Macy's, Inc. (M) Earnings Call Transcript & Summary

Welcome, and thank you all for standing by. I would like to inform all participants that this conference call as well as the Q&A is being recorded and publicly webcast and will be publicly available. Parts of this conference call may also be reproduced in JPMorgan Research. If you have any objections, you may disconnect at this time. [Operator Instructions] This communication is provided for information purposes only. I would like to turn the call over to Matthew Boss. Thank you. You may begin.

Thanks, operator. It's Matt Boss, department stores and specialty soft lines here at JPMorgan. This morning, I'm pleased to introduce Macy's CEO, Jeff Gennette; and CFO, Paula Price, for a virtual fireside chat fresh off their preannouncement an hour ago. Jeff and Paula, first of all, thanks for joining us, and thanks for everyone that's dialed in. Mike, with that, I'll pass it over to you for safe harbors and then to Jeff for some prepared remarks, and then we'll jump right into questions.

Thanks, Matt, and good morning, everyone, and thanks for joining us. Please 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 those in such statements. A detailed discussion of these risks and uncertainties is contained in the company's filings with the Securities and Exchange Commission. With that, I'll turn it over to Jeff.

Thanks, Mike, and good morning, everybody, and Matt, thanks for hosting us today. So we hope everybody listening is healthy and safe. So Macy's, Inc. continues to navigate through the COVID-19 pandemic. Earlier this morning, we released preliminary sales and operating results for the first quarter. As you know, all of our stores closed on March 18. And we're just -- we just began reopening them earlier this month. We started on May 4. Accordingly, our net sales are expected to be approximately $3 billion for the quarter. Looking at the quarter's progression, we had a very solid performance in February. March was very tough. In early April, we began to see -- with stores closed, we began to see an uptick in our digital business, and since then, digital has performed much better than we anticipated. We continue to see the strong digital performance in May. We anticipate an operating loss in the range of $1.11 billion to $905 million for the quarter. There will be several COVID-related impacts in the quarter that affected operating results, most of which we expect to be short term. And please note that these ranges exclude likely goodwill and store impairment charges. As we've shared earlier, we have taken quick and decisive action to keep the business stable and preserve cash. These were not easy decisions, but we know that they were the right actions for our business as we needed to get our weekly cash burn rate down significantly and extend our liquidity runway. These quick actions gave us adequate time to fully examine our financing options, and we are well into that process. We have run a variety of scenarios for the future store reopenings and recovery of sales in order to stress test our liquidity needs. Across all these scenarios, the actions we're taking contemplate what we -- that we would need to make sure that we're covering all the capital to fund operations but also to retire the $1 billion of debt that will come due over the next 2 years. Since early May, we have started to reopen our stores on a staggered basis. To remind everybody, we set clear guidelines that need to be met before we reopen any store. These include state and local government ordinances and health conditions and the ability of each store to drive sales. These factors help determine the best format for the stores to reopen, which is either a full format or as fulfillment only. We also have enhanced health and safety standards to ensure that we have colleague and customer safety firmly done. It's early days, but so far, our teams are adjusting well. And in survey work that we've done, our customers feel confident in the health and safety standards we've put in place. As of the beginning of this week, we have approximately 180 Macy's stores open, and we're going to be opening another 80 stores tomorrow. This is ahead of our initial schedule. Bloomingdale's will also have 11 stores open by tomorrow. And Bluemercury has begun to offer customer pickup. Initially, we plan sales to be down, as we've talked about, about 80% to 85% as we reopen stores. In fact, as you're starting to hear, it's coming in stronger than that. We're down approximately 50% in the stores that have reopened. This trend has been consistent really across all geographies and store types. And performance has been gradually getting better with each week the store is open. We continue to expect a gradual recovery, but we are encouraged by these early results. We will continue to watch customer behavior closely as we reopen more stores. And we will remain agile and adjust our plans as we go along and open up the remaining series of stores. Assuming COVID-19 continues on the current course, we do anticipate that the majority of stores will be open over the next 6 weeks. In the first weeks of May, we also saw continuing strong trends in our digital business. So Macy's is a true omnichannel retailer. We invested early in our digital business. In 2019, we put a focus on strengthening our mobile app. And for the past 2 years, we've built out our fulfillment options, which have paid off during this crisis. Our customers have learned to look for the At Your Service desks at the best entrance of each store, and these entrances now serve as locations for curbside pickup. So we tested, iterated and then scaled curbside pickup within a matter of weeks. We now have approximately 300 stores offering curbside pickup and almost every door that we open will have this service as well. The stores will also -- have also been supporting the dot-com business by fulfilling orders. While this has been a very challenging time, we have significantly picked up the metabolism of the organization. We've been required to reset our plans each day and innovate and execute quickly. As an organization, we are building new muscle that will help us to continue to navigate this crisis and recover our business. So the first quarter of 2020 was certainly not what anybody expected, but I'm really proud of how the team has responded. I feel good about the steps we are taking to ensure our company emerges on the other side of this pandemic. So before I take questions -- or Paula and I take questions, Matt, I wanted to kind of provide an update on how we're looking at the Polaris strategy that we announced in early February. The core of the strategy remains relevant today, but COVID-19 has intensified and accelerated customer behavior shifts that were largely already underway. And we have quickly defined our strategy to address the current environment. Our loyalty program has been increasingly critical as we focus on retaining our best customers and building customer lifetime value. We will accelerate our efforts on personalization to help us reinforce customer loyalty. Our product assortment will adjust to meet customer expectations. And we're putting more focus on fewer brands, including top market brands and our own heritage private brands. Our digital business will become increasingly important as digital traffic and spending is expected to recover more quickly than in-store shopping. We've learned a lot from our customers' online behavior while our stores were closed. And we continue to invest in improving the fundamentals of our websites and apps. And we will innovate quickly to improve the experience to support changing customer behaviors. Into our cost base. Managing our cost base continues to be a priority for us as we navigate this crisis. We anticipate that our sales recovery will be gradual and that for a period of time, we will be a smaller company. This will require us to rightsize our organization and continue to manage our costs with discipline. We will respond accordingly, allocating resources towards the activities with the highest returns. We are examining every aspect of the Polaris strategy to determine where we should accelerate, where we will continue but with an adjusted focus and where we will pause initiatives. While we navigate this crisis and through the ensuing months, I'm confident that we have a path through this. We will fortify and then grow our omnichannel advantage enabled by digital. We'll leverage our brands that range from off-price to luxury. And this work will be underpinned by modern merchandising capability that will protect our fashion leadership and unique online curation, simple and convenient interactions on our digital platforms and in our stores and a laser focus on cost reduction. So to sum it up, these are difficult times for the country, the retail landscape and Macy's, Inc. I'm comfortable that we'll emerge on the other side of this crisis as a strong resilient company. Macy's has the innovation, the vision and the execution to remain an iconic American retailer. And Matt, I'll now toss it to you for questions.

That was really helpful color, Jeff. Paula, maybe before we jump into questions, could you just provide us any additional details or metrics on the financials of the quarter maybe in addition to the preannouncement this morning?

Sure, Matt. Good morning, everyone. So as Jeff said, we had a tough quarter with the impact of COVID-19 causing us to close our stores for health and safety reasons, which obviously impacted our sales. We're still closing the quarter. So we don't have all the financial detail to share with you today. We'll be able to provide more detail on June 9. But I can tell you that there were a number of impacts that came with the extraordinary circumstance of all of our stores being closed. One of them was that we needed to take a significant inventory write-down at quarter end of about $300 million, which hurt our gross margin and overall profitability. And that was because we weren't able to take our typical permanent markdowns throughout the quarter, and so that led to the inventory write-down. And then with respect to SG&A, as Jeff mentioned, we acted swiftly to reduce our cost and preserve cash, including furloughing a large portion of our colleagues, reducing pay for all senior management and dialing back marketing and other expenses. And then another impact that you'll see when we share more detail in June is the slowdown in our credit revenue. Our best channel for acquiring new accounts, new credit accounts, has been in store. And so with the store closures, we lost a bit of ground in terms of acquiring new loyalty customers. And we're also seeing balanced repayments decelerate and delinquencies accelerate because of increased unemployment and just general uncertainty related to the pandemic. But we know that maintaining loyal customers is so critical. And so in addition to extending our loyalty member status through the end of 2021, we're also in partnership with Citi, offering them the ability to opt into a deferral program that will allow them to pause their account for 60 days to delay the delinquencies that may otherwise have occurred. And we plan to just stay close to the customers, supporting them as best we can as well as using the data to understand their buying behaviors post COVID. But those are some of the significant impacts that you can expect to see in our financials, Matt.

Great. That's helpful. So Paula, maybe to start with the balance sheet. What's your expectation for liquidity at the end of the second quarter? And then in terms of magnitude, how much additional liquidity would be sufficient in your view? And any time line in terms of securing that?

Sure. So as you saw in our press release this morning, we have about $1.5 billion of cash on hand at the end of the first quarter because we have been so judicious with our cash preservation efforts. And then to plan ahead, we've run a number of scenarios for future store reopenings and how we expect sales to ramp up and recover. And these scenarios reflect the fact that store openings will certainly not have linear outcomes, and there may be some bumps in the road as it relates to regional resurgences of the virus. So in terms of our earnings trajectory throughout the year, just to give you some additional color, we expect to have our lowest EBITDA of the year in the second quarter and for EBITDA to improve sequentially in the third and fourth quarter. We do expect to generate positive EBITDA in the fourth quarter of this year, and we factored all of this in terms of sizing our liquidity needs. And then longer term, we've assumed that it will take some time to reach a new stabilized level of sales well into 2021 and maybe 2022 in some of the scenarios. So all of this was super helpful in terms of sizing. And so in conjunction with these expectations, we're targeting a capital raise that will be more than enough to support all of our strategies and to take us well beyond the point of stabilization. And we're pleased with the progress that we're making with our financing efforts.

Great. So maybe as we move to category performance, Jeff, I know you spoke at the end of April to strengthen home, beauty and active. What can you tell us today about what's working in the business and what's not?

Yes. So the strength remains in beauty. Activewear is very strong. Sleepwear, fine jewelry came on. So when you think about the last 2 weeks of April and certainly May to date, fine jewelry has been quite strong as has fashion jewelry. Kids has been strong throughout and then really all the home categories. So you've got textiles, housewares, decor. Mattresses has been strong. Furniture has been strong actually online as well as the stores that we've reopened. Apparel businesses, as we've talked about, were soft but better in men's than in women's, and we'll talk about that. And these are similar trends that we've seen in both Bloomingdale's as well as Macy's. We -- I guess we certainly found that the strategies that we invested in over the past 2 years are helping us today. So Vendor Direct has been quite strong. And then our fulfillment, we've been able to use all of our stores' inventory through BOPS and BOSS and now curbside pickup. Curbside pickup is something that -- from concept to kind of creation. Certainly, we've seen that work very well with essential retailers. But as a retailer that mostly has apparel and accessories, we really did not know how big this thing could be. And so curbside, from where we're tracking right now, very well received by the customers. They love that it's safe. They love the speedy transaction. And as stores are reopening, it's being very well used. Since we've reopened stores, the mix has really kind of gone back to its usual pattern. So what you saw in the stores that have reopened, really steady performance in all the accessory categories in beauty. This was pre-Mother's Day. But we now have seen all the kind of the seasonal categories come on strong, so swim, sandals, shorts and tees. Ready-to-wear apparel, we're seeing that the casual pieces of it are doing quite well. And we're seeing that men's has returned back to its kind of pre levels. What remains challenging has been the ready-to-wear sportswear area, and it's underpenetrated from what it usually has been running, both online and in stores as we've reopened them.

So I guess as we think about the reopening process of brick-and-mortar, Jeff, any key learnings as it relates to omni? So as the digital has obviously been functioning, now the brick-and-mortar is opening, how are you leaning into some of your omnichannel capabilities, whether it's ship from store or curbside pickup? Just kind of thinking where you're at here as we now transition from e-commerce to also having brick-and-mortar locations reopening.

Yes. So the -- we -- our digital business has just gotten stronger through the crisis. And so when you look at -- just to kind of go back to what I said in opening comments, we have -- the stores have just opened stronger than we expected. They are 30 full points better than we expected when we reopened. And we did expect that when we reopened would we see a dip in some of that digital demand in those ZIP codes, and we haven't seen that. So during this time, where our business has been down in the stores that we have reopened down about 50%, our digital business in the May time frame is up. It's like up 80% right now. So we've seen no deterioration in digital in those markets that have reopened. So we're cautiously optimistic about the remaining store reopenings particularly as you think about some of the most impacted areas by the virus. So we're working with all the mayors as well as the governors on -- if you think about New York City, that's one that's very top of mind for us in the 5 boroughs, about how we reopened that. And when you look at just kind of the omnichannel capabilities, I would say that the biggest change for us has been the curbside. And so that has been a big opportunity for us. We've had BOPS and BOSS was basically about 9% of digital demand through 2019. This is going to give us a new arrow in our quiver with respect to omnichannel fulfillment. And we're not in the stores that have reopened. We're seeing BOPS and BOSS continue, but curbside now is adding another element and taking another junket of digital demand and satisfying customers through that. And so we've got this pretty much well down. All the entrances of At Your Services, so customers were used to that. It's the #1 door in most of our buildings. It's now the place where curbside is in most. We're measuring how customers are feeling about it. The NPS, we look at. So the NPS for curbside right now is at 76. Did we ask the question about did you feel safe during pickup? That's off the charts, as you would expect. And what we're seeing in curbside is that it's skewing towards center core and beauty in terms of the sales that are going through that. And we're seeing curbside being adopted really across the board. So we just opened our 2 Puerto Rico locations. It's really every store that is open, and then we've got another 130 stores that aren't open yet that are offering curbside. So when you think about curbside plus the stores that are open, by this Friday, we'll have about 80% of the fleet will be offering that level of fulfillment or in-store engagement.

Jeff, how is the transition of your e-comm business from San Francisco to New York? I know that was something in process, right, as COVID hit. How is that progressing? It sounds like there really hasn't been, at least more recently, I think you just said 80% e-commerce growth. So it sounds like the disruption more recently has been minimal. But maybe just an update on how that transition is happening.

Yes. I'll just start with our leader. We're very happy with our new leadership. It's Matt Baer, who has joined us as the Head of Digital. And he really hit the ground running. And he's going to be a great leader for us in one of the most important pieces of our business. So as we discussed at the Polaris launch on February 4, we're standing up teams in Atlanta and New York. And these teams -- and think about the talent that we had in San Francisco all through this and because all of our teams are working virtually. I don't think we've lost -- we haven't lost a beat. We still intend on standing up these teams through the crisis. We're hiring people through the crisis, both in Atlanta and in New York. They're small but mighty teams, but I don't think we've missed a beat yet. So I would say the transition is progressing well, and I'm impressed so far in the talent that we've been able to hire. And it's really going to be important because post COVID, we do expect digital to be a more significant piece of our overall penetration in business.

So now as we think about moving forward, Jeff, obviously, you've started the reopening process of stores, how best to think about the reopening time line for the balance of the fleet from here? And what would be the time line as you see it today to open some of your metro locations, whether it's New York City or some of the other hot buttons or hot zones right now?

Yes. I think that one is a -- as mentioned, we're going to have 80% of the fleet is going to be operating in some capacity by tomorrow. But the remaining ones are going to be -- we have -- we do them in stages. So we've opened our stores in 4 tranches so far, so May 4, May 11, 18, then we'll open tomorrow. And so that will basically put us at about 260 of our 500 locations. So the remaining ones will go in the following weeks. Assuming that there isn't any change in the virus and that from what we're -- again, we watch very carefully how each of the governors are responding. And as they reopen states and particular ZIP codes, we're right there. And so we expect that by the end of -- mid to end of June, we expect all stores to be reopening. We're currently working with the Mayor's Office in New York City curbside pickup for our flagship at Herald Square, and that -- we're expecting that in the next couple of weeks. So we have a plan on each of these. And we're learning kind of each day as these stores open. As mentioned, kind of similar types from neighborhood to flagship, they're opening at about the same rate. We are -- it's not that different between geographies. We expect that, hey, will the South will open differently than the North? Now that we've gotten states like Ohio open, we're seeing that they're pretty similar. We've got Central Florida open right now, but we don't have Miami-Dade open. That opens in the next week. We'll see how that performs when we get into our high-density, big-juggernaut $100 million -- or $100 million-plus annual sales stores. So we're getting some of our big stores open right now, and their performance is quite stable. As mentioned, we opened -- it's been down about 50% on average. They are getting progressively better. We thought it would get like 3 to 5 points better each week. So far, that's playing out. We don't know. Does it -- do we hit a plateau with that? Obviously, we're watching this one carefully to validate how our third quarter and our fourth quarter sales plans because we've got 4 different scenarios running about which way that might go. And we're using the second quarter as just kind of that base to understand it while also continuing to watch what happens in our digital business as our stores reopen. So lots of data for us to absorb as the customer votes and this plays out. So we're learning a lot.

Jeff, to that point, have you seen in your digital business in areas of the country where now you've reopened stores? Have you seen the digital strength hold so far? Or have you seen any changes in digital relative to regional stores that have opened in the same area?

We have not seen an impact in it. Digital just continues to get stronger. In the beginning, like in the March time frame, because we pulled back on a lot of our marketing expense, including SEM and affiliate that we now have like feathered that back in. We're looking at our ROAs on that, and that thing has been quite strong for us. And we're investing in digital as we have, and that continues. The trends continue to improve. And no difference for stores -- in the ZIP codes where stores are open or closed. It just continues to be strong.

That's fascinating. So maybe as you take a step back, any changes to your go-forward store plans based on the current crisis? Or any updated thoughts on store closures relative to the 125 that you announced? And just how many store closures would be best to model for this year?

Paula, why don't you take that one?

Sure. I'll take it. We've determined our store reopening schedule based not only on the health and safety standards, but also and importantly, on cash flow generation as we make our way through this crisis. But that said, we are also revisiting our go-forward store strategy in light of the rapidly evolving macro market competitive shift that we are seeing. And we are reevaluating the closings. We're in the process of doing that, taking a hard look at both the number of stores, whether within the neighborhood bucket or the magnet bucket as well as the timing. And we'll keep you posted as we make those decisions.

Great. So maybe, Jeff, back to demand. And as you attempt to forecast second half demand for the business, how do you take a stab at planning the back half of the year, whether it's the inventory orders, top line? I know you said a gradual recovery. So just kind of trying to think about as you think about those multiple scenarios that you played out, I guess what sort of rate at the median rate now that you're considering as we think about the back half of the year?

Yes. Why don't you start it, Paula, and I'll add color?

Yes. I'll go ahead and start, and you can take it. So even though, as Jeff mentioned, the second quarter has opened up better than we expected, we don't want to get ahead of ourselves in terms of the expectations for the balance of the year. And so assuming that we do open all of the stores by July and that we don't need to reinstate the restrictions, we do expect and we've modeled there to be a slow return to normal. There shouldn't be a doubt that there will be a reduced level of sales throughout the year. But without further major shocks, we have modeled that we're going to gradually get better. And then based on how we're modeling in the current sales trajectory, inventory should be very well aligned by the end of the second quarter. In that way, we can enter the third quarter with fresh receipts and the right mix of product. Jeff, I don't know if you want to add anything to that.

Yes. Just to add, Matt, that we're obviously working very closely with our brand partners. And many of them, most of them, are international. So they've got a strong point of view about what overall demand is looking like and what they're seeing in the landscape. I think what we all want to make sure is that we have fresh products for our customer. So we're really committed to making sure that our inventory is at the right point going into the third quarter. And we've got lots of sales scenarios that we're working with our -- all of our brand partners on. The bulk of our content is seasonless and it is replenishable. So that will seek its level. We're playing with models on that. But we're in deep conversation about the way we're going to plan and forecast fashion for the third and fourth quarters.

Great. And just to reiterate that point. So Paula, inventory, you think, could be realigned to some level of demand coming out of the second quarter so you could have fresh receipts on the floor for back-to-school. Do you think that's the reasonable time line right now for us to think about?

Yes, I do.

Okay. Great. What are you seeing as it relates to the competitive backdrop? Maybe what are you seeing out there competitively as we think about in apparel across the reopening? Any signs of irrational promotional activities in any key categories? Or just how best to think about this landscape as stores are reopening right now?

Yes. We haven't seen that yet. We haven't seen -- again, I think as you get more brick-and-mortar open, and you've got -- particularly in the seasonal categories. So when you think about that content that we bought in January and February and early March, that was the early spring content. That has a shelf life. And we also want to make sure that we've got freshness. So the content that -- we did cut back receipts for second quarter. Some are deliveries, obviously. But some of that we want to bring in, and we want to make sure that the overhang in our spring is moving through. So all retailers are going to go through that same cycle. And then what happens with that -- the level of demand with that amount of supply, what happens to pricing. But so far, we haven't seen it. What we've been doing is basically trying to make our promotional strategies simpler, our price point strategy simpler. So if you walk into our stores today, you'll go into a last act area, which is where we take care of really all of our second and our third -- our end-of-life markdowns. We're doing those now in price point buckets that make it easier for the customer and for stores to set it up. We're doing broader POS in categories. And that's -- so far, that has been working and where we need to be, where we need to go deeper. So like if we talk about the women's sportswear areas, that some categories -- particularly in the dress-up categories, suits and dresses, those are categories that have been more challenged for us. We'll go deeper. And so I don't think it's irrational yet. We're obviously looking at all of our competitors. And we clearly are looking at it every single day online. And so we're moving through -- we've seen -- we've been open all the time obviously online. And we've been making price adjustments all the way through that. But nothing out of -- it's -- we have yet to see that it's been irrational.

So I guess now the key is balancing, buying conservatively, but also having the ability to chase trends if they were to improve in the back half of the year. And like you said in the second quarter off of the reopening, stores opening faster than you had originally thought. So how do you plan to manage that with your vendors? And any categories that you're looking to actually increase in penetration as we think about the new work-from-home lifestyle? And how quickly can you pivot on some of these categories?

So just we have great brand partners, and they have been very flexible in how we're looking together at the fall plans and making sure that we've got the right firepower against the businesses that we expect will fuel sales. So we're -- we -- as stores open, we're just learning every day as those are our brand partners. And we're reacting accordingly to make sure that what we're seeing, we're opening up all the receipts on replenishable categories. We're managing those receipts, focusing on making sure that we're getting the right sell-throughs, and as mentioned, making sure that we're moving through all of the seasonal categories. And as we think about what the content is, we do believe that when you think about the balance of the year that soft home, textiles, housewares, cooking at home, all the family gatherings are going to be really important. And so making sure that we've got all those categories well supported both online and in stores. We've seen customers through this. They're embracing new hobbies. Just the whole cooking, baking, home decorating categories are very strong. We think that as stay-at-home orders are lifted, families will definitely be coming together. So the holidays, I think, are going to be really key. And so we're playing with all of our themes and our gifting strategies around what the holidays will mean in America. We think that beauty will continue to be outsized, especially during the fourth quarter with fragrances and gift sets. Activewear, I think, is going to continue to be elevated. We're working on new categories like home office. Certainly, in beauty, there's lots of health and wellness categories in there that have really jumped up. We're expanding our vendors in activewear. As mentioned, children's is doing very, very well, so like baby gear and kids masks and things like -- all the things with sanitizers and antibacterial accessories. And then in foods, looking at really expanding our packaged food area. So family site, pantry items, those are things we're looking at. So again, what we've seen online and what we're starting to see in our stores is, as a department store, we have the opportunity to kind of ebb and flow categories based on where consumer demand is going to be, and we expect to stay with the customer on this.

Paula, maybe to switch to margins. On the gross margin, what are some of the ways to manage your merchandise margins through this crisis? And should we expect the worst of the gross margin pressure to come in the second quarter followed by continued pressure but at a moderating pace through the back half of the year? Or just maybe the best way to think about the cadence.

Sure. We were able to open up our store inventory to be used for digital sales while the physical stores were still closed, and that was very helpful. And so now we're focused on sharp point-of-sale markdowns for older merchandise. And so as I said earlier, we took a significant hit to our gross margin and overall profitability with the $300 million inventory write-down that we needed to take because we weren't able to take our usual point-of-sale or permanent markdowns throughout the quarter. So we'll continue to work through the excess inventory that was caused by the temporary store closures. And so we expect that, in terms of cadence, that our second quarter gross margin will be a bit tougher even than our first quarter gross margin. And then we expect to see it sequentially improve from there.

And just to clarify that, your second quarter gross margin worse than your first quarter gross margin. Is that outside of the $300 million inventory write-down? Or is -- I'm just trying to think about that $300 million inventory write-down. Should we think of that as onetime in the first quarter? Or should we expect additional write-down?

You should think about that as onetime in the first quarter. And so then we'll continue to clear out merchandise in the stores. That's our expectation as we move through this crisis. And so we'll continue to mark down anything that has passed its seasonality and just to kind of make sure that we can get fresh product by the start of the third quarter. But the write-down, expect that to be onetime but do expect significant markdowns also in the second quarter. That's our expectation, and we'll see how the quarter plays out.

Okay. And then to your point, gross margin pressure also in the third and the fourth quarter but moderating from -- versus the front half of the year?

That's right.

Okay. Great. Maybe to switch gears to the operating expense side. So I mean one of the themes, I would say, since our retail round-up in April has been all costs variable. Even some costs that I think none of us thought were variable have now turned that way. So maybe as we start to reopen stores, how are you examining your OpEx budget across store payroll, marketing, rent? What areas get prioritized? And how best to think about SG&A spending in the back half of the year once all of your stores are reopened again?

Well, we're certainly reevaluating our operating expenses through a whole new lens with the impact of the pandemic on our sales. So as we reopen the stores, we'll be looking for ways to leverage store colleagues even more across their roles, while also understanding how they interact with the customers and optimizing sort of how that occurs and how that might evolve over time. Our marketing strategy will leverage our digital infrastructure even more, and we'll continue to review our lease agreements as terms come due and evaluate them on a store-by-store basis. So things like these will allow us to significantly transform our cost base. One silver lining that's come out of this crisis is that we can be even more aggressive about reimagining and resizing our cost base and about reprioritizing as much as we can our resources on growth. And so all of these kinds of actions will help shift more of our cost structure from fixed to variable, and we've already seen that occur, which will make us less susceptible to cyclicality in the longer term and more able to align our expense base with our sales growth as we move forward.

To that point, Paula, and along the same lines, how should we think about the benefits that the Polaris strategy can provide? And are there -- are you able to pull forward some of the savings to 2020 that maybe were initially earmarked for the out-years?

Jeff, do you want to take that one?

Yes. Go ahead, Paula.

We've maintained all 5 components of our Polaris strategy as well as the components of the Bloomingdale's strategy. So all 5 of those are in place, including how we're thinking about optimizing the store portfolio and resetting our cost base to position us well, to be agile and synergized with our priorities as we move forward. So all of those initiatives are in place. Certainly, they've been affected by the pandemic in terms of timing and integrating them with our cost savings efforts that we've developed and the new muscles we've developed throughout the pandemic. But I'd still think of the Polaris strategy as very much in place and the cost base being impacted favorably by it. I don't know, Jeff, if you have anything to add to that.

No. I just think -- you just said it well. Our focus is really on strengthening the customer relationships, optimizing the stores' portfolio, resetting our cost base so that we're well positioned going forward.

So maybe just to put some of this together and tying to your comments on the top line potentially reaching a point, it sounded like -- and correct me if I'm wrong, it sounded like maybe reaching a point of stabilization in late 2021 or by 2022. Should we consider a similar timing for the bottom line, meaning the operating income, the operating margins are? Just kind of trying to think post crisis, when we potentially stabilize on the top line and what that means for margins coming out of this.

Yes. I mean you can think about the bottom line moving also consistently with the top line. We're focused on both: growing our -- or stabilizing our top line and ultimately growing it and doing the same thing with our bottom line as we focus both on sales as well as on our operating expenses and also on gross margin. So you can think about all of that as moving together.

Great. And then maybe just on the balance sheet to bring it full circle again. How should we be thinking about 2020 CapEx plans as of today? What are some of the areas that you're still planning to spend on? And then as it relates to liquidity, what's your view on reinstating the dividend over time as you prioritize various areas of the capital plan?

Sure. So what we've said about capital is that our CapEx budget will be about half of what we originally planned for the year, which was $1 billion. And so now it will be about $450 million. And we've done this before. 2008, 2009 was also a period of belt tightening, where we needed to scale down and reprioritize our capital spend. And so a large portion of 2020 cash CapEx is related to the timing of payments for projects that have already been completed. But we'll be spending in the fall to support the fourth quarter digital business and the Polaris strategy. And then as we look forward, we're likely going to have a smaller CapEx budget for the next year or 2, again, concentrating on those initiatives that will help us to transform or to grow like digital. And then as it relates to the store base, we would prioritize CapEx on very strategic projects that have returns that clearly justify the spend. But again, our overall budget will be considerably less than what was originally planned. And then as it relates to reinstating the dividend, our cash allocation strategy has not changed, but certainly, based on where we are in the market and with the virus as we manage our way through that, our priorities have changed. And so right now, we're focused on stabilizing the business, and we're continuing to invest in the business, and that is the $450 million albeit at a reduced rate. And we will see how our cash flow progresses as we move forward and use our capital allocation framework to determine when to reinstate the dividend and other things as well. But certainly, we have -- investing in the business, we're taking on additional debt. So we have lots of things to think about.

So maybe on a closing note, Jeff, what steps are you taking during the crisis to potentially position Macy's to emerge stronger after the crisis? And with that, how best should we think about market share opportunity over time for Macy's as we think about the lateral consolidation underway in the sector?

So I think what hasn't changed is that every decision we make is rooted in our customer. So I think to kind of frame up what we're -- Macy's and Bloomingdale's competitive advantage once we move through the crisis is that we're going to fortify and then grow our omnichannel advantage, which is going to be enabled by digital. We're going to leverage our brands that range from off-price to luxury in the case of Bloomingdale's. And this is going to be underpinned by our merchandising capability that we believe will protect our fashion leadership. We are committed to simple and convenient interactions on both our digital platforms and in our stores, and we're going to have a laser focus on cost reduction. As it relates to the competitive climate, we're looking at that very carefully and at a mall basis, at a national level, where there are opportunities. So as you saw, and we've seen this before with competitors that have either closed stores or they've closed completely, that we have different strategies based on whatever that brand was or whatever that business is. So as we saw when Bon-Ton went out, we took a very aggressive approach because we had a lot of like brands. And we had categories where if we didn't go after it, that customer would have been underserved. So we went out after aggressively at a mall basis. We looked at their talent and brought that in. You see certain brands today that are either going into Chapter 13 or Chapter 11. Well, we'll look at that very carefully depending on the brand and the category and with the location of the country. So we see there's about $10 billion worth of opportunity that's up for grabs right now based on what's going on with the competitive climate. That amount may grow. And that is up for brands like Macy's to be very judicious about how we do that. And we'll do it through existing brands or brands will work with our brand partners with or new categories that we will add that we think our customer wanted. So that's how we will approach it.

Great. And Paula, I believe this may be your last public meeting as CFO. Any closing remarks you'd like to add or leave us with?

Yes. Sure. Thank you, Matt. Over the past couple of years under Jeff's leadership, our team has weathered some pretty tough storms together. None quite as tough as this, thankfully. But this experience has required us to develop even stronger muscles as a team so that Macy's can ultimately flourish. And I'm proud of that. I'm especially proud of our entire finance team and of our deep bench, and I'm confident in Felicia's leadership as the interim CFO. As you saw in the press release, Felicia is a 16-year veteran of Macy's with substantial prior relevant experience as well. She and I have worked very closely together during my time here, as you might expect. So I know that the company will be in very capable hands. And then if you'll indulge me a bit more, just let me say what a true privilege and honor it has been to be a part of Macy's journey. This is a great brand, deeply engaged in America's traditions and culture. And I know that it will be here to serve new generations of customers in the future. So thank you, again, Matt, for hosting us and to everyone for listening.

Jeff and Paula, I wanted to thank you again. We appreciate your time and all of the transparency today. Best of luck and stay safe.

Thanks, Matt.

Thank you, Matt. Bye-bye.