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.

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.

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, sales started out stronger than we initially modeled. However, with the recent COVID developments, we do anticipate a gradual recovery now that 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?

We can hear you now, Jeff.

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

Yes. We stopped at the furlough process.

Okay, great. I apologize, guys. So we cut our weekly cash burn rate, significantly reducing payroll during the furlough process. We refinanced for liquidity that gives us the flexibility we need to navigate through the next several years. 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 standards. So we felt momentum as we work through the second quarter, and we’ve seen this in 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 operating 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 the 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 remain open, reopened stronger than we modeled. The weekly improvement that we were seeing has started to 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 than our core customer. We’re working hard on 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 experienced Macy’s colleagues and newly 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 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 a $630 million 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 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 is 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 in place 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 headcount. But for the near-term, we are planning these as permanent reductions in 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, most of which will be intact. 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 stores 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 costs from the mix shift toward 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 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 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.

So thank you, Felicia. 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. Digital is certainly top of the list, personalization, and having a flexible and efficient supply chain are key focuses. There are 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 to explore new formats. We’ll give you all the details in our second quarter earnings call again on September 2. In closing, Macy’s, Inc. and the Macy’s and Bloomingdale’s brands 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’s opportunity for us to pick up market share. 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. We’ll take our first caller, Matthew Boss with JPMorgan. Please go ahead.

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 stores? And is it your mall-based and tourist flagship locations that’s leading you to hold the negative 35% store comps for the back-half of the year at this time?

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 our stores in Texas, Arizona, and Florida. Based on the COVID surge in those particular states, we tend to see noticeably worse trends in brick-and-mortar in those states versus where we started and what we would gradually get better to. Conversely, in those particular states, the Dotcom business is improving. So – to answer your question, I see a couple of things happening. So first off, there are regional differences in just kind of the performance of our stores. The heartland is the strongest. The coasts, which 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, our neighborhood stores have been performing the best. That you would expect some of that, because they are not at traffic at 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 when they would take some of their shopping trips into regional malls. When you look at the magnets and the flagships, many of these doors have reopened, certainly. But many of the services, particularly restaurants, theaters, entertainment, and some specialty within those magnet malls have not reopened, which is affecting some traffic. When you look at the magnets and the flagships, that’s where the tourism business has really been diminished, both domestic tourism, which has definitely curtailed, as well as international tourism, which has disappeared. 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 store 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 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 every day.

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 trends stabilize by late 2021, or I think you said maybe even into 2022. 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 at 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?

Felicia, do you want to take that one?

Yes. Hi, Matt – Matthews. It’s nice to meet you virtually. As we have discussed, 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 even entering into 2022. As you can imagine, modeling and predicting beyond the current year is very difficult, given the headlines that I outlined earlier. So, 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 them to improve relative to Q1 and to get sequentially better thereafter as well.

Great.

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. So we’ve got lots of strategies about how we manage that. But we certainly have lines of sight on historical gross margin level, and we’re very committed to getting back there.

Okay, sounds good. Thanks, Jeff.

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

Hi. The merchandise margin momentum was encouraging. What was driving that? What are your thoughts on inventory planning as we think about Q3 and Q4, and what you’re planning in your scenario analysis, as well as how you monitor the promotional environment and competitors? Thank you.

Yes. Hi, Oliver. Yes, our merchandise margins improved in the second quarter. We’re seeing improvement in selling 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 entered the second quarter to allow our normal pricing and promotional activity to occur. 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 for the back half of the year. With our inventory down in line with expectations, we have appropriately set stock levels in line with our fashion expectations. We really expect to enter the third quarter with clean inventory with newness and freshness for the customers.

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

I think, as Felicia said in her comments, when you look at the stimulus checks, we certainly think 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 closely. We’re monitoring all customer behavior. One of the encouraging things about what’s happened to our business during COVID is the number of new customers that are coming into our brands. You particularly see it online, and what we’re seeing is a younger, more diverse customer with 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 customers over time? We’re very focused on using our marketing and personalization techniques to see that behavior.

Great. Thank you.

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

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

Yes. What I think, Chuck, is that there’s really been 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 reopening. As you heard us comment in previous calls, in your fireside chat, what we commented on was that we expected it to be at a low level; it actually came down 50%. Based on what we were seeing in Texas and Georgia, which were the two states that we opened first, we saw a 3 to 5 point sequential improvement in that trend each week. And that was humming along. But then, 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 due to that. Now it’s modulating; it’s coming back a little bit. But that’s what we’re watching carefully: just how the pandemic is evolving. At the same time, the digital business went up. It didn’t cover the whole gap from that 15 point drop, where brick-and-mortar wasn’t where it became, but it did cover some of it. So that’s what we’re monitoring closely to see where the pandemic goes. While we’re not anticipating a national shutdown, we expect regional flare-ups that we don’t fully know the trajectory of yet.

Okay. Thanks, Jeff. That’s helpful. And then on the digital front, you spoke to Oliver’s question, but obviously, you’re 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 of Macy’s?

Yes. Our digital initiatives are effectively attracting customers. We have implemented personalization techniques for their searches and purchases, and we are beginning to see the impact through our content, emails, and direct communications. Our digital experience has improved significantly for all customers, making it more appealing to new ones. The content we offer and our checkout process have both seen substantial enhancements. Our click-through and sell-through rates have increased. We are concentrating on creating a more seamless checkout experience and providing various fulfillment options as an omni-channel retailer. In 2019, around 9% of our digital demand was fulfilled through in-store and curbside pickup; this has dramatically increased, particularly due to curbside services. We anticipate that our stores will fulfill about 30% of our digital business in the fourth quarter. It's important for us to encourage these new customers to make more online transactions while also engaging them in-store. Offerings like Backstage appeal to many of these new customers, and with its presence in numerous units, we are promoting that. These are just a few examples of our efforts to establish lasting relationships with these customers.

That’s helpful. Thanks, Jeff.

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

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? Is a lot of it moving to Backstage? Can you elaborate a little bit more in terms of how you’re approaching and getting to that more normalized level?

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

Yes. Exactly.

Yes. If you think about what happened as we closed our stores and then began to reopen, we started converting store inventory for store fulfillment into our e-commerce facilities to handle the increased digital demand. At the same time, as the stores reopened, we accelerated curbside where we could, and we’re using store inventory for fulfillment as well. In the second quarter, we were aggressively taking down receipts in May and again in June. Given the pricing and promotional activity that we took, particularly in clearance and fashion merchandise, we’ve seen some strong sell-throughs that have really driven our improvement in merchandise margins. As we enter the back half of the year, I am really confident that our stock-to-sales ratio will remain in line with expectations. Our inventory is projected to be down and aligned with our fashion expectations as we enter the third quarter with clean inventory that will provide freshness for our customers.

Okay. And then my follow-up question is on – can you talk about the performance of the credit business? What are your expectations on credit revenue, and what are you seeing throughout the portfolio?

For the first quarter, our penetration rate was 46%, which was the same 46% as it was last year. We’re watching trends closely, Bob, because as our stores were closed, our new account activity was down significantly. As we model our credit portfolio profit share, we monitor a number of factors, mainly bad debt trends, as they tend to have a delayed impact on our portfolio. We’re also watching banks as they make decisions about consumer credit tightening and the potential impact from the unemployment checks and the stimulus package. It’s hard to anticipate whether the government will renew those stimulus packages in the back half of the year. If they don’t, what impact will that have on consumer spending and behavior? But we’re closely monitoring those metrics, as you can imagine, and we are cautious about consumer spend, consumer behavior, upticks in bad debt, and the aging of consumer portfolios over the different credit categories that we face. We expect to face some headwinds as we clear the back half of the year and move into 2021.

Okay, great. Thank you very much, Felicia.

Okay. Next, we’ll go to Omar Saad with 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. Could you talk a little bit more about that as a percentage of the total corporate headcount? And what types of positions? Is it just a broad-based 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 a corporate restructuring and how you’re planning to reallocate the organizational structure going forward, given the ongoing changes and acceleration of changes? And then I have a follow-up. Thanks.

Hey, Omar. So, yes, when you look at the 3,900, it was over 20% of the corporate headcount after we took the cuts from Polaris that we announced in February. So it was significant. I would tell you that there wasn’t 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.” We really looked at – when you think about the vision of the company, our focus has been to fortify and grow our omni-channel advantage. We want to capitalize on digital, leveraging our brand banners, thinking of Macy’s and Bloomingdale’s, from off-price to luxury. So we looked at, okay, which pieces of our business we want to ensure are best-in-class. In that, we emphasized best-in-class merchandising capability, including our private brands, to protect our fashion leadership and our unique ability to curate fashion online. We also wanted to ensure simple and convenient interactions in our digital platforms and in our stores. So while we did see deep cuts in multiple areas, we focused on maintaining investments in digital. You’d see a disproportionate amount of cuts occurring at the Vice President and above level, as well as a higher percentage at the manager and director levels. We tried to keep our customer-facing colleagues mainly intact. Those colleagues are elastic to our sales volume, and we can expand their hours depending on the volume we see. The bulk of our cuts at the corporate level and in regional leadership were painful but necessary.

That’s helpful. And then I also wanted to ask – I appreciate that you guys are providing an early view on the second half, the minus 20 to 25% range. It’s helpful context. But if we think about stores running down 35%, with your sizable commerce business growing, I think about bridging that gap. It seems like you’re expecting more of that, and you mentioned some of the flare-ups in the second waves. Is it more that’s causing the kind of subdued forecasts relative to maybe what current trends could build over the second half, or is it 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?

When you look at the composite of our sales, it has definitely shifted. I’d say it’s primarily the pandemic that is affecting our total trend. I think that will subside over time. As a department store, we have a unique ability to rapidly accelerate those categories that are in favor right now. Home stores are having a golden opportunity right now; every retailer is talking about that. When you look at how well big-ticket items perform, people are looking around their homes and looking for opportunities to update. So, being a full-service retailer with a strong big-ticket presence in Bloomingdale’s and Macy’s is advantageous. Soft home categories have been extremely strong, and beauty remains strong across both banners. When you look at the apparel categories, it’s worth noting: active and casual are stronger than they’ve ever been. However, dress categories; dress-up categories like suitings, dress shirts, and social dresses have taken a hit, so has luggage. Those categories will be compressed for a while, but not forever, I don’t believe. The emerging categories we see online show promising growth, and we have vendor-direct categories we plan to expand and integrate brick-and-mortar presence in. To answer your question specifically, the trends do not reflect a shift against the categories we sell; it’s largely due to the pandemic. The significant demand that we anticipate in our digital business is expected to buffer any drops in brick-and-mortar. We believe this will be the most robust digital fall we’ve ever had; we expect to achieve more business through digital than ever, and it will test our fulfillment network to its limits, and we’re laser-focused on that. I firmly believe brick-and-mortar will come back, and I think on the question about the flagships and magnets, a lot hinges on those; while current sales may not reflect immediate recovery, we expect to see robust recovery over time.

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 to look like, and also in the fourth quarter, assuming that your sales expectations or demand expectations are correct?

I’ll take that one. 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 are for working capital based upon the demand levels that you’ve assumed in your prepared remarks for the fourth quarter. And then assuming continued challenging conditions in 2021, would you expect working capital could still be a source of cash next year?

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 regarding our working capital positions and the pace at which we’re really pushing into some really strong inventory management in the back half of the year. We’re in a scenario where we need to balance being conservative while also needing the ability to flex up if we see sales pick up and lean into receipts and categories that perform well in the fall and going into holiday. So we need to give ourselves some flexibility. Part of our working capital equation now is our ability to access double the 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 for the back half of the year and as we go into 2021 and 2022. Although I can’t provide specific guidance at the moment, I hope I’ve provided a sense of how we’re thinking about the back half of the year, including how we will have flexibilities if needed based on the nature of the facility that allows us to draw on it and pay it down as necessary.

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 liquidity, 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?

Okay. It’s a great question. 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 and extremely cost-effective. When we look at our total liquidity situation, this financing has provided us the flexibility and liquidity to really fund our business and operating needs for the foreseeable future. That includes paying off two powers that are coming due at the end of fiscal 2020 and fiscal 2021. Over the past few years, we have aggressively managed our capital structure by paying down debt. We’ve retired approximately $2.7 billion in public debt through buybacks and tenders in the past three years. The fact that we were able to utilize highly valuable unencumbered assets to structure our new facility gives us a lot of confidence that we’re in a sufficiently flexible liquidity position for the foreseeable future. However, we still possess a portfolio of remaining assets suitable for another deal, and we continuously consider that as part of our capital structure thinking and modeling. So while it’s never completely off the table, today, we have sufficient liquidity to run the business for the foreseeable future.

Thanks so much. Good luck.

Thank you.

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

Let me take that. When you look at what we discussed in February, it was part of the natural progression of our real estate strategy. At that time, we claimed we would have approximately $100 million in real estate gains in 2020. We don’t anticipate anything above that level in 2020. We’re going to ensure we understand the value of these real estate assets during normal times. We’ll determine whether it’s the right market to sell all of them. We are uniformly evaluating our real estate against our overall retail strategy and how each brick-and-mortar site fits into the national brick-and-mortar strategy and how it affects the overall trade area demand. We’re always mindful of that. We continually look at the sales and profitability of individual stores versus their operational value while also considering their monetization value. While we anticipate $100 million, we’ll update you on our second quarter call, but for your modeling, don’t assume it’s higher than the $100 million gain we anticipated back in February.

Great. That’s super helpful. Thank you.

All right. And next, we’ll go to Heather Balsky with Bank of America.

Hi, thank you for taking my question. As you look at your store closures, you previously announced 125. How are you thinking about your footprint today, especially with the shift to online?

Yes. Heather, hi. As we think about the 125 announcements, we have about another 95 to close against our original timeline. Today, we are reopening those doors, and we expect them to generate a cash flow despite what’s 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 store closing metrics, and every store is part of those performance metrics, watch lists, and closing model decisions. We’re assessing whether we’ll close additional stores, but I believe it’s likely more a question of timing than quantity. As we move through that analysis, we’ll provide further information, as we are still actively assessing our strategy.

The other thing I would add, Heather, regarding the competitive landscape is how it affects our calculus. When you consider the shifts in the competitive landscape, both within off-price and luxury, those changes are ongoing. Any decision we’re making is made with that in mind.

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 in terms of performance at Bloomingdale’s versus Macy’s, both digital and bricks-and-mortar as the bricks-and-mortar reopens? And then, regarding the 3,900 employee reductions, how much of that is Bloomingdale’s, and how much is Macy’s, or is there a breakdown percentage? Then I have a quick follow-up. Thank you.

Yes. With regard to Bloomingdale’s, they experienced about the same percentage of reductions as I discussed, and that was very similar in terms of what we protected and what we cut deeper. When you look at the trends, the performance in Bloomingdale’s versus Macy’s is remarkably similar right now; all categories are aligned. The notable difference revolves around luxury; there is demand for luxury, driven by limited access online. This is coupled with domestic tourists who would typically travel abroad for these items are now purchasing them here. As a result, we’ve seen significant growth in the luxury segment as Bloomingdale’s has reopened. Other than that, the composite across categories is quite similar.

And on holiday, with Black Friday and Christmas coming up soon, gatherings typically increase. How are you planning for the upcoming holiday season?

Yes. Thankfully, we have the 10 largest websites in the country, which allows us to compete favorably. Our biggest ambition now is to grow our digital presence to improve the customer experience and eliminate friction points. But we’ll also run a lot of business on our website, and we believe we can scale our operations to maximize that opportunity. As we plan for Brick-and-Mortar, we recognize that Black Friday and the period before Christmas will see people hesitant to gather. Consequently, everything is on the table as we work with our merchandising and marketing teams to adjust our calendar. There are opportunities to draw demand earlier, especially considering how we believe customers will behave this holiday. We expect increased sales beginning in earnest after Halloween, while naturally keeping a close watch on the competitive landscape. We are also carefully evaluating our store hours during this time. It is a priority for us. Our safety valve to navigate through this season is our digital business, and we’re enhancing fulfillment options such as curbside pickup, which we didn’t have last season. Our customer service score reflects that, and it’s important as we cater to nervous customers regarding crowds. As of now, we have the means to safeguard even the most cautious customers about shopping in-store. This remains a work in progress, and we’ll have more insights following our September 2 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 we 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.

Thanks, everyone.

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