Q4 2019 Earnings Call
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Good morning, and welcome to Macy's Inc. fourth quarter 29.
This conference call.
Well long conference is being recorded.
No.
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Mike Mcguire <unk> Investor Relations. Please go ahead Sir.
We want and thanks for joining us on this conference call to discuss our fourth quarter 2019 results.
Me on the call today, our joking that our chairman and CEO and Paul a price our CFO Jeff.
Several prepared remarks to share after which we'll host a question and answer session. Given the time constraints in 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 in our press release, we have posted a slide presentation on investors section of our website Macy's Inc. dot com the presentation summarizes the information in our prepared remarks as well as some additional back some figures regarding our operating performance in guidance.
Keep in mind that all forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1990 bought 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.
Well contained in the company's filings with the Securities and Exchange Commission.
In discussing the results of our operations will be providing certain non-GAAP financial measures you can find additional information regarding these non-GAAP financial measures as well others used in our earnings release Endo presentation locating 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.
After the conclusion of this call and it will be archived on our website for one year now we'd like to turn the call over to John.
Thank you Mike Good morning, everyone and thanks for joining us as you saw in our press release or fourth quarter comparable sales were down 25% owned plus licensed basis, and we delivered adjusted earnings per share of $2.12.
For the year comparable sales were down 8.7%.
Plus license basis, and we delivered adjusted earnings per share of $2, a 91 cents.
Looking at the fourth quarter, we saw a strong trends improvement in sales from the third quarter, we were able to deliver nearly flat comparable sales within our expected margin range and we closed the quarter in a clean inventory position.
We had a solid holiday season led by our destination businesses gross doors and backstage or digital performance also accelerated in the quarter importantly, our customers responded well to our gifting assortment and marketing strategies, especially at the 10 days before Christmas when we saw a signal.
Pick it up to check in sales.
Our teams executed well this holiday season.
In our stores distribution centers and customer contact centers.
I'm proud of each colleagues commitment to stronger execution. During this important time of year.
As I said at Investor Day Chicken as a whole 2019 did not play out as we attended however, there are always with a business that are working and we will continue to focus our resources there.
The five 2019 strategic initiatives all performed well in the fourth quarter, Let me give you some context on how each initiative contributed to our 2019 results.
Gross wants to see.
In 2019, we expanded the grow treatment when an additional 100 stores comparable store sales at the original 50 gross doors outperform the Macy's fleet by approximately three and a half a percent in 2009, Jane and gross 150 by approximately 3% in the fourth quarter.
Once the additional 100 stores were completed.
Backstage in 2019, we expanded backstage Macy's our price offering to another 50 locations within Macy's stores backstage locations opened for more than 12 months continue to achieve mid single digit comparable sales growth and have improved both gross margin and inventory turn.
Andrew direct in 2019, we lose a vendor direct program and added more than 1 billion skews and 1000, new vendors, it's true nearly 60% increase in vendor direct sales, which now comprise approximately 13% of digital sales for the Macy's Brent.
Mobile in 2019, we improved the omni channel experience for customers to the enhancement about features such as my wallet My store and my stylist, we exceeded our expectations, it's more than 55% increase in sales the Macy's mobile App now contributes.
Approximately 20% of the Macy's brand digital sales.
And lastly destination businesses, we invested in six areas of the business does account for nearly 40% a total Macy's sales dresses fine jewelry big ticket men's tailored women shoes and beauty. These investments were aimed at driving growth through great product chop.
Performing colleagues improved environments and enhanced marketing all six areas continue to outperform the balance of the business on marketshare return on investment and profitability and we capture approximately 9% at the market in these categories in the fourth quarter destination businesses grew 4.3 per se.
Sent and for the full year grew 2.9%.
Each of these strategic initiatives, playing an important role in our go forward growth plans and I've been incorporated into the Polaris strategy I'm now going to turn it over to Paula for more detailed review of the fourth quarter and annual performance as well as our outlook for Twentytwenty.
Thank you Jeff good morning, everyone.
And we previewed at our Investor Day in February said, we delivered net sales in the fourth quarter of $8.3 billion, which brought our full year sales to $24.6 billion and as Joe said, Oh, let's license comps were down quite my person in the quarter in down 27% 40 year, which is there.
Our latest died on.
As we look at our category performance across the broader business, we delivered strong performance during the quarter across our destination businesses and in fine jewelry dresses in fragrances, we saw particular outperformance versus both our expectations and last year.
Taylor mattresses in women's shoes also turned and good results.
Holiday gifting strategy was strong with US, yes under strategy resonating well with our customer.
In particular, our beauty gifting strategy performed very well.
For the quarter, the legal defenses, including fashion watches in housewares and in the future. These will be claims down consistent with the merchandise category work, we shared on Investor day.
Bloomingdales and move Mercury each person one within expectations into fourth quarter.
With regard to our quarterly company sales metrics overall transactions fell 25% versus last year.
Items per transaction were down 1% and in line with trends.
And you saw positive increase the average unit retail during the quarter, which rose 1.1 person on the strength of several other high into our destination businesses.
The increase in day, you are correct, even while backstage, which trades Laura you watch for higher units in transaction Ruconest mid single digits.
Turning to credit revenue, we generated $239 million in the quarter nearly flat to a year ago.
Credit card penetration was 46.4 person in the quarter 60 basis points below last year.
I'm that your credit revenue was $771 million up slightly to a year ago.
Credit card penetration was 46.9% for the year flat to a year ago.
Despite our initial expectations for credit to be down year over year, we posted a slight improvement. This was primarily driven by strong co brand sales growth some transactions undercard outside of the Macy's family of brands.
Offsetting these were the decline in our own topline sales and an uptick in delinquency and bad debt trends to more normal level.
Gross margin in the quarter was 36.8% down 70 basis points versus last year.
We ended the year with a gross margin rate of 3.2% down 90 basis points from a year ago.
I'm just decline about 50 basis points were due to delivery expense.
As we stated in our Investor day, well, we can can you just put pressure on margin rate from the growth of Latin American businesses, and 2020, we will be working to offset this mix impact with $100 million the glass cost savings that will help stabilize our margin rate.
As a reminder, these gross margin improvements derived from initiatives within supply chain merchandising mix and pricing marketing and private brands sourcing.
Comparable inventory in 2019 was down 1.4% to last year underscoring our commitment to a more productive use of inventory.
But then that's DNA, we recorded $2.5 billion of expense in the quarter $29 million less than year ago, but up 10 basis points on a week basis do you just say, let's see leverage.
He asked you any dollar reduction reflects lower variable expenses due to lower sales as well as some benefits from various miscellaneous items, which we do not expect to carry forward into 2020.
Well the total you're asking expense was $9 billion $41 million below last year, but 40 basis points higher on a rate basis.
As we discussed at our Investor Day, we are committed to resetting the cost base and a more stable SDMA rate as we move don't like while still investing in our growth initiatives.
In the fourth quarter, we realized gains on the sale of assets of $95 million versus $278 million last year.
The full year, we realized gains of $162 million down from $389 million last year.
Keep in mind that our fourth quarter and full year 2018 asset sale gains included the $178 million gain on the salad I Magnum building at Union square.
Accordingly, adjusted net income in the quarter was $661 million versus $830 million last year, well on an annual basis. Adjusted net income was $906 million versus $1.3 billion last year.
The decrease in asset sale gains represents about 70% and more than 40% of the decline in adjusted net income in the quarter ending year respectively.
Nonetheless, we are not pleased with the net income decline.
And we communicated at Investor day, well 2020 will be a year of transition for us I pull out strategy will help to establish a base from which we can grow profitably.
Well there its work ahead to improve our overall profitability, we are committed to stabilization and growth as targeted within our three year plan.
When 2020, we expect to a cheap gross savings of approximately $600 million from Polaris, some of which will flow to the bottom line in order to stabilize operating margin.
Adjusted diluted EPS was $2 in 12 cents in the quarter compared to $2.73 last year.
Right. After sale gains represented about 23 cents 65 cents, respectively and for the year adjusted diluted EPS was $2, a 91 cents versus last years $4, an 18 cents.
Which asset sale gains represented approximately 38 cents in 92 cents respectively.
Year to date cash flow from operating activities with $1.6 billion compared to $1.7 billion last year. The variance was driven primarily by lower earnings and a decrease in non merchandise accounts payables, which were partially offset by lower tax payment and a nice improvement in merchandise inventory.
Payable.
Capital expenditures were one point $16 billion compared to $932 million last year above our full year guidance of approximately $1 billion. This was due mainly to the timing of certain projects. However, we continue to expect to spend approximately $1 billion in 2020.
Cash used by financing activities with $1.1 billion this year versus $1.5 billion last year.
We repaid $597 million of debt in 2019 compared to the repayment of $1.15 billion in 2018, which drove the decline.
In both years the debt repayment was predominantly voluntary.
In 2019, we executed very consistently against our capital allocation strategy through continued investment in the business continued debt reduction and the continued payment of a dividend.
As we highlighted at our Investor day, we remain committed to that strategy. We will continue to be disappointed with our financial policy in order to maximize value creation, while also maintaining a balance sheet that so flexible and durable.
Yeah, its focus on executing until our strategy, which will stabilize our profitability in the near term and positioning the business spend growth in the long term.
The company has a strong consistent track record a prudent financial policy endorsed actively managing our balance sheet, including paying down approximately $3.5 billion of debt over the past four years and as we said on Investor Day, We plan to continue to use excess free cash flow to further reduce our dad.
In 2020.
And we want that a fundamental cornerstone about capital allocation strategy is a commitment to maintaining balance sheet strength and downsides, we continue to try and get an adjusted debt to EBITDA multiples of 2.5 to 2.8 times that we believe it's commensurate with an investment grade credit profile.
We have confirming our guidance for 2020 presented in February that at our Investor Day. In addition, I do want to provide more color on a few items.
You will note that we expect credit revenue to decline year over year. This will result from the combination of our projected decline in topline sales in their expectations that slight uptick in delinquency and bad debt continue in line with market trends.
Partially offsetting these projections for continued growth in co brand sales.
With respect to possible impact the cabana virus, we're carefully monitoring the situation to assess implications to our colleagues tourism sales in supply chain.
While still too early to estimate we anticipate that there could be a small impact on first quarter sales from international tourism.
With respect to the supply chain, we're working with our vendor partners to minimize any possible disruption as we said before I less than 50% of our pride in Grand goods come out of China.
Our vendor partner, so it's a sizable amount from there too.
As with tourists and it's too early to side any possible impact, but we'll keep you aware of any changes that could materially impact our business. At this time, we have not factored in any potential negative impact from the current if I went into our 2020 guidance.
With regard to the quarterly cadence about 2020 results, we expect growth to be most challenged in the first quarter from a top and bottom line perspective, due primarily to the anticipated disruption from our corporate restructuring and campus consolidation.
Additionally, parana savings within both gross margin NFC any are not expected to immediately impact the first quarter as those benefits will develop more fully into second quarter and go from there.
Keep in mind that we are cycling off a relatively strong first quarter last year ended our full year 2020 sales guidance is negative with our best sales comp coming in the back half of the year.
Well the first quarter, we expect our owned plus licensed comp sales to be outside the range of our full year guidance.
Our complete guidance isn't to slide presentation, we posted on our website earlier this morning, but in closing we entered 2020 with confidence in our future. We are very clear eyed about the challenges before us and we believe we have the firepower to take them head on.
You know the growth treatment to a magnet locations.
Three point on backstage also it goes conduits for our future.
Savings and pop and stabilization programs are in process. We are focused on execution and what will be a long and bright future for Macy's and with that I'll turn it back over to Jeff.
Thank you Paula So let me show some additional perspective on the business as I mentioned on Investor Day, Bloomingdale's, and Bluemercury are important to Macy's inc. and today I'm going to provide some detail on bloomingdales and I will share thoughts on blue Mercury on a future call.
So bloomingdale's plays an important role that makes you think portfolio as it gives us a meaningful play in the growing luxury market.
As a standalone business bloomingdale's generates revenue of more than $3 billion and contributes to make some saying profitability.
Let me Nails has 34 full line stores with the 30 that store opening in Silicon Valley next month as well as to international stores, we operate under license agreements in Dubai and Kuwait.
Bloomingdale's customer is a fluent and highly loyal to the Brent and importantly, but 19 freestanding bloomingdale's outlet stores have shown sales growth for the past three years and provided valuable learnings on freestanding off price.
Any deals also benefits the Macy's brand as bloomingdales tends to be further ahead on the fashion curve and gives US an early line of sight on trends.
Bloomingdale's also gives Macy's inc., a multichannel platform to test and once before scaling programs enterprise wide.
For instance, we piloted my list a rental service at Bloomingdale's in 2019, we currently have 80 vendors in over 1500 styles wise on my list and we are launching another 20 vendors in the first quarter of 2020.
At our Investor Day on February 5th we showed a pillar strategy country. Your plan. Let me take you through this sort of very high level, we're focusing our resources on the healthy parts of our business and investing in the opportunity to grow well retail is growing today and in the future. This includes growing customer.
Segments, you profitable categories and off mall formats.
We are accelerating what is working in the business loyalty backstage destination businesses or growth store treatment and mobile.
Importantly, we are addressing what is not working in the business and taking actions to stabilize profitability in the face of continued headwinds.
The next three years, our financial targets include Rightsizing costs, and expanding gross margin with accelerated savings totaling 1.5 billion by the end of 2022 600 million of which is gross margin improvement and 900 million of which is SGN a settings.
I'm confident that the plan our strategy will change the trajectory of Macy's Inc. performance and the team is fully focused on executing our plans.
I want to quickly remind you with a five points of the player strategy before we open the line to take your questions.
Number one strengthen customer relationships.
Those customer lifetime value expand our loyalty program and accelerate personalization and monetization.
Earlier this month, we expanded our star rewards loyalty program that we introduced in 2017 loyalty 3.0 now allows every star rewards member has gone on every purchase regardless of how they pay customers will be I don't want role based on the range, we'll spend and all customers now have the opportunity.
To enjoy special benefits, including star money bonus stays in the person offers such as extra savings and access to exclusive events.
Loyalty 3.0 is off to a great start EM, we've exceeded our bronze enrollment goals so far.
True.
Sure great quality fashion, our customers come to Macy's for fashion value and high quality products. So we will curated assortment at the latest trends and exclusive products at the best values from the best friends, We will drive discipline merchandise category roles, maybe the best destination for the best brands, while balancing sales.
In March and a key component of this is our commitment to build for $1 billion private brands.
Three accelerate digital growth, we know that our omni channel customer is our most engaged and valuable customer our digital business generate $6 billion and revenue across all three brands and contributes to our profitability and we see digital as a key engine of growth moving forward, we will improve.
Digital experience by enhancing features across both dot com and yet we will grow our customer franchise with a strong focus on personalization damn continued innovation to deliver the best digital fashion experience to our customers and we will continue to strengthen the profitability of our dotcom business by growing store pickup.
AD monetization.
For optimize our store portfolio, we will continue to grow treatment for stores in the best malls, including another 100 stores in 2020, we will focus on improving productivity in our neighborhood stores.
We'll find ways to profitably expand off mall, including freestanding backstage stores, and we will test improve the market ecosystem, which we're piloting in three markets in 2020.
This ecosystem approach will test within a given market the right mix of format and location of our stores to drive maximum sales growth across both our stores and digital business.
And five reset our cost base or Rightsizing, the organization streamlining our store fleet and addressing the inefficiencies in our fixed cost base and we're focused on improving the productivity of our working capital we took a big step towards this earlier this month with the restructuring that we announced and we will pursue the remainder.
Of our cost reduction goals with discipline.
2020 will be as you transition as we make significant structural changes to the business.
We have spent the past three weeks aligning our colleagues around the new structure and strategy and the teams are beginning to settle and we all have an eye towards execution I'm confident that our colleagues have a clear understanding of the players strategy and share my commitment to delivering our plans in 2020 and beyond.
And with that we will open up the line to your questions.
Thank you, ladies and gentlemen, as a reminder is star one to ask a question and it is so if you find your questions have been answered well now take all first question from Omar Saad of Evercore ISI. Please go ahead.
For taking my question. Thanks for all the information, Jeff you mentioned that the private brand strategy you came up with the Investor day as well big targets here. It's obviously been part of the Macy's ecosystem for a long time.
Could help us understand what's different what are the company's capabilities now.
They are going to landscape has changed but I think would allow you to.
Really build those into big sustainable consistent brands versus prior history. Thanks.
Thanks, Omar so the first thing I'd say as there were a much farther along in global sourcing than we were or even a year ago and we have huge opportunity basically the transition from a brand based.
Global sourcing to category based so our sourcing structure is really going into a into that our vendor decisions. Now are used to be kind of relationship based are now going to more data driven in strategic base or sourcing organization is more centralized whereas it used to be done more within each brand big big change on what.
<unk> materials and speed the markets. So we used to have kind of more inform on AD hoc decisions on materials. As an example, we used to have 12000 different fabrics with a lower than acceptable adoption rate. We're now much more focused on getting fabrics that cut across different genders across different brands.
Are costing basis, we're going much more aggressive and we shared some of this in the investor meeting about what we're doing the garbage and the ski level costing a and really getting more into that we're seeing big changes in the overall costing bike garmin in our tests were now expanding that out into more of our brands.
In our planning is much more involved and how we're doing this across the business. So we talked about the $4 billion brands, we looked at where 38 different categories. There's some businesses that some of these brands are again. So as an example of that would be like the I'd see brand, which is our biggest and I think our most potent prime.
But brand so as an example of that was where three years ago. We work in the shoe business was on it and see you know that's now 100 million plus business. It's an hour number two vendor and all of women shoes are we talked in Investor day about what we were doing fashion jewelry with all the 4 billion dollar brands and we've gone from zero.
With the 60 and that very quickly. So we're looking at all of our opportunities what customers. We serve one lifestyles, we need to be and we were cleared investor meeting about where we saw underserved customers, particularly the customers that are under 40 and the new brands that we'll be announcing later that will serve them.
So I think our capabilities have come up measurably in how we're addressing the private brand opportunity in the future and will get us to our goal of 25% of total business by the year 2025.
Got you. That's really helpful. Then one quick follow up on the Corona virus are you seeing any impact on the international tourism at all from from what's been happening abroad around that or is it too early to tell.
No. It's too early to tell when I say that let me just kinda give a broader except we expect this question with respect to the current a virus. It's certainly an evolving topic a one that we're watching very closely sort of kind of put into three buckets. Starting first with colleagues are we kind of Hong Kong office that has reopened after.
The extended lunar new year, we were put all the processes in place where the protocol that we developed under the stars epidemic.
To run the virus to protect our workers make sure we've got flexible schedules.
So we are in good stead for now with our colleagues.
That's a hard to your question about customers.
So Macy's and Bloomingdale's, we had about 70 stores that have a strong Asian customer grades. So that's either local like a store like flushing or tourist spaced which would be a store like union square and we've seen some slowing down a sales when these stores this month, but nothing to be concerned about yes, but.
He believes that this this is unfolding. So we will see how that goes and then the third bucket is really the product piece, which is what's going on with our supply chain.
We expect a slow down we've seen a slow down a product that's flowing out of China nothing concerning yet.
And we're watching this one very very carefully yeah. This is an example of where the tariff situation actually over the last 18 months really gave us a very clear line of sight into our product flow from China for both our national and our private brands. So for a private brands working really closely with our suppliers. There our team that is in Hong Kong.
Hi is working with all of our suppliers.
We've got those teams that have come back after lunar year, we know exactly what the production of factories are good that expense finished goods that are in process fabric. That's been allocated to current and future deliveries. So we're looking at all of that we're managing that receipt flow in for National brands working with our partners very closely on the impact.
And product availability. So that's all factor right now, but we're watching this it though it's a it's a bit evolving situation and as Paul mentioned in her remarks any any effect of this in our sales and earnings has not been factored in our 2020 guidance and just to give you some numbers on the international tourists and.
What we started in the fourth quarter was about a 10 basis points impact on our comp international tourism, so far with down 7.5% and we attribute that to the strength of the dollar.
Thank you well now take our next question from Oliver Chen of Cowen and company. Please go ahead.
Hi, Thank you very much good morning of our questions about digital margins versus in store and how you're thinking about.
Opportunity, there and what will happen with shipping over time.
A follow up we had is related to the need for speed and speed across the organization. He could help us understand some of the major needle movers with speed as well as how you are embracing the younger customer.
That would be helpful for thinking about long term growth. Thank you.
So I'll start Oliver with respect to digital margins and you know the and the digital business contributes to our profitability, but with respect to the shipping headwind and we do expect that to continue in around the 50 basis points type of range.
All right and so at one way that were mitigating that its sort its not encouraging more buy online pick up in store transactions, which is our most profitable online transactions, where customers order online pickup in store and then by about 25% more.
And then the other way I would think about that long term is that we're using our Polaris.
Saving and those that impact our gross margin to stabilize gross margin in that remember that those include initiative like and a centralized fulfillment location level pricing and markdown optimization. So.
I would expect us to stabilize mark and long term.
And all of her up when we took your second question about you know just kind of speed and one of the things that are even though we said goodbye to a lot of colleagues and with the campus consolidation that we just went through we do believe that once we.
We are fully stable with the new teams altogether, there, we're going to move at a significantly faster pace. So when I look at the culture and I look at all digital now being consolidated two New York and all technology being consolidated to Atlanta.
I think the metabolism of the company is going to pick up dramatically on that.
We're getting all of our new colleagues set up where we're ahead of our hiring plans a we actually had a higher percentage of colleagues from San Francisco that have elected to move into either New Yorker, Atlanta, and we're very happy with the caliber talent that we have available in both New York and Atlanta, So that piece.
It is movie at or ahead of schedule. So I'm pretty pleased with that when you look at the what we're doing just kind of attract the under 40 customer just remember that there aren't many businesses in which we already get it very good share of the under the under 40 customer. So look at fine jewelry I look at handbags I look at men's clothing.
Those businesses are all getting good share there and we're growing that customer base. So rubber opportunity as we said on previous calls is really in a in the what is ready to wear area and so that's what we're really focused on what we've talked about.
In terms of what we're doing with our private brands, what we're doing with a market brands. We have a clear line of sight on bad as we talked about previously we've got a new environment that we tested in six stores in the third and fourth quarters. We're now rolling that out to another I believe it's 60 doors in 2020 that brings all these products together for a concern.
Similar that really doesn't want to Wade through 60000 square feet wants to go to one area, where her needs are being addressed.
We're also doing that online so I believe that we've got a path ahead on that but just turned them just remind everybody that we had parts of our business that are quite strong with this under 40 customer once I mentioned plus the entire men's area. So one is ready to wear is the one that we're really very focused on in 2020.
Very helpful. Thanks, Gents, Thanks, Paula Best regards.
Thank you.
We'll now take our next question from Kimberly Greenberger of Morgan Stanley. Please go ahead.
Great. Thank you so much inventory coming out of Q4, I think you've said Paul is down 1.4%.
Given that sales guidance here for Q1.
Inventory in absolute looks.
Pretty clean, but still running a little bit above your sales plan. So I'm wondering if you expect inventory to get even a leader as we work our way through year end do you think there they have more medium to long term opportunity can manage inventory at a lower level.
Hi, Kimberly so I'll just start by saying that you know the fashion retailer, we want to make sure that were always giving our customers fresh fashion.
So we need to maintain appropriate missy liquidity and so we've been very focused on I've got to sales parity and until we guided next year to be down significantly and as you heard on Investor day, we're targeting to reduce inventory that by $200 million.
Cost over the next three years, and we'll do that through a Polaris and more this year as well that lead wireless and 2020, we expect our comp inventory.
That could be I, didnt hear and whereas down 1.4, so consistent with our sales performance in next year, we expecting it to be.
Down even more than our annual comp sales guidance and so we're looking at a number of initiative, but right now, including a holding flow location level pricing as both of which will impact inventories and just bringing more rigor to how the approach and our buy so we're very much focused on.
I stopped it feels parity as it relates to inventory.
Okay, great. So it sounds like we'll see even more progress from 2021, that's that's terrific and that I just wanted to follow up on the delivery expense number I think it was up 50 basis point headwind in Q4.
Paul It sounded like you said you expect that extends to continue can you just remind us what the full year 2019 headwind was and I know you've got some polaris cost savings that should offset the liberty expense pressure here in 2020, I would imagine this expense pressure continues.
Views into 2021 and beyond in so I'm wondering if you've got a pipeline that's savings in 2021 in 2020 to see offset this ongoing headwinds.
Yeah sure Kimberly so I in 2019 in the spring, we thought about 70 basis points of Oh pressure related to delivery and the fall. It was about 50 basis point, So annual would be about a 50 basis points of gross margin pressure and so.
Again, we expect to and mitigate the AD delivery expense headwinds through our Polaris savings, we have $600 million of savings target over the next three years with very specific initiatives attached to it.
Including as we've discussed and invest Investor day, centralized fulfillment and pricing that private label sourcing location level pricing all the things we've been talking about and we have a very robust and governance model with very specific initiatives tied to each of these programs and so.
We would expect to be able to stabilize at this particular headwind.
Well as other its in our gross margin.
Terrific. Thank so much.
Thank you we'll now take our next question from Matthew Boss of JP Morgan. Please go ahead.
Great. Thanks for all the color.
Jeff maybe break down comps the your destination businesses are up 4% to 5% at 40% of sales in the fourth quarter.
What's driving that continued negative comps and as we think about the cadence for 2020, what do you see in quarter to date, that's driving that first quarter outlook for comps down worse than the two and a half person and just your level of confidence in stabilizing the trend as the year progressive.
Yes, so so Matt I would say that when you look at the there's 40% of the business that in 2019 was up 2.9%, which is the destination businesses. So when you look at the balance of the business is depending on what category or in a they obviously many of them were negative so we've talked about.
A couple we talked about housewares, we talked about fashion watches.
Were two categories as an example, overall ready to wear outside addresses a was challenge to last year.
Pieces and parts of the balance of home store outside of Housewares were negative. So the composite of that as you saw was was down the 0.5% on a comp basis for the fourth quarter and down 0.7 for the full year. So as we look at going into 2020, you know we just there is a love.
Option that we've gone and with the you know about 11% of the executive population that we did we basically are not going forward with in 2020. So that's the level of disruption that we're anticipating you know in the in the first quarter I would tell you, though that the in the month. The February is progressing as we expect.
Good. So it is is not worse than we expected, it's right, where we expected it would be and when you look at going forward into the second through the back half of the year. We do expect that are their business will improve so when we guided the down one and a half to down two and a half we did expect that the first quarter would be the one that was most effect.
To buy it getting better as we got into the second quarter in that the second half will be better than the first half so that will be both in savings as well as where we expect a where we expect sales. The other comment I'd make about I'm one of the big initiatives in sales. They just get starts to get traction in the first quarter and starts to pay a deeper dividends in the second through the back half.
It's the loyalty program and so what we launched on that which was earlier. This month a that starts is that something that builds so as a point system. So as a customer builds points for all tender types and its tier depending on whether or not their proprietary number and their spend level as those points start to bill.
So customers then start to redeem and then they buy or the things as they do so that's a period of building maps, which is really going to be through the first going into the second quarter, you start to see benefits of that in the second quarter going into the back half of here.
Great and then just a follow up on a gross margin Paula what's the best way to break down the flat gross margin forecast for 2020, meaning what's the best way to think about the underlying merchandise margins outside of the 50 basis point digital headwind and just any color on the magnitude of one queues gross margin decline relative to.
The year at flat I think would be helpful.
The best way to think about it and it's again, if you've mentioned, we're guiding gross margin I see flat on the year and so the and the big is a headwind there would be that that didn't go delivery expenses, a 50 basis points and so on.
All of the improvement sad and we've talked about with respect to Polaris again, whether they're coming from the supply chain or and merchandising strategy. All of that will go right into merchandise margin and so we expect merchandise margin to.
Hi, improve and to be able to fully mitigate the headwind.
So I would think about it yeah in those terms and in terms does a quarterly cadence.
I would just think about or the first quarter being the most impacted by pets Hills disruption both from a top line perspective.
And from a bottom line perspective, and then to see improvement in the quarter sequentially thereafter.
As we expect or $600 million the productivity from both gross margin and that's DNA too bad start to materialize I with you at the beginning of the second quarter and then to build from there.
Great Thanks for that.
Thank you.
Our next question from a chunk of Gordon Haskett Research Advisors. Please go ahead.
Just to go you guys outlined a lot of initiatives and then jump you went through him today.
I was wondering if you could maybe for shrink for US you know where do you think the biggest opportunities are mainly as you move into 2021 as you expect comps to turn back into the problem positive territory.
So Chuck just to repeat what I said at Investor Day, I would put them I put the top four in the following rank. The first one would be digital sales in terms of contributing to comp.
Second would be the new loyalty program loyalty 3.0, or the third would be up backstage, a and what we're doing with that those comps that we're getting on all locations that have been opened more than a year or still comping. You know mid single digits and this is like three years running on that and the last would be to the previous to matts question about destination.
In a sense. So those are the floors that are going to contribute to growth and when you look at it digital obviously for US is a big strength $6 billion business is one that we cite above our weight in the digital business across all three of our brands. So we have about 6 million customers coming into.
Our digital platforms every day, so lots of opportunity to take advantage of that traffic, where we had very strong natural traffic. We obviously pay for some traffic, but that's that's a big strength of hours and we were candid about some of the Miss apps that we had in the third quarter with respect to digital work.
Very focused on and we made improvements on that and saw that in our trends in the fourth quarter. So while we have a robust strategy and digital for all of 2020, when I look at the loyalty we mentioned feel very good about that the headline bear on loyalty is how many tender neutral customers, which we call the brands here.
Has joined US earlier, we're way ahead of our expectations. Since we launched the program about two weeks ago and beach or customers. We now we're able to track and so we wanted to expand our known customer base.
Secondly, the bronze program with what we just Didnt loyalty 3.0 is getting it back to us back stages. We mentioned, we're going to add 50 more stores in the in store within stores in 2020, as well as we're going to be expanding to off mall.
Seven freestanding stores in those three markets that we mentioned that Investor day, and then last but not least when I look at destination businesses. This is gonna be you know again when you look at our 38 Fob to have six of them comprising 6% of the or 40% of the company's total business. These are businesses that customers think about Macy's or first sector.
And our third and a and we're growing in these businesses they cite above their weight and ROI CNN profit. So we see continued growth in all six of them. So we're very focused on those.
That's great. Thanks, very much obviously backstage and important component of all that so I was wondering if you guys could just remind us what the average basket looks like some of them for someone that's always shops at a backstage versus me season, and my guess would have combined bounced it looks like a cross across both both in terms of dollar size and also merchandise margins.
Yes, so what's interesting about it is the difference between freestanding store within store for us. So we have had a freestanding stores that we've been operating since the beginning of 2000 really the end of 2015 as well as what Paul mentioned in her comments about where I mentioned in terms of.
The outlets at Bloomingdale's, we have 19 of those so they are.
They perform differently the margins there are actually at the overall companies merchants couple of stores actually slightly above when you look at store within store margins are are fairly comparable.
And when you look at the customer behavior of backstage purchases or the customer gets more loyal and more profitable when they're buying both in backstage as well as a regular brand or the full price brands, we've seen that both in store as well as purchases they might do online. So we've got lots personalization strategies.
See behavior in between the channels and when we do that we get as much stickier loyal customer that is more profitable for us. So.
That's why we've been really talking about this ecosystem and testing it out in three markets to see what the interplay between backstage mall based full price as well as digital what that does for our overall customer journey and the profitability or there are the customer lifetime value of our customers are.
Army channel customers are most profitable customers in the more we increased touch points digital backstage full price the better those customers are so long as we have talked about on many calls we have seen limited cannibalization going on between full price and backstage, we'll just adding to the customers basket when when we.
We are able to see that behavior.
Good thing or.
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Thank you will not go next question from Alex Waldis of Goldman Sachs. Please go ahead.
Good morning. Thanks, so much for taking my question I had a question I mean, you all growth positive here in the quarter can you dig into that a little bit more I believe you mentioned goes and much higher ticket destination categories, but I wonder if there's anything else going on there and if you can comment on you off Crimson like for like category.
Sure Hi colleagues. So you know we look at the AD sales metrics together.
You are you P.T. and transactions Ah, but from an 80 or perspective, if you look at the two year trend that we thought slightly favorable performance and a year over year, but in line with the third quarter, but when they look sequentially higher eyharts with the biggest driver of our trend improvement in.
Oh, probably sales comp and when we look at that three metrics and add Q4 versus year ago and sequentially. We felt more product as you mentioned in our <unk> you are not an hour on destination businesses going in particular fine jewelry I was up quite significantly about an 11%.
Yes, it's about 8% and that performance of them now and by fewer transactions in total add though our units per transaction shows have been if that trend improvement at the other Nick component to be mindful lots that are growing off price business, averaging down eight you I guess just talking about but it does.
Transactions and units per transaction to drive the comp sales improvement.
So the end result was that sequentially at we improved our own sets license sales comps in Q4 versus Q3.
Understood and then just a follow up on that you mentioned the off price.
Units.
Transaction I believe that's also the effect of the there's you know digital business that perhaps you could also comment on that and then I suppose the question I'm getting out here as you know units per transaction has now been down over the last couple of quarters, what's driving that and should we expect to that to recover as because it's a one off price I remain strong drugs that business.
And so a units per transaction is that relatively consistent add the trend is relatively consistent.
Part of that would be the effect of the digital business and I would say that we would expect that trend to add to stay consistent and then we would expect to see offset and in either their transactions, where the you are I said it those three things interplay, if we move forward buy into into 2020.
We don't necessarily forecast that those three metrics that we would expect that if we intend to work together to get through our guidance.
Thank you.
Thank you well now take our next question from Michael Binetti of Credit Suisse. Please go ahead.
Hey, guys I wanted a thanks for taking my question here.
Commented that.
That said, where it was going Jeff exactly the way you plan to but I think that's the language was a lot more specific here today, I mean mentioned very clearly expect.
Meaningful impact disruption in the stores.
Focusing first quarter and then you did mention Corona, but she said is that wasn't in affecting your numbers, yet and I said it was really to put any size to I'm wondering if you're.
I think you might have answered them earlier that.
You're not really seeing anything in the stores yesterday. It was just a common sense comments that you expect that to show up to some of the tourist stores I'm, just I'm kind of curious about it sounds a little it sounds like you've taken a little bit more of a cautious approach to one key what's your commentary earlier said that it was about in line when you're thinking about three weeks ago did I hear those two things correctly.
Yeah, Michael I think what gives us better disruption to me.
Because of the disruption that we had planned as early as with all the changes in Polaris, We plan to first quarter was going to be.
The worst of our four quarters, so independent of the Corona virus [noise].
And when you also look at the performance of the first quarter in 2019. It was our strongest performing quarter. So we're lapping that plus looking just taking a prudent approach based on all the structural changes that we went through as well as the benefits come later as a result of the players changes and.
Gross margin.
SGN, a as well as the benefits of the loyalty program, but all come in the second through the back half of the year. So we took a prudent approach to how we plan for the quarter versus the the other three quarters of the year that all went into our guidance that we delivered at the Investor day, and we reiterated today.
As as it relates to Corona virus into my previous comments, we haven't seen a huge impact on that as of yet obviously the biggest question is going to be about supply chain and what what are the effects of supply chain with respect to either a shortage of labor you know inability to basically react to the materials in the.
In the factories that we have or that we've negotiated and then the transit of that when those long champs or start to break up and what the ports look like.
And the costs up all that so those are those are unknowns right now would be too early for us to comment on those but those that's what we're looking carefully in the future with respect to the current a virus, but just to reiterate we have not seen a big impact as of now.
And then Paul I, just wanted to ask a follow up on the on a credit rating update from last week. It sounds like from your comments you disagree with the change how she thinks that could impact refinance rates. It doesn't change the interest expense outlook that you had in a 2020 bps of to 25 to 275, just looking into longer term there and then I think.
For I think also within your guidance for billion of free cash flow by 2022, but that assumes some net working capital improvement maybe 200 million is there is there any immediate.
Impact that we should think about from receivables or payables and all that might in fact, they might impact that net working capital anything changes to the rates the factors charge on receivables anything like that but with them that we should think about as far as new news baking into the 2022 guidance you gave us.
So I was just kind of go into first half year of your questions. Michael I would say that you know for free cash flow, we've given a target a round that I. So I wouldn't referenced shows and we expected billion of free free cash flow by 2022.
And we've also given specific working capital targets and.
And that seems like getting million dollars by 2022, Oh, no and so with respect to at DS and he decision now clearly we were disappointed and act in their decision to revise our credit rating, but that said.
And you know it has no effect on the targets that we've given out and it has no effect in our commitment to executing Polaris weights as we know stabilize our performance and set us up for a long term as ROE and and as you know the and at credit rating or not something that we can.
Control, but what we can control is our and our focus on executing Polaris and also our our approach to a strong financial fiscal policy and managing our balance sheet and just to remind we paid down 3.5 billion dollar debt.
Over the past four years, most of which most voluntary and we'll continue to at use excess free cash flow in 2020 to pay down debt as we discussed and we'll continue to target our leverage ratio of 2.5 to 2.8 times EBITDA, which we believe its commensurate with that investment grade. So we're focusing on the things.
We can control.
Okay. Thanks. Thanks.
Thank you, ladies and gentlemen, as a reminder, if you want to ask the question today. It is still one and if you find that your questions have been answered you move yourself from the Q, what any moment by pressing star all too well now take go next question from Bob Drbul of Guggenheim.
I'm Securities. Please go ahead.
Hi, guys. Good morning, just a couple of questions from me first on the supply chain have you seen any delays from vendors missing delivery windows on on product and are you willing to sort of open the delivery windows given some uncertainty that exist out there with the supply chain widen the movement.
So Bob obviously very active conversation right now and as a fashion retailer a there is a shelf life of products. So we're working very closely with our vendors as well as our private brands.
And particularly when we look at kind of the early second quarter receipts and making sure that that is fashion appropriate for the timing of when our customers expect it. So we're looking at every one of those every order and a and making decisions about are we going to take all of it but we take part of it depending on what.
Factors come up so theres, a delay in manufacturing or delaying delivery, we have options on all those that were working with our own suppliers as well as our national brands.
So there is a we're also looking to contingencies that if we weren't able to get it here where can we get it elsewhere and are there other options that we have four other businesses that are that would that to get up for our businesses.
Okay, and then just a second question on them the rental business in the re commerce generally you know what categories are you seeing the most response to best response on the mileage piece and I guess just on the threat up relationship he didnt, bringing in Chile.
Newer customers younger customers like any early learnings on I think you have like 40 stores. Tom If my memory serves me on that business any comment would be helguvik.
Yeah, you remember is right 40 doors on threat up and obviously, that's been a big or as a big focus on ours on particularly this under 40, new customer acquisition. So we've been testing in the sporting doors in different locations throughout the store.
There you know we put it next to last actually puts in women's apparel, we put into Jason to Juniors and that's we expect to be the area. That's adjacent to juniors is the ones that are doing the best it's definitely resonating with this millennial gensix customer we have been able to attract many new customers that are coming into our brand a that ours. The result of.
Threat up we have extended our pilot program for spring 2020, and we're working with Jameson his whole team a threat up about what we've learned that the brand priority list is brands that are aspirationally recognizable for the under 40 customer.
Looking focused on the best classes were looking at like as an example jackets happened to be a particularly strong classification within threat up so all the learnings that we've got we've made adjustments in the 40 doors about its placement based on what we've learned and we've got a very active partner and threat up helping us acquire that right good space.
These customers in the stores so much to learn on that the other big test that we've got is really in a subscription which is my list, which we're doing a true castle at Bloomingdales and we're learning a lot. There. What's interesting here is a same aspiration really which was how did you get under 40 customers into our brand.
And so we look at other subscription so far at bloomingdales, 50% of the subscribers are millennial and 30% or brand new to bloomingdales. So that gives us a lot of encouragement about how it's working so as Paul mentioned the vendor matrix is growing a we are we've got 80 vendor so far.
1500 styles that are lives. Another 20 vendors that are coming into the first quarter. So I would you be surveys at the end of each of the of our of our of our interactions with these new customers and two big things come up about a why they why they like it and one is that they trust bloomingdales and one is that they really.
We are enjoying the quality of the service. So those are things that were amplifying and but we're going to continue to learn from both my list at castle and and threat up or ecommerce at Macy's.
Great. Thank you.
Thank you well known to go next question from Bernard Sosnick of Madison Global Partners. Please go ahead.
Have a question on the presentation of ready to wear and the six stores that have been research the 60.
Scheduled for this year, because they're more presentation.
Category, rather than brand, but could you give us a little color on where you're heading.
Yeah. So.
That's exactly yet you know there is it's kind of a hybrid or what we have found is that customers definitely shot by category, but they also want the option of doing it by brand so depending on what store. It is what we're doing is we've got some brands around the perimeter and then in the center or about 50% of the space. It's.
All done on by category and trend within so you've got multi brands that are being merchandised in the center area and then you've got big brands like gas or Nike that would be on the perimeter. So that's what we found is the best way, we tried to where you had everything done by by category that didn't work as well as when we did a hybrid Brent.
And category as a mix and depending on the store. So if you go into like Cross County, which is a cure in the Metro area. What you find there is there certain brands that really resonate with that customer different from one of the other six stores that we that we mentioned so like gas is one of the biggest brands are ready to wear so making sure that that will separate.
I was very important to that customer now is important in some of the other stores, we've experimented with where gas was part of the trend statement that was in the metal. So we're looking at this very carefully and all of our merchants basically have to coordinate what they're doing with promotion and receipt flow in order to support that's not the customers are voting strongly they like it this way the child.
Shop online so how we have a physical environment the kind of matches their experience was important for us to get out.
Thank you very much.
Thank you, we'll now take our next question from GE. So all of a you'd be yes. Please go ahead.
Great. Thanks, so much I sort of follow up on the potential for supply chain disruptions, Jeff how do you think about.
Some decision points you know at what point, where did you decide if you're not seeing production ramp back up in China, which you decide to cancel orders or maybe what point, which is tied to try to two manufacturers in other countries keep it was maybe frameworks of how you're thinking about something.
Great. Thank you.
Yeah, Jay there's I'm I'm not going to add much to what we've talked about what this is obviously a very open you know fluid conversation for US right now so we're watching it but there you know I would put it into kind of a couple of constructs. The first one is if the product is the product in the point of manufacturing in these factories and.
So that's the first one so we're going to want to we're going to want to take that we're going to want to honor. Our agreements is the fabric and the factories that is that is needed and what we might do on those particular cases, we might move off of the current content and move towards future future content that we need so and that when I talked earlier about the whole notion about.
Our improvement in sourcing we are fabrics to cut between the seasons. So that gives us a lot of flexibility where we need to go through the first part of your question about you know when do we make decisions about what we're going to cut or what percent, we would take or when we make the decision to move it onto whenever delivery. Those are all very fluid conversations right now just no.
That our whole new sourcing apparatus as well as every merchants is focused on this with both private brands as well as our market brands and I believe we're going to make all the right decisions as a fashion retailer for our future.
Got it Okay, maybe just switching gears for a second you know and a you talked about backstage and inventory turns are improving.
Can you just give us a big picture sort of framework, but how much inventory turns are approved how much more opportunity. There is you got it.
That metric and maybe what the drivers Arctic that's where you want to be long term before I turn it back stage.
[noise], yeah backstage, obviously, the the fresher the inventory are better off it performs so you know what we're looking at right now we have a number of units in which the sell through is double what we're getting to the full price side the business and so this idea that you're getting fashion. This arriving daily where you got limited quantities that used to sell through a miss it.
Nothing that this group doesn't know about and cover in the off price in history, but that's something that certainly plays out by developing off price business or bloomingdale's and Macy's. So that's very important for us what we're finding is that the turns or faster to dollars per square feet or better when you're in free standing there very strong interest in us Macy stores opened stores.
Because recognize that there displacing content in an area to store that was underperforming now back stages overperforming, but we do expect those metrics to go up considerably as we start to go into you know off mall formats as we've seen a bloomingdale's and as we've seen in the freestanding units that have been up and run.
And since 2015 at Macy's in order to deal with this need for fast faster and fresher deliveries is the reason that we went into Columbus with a distribution center. So I'm you know again, we're building or competency, we're getting better at off price every day in our ambition now is to be off mall as well as on mall. So we'll continue.
To build out the Macy's moment work by adding more units. There I don't think that there is a store the Macy's network that doesn't want to backstage that isn't accretive to the overall sales with those stores. It's us finding the right spaces. In every one of our most productive stores to do that but now starting in these three markets to start expanding.
Off mall, we do expect it to behave much like the stores that are already freestanding. So we also know that we believe that back states that are in a store versus one that is off mall that those those opportunities amplify each other and just remind everybody that every backstage store will now have fulfillment capabilities of anything within the Macy's network. So.
We think thats the opportunity to make any return from any Macy's purchase or buy online ship to store, but that capability is up and running.
Thank you will know CECO next question from Diana Telsey, Oh, Telsey Advisory Group. Please go ahead.
Good morning, everyone. As you think about the gross formula being added to the additional hundred stores. In 2021 is the sales lift you're anticipating from this next conscious stores no different from different from last year, and then Jeff developer Big stories, you mentioned some new plan. How do you think about plans for that for the new neighborhoods.
Thank you yeah.
So Dan I think well, we're certainly anticipating that the growth rate that we're getting will get in the next 100 of our growth starts will be similar to what we got in the first 50, which we then expand it to the Onefifty, which is basically about a two point improvement.
We do have this I believe down to a as much of the sciences. We can have a where we basically we're spending about two and a half to 2.7 million in each of these growth stores about 50% of that spend goes to customer amenities and 50% goes to sales getting initiatives. The entire building lifts by two points, what's very interesting about.
Got it is that all the digital business done on the ZIP codes that that store serves also go up two points. So when you look at the omni channel behavior [laughter], you're getting that amplifying effect, which is great. So that is gives us a nice return on investment for the of what we're doing and these growth stores. So we have ambition to take on the extra hundred.
Which brings to 250 by the end of 2020, and then we'll have about 150 left in the portfolio that we'll be investing in future years to your question about neighborhood stores.
This is one we're not putting a lot of investment into you know basically we'll make sure that the facilities are clean there well operated but obviously when we made the decision to close 125 additional stores. It was knowing that we needed to take care of these customers in the time, if they remain open we need to figure out strategy is to migrate the.
The online or to another store in the market, we need to start to experiment with square footage that would be off mall to see other places where this customer might enjoy Macy's products. Those were all our objectives. There because we know that on mall, we have to have a fleet that is brand right and moving forward and the number that we used to have you know five.
Years ago, just remind everybody that when you look at the number of stores not boxes, but stores. We had about 707 or 670 total stores. We're now down to about four just just under 400 just at 400 when you take out the neighborhood stores for the closures, we just announced so we've shut about 40%.
Of our total stores over the last five years or plans, but we just announced and we believe this is the portfolios that are mostly an a plus malls that deserve a level of investment because we believe these malls are going to be vital destinations for generations to come.
Thank you.
Thank you, we'll now take our next question from a brine Kolon of Bank of America. Please go ahead.
Paul I'm, just to get up and treated for cash flows and funding needs. This year can you provide a little bit of color around the cadence of asset sales and then separately the yearend cash balance.
The Lois I think that's seen since 2007, so should we anticipate a plan to rebuild that cash balance or is this kind of do comfortable cash run rate given improving productivity.
Hi, there so in terms that the cadence that asset sale gains, we don't typically provide and at the cadence and though and that we had that we had guided a year.
And in terms of our yearend cash balance here right. It was lower than here and that's because that we anticipated that we would have and less of a a tax payable this year's never sell that that the tax reform, we're comfortable with the the yearend cash balance.
But to reject that goes off or is that a good run rate to use for your rent going forward.
I am I right I would say that we wouldn't expect that to come back up we getting you'd be cash flow I targets.
Yeah, we think about a billion dollars by 2020 can't [noise].
Okay. Thanks very much.
Thank you we'll now take our next question from fall there's ways of Citi. Please go ahead.
Hey, Thanks, guys I'm curious Paul how should we think about as she and eight per store.
Stores that are closing just want to understand what the base level of expenses are from which you're targeting the future Sinead cuts as part of the Polaris strategy and also if you could maybe just be a little bit more specific in terms of the timing of the store closings that we should expect of this group that you may.
Most recently announced thing.
Yes, so a in terms of timing, we've announced at the first time switches and the 29 stores.
And that we get nothing then I think again 25, which includes at 29 at will take place over that three year period, and I don't think anything more specific bend that and in terms says on the S to name a story and better closing I would I just think.
About the neighborhood stores that were closing as we are really managing those on TV AD dairy pension and managing them up and profit and in terms of our S. DNA overall I guess from mine that we're targeting $900 million of savings over the next three.
Three years, we've broken those out into two buckets, the corporate bucket, it's about 500 million.
That's coming from a number of places corporate restructuring, including the campus consolidation and head count reduction technology efficiency, that's it system modernization and leveraging the cloud more consolidating our system and call center optimization, another 300 million from marketing and storage, we can optimizing median production.
Then a enhancing the productivity in our stores with self checkout and handheld and of course supply chain that we've been talking about at in terms of SDMA, though it's small parcel of contracting and looking at our freight expenses very carefully optimizing lane rate all of that will benefit our SDMA launch.
And overall asset in terms of neighborhoods do I think about those really managing those for productivity and profitability.
Right now and ball the closing of the stores that is just on many fronts and does not included in the industry net savings that but that just as a separate save.
I would think about the total savings from Polaris I would think about that has $1.5 billion than I would think about that has against the overall a onetime costs that we protected so I would think about add it all.
Thanks, and just one follow up the then when did those closing stores come out of the comp base is it isn't one their final close or do they come out one when they're in wind down mode.
We take them out as we close them, so and when we announced the specifics floors and Pat we have been taken those out of comp so and that's about a 10 basis point.
The 29 stores are already out.
But the challenge of its doing that.
Operating.
Gotcha. Thanks, Good luck.
Thank you. Thank you we'll now take on next question from Lorraine Hutchinson of Bank of America. Please go ahead.
Good morning.
Talk about the piano impact of the loyalty program update and then any early feedback we've had from the changes that you've made there.
So what we talked about in the Investor Day, Lorraine was that we discontinued but thanks for sharing program and so those monies and markdowns that we got a corollary to that were already built as part of the base are now going towards the loyalty 3.0 launch so we do not expect.
A a deleterious effect on our gross margin, it's all comprehended, a and as mentioned it's exceeded our expectations. Thus far you know it's early.
But in the first two weeks, we're off to a break start so I'm again, that's the biggest objective on this was for us to get a clear one of size on the larger penetration of our overall customer base, regardless of how they spend with us so to be able to give every one of our customers, even though there may be buying union, either cash or another form of payment outside of our credit card.
Benefits is Ben if they get thus far so our objective is to get at least 70% of our known customer transactions within our line of sight for all the things that we can spend from that yeah, personalization or monetization in the future. So I'm loyalty program was an important step on that but to answer your first question.
I do not expect any gross margin implication as a result of adding these great benefits and as part of loyalty for going out.
Thank you.
Thank you we'll now take our next question from fall through so of Deutsche Bank. Please go ahead.
Hi, good morning, because Gabby carbone on for Paul Thanks for taking your question I know, it's early but looking at the recent Macy's closures can you discuss what you're seeing in terms of recapturing those sales and maybe he just remind us how you're thinking about that opportunity moving ahead. Thank you.
Yes, so I would I just speaking seem to be at recapture that what we've assumed that we would have retention rates similar to what we've seen a in the past instead of averages out to the mid teens.
In the way to think about that retention is always sort of a fast enough the proximity to them.
Any near its time I've been neared Macy stores, the Nixon product that they're buying and out of those stories competition demographics and also in multi <unk> xtwo markets, our ability to retain sales is obviously better than when we exit.
Single door market.
But in terms of how we're thinking about retention and Pat I would say I'd say that's at the other thing is that but as that he talked about at Investor day, We're looking at a number of different strategies to migrate customers to other Macy's doors, including our new off mall.
Format as we placed them and also maybe dotcom, it's a little bit too early to say what the actual retention at will be though but that's how we've generally thinking about it.
Thanks, just a quick follow up on might have missed if I was wondering how outerwear performed over holiday.
Well, we don't comment on that one gabby, but basically it is it performed at our expectations. When you looked at all the cold weather businesses.
Got it thank you so much.
Thank you will note. They go next question from a Priya Ohri Gupta of Barclays. Please go ahead.
Great. Thank you for squeezing me in poets wondering if I had circle back to your thoughts around a the credit profile and how the rating agencies or thinking about rating. It seems that here leverage target as you're seeing some of the rating agencies you bake in additional consider.
Ration.
The leverage target you given remain consistent how are you thinking about other by bird to Paul in the event that you need to sort of preserve rating with that some at the other agencies or is there enough.
Question within the operating profile to withstand a short term migration and high yield if that becomes the king. Thank you.
Right. Yeah. So you know me I've really are our cash profile and the cash and targets that we get we shared at Investor day in how we're thinking about cash efficiency. None of that has changed as a result, a bit and Pat we tend to changing.
In our in our credit rating and as you saw during that at Investor Day presentation at we expect that over the next three years through our Polaris strategy, we will impact have excess cash to determine how to use that and within the.
Or parts of our capital allocation strategy. So we haven't changed in terms of how we're thinking about capital allocation in terms of how we're thinking about and our financial policy and we'll continue to execute on both sides. The operating side with our Polaris strategy and on the financial side.
Think about continuing to pay down debt and continuing to target.
I think you ratio.
But I guess as a follow up how important are critical is it for you to try to retain investment grade ratings at least one of the other two rating agencies.
Yeah, again that that hasn't changed either investment grade rating is very important to life and the data show and we believe that investment grade companies have more cost effective access to capital. So that's important to life. It's also important to demonstrate financial strength and could we didn't mismanagement to I've enjoyed center.
Partners and so that can nothing's changed there we continue to do that as important as we can't again control how the rating agencies greatest but we are as I said before very much focused on what we can't control and that's encapsulated in our plans to stabilize and then growth profitability and cash flows and also in country.
Can you make to prudently managing our balance sheet and again move towards our target leverage ratio. So nothing has changed there.
That's very helpful. Thank you.
Thank you, ladies and gentlemen, though no more questions at this time I would like to turn the conference back over to the speakers for any additional closing remarks. Thank you.
Thanks, everybody. Thank you.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.
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Ladies and gentlemen, the call has concluded and your line is now going to be disconnected. Thank you for your participation and I've agreed with the day.