Sales plunged 45% year over year at Macy's (NYSE:M) last quarter, as the COVID-19 pandemic caused it to close all its stores midway through the quarter. The weak sales results also forced the company to implement big markdowns and take a $300 million inventory writedown, leading to a big quarterly loss.

That said, business conditions have improved markedly over the past two months. During Macy's recent earnings call, management predicted that sales and margin trends would continue to improve gradually during the remainder of fiscal 2020, notwithstanding the headwinds from rising COVID-19 case numbers in certain regions.

Macy's finalizes first-quarter results

Several weeks ago, the department store chain reported preliminary results for the first quarter. The final results, released on Wednesday, mostly aligned with what the company had already disclosed.

Sales of $3.02 billion were down 45.2% year over year. Comparable-store sales fell 45.4%. Gross margin plunged to 17.1% from 38.2% a year earlier. As a result, the company reported an adjusted net loss of $630 million, or $2.03 per share. That compared to adjusted net income of $137 million ($0.44 per share) a year earlier.

The company also took a goodwill writedown of $3.1 billion last quarter, which management had previously hinted at but not quantified. Including that charge, as well as $80 million of other asset impairments, Macy's reported a GAAP net loss of nearly $3.6 billion, or $11.53 per share.

The exterior of Macy's Manhattan flagship store

Macy's flagship store in Manhattan. Image source: Macy's.

Sorting through the outlook

The retailer has withdrawn its full-year forecast due to the uncertainty associated with the pandemic. But during the recent earnings call, executives provided plenty of guidance about second-quarter trends and their expectations for the rest of the year.

During the first two months of the second quarter, sales have outpaced management's initial expectations. Stores began reopening in early May, and nearly all are now open. Most stores reopened at roughly 50% of their 2019 sales productivity, although urban and flagship stores have been a little weaker. Moreover, in-store sales trends have improved over time, and are now down about 35% year over year.

Given the resurgence in COVID-19 cases in many parts of the U.S., Macy's expects a pause in the recent trend of sequential improvement in store sales. On the other hand, management expects strong double-digit growth in digital sales to continue. Interim CFO Felicia Williams estimated that comps will improve by 6 or 7 percentage points sequentially this quarter, implying a year-over-year decline of about 39%. On the bright side, gross margin is now expected to improve sequentially in Q2. This suggests that Macy's quarterly loss may decrease somewhat on a sequential basis, an improvement over management's previous outlook.

Williams also provided an outline of Macy's planning assumptions for the second half of fiscal 2020. The company expects comp declines in the low- to mid-20% range. That would be roughly in line with its recent sales trends. Williams projected a mid-single-digit decline in gross margin for the back half of the year. Meanwhile, despite aggressive cost-cutting, Macy's expects operating expenses to increase slightly year over year as a percentage of sales.

Based on this outlook, quarterly losses may moderate by about 50% by the third quarter. Furthermore, the company could get back to around breakeven in the fourth quarter, if management's assumptions are correct.

Slowly moving in the right direction

It should be clear from this outlook that Macy's expects business trends to remain extremely weak for the rest of the year. Indeed, management has warned that sales may not return to some semblance of normal until late 2021 or 2022.

That said, the No. 1 department store operator is deliberately taking a conservative approach to planning. This is a wise move, as the company will be more prepared than it was earlier this year to mitigate losses if store traffic slows again. Conversely, if demand beats expectations, Macy's will have opportunities to chase additional merchandise and drive better sales and earnings performance.

Given the cost headwinds associated with the digital business (mainly related to shipping and returns), a revival in store traffic will be crucial for restoring Macy's profitability in the long run. Getting store traffic back to normal (especially at high-volume urban and suburban stores) likely depends on a COVID-19 vaccine becoming widely available.

In short, investors shouldn't expect a full sales and earnings recovery for Macy's anytime soon. But with losses moderating and plenty of liquidity following some recent financing moves, it should be able to weather the near-term storm as it waits for customers to become more comfortable visiting its stores.