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Macy's Inc (M) Q2 2019 Earnings Call Transcript

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Macy's Inc (NYSE: M)
Q2 2019 Earnings Call
Aug 14, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Macy's, Inc Second Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mike McGuire, Head, Investor Relations. Please go ahead.

Mike McGuire -- Investor Relations

Thank you, operator. Good morning everyone and thanks for joining us on this conference call to discuss our second quarter 2019 results and our full year 2019 outlook. With me on the call today are Jeff Gennette, our Chairman and CEO, and Paula Price, our CFO. Jeff and Paula have several prepared remarks to share after which we'll open it up for question-and-answer session. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick follow-up. In addition to this call and our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com.

The presentation summarizes the information in our prepared remarks, as well as, some additional facts and figures regarding our operating performance and guidance. Additionally, our Form 10-Q will be filed in a few weeks and that too will be available on our website at that time. I do have one administrative note to share, and that is that we will be adjusting the timing of our typical quarterly earnings release beginning with our next quarterly earnings call, which will be on Thursday, November 21. As a rough rule of thumb and barring any minor conflicts, going forward, we plan to release our results for the first through third quarters on the third Thursday after the quarter end.

However, the timing of the fourth quarter call is not plan to change. In addition, we will now be publishing our earnings release one hour earlier and moving up the time of our calls 8 o'clock AM Eastern Time for all quarterly results. So please mark your calendars accordingly. 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 adjusted net income and diluted earnings per share amounts that exclude the impact of impairment and other costs. You can find additional information regarding these non-GAAP financial measures, as well as, others used in our earnings release and during this call on the Investors section of our website.

As a reminder, today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call and it will be archived there following the call for one year. Now I'd like to turn this over to Jeff.

Jeff Gennette -- Chairman & Chief Executive Officer

Well, thank you, Mike, and good morning everyone and thanks for joining us. So, Paula and I will take you through our second quarter results and then we'll open up the line for Q&A. As you saw in our press release this morning, Macy's Inc delivered another quarter of comparable sales growth. We achieved a 0.3% increase in comparable sales on an owned plus licensed basis. Our earnings per share was $0.28, well below our expectation. As we communicated on our first quarter earnings call, we walked into the second quarter with elevated spring inventory.

The second quarter got off to a very slow start. As we moved deeper into the quarter, it became clear that inventory was a mounting problem due to a combination of factors, a miss on fashion in our key women's sportswear private brands, slow Sell-through of warm weather apparel and the accelerated decline in our international tourism business. We took the necessary markdowns to clear inventory. The unanticipated markdowns impacted our gross margin for the second quarter by almost one full point. We now enter the fall season with the right inventory level end mix to meet anticipated customer demand with improved freshness and liquidity to respond to end season fall trends.

We remain confident in our annual comparable sales guidance of flat to up 1%. That said, in light of our second quarter results, we are lowering adjusted earnings guidance by $0.20 for the full year. We now expect adjusted earnings per share in the range of $2.85 to $3.05 including asset sale gains or 260 to 280 minus asset sale gains. When I step back and look at the business more broadly, while we had our seasonal inventory challenges in the second quarter, there are many areas of the business that are performing well. Our brick and mortar business is healthier led by our Growth50 stores and Backstage expansion.

Our digital business delivered its 40th consecutive quarter of double-digit growth. We made good progress on our 2019 strategic initiatives. All are on track and expected to contribute to comparable sales growth in the back half of the year. So to quickly review them, growth 150, 100 additional Macy's stores are receiving the Growth treatment. Work on these stores will be complete and ahead of last year's Growth50 rollout well in advance of the holiday season. We continue to see strong performance from the original 50 Growth stores and expect a similar sales lift in the 100, ones that are now and where the work has been completed. These 150 stores make up approximately 50% of Macy's brick and mortar sales.

Backstage. In 2019, we're expanding Backstage to another 50 stores with 47 of them already complete. We now have more than 200 Backstage within a Macy's across the country. And it's encouraging to see that the Backstage locations within Macy's stores open for more than 12 months continue to comp mid single-digits. We are getting better at off-price every day. Our Backstage distribution center in Columbus, Ohio is now up and running. This DC operates on the Google Cloud platform giving us improved efficiency, speed and scale to support the continued growth of our off-price business. As part of our supply chain strategy, we will roll this Google Cloud platform out to our other distribution centers in 2020 providing additional network flexibility and speed for both Macy's and Bloomingdales.

Third, Vendor Direct. We continue to aggressively grow the SKUs and brands, we're able to offer our customers on macys.com through Vendor Direct. We're now halfway to our goal of adding 1 million SKUs this year. Our customers love the expanded selection. Vendor Direct only has upside. It had sales and gross margin and increases both customer satisfaction and traffic to the site. The zero capital and inventory investment make for a very high ROIC rate.

Mobile. Mobile helps us create a better omnichannel experience for our customers, enabling them to shop more easily and frequently both in our stores and online. Our app is our customers valued assistant for interacting with the Macy's and Bloomingdale's brands, and we continue to see significant increases in usage and conversion. Mobile remains our fastest growing channel and we have a regular cadence of new features with My Wallet, My Store and My Stylist. Many of these will improve the in-store customer experience like quick barcode pickups of online orders, localized product recommendations and in-store rewards that are exclusive to the app.

And lastly, Destination Businesses. Our six Destination Businesses as a group were up 5% for the second quarter with the strongest performance in fine jewelry, men's tailored and women's shoes. The six Destination Businesses account for nearly 40% of our total sales at Macy's and all six are higher AUR businesses. All six continue to outperform the balance of the business on market share, return on investment, and profitability. And we're putting additional resources behind these six categories to drive growth through great product, top performing colleagues, improved environment and enhanced marketing. These destinations are the point of entry to the Macy's brand, and we see significant opportunity to drive cross shopping, which is one of the competitive advantages of being a department store.

While we're pleased with market share growth and these businesses that we've seen to-date, we won't be satisfied until Macy's is taking market share overall and we will get there business-by-business, starting with these six.

So with these initiatives, the team are hard at work at implementing them, and we are confident that they will be important contributors to our back half performance.

Bloomingdale's had a more challenging quarter, driven largely by declines in international tourism. Women's and men's shoes in Bloomingdale's the Outlet were standouts in the quarter and in the third quarter, we're going to be opening two additional outlet stores. Bluemercury had another strong quarter. We've opened 3 new stores for a total of 167 stores across 26 states. Bluemercury freestanding stores and shops within Macy's stores both grew sales in the quarter, with the shop-in-shops showing considerable growth.

Bluemercury.com continues to have significant runway growing double-digits. We will continue to innovate across all channels to strengthen relationships with our existing customers and to bring new customers into our brand. In July, we launched the second iteration of STORY at Macy's, Outdoor STORY, and we're pleased with the customer response so far. STORY brings in new customers and gives current customers another reason to visit more often. It also opens doors to new partnerships with local and niche brands, as well as, major players. For Outdoor STORY, we partnered with Dick's Sporting Goods and ScottsMiracle-Gro, and these collaborations allowed us to offer our customers unique product and experiences.

We're also testing opportunities in both of our e-commerce and rental to tap into the changing customer behavior, especially among Millennial and Gen Z consumers. This month, we began a pilot with thredUP, the world's largest fashion resale marketplace in 40 Macy's doors across the country. We know many consumers are passionate about sustainable fashion and shopping resale. This partnership gives us the opportunity to reach a new customer and keep them coming back to shop and ever-changing selection of styles and brands that we don't typically carry.

As it relates to fashion rental, we know that our customers want variety and discovery. Tapping into this, Bloomingdale's is launching My List, a subscription rental service with our partner Castle, learnings from Bloomingdale's one form the development of a similar rental service at Macy's in the near future.

So as we look ahead to the second half of 2019, we are confident that we have the right plans in place to continue to grow our business. The second quarter gross margin was tough, but we now have the inventory at the right levels. We've laid down holiday 2019 as a must-win for the entire organization and we have the levers we need to be competitive in today's environment.

While consumer spending remains healthy, there are significant noise in the macroeconomy, tariffs, currency fluctuations, declining international tourism to name a few. It's a dynamic situation and the team is prepared to respond to changes in the consumer environment.

As it relates specifically to tariffs, we're currently assessing the details that the US trade representative's office released yesterday related to the fourth tranche of tariffs on goods imported from China. We have confidence that our scale gives us the leverage to find mitigation strategies that work for us, our vendor partners and our suppliers in China. We know from the earlier tranche of tariffs though, that today's customer doesn't have much appetite for price increases.

So in closing, the first half of 2019 has been challenging, but I'm proud of the work the team has done to drive the business in this dynamic external environment and course correct when needed. We are committed to delivering in the back half of the year. We remain focused on continued topline growth, market share growth and the growth of our customer base.

But as importantly , we also have a clear line of sight into profitability growth in our hard at work on our productivity initiatives. Paula will touch on this shortly, and we will share more details together in early September.

While we know there is negative sentiment on our sector, we are confident in our plans. There is strong consumer demand for high quality, affordable fashion. We are strengthening our relationship with our current customers and bringing new customers into the brand. Today's consumer demands the ability to shop anytime and anywhere and we know we can deliver that convenience as an omnichannel retailer. We've stabilized the business and have a strong and align team.

Our balance sheet is healthy, and we have the resources to invest, to create long-term shareholder value. Now I'm going to hand it over to Paula to review the second quarter and provide more detail on our outlook for the year.

Paula A. Price -- Chief Financial Officer

Thank you, Jeff, and good morning everyone. While we achieved another consecutive quarter of positive comparable sales, we were not pleased with our overall performance. That said, we are fully focused on a successful fall season and confident in the benefits we expect to deliver in the second half of the year from our strategic initiatives and our funding our future productivity program.

In the second quarter, we delivered sales of $5.5 billion, an increase of 0.3% and an owned-plus licensed comparable basis. As Jeff mentioned, we saw strength within all of our destination businesses. We experienced some softness in the home category, while ready-to-wear continue to be a challenge. We saw our strongest performance in the North Central region and Digital continue to deliver solid growth.

International tourism sales were down approximately 9% in the quarter, accelerating the headwind sequentially. It is encouraging to see that growth, the total transactions continues to be a key driver of our positive sales comps and were up 5.3% in the quarter. Average units per transaction were down 1.8% as our platinum customers purchase fewer units on average when they transact with us, but importantly, continue to spend more with us in aggregate.

Our average unit retail was down 3% driven by the growth of Backstage or heightened markdowns in the quarter, as well as, a challenging comparison to a very strong AUR performance in the second quarter of 2018.

We generated credit revenue in the quarter of $176 million down 5.4% from last year and in line with our expectations. Our Star Rewards Loyalty Program continues to drive good momentum in our credit revenue, with credit card penetration up 10 basis points to 46.7% in -- in the quarter. However, there were slight upticks and fraud and bad debt. We monitor these metrics closely and strategies are in place to mitigate our exposure over the balance of the year. We remain confident in our annual credit revenue guidance range, which remains unchanged.

Gross margin for the second quarter was 38.8%, down 160 basis points to last year. Combined, the additional markdowns Jeff mentioned, and the growth in delivery, drove the vast majority of this decline. The increased delivery costs supporting online growth in our Star Rewards program were anticipated, and their impact in our margin was roughly equal to what we saw in the first quarter.

However, it was the additional markdowns that were largely responsible for the much steeper decline in gross margin than we expected at the start of the quarter. With an inventory overhang to start the quarter and the tougher sales environment than we anticipated, our teams took the necessary markdowns to clear that excess spring inventory. While these markdowns resulted in a significantly lower gross margin in the quarter, we ended the quarter with comp inventory nearly flat at up 0.1% versus up 2.4% in the first quarter.

Taking the markdowns was certainly tough medicine, but it was important that we into the fall season with the lined inventory and sales plan. We have achieved that and we are confident in our plans to deliver more normal levels of markdowns in the back half of the year.

Our confidence in protecting margin is supported by several factors. First , inventory is well positioned in our fall received planning is much leaner, allowing us to maintain liquidity to use opportunistically as customer demand dictates. Second, the majority of the unanticipated second quarter markdowns were related to women's sportswear private brands, which is now on a much improved inventory position and is being managed with much greater discipline. This is a problem that we can control.

We put new leadership in place and are doing a deep examination of all aspects of this business. But it will take some time to get the sportswear business growing as healthily as other areas of ready-to-wear. Third, we are being more strategic in our inventory allocation and marketing. For example, we continue to challenge the status quo to drive effectiveness and efficiency in our media, doing more with less. This includes simplifying our offers, leveraging strategic partnerships and improving our segmentation and targeting of customers. We have already taken several actions to simplify or eliminate less effective marketing promotion, saving us a few million dollars of incremental EBIT on an annualized basis.

And fourth, we are making good progress on our productivity initiatives. One initiative that we've discussed many times is hold and flow, which enables us to dynamically reallocate inventory in season based on need, resulting in fewer markdowns and out-of-stocks. The initial results of our test have been encouraging. We found that hold and flow products on average generated more than $4 of incremental margin at a cost of $2, a net benefit of more than $2 each that could translate into 10s of millions of dollars of incremental EBIT on an annualized basis.

This gives us great confidence in operating the program at scale during the fall and we expect to see significant EBIT benefits as a result. Additionally, we're enhancing our data analytics capabilities and getting to a more granular understanding of pricing and markdown decisions, which will also enhance our margins. We are now rolling out our new pricing capabilities at scale, following our successful Spring test also with sizable EBIT benefits expected.

Moving on to SG&A. We recorded $2.2 billion of expense in the quarter, an increase of $13 million or 50 basis points on a rate basis over last year. The increase in SG&A dollars was primarily driven by investment in our strategic initiatives. As a reminder, given the front loaded nature of these investments, we continue to expect the growth in SG&A year-over-year to be weighted toward the spring season and the benefits of the $300 million in restructuring and normal ongoing cost reductions that we previously discussed to be weighted more toward the fall season.

Interest expense continue to benefit from lower debt levels in our balance sheet remains healthy. While our effective tax rate was 25.9% in the second quarter, we expected to be 23% for the year. The variances caused by certain normal and discrete tax benefits that occur unevenly through the year. Summing it all up, we delivered $88 million of adjusted net income in the quarter versus $219 million last year. Included in these net income figures are asset sale gains of $5 million and $34 million respectively.

Adjusted EPS was $0.28 in the quarter compared to $0.70 last year, of which asset sale gains represented about $0.01 and $0.11 respectively. Year-to-date cash flow from operating activities was $350 million compared to $544 million last year. The variance is due to lower merchandise payables and adjusted EBITDA, offset by lower tax payments. Capital expenditures were $501 million compared to $408 million last year. We remain on track to achieve our existing guidance of approximately $1 billion of capital expenditures.

Cash dues by financing activities was $239 million less than a year ago as we paid down less debt this year than we did last year. Here is our guidance. For the full year, we continue to expect approximately flat total sales growth and comps of flat to up 1% and an owned-plus licensed basis. We are confident that we can deliver in the upper end of this sales range. We will be at full strength with our strategic initiatives, we have learned from our challenges during the holiday season of 2018 and consumer spending continues to be healthy. Although as Jeff noted, we are mindful of being up against some macro uncertainty, which our full guidance range contemplates.

Looking at the fall's season sales specifically. We expect the fourth quarter comp to be meaningfully greater than the third quarter comp. In the third quarter, we will be cycling our toughest comp sales comparison of the year, in large part due to the benefit we saw from cooler temperatures last October. On the flip side, in the fourth quarter, we will be cycling the disruption caused by the fire in our West Virginia Mega Centre, and the underperformance of our pre-Christmas promotional events. Gross margin in the fall season is expected to be down slightly to a year ago. Our confidence in this trend improvement is based in the four factors I mentioned earlier. Inventory parity, merchant team liquidity, enhanced precision in our fall promotions and our productivity program.

Regarding inventory, we are expecting it to rise as we in the third quarter as we are intentionally bringing in receipts to support early November Sales and the truncated holiday season. We still expect to be below last year by the end of the fall season. As we look at asset sale gains plan for the back half of the year, we anticipate the balance of our $100 million guidance to occur in the fourth quarter. We now expect adjusted EPS to be in the range of $2.85 to $3.05 or $2.60 to $2.80 when excluding asset sale gains.

Any potential impact from a fourth tranche of tariffs is not contemplated in our guidance as we are still processing the details released yesterday, as Jeff noted. We are in active discussions with our vendors and suppliers to mitigate tariffs and minimize customer impact in 2019 as much as possible, and we'll know more in the coming weeks. With respect to our overall guidance, we are confident in the outcome of what we can control. We are also mindful of what we cannot control and we are providing guidance with prudent ranges that are cognizant of the current macro uncertainty.

You can find our complete guidance in the slide presentation we posted on our website earlier this morning. As we committed, we will be sharing more details on our funding our future productivity programs in early September. I along with Jeff and Hal Lawton, our President, will lay out our productivity strategy more fully, including detail on the six workstreams and anticipated total savings over the next three to five years.

To wrap up, while the second quarter was indeed a challenge, I'm confident that we're on the right track to accomplish both our short-term and long-term objective. We've strengthened our balance sheet through steady debt retirement and it is in a healthy position that allows us additional flexibility. We're making the right investments in the business and we are hyper-focused on profitable growth. We're making good progress on the initiatives that will enhance both customer and shareholder value. Our strategic initiatives are growing our sales, our productivity program will transform the way we work and diligent inventory management and capital allocation, our top of mind, day-in, day-out.

We're improving our management disciplines every day with data analytics, better tools and better processes and we have a strong team that is working together to win every day. With that, Jeff and I will be happy to take your questions.

Questions and Answers:

Operator

Thank you.

[Operator Instructions]

We will take our first question from Matthew Boss with JPMorgan.

Matthew Boss -- JPMorgan -- Analyst

Thanks. So, Jeff, you're seeing comp lift from Growth50 stores and Backstage, you cited comps up mid single-digits, your six Destination Businesses and also commented that the consumer spending remains healthy today despite some of the cross-currents. I guess higher level, what's preventing better aggregate comps today at Macy's and if consumer spending were to take a step down in the back half of the year or into next year, what's your confidence in sustaining positive comps?

Jeff Gennette -- Chairman & Chief Executive Officer

So, Matt. We -- I think you hit the headlines about what is good in our business right now. The one you didn't mention was the Digital overall is quite strong really led by Mobile. But when you look at the -- the other pieces of the business that are a challenge right now ready to wear, particularly ready to wear sportswear and some of the soft home categories definitely depressed the -- the strength of those winning categories to the comps that we're quoting.

So, when you look at the quarter-to-quarter, definitely got off to a slow start and you see the combination of factors that we're quoting on that, that led us to the decision that we're, we expected strong sell-through, stronger sell-throughs and seasonal product, that didn't happen as we worked all the way through May and into early June. So we made the decision mid-June to take the appropriate markdowns, so that we entered the fall season with the right inventory levels on all of our spring and summer, and we were able to flow all of our fall products that we have a lot of confidence, they're going to get us ready for the fall. So we now have our inventory in line, we took the medicine, it did affect our overall gross margin by a full point in the second quarter. Now, let me take you through why we're confident about the -- about the back half of the year. So first off, we're entering the back half of the year with a comp of up 0.5%. We've guided the full year at flat to up 1%, we just to -- to mention what Paula just said, we do expect that the fourth quarter is going to be meaningfully better than the third quarter. Third quarter last year we -- was our strongest quarter and that mostly was buoyed by the cold weather that we had in the month of October. The month of October was a very strong month for us. But on the flip side, as you remember from the fourth quarter of last year, we're cycling all the disruption that we saw and then the -- the fire, as well as, the promotional event change that we made. And what we quoted last year was that, it was about a 70 basis point degradation to the fourth quarter comp. So we're lapping that. So the holiday 2019, we are very focused on that, the entire organization is aligned and engaged to make that happen. It's a must-win for us. And we have a lot of confidence looking at our content, looking at our promotions, we take every opportunity to test, what's going to be important in the fourth quarter. So you saw just now on the Black Friday in July, we are really testing item price velocity using all of our analytics cap -- to make sure that we've got the right items built. We're very confident on our seasonal hiring, our entire fulfillment network, what we're doing with customer events and engagement. We also know that our digital business is a much higher penetration in the fourth quarter than the other three quarters, it penetrates higher, it's worth about 90 basis points of comp in the fourth quarter. And just lastly, Matt, to give -- to give, what gives us confidence is that we're bringing into the fall the full complement of all of the strategic initiatives in 2019 that we've been building and will be building and complete by the end of October. So that comes with us and that's why we're confident that we're going have a positive comp in the fall season to add to the positive comp that we had in the spring season.

Operator

[Operator Instructions] We'll take our next question from Kimberly Greenberger with Morgan Stanley.

Kimberly Conroy Greenberger -- Morgan Stanley, Research Division -- Analyst

Great, thank you so much. Good morning. Jeff, I wanted to just ask about the -- the store base and how you're thinking about it. You talked about the brick and mortar fleet being healthier. I'd love to hear what -- what you mean by that. It would seem, if the digital business is still growing double-digits, it would seem that the stores are still negative. But as you look at the fleet, what is it that you're seeing that's healthier and do you need to take another look at your store base with maybe a potential eye toward some additional store closures? Thank you.

Jeff Gennette -- Chairman & Chief Executive Officer

Yeah, Kimberly. So let's just talk about stores in general. So just repeat our store segmentation strategy. So we have our flagships, which include Herald Square, we've got our Magnet stores, which really are touched on by our growth initiatives, and then we have our neighborhood stores, which are very important for fulfillment and convenience for our customers that live in those localized areas. So we really have a line of sight on what growth looks like for Magnets and Flagships. The growth strategy really led by our Growth50 gave us all the confidence in getting growth out of those buildings. We talked about how those Growth50 stores had outperformed other stores in the Growth 100 by 3 full points. Those stores are positive campaign, this -- customer engagement in those particular stores is much higher than our other store fleet. So what we've done is we've applied all of those learnings to the next 100 stores, which is what we call the Growth 100 and what you're quoting that Growth 150 which will be complete by the end of October touches about 50% of all of our brick and mortar sales. Separate from that is what you have -- many of our flagships that are classified differently that add to that 50%, clear line of sight about what we need to do to make those better. So we've got a lot of initiatives with what we're doing with new experiences like b8ta and Market and STORY, trying new concepts like thredUP that are all adding new opportunities in these stores, many of these stores are touched by Backstage. The neighborhood stores, I would expect those to continue to negatively comp, but they're becoming more profitable because we're operating them more efficiently with less square footage. The customers are really using them big for fulfillment, a higher percentage of their sales are moving through fulfillment. So we're handling their expectations in those particular stores. We're always looking at our portfolio to look at, does it make sense? We're never going to say, we're done, but we do believe this national footprint that we have, we're servicing a national customer. We know that when we close the store, we're firing customers, we lose their business online, we'll make all those decisions very carefully. So this segment's dictation strategy really serves a customer that shops between our stores satisfying her needs, it also satisfies how we're building the omnichannel business through Digital and Mobile, and so we'll be very careful about any accidents that we do in -- in future store closures.

Kimberly Conroy Greenberger -- Morgan Stanley, Research Division -- Analyst

Great, thank you.

Operator

Our next question comes from Lorraine Hutchinson with Bank of America.

Lorraine Corrine Maikis Hutchinson -- BofA Merrill Lynch, Research Division -- Analyst

Thanks. Good morning. I wanted to follow-up, Jeff, on the comment you made about the consumer not wanting to see price increases. And can you just give us a little bit more information on your expectations around the tariffs, what are the mitigation strategies and are price increases off the table for you or will you try to do some selectively?

Jeff Gennette -- Chairman & Chief Executive Officer

So let me just tell you what our experience has been. So obviously tranche 1 and 2, there was no significant impact, and tranche 3, there was very limited impact when it was a 10%. But on May 10, that went to 25%. And so we did play with selected price increases in categories like luggage in housewares and in parts of furniture, and we learned from that experience that the customer had very little appetite for those cost increases. So we had to make adjustments. So I -- to answer your question, Lorraine, I think when you're talking about tariffs going to 25%, then you get into what do you do, how are you working with your vendors, how do you get more make and value into those products that gives you the permission from a customers' perspective because of how they're looking at the value of those goods to raise prices. So when we're thinking about tranche 4, we've had some time to digest this even into this morning, we're looking at which of the remaining pieces that are touching our business to come in from touch -- from tranche 4 are being affected as of September 1 versus December 15. I would tell you that we are looking at no price increases on any content that is touched by tranche 4. So we're looking at what is our risk for the way that it's now been, because you got some categories based on one fiber that comes that's being taxed or by on September 1 for this other category but different fiber that is been affected as of December 15. So looking at all of that and rolling it, I think we -- we recognize that our risk to annual guidance in 2019 would be no more than one nickel. I think on a long-term basis, we believe that we will work through solutions on 10%. We're working closely with our manufacturing partners, we're leveraging our scale and our strong relationships with our sourcing partners, as well as, our vendor partners who -- who source out of China. So I think that 10% is manageable in the short and long-term, I think when it goes to 25%, you're dealing with a whole other series of dynamics that I would not say we wouldn't have to -- to raise prices.

Lorraine Corrine Maikis Hutchinson -- BofA Merrill Lynch, Research Division -- Analyst

Thank you.

Operator

Our next question comes from Paul Trussell with Deutsche Bank.

Paul Trussell -- Deutsche Bank AG, Research Division -- Analyst

Good morning, and thank you for taking our question. Wanted to circle back onto the digital business which is performing well. You mentioned that the Mobile business did over $1 billion last year. Just curious on -- on any update on the total size that you're driving now through e-commerce and also on Vendor Direct, maybe discuss in a bit more detail, the type of product could SKUs that you've been adding to the website as you expanded the assortment and now that Vendor Direct is 10% of sales. I mean, help us understand how much the Vendor Direct business is driving the e-commerce growth. And also how your accounting for that in terms of taking on the wholesale versus a take rate in your top line. Thank you.

Jeff Gennette -- Chairman & Chief Executive Officer

Hi, Paul. So let me take you through Mobile first. So no surprise, Mobile is our fastest growing channel. So well, we told you last year, $1 billion in sales. We expected it to grow 50% in 2019, that will get it to $1.5 billion, we're on track for that when you think about our performance in -- in the first half of the year. So when we get into Vendor Direct on this one, we're on track, what we said was that we had a goal of adding 1 million SKUs, we're halfway to that goal. So we've added 450 new vendors, $640,000 of new SKUs or of that 640,000 new SKUs. So we're -- we started really primarily in home and we are now implementing more broadly. We're -- we're expanding to the full catalog of our brand partners, we're also adding new categories that we look at failed searches and really what our customers expect of us. We always look at what our competitive set is and as we've mentioned, our peers have a larger ratio of SKUs online to SKUs in store. So we have a ways to go here. But I think the benefit of this is it's giving our customers an endless aisle. This is all really driven by data driven personalization and it's given us, we have to make sure that we're hitting Macy's high standards of quality and customer satisfaction.

I think in aggregate, I see nothing but upside with Vendor Direct. I don't -- I'm not going to speak to where we see it going over the long-term. I'll tell you in kind of yearly increments. But we're on track to achieve all of our objectives. I think that it add sales, it adds profit. It increase the satisfaction and traffic to the site. There's minimal capital and no inventory investment. So, it really makes for a high ROIC rate. And so, when we quote, our digital business has been up double-digit, that includes what we're doing with Mobile, that includes what we're doing with Vendor Direct. And we could see continued growth in the entire digital channel with these -- with Mobile and Vendor Directing two of the big accelerants.

Paula A. Price -- Chief Financial Officer

And so just to clarify on the accounting call to your question as well, this is a wholesale model from -- from an accounting perspective. So it had sales, it had gross margin, as Jeff said, there is no inventory, no capital, so it's really quite good in comparison to say owned and it's similar gross margins, it just depends on the categories that -- that you select in terms of what the actual gross margin is. But again, no inventory, no capital makes for a very strong ROIC. And so this is -- this is all good.

Paul Trussell -- Deutsche Bank AG, Research Division -- Analyst

Thank you.

Operator

Our next question comes from Chuck Grom with Gordon Haskett.

Chuck Grom -- Gordon Haskett -- Analyst

Thanks. Good morning. Just wondering if you guys could unpack for us the compression in gross margins in the second quarter. I think, it's around 100 basis -- 100 basis points from markdowns and 60 for delivery. Just wondering if that's correct. And I guess, if you can just hold our hand for the third and fourth quarter, what -- what offsets you could have against that 60 basis point delivery headwind? Thanks.

Paula A. Price -- Chief Financial Officer

Yeah. So just again -- just to step back a little bit on -- on gross margin, when we last to talked to you in May, our margin guidance factored in our expectations around the delivery expense, the pressure from that related to our growing digital business in the Star Rewards program, as well as, the clearance, the excess spring stock that we had at the time. As we move deeper into the quarter, it became clear as Jeff mentioned, due to the factors that he mentioned, the fashion miss in key women's sportswear private brands, the slow warm weather product sell-through, the accelerated decline in international tourism that we needed to take the fast action to put us in good shape for -- for the fall season.

And then, just keep in mind that this was -- this was fashion apparel that had in and out date that we really needed to head. And so when the sell-throughs did not improve as the quarter went on, we took these additional markdowns that got our inventory down to nearly flat on a comp basis, which is a really good place to be as we head into the fall season. So just a little bit on the numbers, the gross margin as you noted, was down 160 basis points. Again, that's about 90 basis points, almost a full point that was related to the additional seasonal markdowns, and the rest of it relates primarily to delivery headwinds, which is consistent with what we saw in the -- in the first quarter and was consistent with our expectations.

So, we took the -- the markdowns thoughtfully and as we're entering the fall season, our inventory levels and mix are in line with what we expect our customer demand to be. And then just while we're on the topic, let me give you the thoughts on -- on how we're looking at the fall. So just reiterate the four points that I made earlier that give us confidence in the fall gross margin improvement. So private brand women's sportswear is in a much better position and we're allocating inventory more strategically and with -- with better tools as we head into the -- the fall season. Receipt planning is leaner and we will have merchant liquidity as we move through the fall season to buy opportunistically. So we are -- we feel good about that.

Our fall promotions are more precise, again, better tools there. And the productivity projects that we've been testing up to this point and sharing with you like hold and flow and markdown optimization, they really are ready to scale in the fall. And so we anticipate benefit coming from -- from those -- from those as well. And then just regarding the guidance, just in general, as you know, we didn't change our sales guidance. We finished the spring season with the comp of up 0.5% and as Jeff mentioned before, we have confidence in our fall strategies to continue the positive trend.

So if we hit the upper end of our sales range, we see gross margin down slightly. And then to be prudent, if sales are at the lower end of our range, we would expect the gross margin rate to be a bit worse. But, as I said, we are confident in the fall plan.

Chuck Grom -- Gordon Haskett -- Analyst

Thanks a lot.

Operator

Next question comes from Jay Sole with UBS.

Jay Sole -- Analyst, UBS

Right. Thanks so much. Jeff, I want to ask about your comment that I think, you said that you see the risk of the annual guidance for 2019 to be no more than one nickel from tariffs. Could you talk about the algorithm to get there is that that you feel like that if you don't change prices, the vendors basically absorb all the price increases or is there an element of maybe gross margin be a little bit under pressure, but you can offset it with SG&A? Any help on that would be -- would be great. Thank you.

Jeff Gennette -- Chairman & Chief Executive Officer

Yeah. So -- so on that, Jay, we've got -- we're looking at our own private brands where we bear the full risk of any changes that we make. And so we've looked at that, we're obviously talking very intensely with all of our vendor partners and have been really on the whole subject of tariffs for some time now. So we've gotten into a good place in terms of what -- what price increases, they are going to foist on us what they are absorbing themselves or what they were believing they're going to concessions from their own sourcing partners. So I think those are kind of in the -- we're looking at that in three parts. We're looking at what we are doing in our -- our own private brands, what that means. And as I mentioned, what we have found is there is no customer appetite for price increases, so what are we going to do to mitigate that. And so in the short run, where we've already taken our mitigation strategies, we believe that we might have additional risk of up to a nickel, when you look at between our brand partners in our private brands based on what we learned yesterday, that would be for the balance of 2019.

We're hard at work, but if we continued with all of the 10% tariffs for -- that are landing as of mid-December onward, we are looking at opportunities to mitigate that in 2020 and beyond, and we'll keep everybody posted as we work through all those scenarios.

Jay Sole -- Analyst, UBS

Got it. Thanks so much.

Jeff Gennette -- Chairman & Chief Executive Officer

Thanks, Jay.

Operator

Next question comes from Paul Lejuez with Citi.

Paul Lejuez -- Citigroup -- Analyst

Hey, thanks guys. Can you talk about how big Vendor Direct loads as a percentage of e-com sales this quarter versus what it was in the second quarter of last year? Also what the plan is for the second half, how much of the growth driver that can be to -- to the comp? You did mentioned just secondly, that second quarter is off to a -- got off to a slow start. Curious if you could make any comments about how 2Q finished and how 3Q started? Thanks.

Jeff Gennette -- Chairman & Chief Executive Officer

What I'd say on, Paul, let me take first, we're not -- we're not quoting what Vendor Direct is through the first half of the year, we'll definitely give you that at the end of the year. As mentioned with the previous caller, it was about 10% of the business for 2018. It is growing at a rate bigger than the average of overall income which is double-digit. So, we don't break that out kind of midstream on that, as to how like to how I characterize sales flow within the quarter, started out very slow in the month of May. And so the month of May was, we don't often talk about weather, but in the month of May, it was particularly cold, and it was particularly wet and it was across the entire country.

So generally with weather, you get some pockets of the country that are experiencing warmer weather than others and they kind of cancel each other out. In this particular month, it was pretty tough across the board. So that's -- that's really the whole conversation about, those are really important weeks in sell-through in seasonal goods like a spring and summer fashion deliveries, particularly shorts, tanks tease those types of deliveries. So, very important that we responded to that. It did get better in the month of June and the positive continued into into the month of July. So what I would tell you is tough May got better through the course of the remaining two months, which led to our positive comp for the total quarter.

Paul Lejuez -- Citigroup -- Analyst

Thanks. Anything on Brexit?

Jeff Gennette -- Chairman & Chief Executive Officer

I'm sorry.

Paula A. Price -- Chief Financial Officer

Yes, we don't comment on in-quarter results as you know, Paul.

Jeff Gennette -- Chairman & Chief Executive Officer

What I'd say, Paul, is that what we -- we said earlier was that we do expect that the fourth quarter is going to be meaningfully better than the third quarter from a comp perspective.

Paul Lejuez -- Citigroup -- Analyst

Thank you guys. Good luck.

Paula A. Price -- Chief Financial Officer

Thank you.

Operator

Next question comes from Alexandra Walvis with Goldman Sachs.

Alexandra E. Walvis -- Goldman Sachs Group Inc., Research Division -- Analyst

Good morning. Thanks so much for taking the question. I had a question on tourism, you mentioned that sales of foreign tourist were down 9% in the quarter. I wonder if you could give a little more color on that and whether the shape of that tourist spend has been changing over the last few quarters. Is it more a function of traffic or more a function of basket size there, and how are you expecting that the trend?

Jeff Gennette -- Chairman & Chief Executive Officer

Hi, Alex, let me give you some context on international tourism. So and how it affects our business. So it is a significant driver of volume in 40 of our Macy's and Bloomingdale's stores. So it's the gateway cities -- and many of these stores, virtually all of them are really touched by our growth initiatives. So we're built and ready in both Bloomingdale's and Macy's for those markets. When you look at these international tourist sales, they're really some of our best transactions because they're high AUR, they're more apt to buy full price, and there is virtually no returns . So it's a very high margin sale that you're dealing with here. So, as we mentioned, we -- our business across Bloomingdale's and Macy's, it was down 9% in the second quarter and that was an acceleration from our trend from the first quarter we were down 3%. Now we are -- we are lapping four now consecutive quarters of negative comps. So we're going up against a easier fall compare, then what we were up against in spring. And as I think, we're -- we get -- we're pretty good at this. We see the international tourism always has its ebbs and flows. This decline is not unprecedented, we've navigated through this before. But just to be on the prudent side, we took our comp from the second quarter and we pulled out all the way through our fall expectations, just to be prudent. So even though we're up against a negative a much easier comp in the back half, we did pull that through, just to be prudent. And then where we're really focused in these 40 stores is what can we do to offset that -- the international tourism. So we're really focused with those teams and our corporate teams on how we get more domestic tourists and how we really win more local customers in these very important doors. So then when you look at the composition by country, certainly Brexit is affecting us, China is depressed, there is always ins and outs depending on what country. But I'm confident as I see it right now, we're taking the trend from the second quarter and carrying that through the back half.

Alexandra E. Walvis -- Goldman Sachs Group Inc., Research Division -- Analyst

Great, thanks, Jeff, that's too [Indecipherable]. And then one more here for you and is related. I wonder if you could comment on trends in the New York market. I'm sure that tourism is having an impact there, but I wonder if you could also comment on the incremental supply in this market as it been a few new openings of retail areas there are some more coming up. How are you thinking about the New York market in that context?

Jeff Gennette -- Chairman & Chief Executive Officer

As expectations, I'm sorry. If you -- if you look -- if you look at the Manhattan, we have seen little change in our business at both Bloomingdale's and Macy's as a result of the new competition coming in there. We have some of our best performing stores are in the Metro area, and I would attribute that to customer satisfaction scores being up, growth initiatives being in place. So where we have fought hard in those communities, we're winning. And that's not different in New York City or New York Metro versus other parts of the country. So Bloomingdale's is, while they had a more difficult quarter, where they're making investments, you see it in New York City, they're having great strength in all of the areas of the Bloomingdale's 59th Street store, that they renovated, very happy with that -- we've seen very little effect with the competition increasing in Manhattan with Bloomingdale's 59th Street. So I would say, the Metro area is unaffected by what you're describing.

Alexandra E. Walvis -- Goldman Sachs Group Inc., Research Division -- Analyst

Thanks so much.

Operator

Next question comes from Omar Saad with Evercore ISI.

Omar Regis Saad -- Evercore ISI Institutional Equities, Research Division -- Analyst

Good morning, thanks for taking my question. I wanted to ask a follow-ups on inventory but maybe a little bit more from a structural standpoint. Jeff, could you talk to following another kind of buildup in inventory and the need to mark down to clear it? Could you talk about why -- why Macy's maybe hasn't seen more benefits from technology -- using technology to run the business with less inventory omnichannel capabilities? Is that something we can look forward to in the future around inventory? And then you also mentioned Vendor Direct, the returns efficiency of that model, where you don't have to own the inventory. As you think about your physical business as well, is there an opportunity to do more concessions marketplace, at least, with some of your big vendors where you can run -- they can run the business owning the inventory and create great working capital opportunities through Macy's in that way as well? Maybe you could address those things. Thanks.

Paula A. Price -- Chief Financial Officer

So -- so I'll go ahead and start on this question, Omar. And then, Jeff, if he wants to add can do so. So one of the biggest things that we're doing with funding our future is developing more tools to manage our inventory and our supply chain in a much smarter, more efficient way and so it's very much powered by by technology. And we already use advanced fulfillment logic to get our customers their products in the quickest amount of time at the lowest cost for us. And with the most effective inventory strategy, we use a combination of our mega centers, stores, vendor partners to offer the customers the best experience, while allowing us to move inventory efficiently and cost effectively. And we're taking that a step further by taking inventory position and markdown risk into consideration as we make fulfillment decisions using data analytics. So we are really -- we are really excited about our supply chain and the transformations that we're seeing. We're also getting ahead right now of the peak holiday season by allocating more of the high volume inventory and distribution centers to operate at full capacity and using our store fulfillment logic in options more effectively, and we're also sort of efficiently consolidating BOSS shipments to stores to reduced shipping costs. So when we think about the supply chain team transformation and funding our future productivity, there are a lot of different initiatives that sort of fall under that. In addition, in terms of inventory management, we are applying data science, data analytics to -- to our markdowns and pricing, so that we can really measure the price velocity, how -- how the inventory is moving at what prices and really get very, very smart -- smarter about how we manage our inventory. But this is a really big opportunity for us.

Jeff Gennette -- Chairman & Chief Executive Officer

And just to add one thing more to what Paula just said, I think the thing that we're most excited about with markdown optimization is the ability in fall season to do that at a store level. So we've been doing it a zone level, we're now -- we've tested it and we're now ready with all of our technology to be able to do that at a store level, which is really going to help, you don't take markdowns on certain SKUs where you don't need to or you go to different levels where that's prudent. So that's going to help us with overall margin, both in sales, as well as, gross margin improvement with markdown optimization. And then the second part of your question about, what are you learning from Vendor Direct and shifting some of the economic burden into lease or hybrid models, that is definitely always, we're always looking for opportunities with that. And so when you look at what we learn from the market kind of retail as a service, we don't own any of that inventory, we basically are renting space that and we're doing that through our -- our partnership with b8ta, and so that platform is really running all the kind of amalgamation of different retailers that are coming into that space. They -- they basically pay a fee, basically to be a part of that and that's giving customers new opportunities, new things for them to see, but with no risk to us. When you think about lease, always looking at different lease options. The Bloomingdale's lease percent of their overall business is higher than Macy's, I know that Macy's will go higher over time. And we're looking for opportunities there. We definitely although, always want to make sure that whatever we're doing with lease gives us the opportunity to make ships where customers go. And so making sure that we're not tied ourselves into long-term commitments that may not be customer-focused. So we're always looking at this and expect us continue.

Omar Regis Saad -- Evercore ISI Institutional Equities, Research Division -- Analyst

That makes lot of sense. Thanks.

Operator

Next question comes from Oliver Chen with Cowen & Company.

Oliver Chen -- Cowen and Company, LLC, Research Division -- Analyst

Hi, thank you. You've been really innovative, Jeff, and thinking about e-commerce and subscription, we've done a lot of work here with threadUP why is now the right time and what are your thoughts on balancing your relationship with thredUP in Castle against your vendor Matrix and also thinking about consumers looking for new items and the cannibalization risk and balancing that against the opportunity? And Paula, just a quick follow-up, the precision in the fall promotions and thinking about that, sometimes the challenge can be in making sure you still get your fair share of traffic when you all to promotions. Would love your thought on how you're balancing the precision against the traffic risk. Thank you.

Jeff Gennette -- Chairman & Chief Executive Officer

So, hi, Oliver. Let me go first on your questions about kind of re-commerce and rental. This is a -- this is a -- when you think about kind of acquisition strategies, we have a very developed core customer who loves our brand and they should -- we just got stickier with her decisions about shopping with us, with our loyalty program. We've got a customer base and what I would call bucket 2, which is an occasional customer that we're trying to get them to migrate up in their spend and then we've got an entire acquisition strategy.

And when you look at acquisition, re-commerce and rental is really at the heart of that, and so there is many customers that love from a sustainability perspective, as well as, just having new content at great prices. They love what the real is doing or in the case of our customer, what thredUP has been doing for some time. And so when we met with James and really said, "Okay, what's our opportunity?" He was looking at opportunities with brick and mortar and his own or partnerships and this was a good connection for us to come together.

So we're doing it now, it's rolling in. We're doing it for the back-to-school time frame, in 40 doors is really when it starting, and I will tell you that with the products that are selling best are those that we don't currently carry. So, to your question or concern about how do your in-line vendors feel about it, it's just giving these customers additional brands that we don't carry at great prices. So, I'm very encouraged, we're testing it in different parts of the store where -- where it's best, how it's best received. So, we're going to be, we'll have a full analysis of it as we get through the fall season. But, I'm very encouraged by this.

As it relates to rental and what you see with what -- what Bloomingdale's just announced, which is My List and our partnership with Castle, we needed to play in this game. And I'm really happy with what Tony and Denise and their teams created here. And this has been under development for about a year and a half, I think it's got some unique characteristics, but it takes the full complement of strengths of contemporary vendors at Bloomingdales. The vendors themselves are thrilled to be a piece of it -- to be a part of this. So, and then the broader play would be what is this due to inform a similar opportunity in Macy's future.

So staying on kind of the acquisition, we're really focused on digital first strategies, what that means with influencers, what we're doing with our own colleague population with style crew, have reinventing beauty with respect to Instagram, so these initiatives, I think really help us with acquisition.

Paula A. Price -- Chief Financial Officer

And so in terms of your question regarding balancing precision in traffic risk, so what I meant by that is that, we're really using better tools, better data to understand all of our promotions in terms of what's working and what's less effective. And so we're simplifying our promotions, we're measuring how effective those are, what kinds of results and outcomes they deliver, we're delayering where it's appropriate our promotions, we're partnering to get better, data around the outcomes of our promotion, we're segmenting the customers in looking at how we target different customers with different promotion.

So, that's the piece that I mean when I say we're doing this with greater precision and we are balancing that with the outcomes, outcomes like traffic and ultimately, what sales these -- these promotions drive. So, we're getting better at that. It's just another way of how we're using data and data analytics to support our -- our decisions.

Oliver Chen -- Cowen and Company, LLC, Research Division -- Analyst

Thank you. Best regards.

Paula A. Price -- Chief Financial Officer

Thank you.

Jeff Gennette -- Chairman & Chief Executive Officer

Thanks Oliver.

Operator

Your next question comes from Bob Drbul with Guggenheim.

Bob Drbul -- Guggenheim Securities -- Analyst

Hi, good morning. Just a couple -- a couple of more questions. On the thredUP relationship, how -- how much square footage are you allocating in the 40 stores that you're doing and the overlap with Backstage versus thredUP and I guess, if you could talk about that? And then just a question on national brands like, you had some pressure on your private brands, but I was just wondering if you could comment on national brands and maybe even Denim a little bit as a category. Thanks.

Jeff Gennette -- Chairman & Chief Executive Officer

Okay. Thanks, Bob. So, square footage in thredUP is approximately 500 square feet in each of these 40 stores, very little impact, it's when you look at the content of Backstage, the content of Macy's, the content of thredUP is mostly discrete. So, when you look at thredUP, we obviously give them a list of vendors that we don't need products, because we've either got them expressed in Backstage or in last factor as part of our regular portfolio. So we're really, we're merchandising into where we saw holes in our inventory with this re-commerce play in this idea that it was pre-owned is very attractive to many customers, not just because of the price, but also because of the sustainability.

So that's how we approach that. When you talk about national brands like -- like anything, you've got some national brands that are totally on the pulse of their customer and they made all of the right decisions from a value in a content perspective and they're winning and others that are finding their way where their customers shifted and they're having to make adjustments. So, I wouldn't characterize one series of vendors, one way or another, it really depends on the business that you're in and where they are in their own evolution. And -- and so that's how I'd -- and then with respect to Denim, what I'd tell you is that, when I look at Denim from the second quarter that were really positions of strength in a number of areas. When you look at our kids' business, our kids' business is one of our standouts in the first half of the year and some of that was as a result of Denim and then Denim is -- is mixed in the women's apparel area and doing quite well in men's.

Bob Drbul -- Guggenheim Securities -- Analyst

Great. Thank you very much.

Operator

Next question comes from Michael Binetti with Credit Suisse.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys, good morning. Thanks for all the detail here. Can I just ask on the categories that you guys spoke about, what confidence is there in -- I guess, what's different between the spring and the fall women's apparel trends, I know you said you're confident that you are clean on inventory. But I'm trying to figure out what you see that helps boost your confidence, the new assortment can drive improved traffic. And then, just sticking with the topline for a second. I want to ask about the comps again, Paula, maybe, can you help us think -- should we think about 3Q comps within the full-year range of flat to up one or should we be thinking more like 3Q comps negative switching to positive in 4Q? Just to help us understand some of the dimensions.

Paula A. Price -- Chief Financial Officer

Michael, let me start. So, when I tell about ready to wear is that ready to wear is really in kind of two pieces. There's the classifications piece which is dresses, suits, activewear, coats, swim, those an aggregator showing really healthy growth, and they've been strengths of Macy's. We see those continuing all the way through the back half of the year. When you look at sportswear, which is where we had our problem with private brands in sportswear, which is the bulk of that business, the bulk of our sportswear business is private brands.

What I'd tell you is that we're in a really good inventory position for the right expectation for fall season. So, what I would expect those it's -- this is not a rapid turnaround. I would expect that the trend that we have experienced in the sportswear business will continue through the back half of the year without the -- without the inventory overhang it's going to create a margin problem for it. So, that's how I would characterize ready to wear.

Michael Binetti -- Credit Suisse -- Analyst

Okay.

Paula A. Price -- Chief Financial Officer

And so what I see about the quarters, Mic, is that we don't drive the quarters as you know, but as I said earlier, we do expect the fourth quarter to be meaningfully better than the third quarter. And so Q3 could be outside of our annual guidance range. So, I would think about it in that way.

Michael Binetti -- Credit Suisse -- Analyst

Okay. If I could just ask a follow-up -- maybe an easier one on the SG&A leverage in the second half, I know you've got some cost initiatives flowing through, have a little better control over that after some investment in the first half. So I guess if sales do come in above the plan, how should we think about SG&A relative to your guidance and then if sales come in light, do you have more room they can pull back on SG&A or are there still some fixed costs from the initiatives running in there to make it a little bit inflexible if sales are to the downside of the plan? Thanks.

Paula A. Price -- Chief Financial Officer

Sure. I would just -- just repeat at our guidance in terms of SG&A, at the high end of our guidance, we would expect the performance to be better in the fall than in the spring. And, again, as you know, our expenses are weighted more heavily to the first half of the year because we begin our investment earlier in the year and we'll benefit from expenses later in the year. Sales are higher then that you would see that in our SG&A leverage, if sales are lower. Yes, we always manage our expenses prudently and think about different sales scenarios and what we would do there. And so, we've demonstrated that we can flex our sales in different sales environment or flex our expenses in different sales environments.

Michael Binetti -- Credit Suisse -- Analyst

Okay, thanks to both of you for all the help the detail here.

Jeff Gennette -- Chairman & Chief Executive Officer

Thanks, Brian.

Paula A. Price -- Chief Financial Officer

Thank you.

Operator

Next question comes from Brian Callen with Bank of America.

Brian Douglas Callen -- BofA Merrill Lynch, Research Division -- Analyst

Hi, good morning. Thank you. I just wanted to peel back on your perspective on balance sheet health. Debt reduction has been strong, but 2019 leverage looks like it could still be at or above the high-end of your target range. So what option should we consider being available near-term to keep the balance sheet in line with investment grade ratings? You don't seem to be getting credit for the -- I guess 10% dividend yield. So would you consider altering that dividend payout?

Paula A. Price -- Chief Financial Officer

So again, I would just reiterate our capital allocation strategy, which hasn't changed. We do continue to generate strong cash flows and we -- we use that cash flow prudently. And so, just to reiterate what our priorities are, first and foremost is to invest in the business. And so we've guided that we'll invest about $1 billion this year. Second, it's to maintain a healthy balance sheet, so we're significantly -- we've been significantly reducing our debt. We plan to use excess cash in 2019 as we said before, to further reduce our debt, to be well within our target leverage range of 2.5 to 2.8 times and you look at that with and without asset sale gains, and that's important as we face into any economic environment. And being in this range gives us flexibility as well. And next, we will continue to return a competitive cash dividend to our shareholders, we're doing that and we're committed to continuing to do that and then the last thing is that, as our cash position warrant, we will consider along with our Board resuming our share repurchase program. So that's how we think about capital allocation strategy and it hasn't changed.

Brian Douglas Callen -- BofA Merrill Lynch, Research Division -- Analyst

Thank you.

Operator

And if there are no further questions at this time, I'd like to turn the conference back to your hosts for any additional or closing remarks.

Mike McGuire -- Investor Relations

Thanks everybody.

Paula A. Price -- Chief Financial Officer

Thank you, everyone,

Jeff Gennette -- Chairman & Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

Mike McGuire -- Investor Relations

Jeff Gennette -- Chairman & Chief Executive Officer

Paula A. Price -- Chief Financial Officer

Matthew Boss -- JPMorgan -- Analyst

Kimberly Conroy Greenberger -- Morgan Stanley, Research Division -- Analyst

Lorraine Corrine Maikis Hutchinson -- BofA Merrill Lynch, Research Division -- Analyst

Paul Trussell -- Deutsche Bank AG, Research Division -- Analyst

Chuck Grom -- Gordon Haskett -- Analyst

Jay Sole -- Analyst, UBS

Paul Lejuez -- Citigroup -- Analyst

Alexandra E. Walvis -- Goldman Sachs Group Inc., Research Division -- Analyst

Omar Regis Saad -- Evercore ISI Institutional Equities, Research Division -- Analyst

Oliver Chen -- Cowen and Company, LLC, Research Division -- Analyst

Bob Drbul -- Guggenheim Securities -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Brian Douglas Callen -- BofA Merrill Lynch, Research Division -- Analyst

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