steps you’re taking today to try to convert them to permanent members to Macy’s?

[Jeff Gennette, Chairman and Chief Executive Officer]

So, yes, when you look at all of our – of what we’re doing, which is talking about digital for a second, that’s how they’re really coming in is using the – whatever they thought. We have personalization techniques about or looking at other cohorts that they like they do and what they purchase and we’re starting to see that content and e-mails, 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 for [indiscernible], if you look at our checkout operation has been better. Our click-through rates have been better or 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 as an omni-channel retailer. So right now, we’re – 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 – when we look at the value construct about it 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 that these customers, we get them first, second, third, and lifelong relationship.

[Chuck Grom, Gordon Haskett Research Advisors]

That’s helpful. Thanks, Jeff.

[Operator]

All right. Your next question will come from the line of Bob Drbul with Guggenheim.

[Robert Drbul, Guggenheim Securities]

Hi, good morning. Just a couple of follow-up questions on the inventory side. In terms of vendor support or how you’re addressing and getting the inventories aligned to where you want to, are you utilizing a lot of vendor support? Are you – is a lot of it moving to Backstage are using last back. Can you just elaborate a little bit more in terms of how you’re approaching and getting to that more normalized level?

[Felicia Williams, Interim Chief Financial Officer]

Bob, did you mean more normalized low level of inventory?

[Robert Drbul, Guggenheim Securities]

Yes. Exactly.

[Felicia Williams, Interim Chief Financial Officer]

Yes. And so if you think about what happened in, as we closed our stores and then began to reopen, it’s just that we started to convert a 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 we’re really using the store inventory for fulfillment as well.

And so, as you think about the second quarter and multitasking on the other side, we were aggressively taking down the seats in 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 age merchandise and the ability to get some really nice sell-throughs as our stores reopened, combined with the seat take down.

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 the duties of 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.

Before they 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.

[Robert Drbul, Guggenheim Securities]

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, what you’re seeing throughout the portfolio?

[Felicia Williams, Interim Chief Financial Officer]

Yes. And so for the first quarter, our penetration rate was 46%, which was the same 46% as 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 a bad debt trend, 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, what will that – 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 in 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.

[Robert Drbul, Guggenheim Securities]

Okay, great. Thank you very much, Felicia.

[Operator]

Okay. Next, we’ll go to Omar Saad with Evercore ISI.

[Omar Saad, Evercore ISI]

Thanks, Jeff. Thanks, Felicia, for taking the question. A couple of areas I’d love to get a little bit more detail. First, on the 3,900 corporate headcount reduction. Maybe you could talk a little bit more as a percentage of the total corporate headcount, what are we talking here? And what types of positions?

Is it just a broad-based kind of percentage cut across the Board? Or is it more of the merchant buying organization or financial planners and inventory planners? And does it reflect? 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 a follow-up. Thanks.

[Jeff Gennette, Chairman and Chief Executive Officer]

Hey, Omar. So, yes, when you look at the 3,900, 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 the – 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 – when you think about the vision of the company and you say that, 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. So we really looked at, okay, what are those pieces of business that we want to be best-in-class.

So best-in-class merchandising capability, which includes our private brands and it protects our fashion leadership and our unique ability to curate fashion online. We really wanted to fortify simple and convenient interactions on our digital platforms and in our stores. So making sure that the digital and the full omni-channel 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 was really this laser focus on cost reduction and our opportunity to reinvest where the customer value set. So what you would see in the kind of the complexion of the 3,900 was, obviously, digital was not affected much, but other areas of the company, where we don’t have to be best-in-class to deeper cuts.

And so all of them extremely painful. We really focused on spans of layers. You’d see a disproportionate amount in 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, the customer-facing colleagues, we really tried to keep those as intact as possible.

Now those are – we’re elastic to sales. And we said when we have a lot of flex, colleagues, we have colleagues that can go and can expand hours. So wherever the volume goes, we have opportunities with those colleagues. But 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.

[Omar Saad, Evercore ISI]

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 sizably commerce business is growing, I 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 forecasts 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 in the career business and other wearing occasions aren’t materializing?

[Jeff Gennette, Chairman and Chief Executive Officer]

When you look at the composite of our sales, it definitely 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 so – and I think that is – that will subside over time. And what I’m – as a department store, we have a unique ability to basically really accelerate those categories that are in favor.

And so when you think about 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 full-service opportunities in big ticket suit 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 store opportunity to react to where the consumer is going on this.

So to the base of your question, I think, the trends are not a shift against categories the department stores sell, I think, it’s really about the pandemic. And how can we make up what we’ll 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. It’s going to be the most – 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.

[Omar Saad, Evercore ISI]

Thanks for the insights.

[Operator]

All right. And next, we’ll go to William Reuter with Bank of America.

[William Reuter, Bank of America Merrill Lynch]

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 or demand expectations are correct?

[Felicia Williams, Interim Chief Financial Officer]

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.

[William Reuter, Bank of America Merrill Lynch]

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

[Felicia Williams, Interim Chief Financial Officer]

I want to – I will say, definitely give me more on the outlook beyond the fall in the second quarter when we go through the update with you guys in the second quarter. Big picture, I would say, we’re managing and thinking through many factors as you think about our working capital positions and the pace at which we are really trying to move into some really strong inventory management in the back-half of the year.

We’re in this situation here, where as I said, we’re being conservative. But we also need the ability to flex up to the extent that we’ve seen 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.

As 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 2021 and 2022.

And so although, I can’t give you specific guidance at the moment on our projected working capital, I would like, I’m giving you a sense of how we’re thinking about the back-half of the year and indicating that we do have some flexibilities if we need to because of more with respect to how we’re managing our inventory into just by the nature of the facility that gives us the opportunity to draw on it and then pay it down as needed.

[William Reuter, Bank of America Merrill Lynch]

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 billing for additional of 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?

[Felicia Williams, Interim Chief Financial Officer]

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, but it was a somewhat complicated deal, as you know, but extremely cost effective.

But 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 2020 and fiscal 2021.

If you take a step back and just 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 with nearly $2.5 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 a remaining portfolio of assets to do another deal. And we’re 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.

[William Reuter, Bank of America Merrill Lynch]

Thanks so much. Good luck.

[Felicia Williams, Interim Chief Financial Officer]

Thank you.

[Operator]

All right. We’ll go now to Carla Casella with JPMorgan.

[Sarah Clark, JPMorgan]

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

[Jeff Gennette, Chairman and Chief Executive Officer]

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. And 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 trade area demand for those particular Zip Code.

So, we’re always mindful of that. We always then look at the sales and profitability of that particular store and its value – versus its value to operate when you look at the monetization value versus the value to operate, we’re looking at that with reduced levels and the profitability and pulling that through.

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 gain that you had built in from our February conversation.

[Sarah Clark, JPMorgan]

Great. That’s super helpful, ultimate. Thanks.

[Operator]

All right. We’ll next go to Heather Balsky with Bank of America.

[Heather Balsky, Bank of America Merrill Lynch]

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 accelerate to online? Thanks.

[Felicia Williams, Interim Chief Financial Officer]

So, yes. Heather, hi. As we think about 125 announcements, probably have about another 95 to close against our original timeline. Today, we are reopening those doors and we do expect them to generate a 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. We are – we can – as you can imagine, we are modeling all of our store closing metrics. And really all of our stores are part of those performance metrics, watch lists and closing model decisions.

So we will consider whether we’re going to close additional stores and, 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, which is really in the process of still assessing.

[Jeff Gennette, Chairman and Chief Executive Officer]

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 has 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.

[Heather Balsky, Bank of America Merrill Lynch]

Thank you.

[Operator]

All right. And next, we’ll go to Dana Telsey with Telsey Advisory Group.

[Dana Telsey, Telsey Advisory Group]

Good morning, everyone. As you think about the business, what did you see differently just in terms of performance in Bloomingdale’s versus Macy’s, digital and bricks-and-mortar as the bricks-and-mortar reopens? And then up to 3,900, employee reduction, how much is Bloomingdale’s and how much is Macy’s, is there percentage? And then I have a quick follow-up. Thank you.

[Jeff Gennette, Chairman and Chief Executive Officer]

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 Macy’s? It’s remarkably similar. I mean, when you think about every single category, the big difference, if there’s one big difference, it’s luxury.

So as you think about the luxury business right now as it reopens in this country, you see huge demand. And 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 those – that content that would go to other countries to do so we’re now buying it here.

So we’re seeing big surges in the luxury business as Bloomingdale’s reopens. But outside of that, the other – the composite about what you wear is a little weaker, home store is really – its huge beauty is strong across both banners. Those are consistent.

[Dana Telsey, Telsey Advisory Group]

And then holiday will be coming up before we know it. Black Friday and like 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?

[Jeff Gennette, Chairman and Chief Executive Officer]

Yes. So, hey, thank goodness, we have the 10 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 and what we can do, we have a very strong game plan about how we’re going to keep this trend of digital guide. And – but when you look at the stores, I would tell you that it’s a big concern of ours. But when you think about a Black Friday, if you think about the 10 days before Christmas, 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 stores will not have any issues. 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 going to jump on Black Friday, earlier and earlier in the calendar. And so we expect it to start in full force after Halloween and a lot of – and walk in the competitive cycle.

So we’re looking at that carefully. We’re looking to store hours carefully on all of that. So very top of mind for us. But our safety valve on this is how big can we get the digital business. And then we obviously have a very developed omni fulfillment network about how we satisfy that demand.

Curbside pickup is going to be a big secret weapon for us this holiday season. We didn’t have last holiday season. When you look at the service scores of customers we’re going through, the – first off, the speed and the safety of curbside pickup, we think that’s going to be huge for this holiday season, if they’re not comfortable to walk into a store. So – and what we’ll do with store fulfillment is going to be big.

So we have all of our extra service where they pick up if they wanted to buy something online and have it shipped to a store or it’s being pulled from store inventory, that’s actually at your service. We’ve been able to really keep the social distancing there with line control right at that main door.

So we’re – 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. And we’re – but it’s still a work in progress, and we’ll have more for you on the September 2 call.

[Dana Telsey, Telsey Advisory Group]

Thank you.

[Operator]

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.

[Jeff Gennette, Chairman and Chief Executive Officer]

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 look forward to sharing our story then.

[Felicia Williams, Interim Chief Financial Officer]

Thanks, everyone.

[Operator]

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