梅西百貨 (M) 2020 Q2 法說會逐字稿

Good morning, and welcome to Macy's, Inc. Second Quarter 2020 Earnings Conference Call. Today's 90-minute long conference is being recorded.

I would now like to turn the call over to Mike McGuire, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thanks for joining us on this conference call to discuss our second 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. (Operator Instructions)

In addition to this call and our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com. This presentation summarizes the information in our prepared remarks and includes some additional facts and figures.

I do have 2 housekeeping items to share. First, with our third quarter results, we'll be resuming our normal earnings report cadence. We'll be releasing results and hosting the associated earnings call on Thursday, November 19, before market open. Second, Jeff and Felicia will be participating in a fireside chat at the Goldman Sachs Global Retailing Conference on Wednesday, September 9 at 7:30 a.m. Eastern time. Both events will be webcast on our Investor Relations website, so please mark your calendars.

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 2 hours after the conclusion of this call, and it will be archived on our website for 1 year.

Now I'd like to turn this over to Jeff.

Thanks, Mike. Good morning everyone, thank you for joining us. As you saw in our press release this morning, despite the challenging environment, Macy's, Inc. second quarter came in better than we had anticipated. I want to thank the Macy's, Bloomingdale's and Bluemercury teams for their efforts in these extraordinary times.

On today's call, Felicia will take you through the second quarter results and provide some perspective on how we're looking at the back half of the year. Then I will provide some context on Holiday 2020 and give an update on the Polaris strategy, which we launched in February. We will then open up the line for your questions.

With that, I'll hand it over to Felicia.

Thank you, Jeff, and good morning, everyone. As Jeff said, the second quarter closed stronger than we anticipated, and this trend happened across all 3 brands: Macy's, Bloomingdale's and Bluemercury.

Overall, we delivered sales of approximately $3.6 billion, a decline of 35.1% on an owned plus licensed comparable basis. We experienced some ups and downs during the quarter. For instance, some aspects of our business recovered more quickly than we originally modelled, such as our stores, which reopened stronger than anticipated. And our digital business remained strong throughout the quarter. Luxury, particularly at Bloomingdale's, also outpaced our expectations. These factors contributed to the outperformance that we saw against our expectations.

On the other hand, in our Star Rewards loyalty program, the foundation of our customer retention, migration and acquisition strategy, year-over-year, we saw our members' spend slightly lagged our non-loyalty customers in the quarter, but we saw building momentum in August starting in week 1 with our Star Money event. So far, we have enrolled 0.25 million people in the first 3 weeks of the fall season in our gender-neutral Bronze tier, which is an approximately 40% increase over prior year.

Our stores saw a sales decline of 61% in the quarter versus last year. As you know, we began reopening our stores gradually during the first week of the quarter, but almost all stores reopened by the end of June. The trend in store results was closely correlated with the pace of reopening as performance improved sequentially each month as the quarter progressed, and we exited the quarter with July down 40%. And we saw this progress despite the month of July being negatively impacted by pockets of COVID flare-ups in various parts of the country, Florida, Georgia and Texas among them.

However, in many of those areas where the resurgence slowed the stores recovery, the digital business helped to partially offset the pressure. And overall, our digital business accelerated its strong performance coming out of the end of first quarter and grew by 53% in the second quarter. Digital penetration across the company increased to 54%, up approximately 10 percentage points versus the first quarter. However, with stores improving as the quarter progressed, digital strength moderated at the end of the quarter, with July penetration coming in at 42% on digital growth of 25%. We expect this moderation to continue into the fall season, as we discussed on our last call.

In some urban markets, including New York City, San Francisco and Chicago, we continue to see deep declines in traffic, driven by the slow return of workers to these city centers and the erosion in both international and domestic tourism. Thus, as expected, international tourism sales were down significantly in the quarter and the decline impacted our Macy's, Inc. comp by about 210 basis points.

Within the Macy's brand, we saw strength in many of the categories that are in demand. Home- particularly housewares and textiles, as well as fine jewelry, fragrances, activewear and sleepwear. We also continued to see softness in men's tailored and dresses, which is indicative of the work-from-home world in which we now live, as well as slowness in luggage due to greatly reduced travel.

At Bloomingdale's, home and accessories were the strongest performers. Housewares drove the home trend, followed by textiles and tabletop. Handbags, fine jewelry and women's shoes were also among the best performers. As with the Macy's brand, apparel continues to be challenging in both men's and women's.

Interestingly, we believe we are benefiting from the current move away from spending on experiences towards spending on products, especially within luxury. From textiles to shoes, to handbags, to mattresses, to diamonds, luxury proved to be strong across almost every category of the Bloomingdale's business, significantly growing its penetration of the business year-over-year. Given our strength in this area, we are leaning harder into luxury in order to capitalize on the shift in spending.

And at Bluemercury, bluemercury.com experienced a 105% sales growth in the second quarter, and we saw our total web customers grow by more than 50% year-over-year, with the strongest growth in May, moderating each month thereafter as retail locations began reopening.

Turning to off-price, in the quarter, Backstage performed better than our main boxes but still saw sales erosion of nearly 45% due to closures. We took appropriate markdowns during the quarter to clear through seasonal merchandise in Backstage and enter the third quarter in a clean inventory position. The sales recovery is expected to improve in the third quarter as we lean into stronger trends in home, casual and basics.

We generated credit revenue in the second quarter of $168 million, down $8 million versus last year. Our proprietary card penetration was down 590 basis points in the quarter at 40.8% this year compared to 46.7% last year. This year-over-year decline was largely due to a recent shift by consumers to debit card and cash, which appears to be tied to economic stimulus and unemployment checks being deposited directly into consumer bank accounts or loaded on to prepaid bank accounts. In addition, we derive about 85% of our new accounts from customers' face-to-face engagement with our store colleagues. As a result, with the majority of our stores open for only a portion of the quarter as well as reduced in-store traffic once the stores reopened, new accounts were down significantly in the second quarter of 2020 versus the second quarter of 2019.

Gross margin was 23.6%, down more than 15 percentage points from last year but up significantly from first quarter's 17.1% as retail margins benefited from good sell-through of clearance merchandise as well as an improved mix. In fact, not only did we sell through our clearance merchandise much faster than we did in the first quarter, but we also sold through our regular-priced merchandise at a faster pace. As a result and importantly, we ended the quarter with inventory down 29% year-over-year, and we are entering the third quarter with clean inventory and an appropriate sales-to-stock ratio.

As a percent of sales, SG&A expenses improved by 10 basis points in the quarter over last year to 39.2%. We recorded nearly $1.4 billion of SG&A expense, an improvement of approximately 36% from last year's second quarter, driven largely by strict expense management. Recall that we announced a reset of our cost base in February as part of our Polaris strategy, and that was the primary driver of the improvement. The furlough of many of our colleagues in May and June and beginning of July, the subsequent long-term and more permanent restructuring also contributed to the improvement. Overall, this quarter, we were very disciplined with our variable costs, which we fully control and will continue to limit and monitor.

Given the current real estate environment, real estate transactions were minimal during the second quarter, and we expect that the current environment will continue to weigh on what we originally targeted this year. We are still selling assets but we are being more selective given that the market has slowed. And we are being very thoughtful about when to go to market on certain assets in order to maximize value. Year-to-date, we've recognized $16 million in asset sale gains, and the current expectation is that we will recognize about $50 million for the full year.

We recognized $242 million of restructuring, impairment and other costs, of which $154 million was severance associated with the recent restructuring of our workforce. Additionally, we are extremely pleased to have completed approximately $4.5 billion of new financing during the quarter, much of which occurred before our first quarter call. To summarize, this included $1.3 billion of senior secured notes as well as a new $3.2 billion asset-backed credit facility. Recall that the proceeds of the notes were used to repay the outstanding borrowings under previously existing unsecured credit facility. Additionally, we successfully executed an exchange offer and consent solicitation for $465 million of our previously issued unsecured notes, allowing us to create greater financial flexibility for future needs.

With all of these completed, we expect to have sufficient liquidity to fund our business for the foreseeable future while repaying upcoming debt maturities in fiscal 2020 and fiscal 2021. Notably, we finished the quarter in a strong liquidity position with approximately $1.4 billion in cash and approximately $3 billion of untapped capacity in the new asset-backed credit facility.

We incurred net interest expense of $69 million, an increase from $47 million in the prior year period, driven by the additional debt during the quarter. We recorded a tax benefit of $298 million, representing an effective tax rate of 40.9%. This high rate reflects the impact of the carryback of net operating losses as permitted under the CARES Act.

Summing it all up, we saw $251 million of adjusted net loss in the quarter versus income of $88 million last year. Adjusted EPS was a loss of $0.81 in the quarter compared to income of $0.28 last year, of which asset sale gains represented EPS of about $0.01 last year.

As you all recall, we withdrew our 2020 guidance in March. Given that there remain many unknown and uncontrollable factors impacting consumer behavior and the retail landscape in these unprecedented times, we are not providing new guidance at this time. However, as we did on our last call, I would like to update you on our current thinking as it relates to the rest of the year.

We continue to model various scenarios for the back half of the year, and ultimately, we continue to take a conservative approach to our forecasting. In July, we closed out the second quarter strong in the face of various challenges, many of which we previously outlined. And there are a number of factors that will likely impact our business in the back half of the year.

As I've already noted, the possibility of pockets of COVID-19 resurgence and the erosion of international tourism remain headwinds, as does the slower recovery of our stores in urban areas. In addition, while receipts are beginning to flow more reliably, they are sluggish as a result of under-plan demand from the global and national supply chain, and as the supply chains open up, we are seeing bottlenecks in the port as well as challenges with ground freight.

As you know, back-to-school season has been slow, and we are anticipating possible impacts from recent challenges to the federal unemployment assistance. To combat these, we are adjusting our plans and placing more emphasis on key areas of the business such as service, value, marketing, product mix and supply chain. Encouragingly, in the markets where we saw the initial regional resurgence, while stores have seen a dip in sales, they have been regaining momentum in pockets. Many of the expectations we've laid out on our last call remain the same, and you can view those within the slide presentation posted on our website.

To briefly summarize, we expect total company comps to culminate in the third and fourth quarter down in the low to mid-20s range. We are forecasting slightly stronger digital growth and slightly weaker store recovery given some of the disruption around the country. While the underlying parts have changed slightly, the sum of the part remains the same. Gross margin expectations have not changed for the back half of the year, but quarterly margins might peak in the third quarter as slightly stronger digital growth expectation and recently announced holiday surcharges in the fourth quarter will lead to higher delivery expenses that weigh more heavily on fourth quarter margins.

We continue to expect elevated levels of SG&A as a percent of our lower sales base despite improving year-over-year in the second quarter. For the fall season, this could be low to mid-single-digit percentage points higher than last year, as we said on our last earnings call. Remember that the second quarter benefited from a partial quarter of furloughs of our corporate colleagues. Now nearly all of our colleagues have returned. However, our stores are still ramping up. This will result in a higher SG&A rate in the back half of the year, but we expect the rate to continue to improve as we leverage our fixed cost as sales improve.

Credit revenues are expected to be depressed as we move through the year, continuing into 2021, given potential consumer financial stress and the ongoing environmental factors I mentioned earlier. We are expecting to generate credit revenue as a percent of sales roughly in line with what we generated in the back half of last year.

Finally, we continue to expect CapEx spend this year of about $450 million. We scaled down and re-prioritized our capital spend to support the digital business as well as our Polaris strategy. As we look beyond 2020, we're planning to have a moderated CapEx budget for the next year or 2 that reflects the fact that we are a smaller company and, again, concentrating on those initiatives that will help us to transform or to grow, such as digital. And we'll be prioritizing our capital spending on very strategic projects that have returns that clearly justify the spend.

Overall, given the tumultuous environment, we are pleased with our spring performance. While we are planning the remainder of the year conservatively, we have the utmost confidence in our colleagues to successfully execute well on the things that we can control. We have the ability to pull levers and remain disciplined with our spending and investments, and we have also demonstrated that we can skillfully navigate the changing environment with agility.

With that, I'll turn it back over to Jeff.

Thank you, Felicia. So as Felicia noted, we continue to approach the back half of the year conservatively. Our immediate priority is to control what we can control to deliver third quarter and prepare for the critical holiday shopping season. There is uncertainty, but over the past several months, our teams have learned a great deal about working in this environment. And we will continue to adjust our actions quickly to both address challenges and take advantage of opportunity as we go through the back half of the year.

The holidays are when Macy's shines, and this year will be no exception. There are several things about Holiday 2020 that won't change. First, America comes to Macy's and Bloomingdale's for gifting. We had a successful gifting strategy for holiday of 2019, and we're building on that for 2020 and believe the shift away from experiential gifting provides some upside for us.

For Holiday 2020, newness represents nearly 50% of the total gift assortment, led by items in beauty and home. We have great brands and are introducing new categories and in-demand content. And whether customers are shopping in our stores or on dot-com, we will have something for every person on their gifting list.

Next, America comes to us for value. We have great content and the best brands at all price points throughout the holiday season. We further built out our Gifts Under strategy, which we believe will resonate with customers in this environment. Customers will find great value at every price point, for gifts under $15 all the way to luxury gifts. We are adjusting our promotional cadence to support an elongated holiday shopping season, and we are expanding our fulfillment options so customers can better manage the trade-offs between cost and convenience.

Third, America comes to us for celebration. We help bring special moments of the season to life, both big and small. We are reimagining our iconic events to deliver the magic of the holidays. From the Thanksgiving Day parade to local tree lightings and holiday windows, we'll kick off the holidays in our communities. We will help our customers celebrate at home with family and friends, whether it's writing letters to Santa to support our Believe Campaign with Make-A-Wish or making a virtual visit to Santaland. 2020 has been a challenging year for the country, and we need these moments of joy this year more than ever.

But there are other aspects of the Holiday 2020 season that will be different as we meet customer expectations around convenience and safety. Let me cover some of those now. The dramatic channel shift that we've seen from stores to dot-com has required us to rework our fulfillment strategies. We've taken a number of steps to mitigate both customer friction and financial impact. We're optimizing inventory placement to meet customer demand wherever and however they shop: in our store, curbside, BOPS and BOSS, Vendor Direct, dot-com or mobile, same-day delivery, "I can wait" delivery options.

In digital, we are adjusting our assortment to meet trending demand, including leveraging the flexibility of our Vendor Direct network. We are also improving product availability information and providing more shipping options and better clarity on delivery days.

In our stores, Holiday 2020 operations will have an emphasis on traffic flow to ensure that our customers and colleagues have a safe experience. We will be taking actions in our stores to disperse typical bottlenecks and control occupancy levels. For instance, within At Your Service and our larger doors, we will have separate areas for returns versus pickups. We're also adjusting our promotional calendar to spread out traffic to our stores.

Planning for Holiday 2020 has been extensive, and we intend to provide our customers with a great holiday experience. Strong execution of the third quarter and Holiday 2020 are the top priorities of every Macy's, Inc. colleague.

So let's shift gears now and talk about the future. Our vision for Macy's, Inc. remains unchanged. Our vision is to be the leading multi-branded fashion retailer. From off-price to luxury, from online to offline, from on-mall to off-mall, we will offer convenient access to the fullness of our brands.

Our customers want great fashion. We carry the best brands in America and outside of their own sites and stores, offer the strongest expression of these national brands. Our customers are omni-shoppers, and we will deliver a great experience whether they are in our stores, our sites or our app. Our customers come to us for the special moments of life: for celebration, special occasions, for gifts and to create shared memories.

And our Polaris strategy, which we shared with you in February, remains the right strategy for us. But we've reexamined every point of the strategy for relevancy, viability and financial impact. We have fine-tuned our plans based on the needs of the customer today and where we think the opportunity is in the future. Our updated Polaris strategy focuses on areas where Macy's can differentiate and drive competitive advantage to first recover the business and then drive both top and bottom line growth.

Retail today has been disrupted, and while that disruption creates challenges, it also holds opportunity. With many competitors closing or struggling, we see the potential to bring new customers into our brands and gain market share. So let me take you through each of the 5 points of the Polaris strategy that we shared with you in February and cover the changes that we've made.

We always start with the customer in mind, and the first point of Polaris is strengthened customer relationships. We remain committed to strengthening our customer franchise and building profitable lifetime relationships with each of our customers.

Loyalty continues to be important to us, and we're pleased that the investments in Macy's Star Rewards loyalty program that we launched in 2018 are paying off. As Felicia shared, during the enhanced federal unemployment payments, we did see a shift in spend away from proprietary cards. But on a positive note, we also saw a corresponding increase in sign-up for our Bronze or gender-neutral program.

Our loyalty program is helping us build relationships with new customers, which is important because, in the second quarter alone, we acquired nearly 4 million new customers to macys.com. We're creating value for them by expanding earn every day events and adding more Star Money days. And we are using our loyalty program to get our best customers back shopping with us. Longer term, we see continued potential to enhance loyalty programs across Macy's, Bloomingdale's and Bluemercury.

We also continue to move forward on personalization, which strengthens customer relationships, presenting the customer with the most relevant products and messages. We have more than 40 million known customers in the Macy's brand alone, and personalization will allow us to improve their experience and drive engagement. And we will continue to pursue on-site and off-site monetization as a future growth driver.

The second point of the Polaris strategy is to curate quality fashion. We continue to build on our fashion authority by curating national and private brands to support our customers' self expression at all price points, from off-price to luxury. While our ambition remains the same, the categories we focus on have changed. Dresses and men's tailored, 2 of our former Destination Businesses, have seen nearly 70% sales decline in the spring season. While I believe these categories will come back over time, we don't expect that business to return to growth anytime soon.

We've reexamined category roles in light of current customer demand and future potential, and we've honed in on what we call the focus 4. These are 4 categories where customer demand is strong. We have a dominant or growing market position and we feel we can drive profitable growth over a multiyear horizon. For Macy's, these are fine jewelry, beauty, furniture and mattresses and Backstage off-price. And for Bloomingdale's, the focus 4 are luxury, advanced contemporary, textiles and Bloomingdale's The Outlet off-price.

To support all of our product categories, we have access to some of the best brands in America. We are weathering this crisis together with our brand partners and are committed to a long-term vision of serving our shared customers. Maximizing our private brand offering remains an important part of the plan as these products have some of our deepest customer connections and highest margins.

While there has been a significant sales impact on some of our private brands, particularly in apparel, we have also seen strong performance in the private brand home and accessories categories. As we stated in February, we intend to grow private brands to a 25% penetration. And given the importance of private brands to our profitability, we are accelerating the sourcing strategies that we shared with you in February.

The third point of the strategy is accelerating digital growth. We will strategically invest across the enterprise to improve the digital experience, building customer lifetime value and driving profitable digital growth. In February, we shared that we will improve experience across both dot-com and our app, grow our omnichannel customer base and improve profitability. These remain our priorities, but everything on the digital agenda has been accelerated.

Customers have migrated online at unprecedented rates. By some estimates, retail has seen 10 years of digital growth in just 3 months. Few companies were adequately prepared to fully serve these migrating customers, and those that rapidly invest in their digital retail infrastructure has significant opportunity.

In an odd way, we've been able to move farther and faster on our digital agenda because of this disruption. As we announced in February, we closed our San Francisco office, where our digital business was formerly headquartered. We've been successful with recruitment and found strong digital talent in the New York metro area during the COVID epidemic. This influx of new talent has put fresh eyes and energy on the business, and we expect that to continue.

Digital as a higher penetration of our sales has some significant implications on our business model. We are improving profitability of the digital business by identifying opportunities for margin expansion, leveraging financial analytics for assortment prioritization and optimizing marketing spend allocation. Core to our efforts is improving the transparency into data that helps drive business decisions and delivering more granular data to all of the business owners. This information allows us to identify areas of growth and opportunities to course-correct.

We can also prioritize assortments on our site and optimize channel mix to prioritize fulfillment where it is most profitable. This spring, when we saw a significant sales impact from COVID-19 and the rapid growth in digital, we took the opportunity to rewire our cost structure and resource allocation to support a more digitally focused business. You saw that in the SG&A numbers that Felicia shared.

The fourth part of the strategy was around optimizing our store portfolio. Now we look at it more broadly as optimizing the omni experience. We will innovate and optimize our stores, supply chain and call centers to ensure every customer can shop when, where and how they choose. The rapid customer migration to omni-shopping, coupled with the financial realities of our business, led us to adjust how we look at the stores aspect of the Polaris strategy.

As always, our strategy is built on our customers' journey. And for today's customer, a strong omni experience is a baseline expectation. We have been tracking customer response as we've reopened the stores, and it's encouraging to see consistently strong customer satisfaction scores. And driving some of this customer satisfaction is the enhanced health and safety measures that we've carefully taken.

As it relates to our stores, we are pausing on investment in additional growth doors, although I will note that our prior investments over the past 2 years are paying off and the G 150 continues to perform well. As a reminder, through the G 150 strategy, we upgraded the stores that accounted for half of our 2019 brick-and-mortar sales. So we expect to continue to benefit from those investments.

We paused on our market-based ecosystem test, but we're now restarting those, albeit at a modified scale. We're continuing to focus on the Dallas, Atlanta and Washington, D.C. markets. Over the next 2 years, we will open several smaller-format off-mall Macy's, and we will test a smaller-format off-mall Bloomingdale's. In off-price, we will open several additional freestanding Backstage stores, continue the expansion of Bloomingdale's The Outlet and test Backstage online. As we shared in February, every off-mall store will have full service for pickup and returns.

We continue to believe that the best malls in the country will thrive. However, we also know that Macy's and Bloomingdale's have high potential off mall and in smaller formats. I do want to note that the number of stores that we plan to close hasn't changed since our previous announcement. However, we are monitoring the competition and both store and mall performance closely, and we will adjust our time lines if needed.

In this more omni world, we need to use our entire network, stores, supply chain and our call centers, to maximize our capacity and serve our customers in a truly omni experience, from prepurchase browsing to purchase, from pickup to delivery and post purchase to returns. With this, we need to flex our network and fulfillment strategy, given the acceleration of digital, to focus on capacity expansion, cost efficiencies and providing customers with more choice and control over their delivery and returns experience.

For instance, we're developing a centralized fulfillment network to demonstrate efficiencies in getting products to stores and customers more quickly. The supply chain redesign that we shared with you in February is moving forward with an early emphasis on capacity planning and centralized fulfillment.

At the start of the COVID-19 pandemic, call center volume and response time was a pain point for us, and we had significant disruption with our offshore partners. Within the U.S., in the span of 2 to 3 weeks, we developed and implemented a work-from-home option for our call center colleagues. And we are diversifying our geographic footprint to enable us to provide continuity of service to our customers in the event of regional or global resurgences.

The last point of the Polaris strategy is reset the cost base. We will show discipline on cost management and create a culture of continuous assessment to derive the greatest ROI on every dollar spent. In February, we shared that we would reset our cost base, rightsize the organization and expense base, balance top line and bottom line growth and improve productivity and working capital, including faster inventory turns. The current environment has required us to make our organization even more efficient.

Our Polaris cost savings target of $1.5 billion that we shared with you in February has now expanded to $2.1 billion now, all by the end of 2022. We will continue our disciplined expense management to allow as much of the $2.1 billion as possible to flow to the bottom line, recognizing this will help mitigate higher costs from our aggressive lean into the digital business over the next few years. And some will be invested in strategies that drive top line growth.

Through our continued focus on disciplined expense management, we have created a Macy's that is better positioned to effectively compete today and in the future. To sum it all up, the updated Polaris strategy continues our work to strengthen customer relationships and build customer lifetime value; hones our merchandise strategy to focus on categories that matter most to customers today and have a long runway for growth; aggressively accelerates digital; optimizes all aspects of our network, including stores, supply chain, call centers, to deliver the best customer omnichannel experience; and delivers profitable growth on a rewired cost base.

In closing, we are confident that we have the right strategy. We're trying to focus on what's important now and in the future. We have resilient brands that will stand the test of time. We have an organization that knows how to execute through uncertainty by listening to our customers, following the data, reading the signs and pivoting quickly. I couldn't be more proud of our colleagues and thank each of them for their continued dedication to the business.

The past 6 months have presented challenges that we never imagined and have forced us to make significant changes in how we run our business. But the changes we've made not only address today's climate, but position us well for the future. We know that there are more challenges ahead, but I'm confident that Macy's, Inc. will come out on the other side of this crisis stronger and ready to serve another generation of American consumers.

Thank you. And now we'll open up the line for questions.

(Operator Instructions) We'll take our first question from Matthew Boss from JPMorgan.

Yes. Can you hear me?

Yes, we can hear you, Matt.

Okay. Great. So Jeff, can you speak to the interplay that you're expecting between the negative 40% brick-and-mortar store comps and the moderation in e-commerce that you saw exiting the second quarter as we think about the back half of the year? And just anything materially different that you've seen so far in August relative to the trends by channel that you saw in July?

Yes. So what I'd say, Matt, is that we do expect that the trend line that we have in stores that we experienced in the month of July, that -- give or take, we can pull that forward. And that's a conservative approach, but that's where we have planned it. And August was in those expectations.

And in digital, as we described on our last call, we do expect that to moderate. It's still going to be significant, but it's more in the line of what we experienced in the month of July. So that is -- that kind of culminates between kind of the way we're looking at the back half of the year of down low to mid-20s for the full enterprise of Macy's, Inc.

Now we're seeing lots of things in between that. When you look at the month of August, some things were better, some things were worse, but as an overall characteristic, in line with what our expectations were. We've all talked about what happened in the back-to-school time frame, what happened with the cessation of the unemployment benefits, what happened with some of the resurgence. But there are also some good tailwinds that we've also seen.

So what we've seen is that now that we've got our inventory in parity with the demand that we're expecting in the back half of the year, seeing some really good regular-priced sell-throughs in categories from off-price all the way to luxury, our freight is moving very well right now. We've got good demand, and we're getting good response and receipts coming in to support that demand. So -- and we've got -- we feel very good about the gift assortments that are coming for the fourth quarter.

So we are taking a conservative approach to the back of the year. Our -- I kind of noticed to all of you about what we said at the end of the first quarter really holds for this call as well. We're taking a conservative approach. We have an upside scenario. We have a downside scenario, but we're staying really close to it. We're basically tracking where the customer is going, and we've got the receipts there to support it.

Great. And then just a follow-up on the Polaris strategy and maybe thinking relative to the initial plan that you laid out at the Analyst Day a while back. What are the largest changes that you're making multiyear post the pandemic as we think about merchandising assortments and the margin opportunity over time?

Yes. I think the big thing there is really what is the mix of the business and when you look at what digital is going to be of the overall business. So that has been a -- we do expect that to be at least 40% of the business moving forward. We're clearly seeing that in 2020 with the door closures, but we think that forever is changing the complexion of the business. And so feel very good about our digital team and how they're going at that, where that demand is, how they're responding to that demand, how we're using that data, how we're building the supply chain to take full advantage of that to improve the profitability.

So we're expecting higher shipping costs, but we're expecting margin expansion based on all of what we're doing with personalization and new categories that we're getting into. We've obviously expanded Vendor Direct. We're looking at new categories based on what we've learned through COVID. So we have -- right now, digital gives us -- contributes to our overall profitability, and we have a clear line of sight about how to grow that over time. So we're -- that's the biggest change, is really what's going on with our digital business.

Great. Best of luck.

Thanks, Matt.

And now we'll take our next question from Oliver Chen from Cowen and Company.

Regarding what's happening with the product assortment and consumer demand, what are your thoughts on how you've been able to reposition the assortment to what's attractive with at-home demand relative to some of the caution points around apparel? I would also love your thoughts on as we approach Black Friday. Just more generally, how do you see this evolving? And what's within your control to drive a safe yet compelling and value-orientated experience?

Oliver, so one of the benefits of being a department store is the range of brands and products and values that we can offer and we can pivot where the customer takes us. So certainly, in COVID, we've seen big changes in the overall merchandise mix. And so it's -- everybody is talking about what's happened with the need for more casual and active, and that certainly is the case. With everybody being at home, they're making lots of changes with their home, be it new textiles or new home decor or new furniture or mattresses. And that is -- as a department store, that gives us opportunities to grow those businesses disproportionately.

So we've added a lot of categories, a lot of categories online and categories in store. When you think about food and beverage, categories there as well. So the mix of the business is definitely -- has changed. So we've added new brands, new SKUs. Our strongest businesses have been in home store and have been in beauty and in certain accessory categories.

As we talked about in our pre remarks, one of the surprises has been the strength of luxury and that has been a -- so again, being off-price to luxury in our offerings. We have certainly seen that at Bloomingdale's, but we've also seen that in the luxury categories at Macy's, so when you think about luxury mattresses above a certain price point, same thing in furniture, luxury fragrances, diamonds. When you look at all of those categories, they have been disproportionately strong. So we expect -- we're reacting to all of that in terms of what we've got coming in for the balance of the year. And so I think that is a -- the merchandise mix is -- we're constantly responding to it.

As it relates to kind of Black Friday, we do expect, as you're hearing this from our competition, an elongated season. So we do want to -- we recognize the concentration of customers that are going into our stores during the Black Friday time frame, and we want to make sure that we are creating a safe environment for our customers and giving them options to purchase in advance.

We also know the constraints with it. It's much digital shipping that is going to be done and ensuring that our customers are being able to get the values that they want and the gifts that they want in time for Christmas and ensuring that they've got enough time to do that.

So we're going to be giving them lots of opportunities for that. The time between Thanksgiving and Christmas is still going to be incredibly important, but I do expect spreading some of that demand earlier. And we've got tactics and strategies to do that.

Okay. Our last question on the new customers to macys.com and new customer acquisition. What are you seeing in terms of maximizing and optimizing retention of the new customers and making sure that engagement can continue?

Yes. That one's been good, Oliver, because we -- as we mentioned, we have 4 million new customers that just came into macys.com in the second quarter. And of those, 3.8 million of them were brand-new to the Macy's brand. And the majority of those are -- first off, they're more diverse and they're much younger than our current base. So we're all over that to ensure that, that first purchase that they're making leads to a second purchase that leads to them developing as an omnichannel customer.

And so we're using our personalization prowess in order to seed that. We're looking at look-alikes. We're starting to seed them offers. We're getting great bites from it. We're getting these customers into our Bronze loyalty program, which is really strong.

So our main mission in all these new customers is to retain them and use the whole breadth of our price points, of our brands and Bloomingdale's and Macy's as our banner brands to attract them. So that's one of our top priorities, is to make sure that these customers that came in, that we develop a relationship with them that can lead to a profitable relationship with them over time.

And now we take our next question from Kimberly Greenberger from Morgan Stanley.

Felicia, I'm just trying to parse through some of the commentary you made on the call this morning about the second half outlook and the way August has started. I think you indicated that the inventory levels are currently a little bit perhaps too lean but back-to-school season is off to a bit of a slow start. So I'm wondering if you feel like your revenue trajectory during the third quarter is being held back by the inventories. And then how should we think about your inventory planning through the back half given the slow start here to back-to-school and then some of the other challenges that you identified?

Thanks, Kimberly, for the question. I indicated that our second quarter inventory ended down 29% versus last year. And actually, we indicated the fresh inventories going into the fall, and we believe we have really good sales-to-stock parity going into the fall season.

And yes, the back-to-school started off slowly, but I think what we're seeing with back-to-school is a much more elongated back-to-school season. You think about back-to-school traditionally. And with -- Kimberly, as you know, with the government orders and school districts changing the timing of back-to-school, back-to-school is now -- we have to think about back-to-school a lot differently.

With respect to inventory planning in the back half of the year, we are working very closely with our vendor partners to ensure we have the receipts that we need to support our sales plan and also the receipts that we made, as Jeff mentioned, in the right categories. So we feel good about our back half of the year sales planning, and we will continue to lean into managing our inventory, which will drive better sell-throughs and better working capital. And so we believe we have the team and the agility in place to manage our receipts. It's one of the things we learned coming out of -- during this pandemic.

I'm not sure if anyone mentioned, but we have restructured our planning team. We combined it into one team all under the supply chain. And really, that gives us an opportunity to really make decisions about inventory planning, about the placement in the proper channels. And I think we saw the other benefit of that combined innovative planning team coming out of the second quarter as we talked about the better sell-through -- the better sell-throughs particularly on the regular-priced merchandise. So we feel we're in good shape as we go into the back half of the year and that we have the right team in place to execute the inventory assortment and planning that we need.

Great. That's very clear and helpful. And I just wanted to follow up on your question -- on COVID markets. I think you saw that they're actually showing strength or sequential improvement here in August. That seems to be encouraging, but I'm wondering if you can just expand on that.

Sure, sure. And so we've mentioned that we're watching the COVID markets really, really closely. And I gave a couple of examples of Texas and Georgia, Florida, where we have seen -- those were the areas of the initial resurgence. And what we've seen in those markets is that the sales are coming back. They're coming back slowly, and -- but they are coming back. And so that gives us some positivity, if you will, going into the fall season.

The other thing that we've learned with COVID is that we have to be very, very reactive to what is happening with these sort of sporadic store closures. Our Guam and our Oahu store in Hawaii are currently closed, and we're reacting to that. I don't know if you're aware, but the California -- in California, all of the indoor malls were closed, but we remained open because we have exterior doors and the opportunity to do curbside pickup. All of the California malls should be opened by the end of this week or early next week, and so we will be reacting to that.

And so what we're learning as we go through these COVID resurgences is that we do have the ability to react, to remain open, to ship, to curbside or to increase our fulfillment through those stores that are being impacted by the resurgence. And so we do expect, as we had earlier with the COVID, to have disruption to the sales. But I think that we are learning that we can react to it in order to minimize that sales disruption.

And Kimberly, let me just add one thing to what Felicia just said, which is when you run a retail as really local and when you think about our brick-and-mortar, so this is something we've gotten pretty good at. So we are -- we monitor all the public health data, the colleague and the customer sentiment, and we created a thing called -- we have the watch list, which is really we look at the predicted increase in cases or the current confirmed infection rate in each county of the country where our stores have zip codes obviously.

And I want to just give you a broad side. At the end of July -- we call it risk 1 -- or level 1 or level 2 in a risk category. At the end of July, we had 38 locations that were in that risk category that had -- resurgence was really mounting. At the end of August, there was only 6 stores. And as of this week, we're down to 0. So when we look at that, it shows us that our brick-and-mortar business that we have been modeling is on the side of exactly where we had thought it was going to be, maybe even a little better.

And now we take our next question from Paul Lejuez from Citigroup.

Question on SG&A. I think you mentioned the SG&A was helped by both February and July restructuring. Can you maybe walk through those 2 events in both -- talk about the gross and net savings from each that you'll generate from -- on an annualized basis from those? And also, I think you mentioned the CARES Act. If you could also quantify what that helps in 2Q.

Felicia?

Yes, Paul. I can -- yes, Paul. So on the SG&A, the SG&A, if you remember, we did furlough the majority of our colleagues because of the pandemic, and we are seeing a benefit from that in the month of May and June. With respect to the restructuring in force, if you recall, we announced in July that we were laying off about 3,900 of our corporate and management colleagues. And at the time, we anticipated that we would receive an annualized benefit from that restructuring of about $630 million. And so you will see about a month of that benefit coming through the second quarter.

The restructuring -- the reduction in force will be permanent and will impact the back half of the year and beyond. The furloughs that we did were temporary, and it did benefit the second quarter. That will reverse as we go through the fall season as we have begun to bring colleagues back the first part of July, and we also began to bring back our store, call center and logistics colleagues as our sales continues to improve. And so that has been a slower trajectory of returning of those colleagues, but we expect that to ramp up as the sales increase in the back half of the year. We certainly expect to have our colleague -- all of our colleagues back in full force this month. And so you will see -- as I said in my remarks, the SG&A rate relative to second quarter reflect -- we'll have higher SG&A rates in the third quarter and fourth quarter relative to the second quarter because of that furlough dynamics.

With respect to the CARES Act, we did have 2 benefits from the CARES Act that we talked about generally. One was on the SG&A line for the payroll tax savings that the CARES Act allowed, and the other was on the tax line due to our ability to take those net operating losses back and take advantage of that arbitrage difference between the 35% and the 21% differential on the tax rate. So that is where we benefited the most from the CARES Act, a little bit on SG&A and then also on the tax going.

Any quantification on that, on the CARES Act?

I'm not going to actually share, Paul.

Okay. And just one follow-up. Can you just tell us what inventory was down in units end of second quarter?

Sure. Can I have Mike or Monica to get that back to you? I don't have it on my fingertips, sorry. I just had the 29% at the moment.

Sure.

And Paul, let me just add -- let me add one thing to what Felicia said, and that is when you look at our AUR at the end of the second quarter, we definitely -- AUR was depressed based on all the clearance that we had to move through. And based on the clean inventory position that we have, the AUR in the month of August has been significantly better than where we were last year based on the regular price and luxury sell-throughs that we're getting in a lot of categories.

So we do believe that our inventory is in great position going into the back half of the year. And the stock-to-sales parity, we're in really good shape with respect to that. And we've got receipts flowing to be able to react to customer demand, and we're making shifts all the time as that demand changes.

And now we take our next question from Lorraine Hutchinson from Bank of America.

I wanted to ask about your gross margin, how much fulfillment cost pressure do you expect in the third and fourth quarter and then what your outlook is for merchandise margin now at the current inventory levels.

Yes. Thanks, Lorraine. With respect to gross margin, so we're thinking about it in 3 big categories, Lorraine, with respect to, at least, the performance for the quarter. And this somewhat applies to the back half of the year.

So in the second quarter, as you know, we were aggressively liquidating seasonal merchandise as our stores were closed. The second impact that we would have experienced in the gross margin in the quarter was the shift to digital and the corresponding delivery expense impact. And then the third area was just the mix, particularly the mix on the Macy's brand, going from a higher-margin apparel business to a lower-margin on-home and active.

But as we think about gross margin in the back half of the year, clearly, we will continue to lean into the digital business. We talked about the expected mix between digital and brick-and-mortar. And because of that, our gross margin expectations have not changed for the back half of the year, but we are expecting a peak in the margin in the third quarter. And we're really looking at the implications of our fourth quarter margin due to the higher delivery expense and some of the recently announced holiday surcharges that you guys have probably read about.

But importantly, as we think about margin for the back half of the year, we are flowing fresh receipts. We have entered the fall very clean, and we are expecting some faster turns and better sell-throughs. And we are keenly, keenly focused on maintaining appropriate inventory levels and, more importantly, appropriate inventory levels in the right channel to ensure we're satisfying the customer demand and to ensure that we are being as flexible as possible with those channels. As I said, with the stores closed, we want to make sure we have the right assortment and units in the stores to handle buy online, pick up in store, same-day delivery as well as the right mixture of units in the fulfillment centers to hand -- to support that ongoing digital demand.

And then I just wanted to follow up on the comment that you made about receipts being sluggish. How confident are you that you can get what you need, the right mix of product in time for holiday?

Yes. I'll comment, and then Jeff may add some additional broad color commentary. Our receipts have begun to flow more reliably, I guess talked a little bit about the disruption. Our [NUWR], these are not -- the disruptions are not unique to Macy's, particularly on the supply chain side, as we saw some port challenges with the inbound/outbound consumers not being sufficient all the time, as well as some just some ground transportation challenges as everyone is faced with this higher digital demand, and we're all competing for capacity. And so those are not unique to Macy's.

And so what we are controlling, as far as what we can control, as Jeff mentioned, is using our Vendor Direct capabilities to help fill some of the white space. And so, Lorraine, I would say that we are confident in our ability to work with our brand partners. We have great brand partners, and we're working very closely with them on the assortment and the level of receipts in the back half of the year.

And I don't know, Jeff, if you wanted to comment further.

No, I think you said it well, Felicia. I think, Lorraine, when you think about the first quarter and the second quarter, based on the pandemic hitting with the sledgehammer and we're closing all of our stores in mid-March, we did -- we cancelled -- when you think about our private brands and our market brands, we cancelled off the balance of first quarter. We dramatically curtailed what we were bringing in for second quarter, took a haircut in the third quarter, and we're in a wait and see on the fourth quarter. And so I would tell you is that we've made it past kind of the receipt flow of the first and second quarter. Everything that Felicia said in terms of getting the bottlenecks through ports and freight, we're seeing much more of a consistent stream of fresh goods coming in right now and expect that to continue to improve through the balance of third quarter and into fourth quarter. So we're feeling pretty good about our receipt flow, building on our current liquidity position and stock-to-sales ratio as it stands.

Our next question comes from Chuck Grom from Gordon Haskett.

On Slide 13, Jeff, you put the store base into 5 cohorts, which is an interesting slide. And I was just wondering if you could give us your latest perspective on store closings down the road, particularly in those -- the first and second quadrants where your sales per square foot is -- looks like it's sub $150.

Yes. What I'd say on that, Chuck, is that, as Felicia said in her comments, our -- what we announced in February in terms of closing the neighborhood stores over a 3-year window, the amount of those store closures is the way we're thinking about that is going to happen. The timing of that may change. But I think what we've learned through the pandemic and, certainly, through reopening our stores, has been the value of having these stores where customers feel comfortable. They're using these stores basically for lots of basic transactions, for returns, for pickups, for all the things that they do when they come into a store and having a clean environment where they can do that in a safe place, they're using that.

So when you look at the performance of our neighborhood all the way through our flagship stores, it's amazing how well the neighborhood stores are performing when you look at it versus the overall average. Our flagships are more pressured as a result of the drop of international and domestic tourism and just based on the amount of office workers that are now operating from home. So you have kind of an inverse of that where your neighborhood stores are actually quite strong right now. Now a number of them are performing in malls where we've had lots of competitive closures. And so I think over time, these malls, a number of these malls in B and C malls are going to continue -- B, C, D malls are going to continue to be pressured. But right now, I'm very happy that we have the portfolio that we have. And our customers are putting them to good use.

Okay. Great. And then I realize it's hard to unpack. But when you look at the comp compression and maybe more so over the past 2 months now that things have started to stabilize a little bit. How much do you think your traffic issues are, the consumer being kind of some on the verge to shopping in your stores versus the mix of product that you're selling? And I guess, how do you plan for that beyond the holiday into, say, the spring of 2021?

Yes. I tell you, it's the mixes, that when you think about Macy's, a big chunk of our strengths have been dressy businesses and the kind of important occasions in life. And some of those, like dresses and men's clothing, women's suits, bags, luggage, we're obviously a strong business in luggage. Those businesses are down. But also, a big stress of ours, like fine jewelry and Big Ticket and textiles, when you think about sleepwear, when you think about the active categories where we're very competitive, those have got a bullet on them. They're doing quite well. So I think the mix of the categories through the pandemic is shifting out. Home is becoming much more important, both soft home as well as Big Ticket. We've been able to satisfy that with our existing brands as well as when you look at the increases we've made in Vendor Direct and our assortment of vendors and SKUs, about half of those increases have been in the Home categories. And we're satisfying customers through that. And -- because we have so many eyeballs coming into our website. So I would tell you that the category mix is evolving. I think with the new customers that are coming in, and as to Oliver's question, the opportunity to convert them into omni shoppers is our opportunity.

As for -- when we talk, Chuck, about '21 and 22, we want to -- look, we've got to get the baseline of the third quarter and the fourth quarter. We obviously had a 3-year plan that has changed as a result of not giving guidance for the plan of record, the one that we're in. And as we get through the holiday season, we're thinking about those future years, obviously. We're working through all the scenarios that we have. And we'll give you more detail on that as we get farther into this particular back half of the year.

And Jeff, if I may add on just a little bit, to add to Chuck, with respect to how the consumers feel about shopping in our stores specifically. Our NPS scores, when we ask about health and safety in the Macy's environment, the NPS scores and the NPS response to that question are some of the highest ones that we've received. And so we really think we're doing a good job, the best job possible, with respect to maintaining a healthy and safety environment for our customers and our colleagues.

One of the things we're doing in holiday for actual service that Jeff mentioned, we'll have a separate pickup and return area for our customers and our colleagues to keep them safe. And so we're spending a lot of time and effort on maintaining that healthy environment for those people who do want to come into the store. And when we get that traffic, we want to make sure they're having the best, healthiest, safest environment as possible. And I think our customers are telling us that we're succeeding in that area through our NPS scores.

Now we take our next question from William Reuter from Bank of America.

This is Mary on for Bill. So I was just curious on your centralized fulfillment capabilities. When do you expect those to be fully built out? And what kind of impact are you expecting that to have on your cost base now?

Do you want to take that, Felicia?

Yes. So there are a couple of aspects for the centralized fulfillment that are part of our strategy. One of them, you may be more familiar with, it's the holding flow, which we're driving that out to centralized fulfillment. And as we look at the back half of the year, we are looking at a couple of different areas, location pricing, location-level pricing. We are testing that and expect to fully roll that out in fall of 2021. We're looking to optimize our POS strategies, and then we're also looking at strategic sourcing from a broader standpoint.

And as I mentioned earlier, our -- we have really strong ambitions in our supply chain area, and it's all about the right content in the right channel at the right price and at the right time. And so our centralized fulfillment inventory allocation strategy is underway. I talked a little bit about the fact that we brought the teams together. And so now we have our supply chain team and our merchandise planning team all under one umbrella. That's really facilitating decision-making, faster decision-making about placement of our inventory, ensuring that we get it in the right place, which we're seeing a little bit of benefit of turn in that area because of that decision.

Location-level pricing, as I said, we'll begin testing that in October with a full rollout through spring 2021. We are expecting that to have benefits, to drive some more proactive markdowns and to help the margin and also to help the sell-through.

So taken as a whole, we are really leaning into this centralized fulfillment and all of our strategies, particularly as we're forcing more and more on digital. But the long-term implications, we would expect to have overall improvement in sales and margin as well as really meeting the customer satisfaction goals, which we can't stress enough as you lean more heavily into digital. The customer -- customers' need changes a little bit with respect to timeliness, quality and [delivery] of our delivery metrics. So we are, as I said, clearly focused and very focused on the centralized fulfillment and hitting all of our KPIs in that area.

And now we take our next question from Dana Telsey from Telsey Group.

Nice to see the progress. As you think about your charge card customers, what are you learning from them? How is that penetration holding?

And then, can you go into any more commentary on the Backstage concept? How that's performing? And when do you test online? How do you expect that assortment to flow versus what you see in the stores?

So Felicia, why don't you take credit card -- yes, I think we're saying the same thing.

Yes, right. In that vein, I'm sorry. Thanks, Dana, and thanks for the kind words there about the performance.

So with respect to our credit -- the credit card performance and penetration, this has been an interesting spring season as we talked about the credit penetration being about 590 basis points off of last year quarter-over-quarter. As we entered into August, we did see a moderation of that gap and an improvement in that gap. And empirically, we think that it's driven by the cessation of the economic stimulus that ended in July. And as we saw that end and thus so does direct deposit or into consumer bank accounts come to an end as well as the loading of those prepaid credit cards, so consumers have been going back to what we're seeing off our proprietary credit cards. And so that 590 basis point gap is beginning to narrow.

The other thing that we're closely watching is our delinquencies. And again, we -- this is all in pure holding, and we're looking at data, we actually effected 2008 if we look at what happened under those economic conditions and the trend there. But as we talk to our banking partners, they continue to anticipate that delinquencies, at some point, are going to rise. And they may start to rise sooner than anticipated because of -- because stimulus has not been renewed. And so as we think about the Macy's credit revenue portfolio, we are modeling that we will begin to have the impact of consumer financial stress beginning in the late part of the back half of the year, Dana, but really as we get into 2021.

And so those are headwinds that we are anticipating for 2021 and beyond. But the data at the moment doesn't support it. We've seen delinquency rates pretty much hold relative consistent first quarter to second quarter, but we are watching our delinquency rates very, very closely.

And then, Dana, to your Backstage question. So just the broadest point on Backstage is that our customers love it. And they love our price at both the Bloomingdale's brand as well as Macy's. And over the 4 years that we've had it, we've hit the right formula. And I think when you look at the brands and you look at the value, we're seeing that in our growing comps, that even in stores where the main box might be declining, Backstage consistently is giving us positive comps year-over-year. We're also seeing it in the margins. When you look at our margin rates that we're getting -- in gross margin rates that we're getting in Backstage versus our competitors, we've got the right value formula. And when you look at the sell-through, which is really how the customer's demand is responding to just the fashion component of it, we're getting very nice sell-throughs there.

So our opportunity in Backstage is really in distribution and logistics costs. So that's what we are. So when we reopened our stores, we've already added a dozen or more Backstage store-within-stores. You heard in our opening comments that we're continuing with our ambition and expand on rollout of Backstage freestanding as well as Bloomingdale's The Outlet freestanding. That's going to give us more portals. The more business we do, the more the logistics are going to be in line.

Profitability is growing in this particular business. It's not at the level of Macy's, Inc., but it's growing in that direction, which is a real positive for us. And then as I also mentioned to your question, we will be testing Backstage online. No details to tell you on how we're going to do that or what you can expect for the timing of that, but that definitely is in our road map for 2021.

And now we'll take our next question from Carla Casella from JPMorgan.

Two questions here. One is on COVID and CARES. When do you expect to make up the rent payments that you were able to defer this year? Will that be something that's paid in '20? Or is that a '21 payment? And on the flip side, with CARES, when do you expect to get the cash benefit from the deferred taxes on the omni exchange in the NOL look-back?

Okay. I'll start with the last one. On the CARES Act, we will file our fiscal year 2020 tax return end of -- typically, we file in the first quarter, early part of second quarter, which means the cash benefit would come at the earliest, call it, at the beginning of the third quarter. And so it really depends on when we're able to get our fiscal year 2020 tax return filed, signed off, et cetera, cleaned and audited. But typically, our normal expectation will be Q3 2021.

With respect to COVID, I just want to make sure I answer you as best as I can on the COVID question.

Yes. I guess I'm wondering how much rent you were able to defer, that you didn't have to pay in cash? And when do you have to make it up?

Yes, we haven't been sharing that. Big picture, I would say, we've had some really, I would say, amazing conversations with our retail partners, our landlords. They have really had engaged. We've had really good conversations. We've set up an internal team, a task force to really go lease by lease, go landlord to landlord to have some really great conversations.

Although we have deferred and negotiated deferrals of some of our rent payments, all of that is flowing through expense. We are -- have been really respectful of each other's positions with our landlords. We've been in really engaging and ongoing good conversation, very transparent, very collaborative. So from a cash standpoint, I guess I won't give you the specifics on how we're modeling the cash flow because each agreement has really had nuances to it. There's been deferrals, there's been deferrals of rent, deferrals of CAM, deferrals of both. So there's lots of different combinations depending on the negotiations.

But I can't say -- we all -- we -- both parties have a shared interest in making the mall vibrant and a good experience for our customers. And I don't anticipate that we'll have any negative cash implication based on how we're -- how these conversations are evolving and how they're deferring those payments.

And I'll remind you also that the rent expense -- the rent was flowing through our books.

Right, exactly. I see it now.

And we're all recognizing the expense. Okay, okay. Yes, you got it.

Yes, I was just tweaking with a couple of cash flow items. But on that -- on the store front, and it's really helpful that you break down all the store detail in the presentation this quarter. Thank you for that. How many dark stores are you sitting on, stores that you closed that you still own? And maybe can you just update us on how many of your leases come up for renewal in the next year or 2?

Carla, I don't have that information at my fingertips. It's just that we are still committed to close the 97. Some of that may accelerate. But I can get you the composition on the lease off the phone. I just don't have it at my fingertips.

We take our next question from Omar Saad from Evercore ISI.

Jeff and Felicia, I wanted to follow up on your comment about dresses and men's suiting and those types of categories being down really big. As we move through this pandemic and things start to stabilize, are you seeing any signs of demand in those dressier categories? And then kind of what's your medium and out term and longer-term outlook? Do you see a more of a sticky shift to things, as you mentioned, like casual, athletic, home, those categories? Or do you expect that kind of desire -- the consumer desire for fashion to get dressed up to come back sometime in '21?

Omar, well, first off, I believe that both men's clothing and dresses, particularly dresses, will come back robustly. Right now, to your question, as kind of COVID restrictions are opening up locally, you're starting to see customers move towards casual dresses. But career dresses remain very challenged. And the real formal dresses, the social dresses, remain challenged. But casual dresses are definitely -- we've seen a pickup there. But I believe the dress category is going to come back robustly.

I think the American spirit, you can count on it. And I believe that there will be a time where when you think about what people are going to do for any dressy occasions, weddings, anything with being able to go out and looking your best, they're thinking of Macy's as one of those players. It's not just in dresses. It's also in dress shoes and socials shoes.

We're seeing a total shift into athletic and casual footwear on both men's and women's side. That improves when you think about wearing occasion as that changes. So I'm expecting that. We don't know the timing of it, but we'll be ready when we do.

On the men's suits side, what is going to happen permanently to kind of work from home? And we're thinking about our own kind of scenario here with our corporate employees. I think that every business is changing the way that they're looking at their workforce and how virtual has changed their perspective of that. And I think all of us are kind of looking at it much like what much like schools are today, that there's going to be some level of hybrid, that we're going to have times in our calendar that we come together, where we collaborate and we brainstorm. And there's other one we're executing the business that we might be doing that virtually. So I think that is going to play into the wardrobe for both men and women.

And so men's clothing, because that was on a -- we were the dominant player. We have a major competitor in that particular business that's suffering as well in this category. I do think it's going to come back. I'm certain it's going to come back in dresses. And to the degree it comes back in men's clothing is to be seen.

Got it. That's helpful. And then I'd love to ask a follow-up, too, on your comments earlier about the members may be underperforming some of the non-members in the quarter. Can you see in the data who that is? Are there certain demographics? Or is kind of everyone across the board spending less? Or any characteristics there? Is that maybe an older customer who is more afraid of health and safety? Any color there on that membership performance would be great.

Yes. What you see in the data is that it really is -- we benefit from having the bulk of our business being done with omnichannel customers. But you do have a store cohort that are not comfortable online, and they're generally older and they're in certain pockets of the country, and their business definitely has been more depressed. But we're starting to see them come back as our stores have reopened. And as Felicia talked about earlier, there are certain states in which the malls have been closed while the outside entrances of the anchors have been open. And so as the malls start to reopen and that area ends up being more of a destination, we're seeing those customers return more robustly.

So I'd tell you, the older customer has been more affected, who were a stores-only customer. But so many of our older customers or more mature customers are omni shoppers. And so we have not seen a change in their behavior. So we track so many different cuts of our customers, but to characterize that one end of it is what I just did.

And now we'll take our next question from Paul Trussell from Deutsche Bank.

Maybe to start, I wanted to follow up on your comments about the evolving role of the store. Maybe you can discuss that in a bit more detail and, frankly, help us think about how you are maybe remeasuring the profitability of the store and the decision on whether or not to keep a door open given its support for your digital operations.

And as part of that, maybe discuss a bit more about what you alluded to as the market ecosystem and the way you're going to approach small-format, off-mall and Bloomingdale outlet locations.

I'll start, Paul, and then Felicia, anything you want to add.

Look, the store remains a very, very important component of our brands. And customers like the fullness of the options that they have between digital, the app and stores. In cases like in COVID, they're not using stores to browse. They're coming to stores now that they're reopened for a place of -- I mean, they're mission-based. They're coming in for a transaction. They've got an idea about what they want to buy. They're lingering in less time in stores, and they're buying at a higher conversion rate. So that's the behavior there.

But stores are going to remain very important to us, for us to be able to show the fullness of our brands, for customers that need inspiration. We have other customers that are getting that full inspiration by browsing online. So we want to be -- we want to have all the right access points for customers however they choose to shop, whenever they choose to shop. So we see big benefits in continuing with stores.

Customers want immediate gratification. They're buying something, they want to be able to pick it up right away or they want it delivered that same day. Stores are always going to be important in terms of the fulfillment options of a national customer. So having our DMAs well covered with our stores and having those portals ready to respond to customer demand. 30% of our digital transactions are being fulfilled out of stores. I see that increasing. And what we're building out in terms of our omni network and our fulfillment strategies, our opportunity to be able to satisfy customers however they want to shop in a store, curbside or same-day delivery, we will be able to do that. So stores are going to remain important.

As for the point about ecosystem, we made the call in February that we were going to look at 3 markets to being able to test what a small-door format would look like and what off-price in a freestanding format would look like and how the interplay would be for the customer that is shopping in between those units, that are going to mall, but also might go to off-mall. Or they're typically an off-mall customer with our competitors, and they're not as comfortable going to a mall because of its size or it's too cumbersome or it's not -- they feel it's going to be crowded or whatever the issue might be. How do we get the Macy's brand and the Bloomingdale's brand into those markets? So that's what we're doing. And what we -- the decision or the announcement we made this morning was that we were going to be testing a small-door format for Bloomingdale's that will be launched in the fourth quarter of 2021. It's under development right now.

As you know, we launched a strategy in February or in January called Market @ Macy's, which is a mini Macy's format with interesting content. Service is fully built out, hospitality is part of it. We're going to build our second one. That is going to also be in the Dallas market. That will be in 2021. And then Backstage freestanding, which we started with the Backstage concept freestanding. And those buildings continue to operate very profitably. You're going to see us build those out now in those 3 markets and, as mentioned, continue with what we're doing with Bloomingdale's.

So -- and all of those units basically will have full fulfillment, return capability. You can do buy online, pick up in store, if anything in the network, use those basically for full customer access to the fullness of our brands. So we're going to watch customer behavior. Does it build on lifetime value? Does it help us recruit new customers into our brands? Using these ecosystems and being able to market accordingly is going to give us a very good lens about does this have play beyond just these 3 markets. So we're going to learn in '21 and '22 on that, and we'll make adjustments as we move forward.

And the only thing that I would add -- well, Jeff, the only thing I want to add to that is that --

Go ahead, Felicia.

No, no, just over the past 2 years, we have made significant investment in our gross stores, we invested in over 50% of the business at both Macy's and Bloomingdale's, and we expect to derive benefit off from those -- the growth investments that we made over the past 2 years. And we are shifting away. Yes, we are shifting away from investing in the physical building. But as we think about our capital spend over the next 2 years, we are very focused on digital supply chain and technology. And embedded in technology is the opportunity to ensure that we're giving our customers the best technological in-store experience as possible, which will nicely marry up with those physical investments that we've been making over the past couple of years.

Then just circling the wagons back to SG&A, the Polaris strategy, pre COVID, I believe, discussed a $900 million run rate savings, and that target is now roughly $1.5 billion today. Maybe just remind us of where the incremental kind of saving targets are coming from and where we kind of stand on that or where you expect the run rate and savings to maybe be exiting this year?

Yes. Thank you. And so it's sort of laid out on our Slide 11 on the web slide, but I'll just sort of talk through it. You're right, the initial Polaris savings that we discussed, going back in February, included an SG&A savings of about $900 million, $600 million on margins. And then coming out of the COVID, at least coming out of part of COVID through June, we had the additional reduction in force. That contributed another annualized $600 million of potential SG&A savings. And this is all through 2022. So this is our 2022 run rate savings.

But the big components of that $1.5 billion is really coming from the ability to leverage our marketing spend as we drive long-term sales growth reductions in the supply chain, mainly through efficiencies, by going maybe more to a centralized fulfillment environment, by streamlining the team that I talked about. A portion of it is coming from stores. Again, it's about being a smaller company, being able to leverage our -- or flex dollars more efficiently. And then, there's a big category of corporate, which is really the reductions that we took in our corporate and management team since February. And so that's the high-level breakdown of that $1.5 billion. And we are intensely focused, as you can imagine, continuing our aggressive expense discipline and ensuring that we are looking at every dollar for its potential to return above-the-dollar investment and spend that we're making. And so we -- as we think about it, Jeff said, about our -- one of our Polaris strategy focus will be now setting up -- continuing to reset our cost base. That is the way in which we are approaching our SG&A spend over the next couple of years.

And now we take our next question from Bob Drbul from Guggenheim.

Just a question on mix, really. Good-better-best and I guess you think about trends of the customer around good, better and best in your stores. But I'm also curious, just in terms of receipts of your planning and penetration of private branded merchandise versus national branded merchandise in apparel and just sort of where that is and the commitments that you've made and how you think that plays out in the back half of the year would be very helpful.

Bob, so the mix question, I think that it really is -- you think about from kind of off-price to luxury. So that obviously is our sweet spot. So we have Backstage going out the door at about $12, and Bloomingdale's is going out the door at about $90. And so you've got the Macy's brand in the middle with about $35. And the outlet is going out, Bloomingdale's outlet is going on at about $33. Those are the AURs. And we can -- depending on category, there's differences when you look at the category mix in between those 4 banner brands. So lots of opportunity for us to play with that based on where the customer demand is. And we've gone into some detail and through the course of this call about new categories that are emerging, how we're responding to that, how we're getting that to the customer through either Vendor Direct or through own categories, in-store or online. So we will continue that.

Your question about private brands, it's the first one that's come up, is we're deeply committed to continuing with our journey of getting private brand to about 25% of our total business. And we've been really working on our sourcing model to ensure that working with -- making sure the lead times are dramatically shorter, really working with digitization and turning more of the responsibility over to factory, have fewer factories, sharing fabrics, consolidating brands, adding new brands. So very happy with the progress the team is making. Obviously, when you look at private brands, much of that is really the base of our apparel business. So happy with some of the early reads we're getting with the work that the team has been doing on that. So we're committed on continuing to drive exclusive brand content through our private brands. So that's definitely our journey.

And now we'll take our next question from Jay Sole from UBS.

Jeff, I just want to ask you about your comments that the holiday season could happen a little bit earlier this year and trying to maybe shift some of the sales demand. Can you just talk about your confidence in being able to do that and sort of what are some of the tools you might be able to use to make that happen?

Yes, it's a great question, Jay. Because in the past, it's hard to look at a model in the past where you would say that the holiday demand is going to move in between the goalposts of Thanksgiving and Christmas Day. I think this year is going to be different.

And so we have lots of opportunities with values. And so look, we have certainly seen through that our customers always respond to great values. They respond to great brands at great values. And so we know how to do that. We -- the kind of trial run for us is always kind of Black Friday in July. So we're always using that as kind of a dress rehearsal to look at what customers respond to and try and put on the holiday factor and sell-through on top of that.

So we've looked at the entire promotional calendar, really from before Halloween, all the way through the month of November through Black Friday. And obviously, Cyber Monday into the last 10 days before Christmas. So we're anticipating that there's going to be customer concern for health and safety during those compressed periods, Black Friday and the 10 days before Christmas.

And so looking at what that demand might look like, what then happens to the digital demand and what happens within sales that you're going to need to spread differently and what is the offering and the events that are going to help you do that. And also hearing our competitors also talk about that, and so I think that it's definitely out there and the opportunities for consumers to hear all of the competitive cycle, talking about the opportunities to get great gifts at great values in time, to have it shipped comfortably and safely by the time of either Hanukkah or Christmas. And there are other holidays, but those are the 2 main ones.

So I think this year is going to be different. But the base of your question is, in the past, historically, we have not seen the opportunity to move demand earlier than Thanksgiving for a holiday purchase. But I believe this year is the year that it will happen.

Got it. And then, it's sort of like some of the efforts that you guys contemplated in the guidance that you've given for gross margin in the back half?

Correct. It's all baked into that. So I feel comfortable. We're taking a conservative stance on that. And -- but I believe we are -- we're in the ballpark right now.

It appears there are no further questions at this time.

Mr. McGuire, I'd like to turn the conference back to you for any additional or closing remarks.

I just want to say -- I just want to say to everybody, thank you for your attention as we went through a long description of how we're -- what we're up to and appreciate everybody's interest in the Macy's and Bloomingdale's and Bluemercury brands. Everybody, have a great day.

This concludes today's call. Thank you for your participation. You may now disconnect.