Dive Brief:

• Macy's on Tuesday said that store reopenings have exceeded expectations with "strong digital business sales" continuing throughout May. By June 1, some 450 stores were opened, most "in their full format," CEO Jeff Gennette said in a statement.

• The department store also said it expects first quarter net sales to reach $3 billion, down from $5.5 billion last year, with net loss of $652 million (down from net income of $136 million) and operating loss of $969 million (down from operating income of $203 million). Gennette said the company expects to exit the current quarter with clean inventory. 

• On Monday, Macy's announced that it has closed on about $4.5 billion of new financing, which includes $1.3 billion in previously announced 8.375% senior secured notes, as well as a new $3.15 billion asset-based credit agreement. The company "expects to have sufficient liquidity to address the needs of the business," according to the release.

Dive Insight:

The COVID-19 pandemic is not yet in the rearview mirror. Cases are still rising in some areas and even states with declining numbers still face uncertainty over how reopenings of public spaces could interfere with their positive trajectories.

But several retailers, faced with a major blow to sales as stores were forced shut, have reopened many locations in areas where it's allowed. In his statement, Gennette noted that the "COVID-19 pandemic significantly impacted our first quarter sales and earnings results," but said that e-commerce, including stepped-up omnichannel services, has helped mitigate that.

"Our reopened stores are performing better than anticipated," he said. "Importantly, we are receiving positive feedback on the curbside pickup experience and our efforts to create a safe and welcoming shopping environment."

The department store's latest preliminary report is slightly more optimistic than its previous warning that its operating loss could top a billion dollars.

Macy's and other retailers will, understandably, likely not report store comps for a period when stores were shuttered most of the time. But that metric will again become key in the second quarter, as will gross margins, according to a note from Credit Suisse analyst Michael Binetti.

The department store on Tuesday said that gross margin in the quarter declined year over year to $516 million, from $2.1 billion in 2019, according to Macy's preliminary report. Gennette said that the department store is "seeing strong sell-through of seasonal merchandise, and anticipate that we will exit the second quarter in a clean inventory position."

That will likely come at a price, however, with markdowns necessary to move merchandise and higher costs associated with e-commerce. Even pre-pandemic, as e-commerce penetration has gradually increased some 150 basis points annually since 2010, EBIT margins have steadily declined, about 410 basis points for department stores and 430 basis points for specialty apparel retailers, according to a note from Morgan Stanley researchers led by Kimberly Greenberger.

That comes from digital sales cannibalizing brick-and-mortar sales, "resulting in less efficient retail margins as stores delever fixed costs," they said in emailed comments. "As such, we would expect incremental digital operating income for these retailers to be more than offset by the shortfall in four-wall profits, absent aggressive store closures, leading to lower earnings power post-COVID-19," Greenberger said in emailed comments.