Q3 2020 Macy's Inc Earnings Call
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Good morning on wells come to Macy's Inc. third quarter, two types of the twin <unk> earnings Conference calls.
Todays conference is being recorded at.
Now I'd like to turn the conference over to Mr., Mike Mcguire head of Investor Relations. Please.
Please go ahead Sir.
Thank you operator, good morning, everyone. Thanks for joining us on this conference call to discuss the third quarter 2020 results.
With me on the call today adjusted net.
The <unk> CEO Adrian Mitchell of CFO.
Just on Adrian have struggled prepared remarks, the share after which we'll host the question and answer session. Given the time constraints on the number of people who want the park. It's great. We ask that you. Please limit your questions coupon.
In addition to at this call on our press release, where most of the slide presentation on the investors section of our what makes you think dotcom the presentation summarizes the information in our prepared remarks and of course, some additional back the figures.
I do have two housekeeping that's true.
First just on Adrian will be part the screening or fireside chat at the Morgan Stanley virtue of global consumer and retail conference on Tuesday December 1st at eight o'clock am Eastern time on this.
At this event will be webcast on our Investor Relations website. So.
Please mark your calendars for that.
Second we will not be providing the holiday sales of the drug where it will be disgusted on holiday performance as well as our 2021 outlook during our fourth quarter conference call on February 20 Threerd.
Keep in mind at all forward looking statements are subject to call provisions of the private Securities Litigation Reform Act of Nike Mike.
These forward looking statements are subject to risks and uncertainties the call.
Actual results to differ materially on the expectations and assumptions mentioned today, a detailed discussion of these factors and uncertainties is contained at the company's filing at the Securities and Exchange Commission.
In discussing the results of our operations, we will be a lot of certain non-GAAP financial measures you can.
The additional information regarding these non-GAAP financial measures.
As most of those used in the earnings release and presentation located on the investors section of our website.
As a reminder of today's call is being webcast on the website at <unk>.
Play will be available approximately two hours after the conclusion of this call at it will be archived on our website for one year.
Now I would like to turn this over the job.
Thanks, Mike and good morning, everyone and thanks for joining US with me today is Adrian Mitchell, who joined Macy's has chief financial Officer on November stuck on I'm thrilled to have Adrian on board and you will hear from him at a few minutes.
As you have seen at the press release. This morning, we delivered a solid third quarter comparable sales declined approximately 21% on an old basis at approximately 20% on an owned plus licensed basis.
Operating results came in somewhat better than we had anticipated.
Based on cost management strong execution by the team at an early start of the holiday shopping.
We also returned to positive EBITDA.
Out of our plans and didn't draw on our asset base the sold at so.
So we entered the fourth quarter at a stronger than expected financial position.
I want to thank every colleague on the Macy's Bloomingdale's at Bluemercury teams for their hard work not only of the third quarter, but also the throughout the pandemic their dedication to our customers has been a tremendous asset at because of them. We are well positioned to deliver a successful holiday 2020, I also want to thank our market brands for their partner.
As we work together to serve our share of customer the.
Good morning, I will start by providing some high level of commentary on the third quarter, then on handed over to Adrian who will take you through the quarter in more detail I will then.
Sure some insights into the holiday 2020 before we open the line for your questions.
The kind of an update on the part of a strategy last quarter. So we won't go into the details today, but the sum it up at the player strategy continues on what the strength of customer relationships.
Homes on Whats your day strategy to focus on categories that matter most of customers today.
Aggressively accelerates digital.
Optimizes all aspects of our network to deliver the best of customer Omni channel experience at delivers profitable growth on the rewired cost space.
I want to take a few minutes now the dig into some of the contributors to our third quarter performance, our customer franchise category performance at her on the approach the business recovery.
Starting with our customer franchise, we continue to make progress with customer acquisition and retention that's.
As an update on the 4 million new customers the came into Macy's dot com of the second quarter. We are seeing good retention rates with many having made for Keith online shopping visits.
The kind of getting these customers of the personalize the messages and intend to keep the engaged throughout the holiday season, we continue to see a good flow of new customers through of digital business customers, who are younger and more diverse than our typical core customer.
Our strong rewards loyalty program continues to attract new customers of the brands, while strengthening our relationships with existing customers in the third quarter more than 1 million new customers signed up to the Bronx program, our tender neutral care, taking our bronto enrollment the 9 million members since we launched this option today.
On the penetration improve sequentially, the more than 56% in the quarter.
The next turning to category performance on encouraged the four of our Polaris focus categories fine jewelry beauty furniture, and backstage performed very well on the corner at outpaced the business.
In addition, we're continuing to emphasize the categories our customers increasingly value as they spend more time at home such as textiles housewares at home Entertainment, it's at the core.
Had double digit sales increases during the quarter.
We had strong performance at both ends of the value of spectrum. The luxury trend continues across Macy's and bloomingdale's at customers shift their spending from experiences to products.
Yeah at off price, arguing with existing backstage stores of the store locations performed well.
And while the overall apparel is still down we have been able to shift the effectively at the casual and active categories, where the customer shopping at last our response to the 19 has heightened our focus on the omni customer we are redefining the experience of our customers are looking for today and on improving all lakes at the omni experience. So.
Of course digital and stuff the all the time, so our customers can shop, when where and how they watch it safely and without the friction in the third quarter of customers continue to respond well to our expanded fulfillment options, allowing them to shop safely and conveniently in store or online are.
Our same day delivery partnership with door Dash is fully rolled out across Macy's and bloomingdale's at stores Jordan.
Jordache gives customers another convenient way she shops on the comfort of their at home and get their deliveries quickly the.
It will be especially important as we get closer to the holidays at customers, how the more urgent need for their purchases.
It provides a fast reliable way to deliver guess, it's the last month of shoppers.
And curbside pickup we launch curbside quickly last spring the need to the immediate customer eight at the onset of cold at night.
We recently completed a significant upgrade to our curbside offering which includes an improved digital check at experience and the new colleague GAAP to quickly process curbside orders customers are responding well to the enhanced experience.
Digital continues to thrive and as the healthy component of our business. We're pleased with the performance across all metrics, including traffic search and conversion.
Certainly our growing digital business continues to contribute to profitability and we're making constant improvements to our mobile and dot com experience, we launched our partnership with Florida. Our buy now pay later partner in early October and we're especially excited about this relationship because of their customer tends to skew younger.
On the store side on the couch that our stores are showing the gradual steady recovery across all three brands Macy's bloomingdale's at Bluemercury I'm proud that much of our enhanced productivity is driven by our colleagues who are showing improvements in conversion service end customer satisfaction.
We're seeing that when customers make the decision to come to our stores, they're doing so with the intention to purchase rather the browse at discover and her colleagues are ready to serve them.
Well also see any positive impact from improved receipt flow.
We will continue to watch the resurgence of Pope at 19 closely but have shown that we can operate responsibly and safely customers continue to respond well to our enhanced health safety measures at stores at.
Since the end cleanliness are consistently our top end T.S. scores.
So the only pleased to introduce you to Adrian Mitchell.
The drain joins us from the Boston Consulting group, where he was managing director and partner in the digital BCG end consumer practices. He has worked with many retail brands, including already on our house.
Daryl at target, while Adrian has deep financial and operational experience. He has also held leadership roles at strategy innovation and transformation. So.
So we really adds depth to our bench.
The wagering book or do you.
Thank you Jeff.
The pleasure to be with you all of this morning in the moments we have together today I'd like to share with you why I joined Macy's our focus looking forward and my reflections on the our Q3 performance and the outlook for Q4.
So why did I join Macy's. The first the reason is that at Macy's is an iconic brand.
Brand has a long wanted at 62 year history of providing delightful and innovative shopping experiences for our customers.
I believe at Macy's will continue to do this for years to come at.
And what really excites me is the opportunity I now have to be a part of the reinvention of this iconic brand.
Like many retailers, we have been impacted by the acceleration of digital sales and the shifting customer expectations, particularly among our younger customers.
I joined Macy's at a time, where the company is reinvigorating our focus on innovation in order to better address the evolving marketplace and ultimately strength in our business.
The company's Polaris strategy introduced earlier this year is the compelling multi year journey, the ins to drive both top and bottom line growth and one of the opportunity to be a key contributor to the success of this journey.
I've been impressed with what the Macy's has accomplished during the end deneke, moving with speed and agility to response of the cost of the changing market as we work to redefine the role of the Department store.
On top of that's given what I've learned in recent weeks and months that we have the energy the focus and the capacity the completely transform our business into the modern omni channel retailer that it needs to be to successfully compete.
The other reason I joined Macy's was because of the great quality of our team.
Our colleagues are talented focused and excited about the is there any of that is ahead of us.
And they are very committed to the success of our iconic business.
So I'm thrilled to be at part of this experienced team.
I'm excited to contribute to the work of re imagining on how to best serve our customers.
Our plan of strategy, we will continue the positively contribute to our communities as a thriving and relevant at retail business for years the cotton.
Now, let me be clear on our focus looking forward we.
We are laser focused on delivering strong end sustainable returns for investors over the long term at this moment in our history. We have the unique opportunity end the capacity to invest in transforming and modernizing our business as we said when we introduced the at the lack of strategy back in February we will create.
Share holder value by returning Macy's to long term sustainable growth and clearly tracking our progress with well defined keep the eyes milestones and align incentives.
My former wells at led work with a wide variety of retailers, helping them solve their toughest challenges in an increasingly competitive and disruptive environment.
As I reflect on the strategic operational and financial experiences I've gains do this work being able to achieve consistent and sustainable growth in the more digital and analytics the driven world is paramount.
At the same time, maintaining a healthy balance sheet generating strong free cash flow and being disciplined stewards of capital true.
Currently deployed in projects that generate strong returns remain our priorities.
And we are fortunate to have the capacity to invest in our customer value proposition, our omnichannel shopping experiences and our supporting infrastructure to once again take on the momentum of the leading retailer.
As Jeff a share we continue to evolve our platter of strategy to be competitive at the new retail normal in the years ahead, and we will share with you our progress as we move forward.
Now, let me turn to our performance.
We're pleased with our Q3 results and are cautiously optimistic about the outlook for Q4. However, we remain conservative given the uncertainty and recent surge isn't co the cases across the U.S. at.
As Jeff mentioned, we are pleased to have delivered not only positive adjusted EBITDA in the third quarter, but also positive on adjusted EBITDA given the strong performance throughout the income statement, especially at DNA. Our teams were able to accomplish this a quarter earlier than we had originally expected generating 100 of 50.
$9 million in adjusted EBITDA at 100 of $13 million in unadjusted EBITDA on the quarter.
We know we have a lot of work in front of us to grow profitably, but this is a significant achievement given what the business has endured during the pandemic.
Notably given the Overperformance in cash generation and our continued disciplined inventory management, we finished the quarter without drawing from our asset backed credit facility as we had previously anticipated the.
This is also a significant achievement and underscores our ample liquidity and financial flexibility.
And while the on knows remain through the end of the year. We currently anticipate having to draw very little if any from the facility as we head into the first quarter of next year.
Third quarter sales finished at better than what we had anticipated a few months ago.
The industry experienced earlier than normal holiday the man in October as did Macy's and this benefited our topline.
Combined with the shifts and the start of our friends and family event from September into October These helped to pull some sales for it at the Q3 Oh.
Overall, we delivered omni channel sales of approximately $4 billion a decline of 20.2% on an owned plus licensed comparable basis remember that we were expecting omni channel comps of down the low to mid twentys for the entire fall season. So we delivered sales in the quarter in line with the with expect.
Patients, albeit at the better end.
Our digital business as an omni channel retailer remained strong in the quarter going on by approximately 27%.
As expected with all the stores opened during the quarter digital penetration moderated to about 38% of significantly from last year by more than 14 percentage points store.
The store sales decline improved to the about 36% slightly better than expected again, largely due to the pull forward of sales.
Omni channel gross margin was 35.6% down 440 basis points from last year in line with our expectations for the fall season and up significantly from the second quarter's 23.6% rate retail.
The retail margins benefited from disciplined inventory management better sell through of both full price end clearance merchandise and lower clearance markdowns importantly, we ended the quarter with balance sheet inventory down 29% year over year end, we again or entering the next quarter with clean.
Inventory at an appropriate stock the sales ratio, including the fresh fashion and get the getting support the holiday time period.
We recorded approximately $1.7 billion of SGN expense, an improvement of 22% or $476 million from last year's third quarter, which is better than what we had expected. This was driven largely by strict expense management as a percentage of sales SGN expenses the cheer on.
Weighted by about 70 basis points on the quarter from last year to 43.3%.
Sales the leverage was the major driver of the increase offset by the reset of our cost base in February and our restructuring in July.
Overall this quarter will continue to be very disciplined with our variable costs and we expect that to continue through the end of the year.
We earn credit card revenue on the third quarter of 100 at $95 million of 12 million from last year and ahead of expectations.
Our profit sharing from our city Bank arrangement has performed better than anticipated in recent months as customers are evolving and maintaining the credit spend with us.
Potentially influenced by the broader macro observations in savings rate industry Covenant relief efforts, a few in new customer acquisitions in the near term, we do not see an increase into delinquency at this time.
Our proprietary credit card penetration of was down 330 basis points in the quarter at 45% this year compared to 48.3% last year.
It's a sizable improvement from the second quarter, which was down 590 basis points. So it's part of your period.
We incurred net interest expense of $80 million, an increase of 32 million to the prior year period, driven by the additional long term secured debt we took on during the second quarter.
We recorded a tax benefit of $126 million, representing an effective tax rate of 58.1%. This high rate reflects the impact of the carry back of net operating losses as permitted under the care that.
In total we saw $60 million of adjusted net loss in the quarter versus adjusted net income of 21 million last year. Adjusted EPS was the loss of 19 cents on the quarter compared to adjusted EPS income of seven cents last year.
Notably, we again finished the quarter in a strong liquidity position with approximately $1.6 billion in cash and approximately $3 billion of untapped capacity in the new asset backed credit facility.
As you will recall, we withdrew our 2020 guidance in March given that there's still remain many on known and uncontrollable factors impacting consumer behavior end the retail landscape, we're not providing the guidance at this time.
However, as we have done in the last couple of calls I would like to update you on our current thinking as it relates to the rest of the year.
We continue the model of various scenarios for the last quarter of the year and ultimately we continue to take a conservative approach to our forecasting.
While the close out the third quarter strong our performance was within our overall expectations for the fall.
Over the surging again across the country and that continues to end heat recovery in the international tourism and urban areas and the supply chains, the opened up yet bottlenecks remain.
Many of the expectations, we've laid out on our last call remain the same and you can view those within the slide presentation posted on our web site now.
Now the briefly summarize we expect total company comps to be down in the low to mid Twentys range for the back half of the year.
Gross margin expectations have not changed and we continue to expect third quarter margins to be slightly stronger than margins in the fourth quarter due to the digital growth at holiday surcharges from our shipping partners.
We continue to expect at sea and they as a percentage of sales to the low to mid single digit percentage points higher than last year for the fall.
Our outlook on credit revenues has improved thanks to the reasons I mentioned earlier however, unlike what we earned in the third quarter, we expect that to be down year over year in the fourth quarter. However at the percent of sales, we expect to see a modest improvement from what we generated in the fourth quarter of 2019.
Finally, we continue to expect our Capex spend this year of about $450 million.
Overall, we're pleased with the performance in the third quarter and I'm, particularly happy with the solid progress the businesses, making at the comes back we continue to plan the year conservatively, but have great confidence in our ability to execute well during the holiday season.
I'm excited to be joining the Macy's team at this critical point in our company's history, and I look forward to meeting and talking with everyone. In the weeks end. The months ahead with that I will turn it back over to Jeff.
Thanks, Mike.
So looking at the holiday 2020, we know the season is different as our customers continue to spend more time at home.
But the holidays on one Macy's shops, and this year will be no exception of we're already celebrate able with local community events around the country. So.
The the holidays.
America constant basis at Bloomingdale's, the for gift items, and we have the right gifting assortment from gifts under the luxury brand the best National and private brands to our customers 50% of the content, it's new on.
The expanded fulfillment options, including curbside pickup at the same day delivery allow customers to shop safely and without the trend in store or online at the shop right up until December 20 Force we've.
We have a long dated the Vance and put an increased emphasis on digital to even out the flow of traffic in our stores through the holiday season to maintain health and safety for our customers and colleagues price.
Those are dressed for the holidays at our digital platforms are ready to go.
Our teams are 100% focused on executing holiday and we are confident in our plants.
The like all of the 2020, we don't expect the challenges and opportunities will come our way and her team is prepared to tackle them.
So looking to the future. While this has been an extraordinarily disruptive year, we feel good about the health of our core business and there are things that we learned about our business at 2020, the gives us confidence on the future.
We've successfully managed the channel shift to address the customer demand for a true omni channel experience.
We have new customers coming into the brand via digital and loyal customers. The continued to the attached to the brands.
We've shown that we can flex categories and price points as the customer needs and demands the change.
We are early enough and our supply chain redesign that we were able to adjust our plans for a more omni future.
We've been incredibly focused on how we manage our cash.
We have market share to gain at an aggressive and intentional plan to go after it.
And our teams are more natural than ever they listen to our customers follows the data into the quickly.
And importantly, we have a flexible business model to the enables us to remain relevant to our customers. We can adjust formats channels categories brand services and price points to meet our customers wherever and however, they are shopping.
In closing, we're pleased with our third quarter results, particularly as we got back to positive EBITDA of quarter earlier than anticipated.
We're watching the resurgence of Cove at 19 closely despite the uncertainty we're ready for holiday.
Confident in our future and our ability to invest at becoming a healthier business based on how our customers are shopping now and at the future.
And with that we're going to open it up for questions.
Before we go to keep an eye I want to remind everyone that there are on so you.
On the multiple ended the call this morning.
The limit your questions. The one so we can get rid of many people on possible. Thank you operator.
Thank you, ladies and gentlemen, if you would like to ask the question Macy's by pressing star one on your telephone keypad.
If you're using the speaker phone. Please make sure your mute function is turned on to allow your signal to each of the equipment.
Once again, please press star one to ask the question.
We will oppose the just the momentum, though everyone an opportunity to take now.
We will take our first question from Matthew Boss of JP Morgan. Please go ahead.
Great. Thanks.
Jeff relative to comps down low Twentys, that's corridor near term and based on what you've seen in November.
Think about similar performance in the fourth quarter and then the second part of my question at larger picture and looking to 2021, what gives you confidence at post the vaccine when demand returns to your core categories at Macy's will be the primary destination and that you'll be able to regain share overall share.
And so it's the first to talk about the fourth quarter question I do believe that the trend line that we showed in the third quarter is it safe to pull that into the fourth quarter, that's assuming no significant regional or national shutdown.
Pounds in stores.
So in our digital business, we expect to continue to grow at a very aggressive rate based on all of our of our plans and have a lot of confidence of mass that will obviously continue to grow even faster, it's depending on what any shutdowns might look like in the stores. So we didn't we are taking a conservative view to the fourth quarter, but.
I really feel good about where we stand right now.
As it relates to a vaccination you know assayed scalable vaccination is obviously on everybody's mind and what I'd tell you is that there.
There is a lot of people return to their you know all normal if you will the all the work that they did as.
As well as you know occasion based.
Activity. So that you know weddings problems, just going out and when you look at those particular categories. I think the customers are going to be there's going to be a surge of demand when that happens and there is going to be customers that have been wearing the same close at the end lounging in active at in casual sportswear and they're going to want to they're going to want to dress.
That fits squarely in our strengths and I'm very pleased with the way that we've controlled our inventory and we've gotten the our inventories down in those end those dressier categories that are very appropriate to the demandware a worst we're seeing right now the we will ramp that up very quickly with all of our partners on our private brands at.
As the the access as the vaccination becomes more apparent. So on you know I feel I feel very strongly that we will we will reap the benefit of that when we do go back to a new normal if you will.
That's great hopefully sooner than later, that's the low.
Thanks, Matt.
Thank you we now move on.
Excuse me, we now move to Poland. The just 50, great. Please go ahead.
Thanks, It's Tracy Kogan filling in for Paula I was wondering if you guys could talk about the I guess on first.
First of all brand performance in the quarter and then how your private brand performance.
Penetration compared in the digital channel versus in store. Thanks.
Yeah, Let me take on so you know.
One of the when you looked at the quarter and you looked at the composition of our business.
The private brands the played a significant role on those categories that are turned on and so when you look at the home categories.
Our home business was across all the at home furnishings as well as big ticket was up double digits.
In the quarter and private brand was a big piece of that particularly in textiles. When you look at the big ticket at much of what we do there is exclusive content that you know the fact is made exclusively for us. So that that part is at private brand played a big role as you get into you know the apparel categories. We definitely when you looked at the at.
If you looked at sleep, where you looked at those categories with private brand being a big component of them those.
Those as did very well and when you look at the other categories in the sportswear areas kits performed better than than women's and men's and the men's is when you looked at the private brand that was a better penetration than we were historically in the women's area that is our most depressed overall category private brand is a big piece of that but what I'm.
Really excited about is the work that the team has done on a really reinventing these private brands, which we talked about back in February with the Polaris strategy. All of that content is now in stores and those are getting excellent sell throughs.
Even with the business that has been challenged so as Adrian mentioned in his in his in his message in his comments on record of price sell throughs at sharply. So when you look at the new contents that customers are voting on which includes many of our private brands across all categories on really liking the signals that we're seeing.
Great. Thank you.
Thank you we now move to pop the true of Guggenheim. Please go ahead.
Hi, good morning.
Couple of questions on the on the 4 million new customers can you give us a little bit more color in terms of the characteristics and dynamics of the who you're tracking in the and I'm. Just curious if you could talk a little bit about sort of backstage and how that's performing and the inventory procurement in the full backstage a little bit.
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So let me ask first on the on the Formula of new customers. The came in in the second quarter.
They were much younger and more diverse than what we're seeing in our core business and so the thing that we are excited about was their behavior in the third quarter. So a nice chunk of those has already gone onto the second purchase on mostly on the line, but a number of them have also come into our stores. We've also seen that trend of the new customers again.
More diverse than younger 3 million new customers came in during the third quarter and a and so really our our whole focus is ensuring that these customers are seeded with the right of the right content.
The to get another purchase we're trying to get them into our loyalty programs on number of them at the converted into the star rewards program. Most of them are coming in through the bronze tier, which is gender neutral and that gives us the opportunity to track them very carefully look at the you know the cohorts of that they might behave like us and look at their signals.
And then that's the that's personalized content based on that so were you know with everything that we have been talking about in terms of personalization at our ambitions with the customer acquisition. This was the 7 million new customers that have come into the brand a.
Has been it's been a great opportunity for us to make the build on their lifetime value with us. So I'll ask the backstage to your other question axis performed very well on the quarter on both at the Bloomingdale's at Bloomingdale's outlet as well as Macy's backstage and on you know, it's basically about twice the trend of what we're seeing at.
On the balance of the store the same categories that you're seeing at the in the store on the stores off the hook some.
Some of the you know the beauty area is doing quite well the apparel areas or the or more slow up at at those price points. You know, we're seeing great sell through is better than what we were up against from last year. A you know with the supply chain is in very good shape on that so we remain committed at this business. We're obviously looking very carefully as we have in times past at the cross channel.
Well, that's going on for backstage, how they continue to purchase and backstage the how they're also migrating to the Macy's and bloomingdale's.
The other brands on both online and in store and that behavior continues through the last two quarters.
Great. Thanks, Jim.
Thank you Paul Trussell of Deutsche Bank has our next question. Please go ahead.
Oh, good morning already there.
Yes, hopefully the I mean at all.
The here you know.
Great Great. Good morning, and thank you for the D. so low.
On the to asks about the margin performance.
Maybe a little bit more color on the puts and takes and GP end up.
On the weak Q1, the how we should think about areas like the Mark Downs of the digital mix of.
Inventory of.
In addition, it's of course you all the end given the savings obviously on the ex Sinead side, we're very meaningful and so just help us understand what's within that is really sustainable on Seattle versus more of a temporary in nature of thank you.
So let me start at the margin question on the Adrian I'm going to throw to you for SGN at so so call on on margin is that you know we're very focused on first off the margin is definitely benefited by having our inventory of great shape and so too as you've seen in the last two quarters.
They have our inventory below where our sales line as you know the beat down 29%, we're able to react in season to any demand at is coming our way and you can see that on a regular price sell through as you can see that on or a you are so our maintain mark on is the is continuing to improve we're getting faster sell throughs we.
Definitely are dealing very aggressively with anything the customers are not signaling demand for taking those markdowns and work our inventory isn't as good of shape as it has been in a long while very pleased with that and you know even in those areas where the demand is off at even in those areas, where the demand is quite high we have been able to react very quickly.
On the season to that been able to get the receipts in those categories that customers are showing strong signals to some of you look at the home textiles area of look at fine jewelry, you look at fragrances been able to get that inventory end to meet that customer demand. Those sell throughs are great. You know that that those margins are growing up when you look at the the overall.
All of us.
The the headwind on on margin is really about a delivery expenses. So were very focused on the omni channel strategy of at how much of our digital demand is going to be fulfilled out of our stores, which obviously decrease the shipping expenses and when you look at what that's going to look like on the fourth quarter, obviously shifting goes up we're expecting robust growth.
On line, we're anticipating that in what are shipping charges are going to be what we're going to fulfill a lot of stores. The surcharges that we have from some of our carriers. So all that is built into our fourth quarter of a.
Planning and we yeah, we have a clear line of sight on that at a clear line of sight on how we're improving margins of I'd love to store it over to entering the kind of talk about some of the things that we're doing to improve margins as well as to address the rest. Your net question. So average ticket to your ticket away.
Yes. Thank you very much in all parts of the mid Th you know at.
We think about our expectations on gross margin of you know we have not changed kind of how we view gross margin for the rest of the year.
The to your question is the looks the Q4 you know the improvement in gross margin in Q3 compared to Q4 was really driven by a lot of what Jeff described a lot of strong inventory management that of sell through of our full price and clearance merchandise as well as on lower markdowns and what's really nice is about at that we're getting a tremendous amount of credit for the progress that we're making.
As we think about managing their inventory down which was down 29% to last year coming out of the quarter.
As we go into the fourth quarter. The thing we have to keep in mind. Paul is that we recognize that there will be significant shipping surcharge. Since you force in the fourth quarter end, so were working pretty diligently to figure out how to offset some of those headwinds.
The when get to the end building into the quarter with the lean inventory will be helpful to help us manage some of those markdowns and hopefully help US also drive some higher sell throughs value.
You also asked about the name and as we spoke about of it earlier, our EPS came in at about 1.7 billion, which was down 476 million at the <unk> relative to the third quarter of 2019, you know what I would say, there's there's three things that we've been quite focused on the.
Of course, it's just our colleagues productivity in our stores you know they've been doing a terrific job in terms of driving great customer experiences. So I think conversion and our teams are doing a terrific job of just managing the productivity of our labor hours in those stores. The second thing is throughout the life of strategy Weve been very very diligent in beauty getting good expense control with the the S.
Good day, so we have the number of initiatives that we had put in place that the benefited from for most of 20, Mike 2020, and so we'll continue the had that as a big focus for us as we look forward as well if the.
The thing I would speak to Paul the is really our credit read the game you know so when I think about the health of RBC customer end, our credit portfolio. You know we continue to see pretty healthy performance is pretty solid gross profit sharing on the credit side of the business.
So credit from what you saw on Q3 was was at $195 million up 12 million over the last year. Despite the expectations of depressed credits that we were hearing in the marketplace. So overall, we feel very good about Q3 performance as we get into Q4 of managed the headwinds on margin add book continues to be very disciplined in our S.
The management.
Thank you and best of luck.
Thank you.
Thank you William Reuter of Bank of America has our next question. Please go ahead.
Hi, My question is just around performance by geography or by store attributes. So thinking about how your urban stores were doing versus your more suburban ones and if that is going to have any impact on your expectations for store closures over the next three years.
So [laughter] early the of the the stores that are performing the worst are the ones that are in or downtown locations. So when you look at Herald Square you look at 59 Street at Bloomingdale's State Street Union Square there there are most challenged.
And there is of the two biggest factors on that is basically what's happened to the trends. The at work population of the office workers as well as tourists. So I'm I'm actually very heartened by the performance of of what's going on on those buildings with the local customers and on those teams have been very focused on getting the great expense.
The answer is in body on those customers into those buildings. So were seeing those purchasing the you know is up but when you look at the transient population in the tourist business. That's been most challenged so those are our most difficult the urban flagship stores on.
When you get into the suburban population will be used to call on magnets stores as well as our neighborhood stores, the pretty consistent depending on what part of the country at sense. You know when you were in the obviously when you add in the the either the pandemic there were certain regions of the country that were either closed or they were reopening of the customer didnt have confidence to return to brick and motor shop.
So you saw those kind of the so sub highs and lows right now it's pretty consistent and what we are saying is that our neighborhood stores are great convenient locations customers are very comfortable shopping on them.
And they are completing their shopping journey is they're very attention based when they go into the stores are not browsing. They haven't mission. They know what they want they are either having not the filled and at the extra service stations, which are in every single one of our stores or they are in the store at the one at a shorter period of time conversion is way up on that you know there there.
Yeah were what we call the the NPS scores are quite high they're very satisfied about what they're seeing in our stores and I'd say, it's a pretty consistent trend between the magnets in the neighborhood of at this point across all regions of the country.
Great. Thank you.
Thank you Omar Saad Evercore ISI has our next question. Please go ahead.
Good morning, Thanks for all the information Great update you know you guys mentioned, you're watching the coded surge a end of in the release and the few times on the call. The are you seeing an impact at all from that you know how concerned are you about this resurgence you think there's a chance we could go on to lock down again on store closures and if we do.
Do end up in that sort of scenario, how do you feel about your chances at this time around having kind of gone through at versus back in March and April.
Thanks.
The little more of that's the that's the type of.
That's great question you know what were we definitely are believed that we can operate a true from co. The and keep every one of our stores open and I think we clearly shows the so we know how to keep our colleagues in our customer site.
Yeah, you know and so that's what we're clearly pushing through the in Iraq, and where you are working with all of our the municipal leaders as well as of.
Governors, we don't believe the designation of essential and non essential should play on retail we believe any of you have a safe environment or not we should help the held accountable to two at health and safety standards and we stand by those and based on how we perform and based on how our customers have the signal to us we're doing a great job of that.
So when you look at the first part of your question. You know there are places like in El Paso, Texas, which everybody knows about what that puts it at our store is closed right now, but all of our stores are opening and you know even at California, where they have of was right now the basically on or talking to 25% occupancy we have some stores and what we are hearing to strike one.
So all of those of you know because of the we were very aggressive about going after in stores. The settlement. We went after making sure of that we have curbside at we got the same day delivery all of that is that adults. So even at the store may close in the future of we believe that we'll be able to the that will not be work on inventory and we'll have lots of colleagues will be ready.
This is the satisfied the demand in those particular areas. So we're working hard to ensure that we're operating safely.
You know, we modeled a closures I don't anticipate that if they weren't of happen, we'll be ready and and so you know it's it's hardening the hear about vaccines. The when you look at the surging that's going on right now on the country. We're mindful of that so we have a dashboard at looks at all of those metrics what that means in terms of the customer sentiment.
You know how confident they are to go one of those buildings you know what that means in terms of our staffing levels are what we need to do with her services. So you know we're getting we're getting expert at the us and and we're ready to go no matter what comes our way.
Thanks, Jeff that's really helpful explanation.
Next we move to kind of that kind of Fella JP Morgan. Please go ahead.
Hi on balance sheet questions on you you're working on it with a lot better than expected I'm wondering if some of the deferral of what do you have to pay down more on payables. There were at the tariff in the fourth quarter or is that something that you think the card at 21 and on the real estate front, if you're sitting on end.
I Wonder if you are sitting on the balance sheet on anything any real estate Wayne sold at I'm, sorry, not for all of the close of stores, but not yet sold them.
Yes, I can speak a little of it to that I mean, you know the thing that we are pretty excited about as we think about our current position on inventory is at the we've been very good in terms of managing our clean inventory. So a big part of that is just making sure that as we look at our sales expectations going forward that we're managing our buys you know we're very fortunate the.
You bet ours inventory, it's kind of again, but you know we do feel that we've been very diligent and Planful and looking ahead of at at our expectations around sales and matching managing that inventory appropriately. We continue to put the to pay for our inventory on good terms with our vendors and so we feel really good about that but you know I'm kind of its Mike.
Take a step back the thing that we're really excited about is just really be strong cash position that we have within the business, which was one of the things that's very pleased to see you know.
Coming into the business. The CFO, we came out of the quarter was 1.6 billion of the cash we plans of tee up our maturities coming at you know in their end the year at $530 million on January 460 million agenda. Gross 2022. So you know just continued to be very focused on cash generation the matching expenses managing very healthy at working on.
Capital, but also making sure we're using any excess cash to get the invest in profitable growth initiatives as we navigate through the pandemic.
Okay anything on the real estate kind of the it's sitting on any earn stores that you did occur.
Hi, Mike you have a hobby.
I do whatever you know we do out of like two stores that as you know that we have that are close of the basically we're operating as the film and centers and so what we have on the as we call them. The the dark stores the more externally with that you know I know the what we're looking at at the Omni channel customer is having inventory of it is available at wherever the customers demanding it and so to have.
And to have inventory that is available to go on we are looking at some of our real estate to test into the to see how do we particularly with the the demand and the spike that we get during the holiday purchasing for our customers. So on we are looking at our real estate with that in mind as well.
Great. Thank you.
Thank you the next move to Kimberly Greenberger of Morgan Stanley. Please go ahead.
Oh, great. Thank you so much I want to ask about kind of revenue was obviously up very very nicely and I guess intuitively, we would expect kind of revenue to the news with the total revenue on.
Perhaps on the likes basis so.
Can you just talk to us about why the divergence in the trend this quarter end and perhaps how we can better think about credit revenue going forward and then I just wanted to follow up on.
The buy online pickup in store and the clubs on capabilities on in particular, the court ruled out the here in the <unk>.
Third quarter, what's sort of the uptake or no consumer of.
The sponsor at programs like that you know.
Quarter of your E commerce orders through either of the vehicles or something on higher than that at any color you can give us on the success of the programs. Thanks so much.
'cause it at a bunch of embraced the credit question that holds at curbside.
Terrific terrific. So you know Kimberly overall, you know we've been very pleased with the help at the Macy's customer and also the credit portfolio and the performance of our profit share in recent months has actually been better than expected and were hopeful that this performance will actually continue to the pandemic.
As I said at the opening remarks are earned quite of Red if in the in Q3 was about 195 million.
Mike expectations for a depressed credits that we were expecting to experiences of like Youve of third quarter. We did observe that are you at counts for down compared to last year now the terms Kimberly of your out of to your question about the outlook our outlook on Q4 credit revenue has improved but we expect them to be down year over year, we do however.
Ever expect to see at modest improvements from what we generated in the fourth quarter of 2019 and more broadly be low that overtime as macro conditions change that just looked at the beginning of the call. It will have an impact on our portfolio. But this is just simply something were watching quite closely.
Yeah, the Kimberly on the on on Curbside. So you know we don't know how this is going to play out yet I will tell you that when we went to the curbside. We watch this as we talked about in the previous call at about 18 days of cross Macy's and it was kind of.
It was the cobbled together very quickly Weve sense launched what we call Curbside 2.0, which we've really improved the app experience and the speed of the US. The colleague of response to this has been quite strong end customers are really signaling hi, hi, there.
They are liking what they are saying on this we're getting very high NPS scores on this so what does this mean for the holiday season, it's going to be a great question for US you know when we talk about the holiday season in February we except as to dramatically go up we've really focused on forward deployed inventory at all of our key items on or Giftables ready to go for the same day delivery on.
Our true curbside, so on it's ramping up as we expected it really is going to spike over the next number of weeks you know when you look at our digital experience on the is how we're sitting on willingness on line or on the App and our ability to respond to the customer win a one day when they signal at or need it will be there so more to come on that we do expect it to be at <unk>.
Secondly, higher percentage of our overall digital demand through the combination of curbside Bops boss and same day delivery and where we were at last year. It will be able to update the group, but on on those four elements of our digital demand of the only talk again on February 23rd.
Thank you at all.
Next the move to Oliver Chen of Cowen. Please go ahead.
Thank you good morning on line.
The customer acquisition, that's very encouraging what do you see ahead as the bigger opportunities across categories indoor execution do attract and retain the younger customers. Thanks.
All of the that's the first question you've ever asked.
Let me just day that on this the day, it's a multi prong question. The ER. The first thing with the younger customers really looking at the content. So we've been hard at work at this for the last year and really looking at first off on our private brand portfolio what at Justice, we need to make so we have repositioned brands. We've retired brands were adding number in.
In 2020 21 on the US we've actually really quite the value of from ticket to promotion to loyalty we'd.
We've looked at experiences on how we merchandise at how we showcased at on line in experiences. So if you look at our website right now when you look at the some of the the big changes that we've made in the experience on our website. It was with the under for the customer in mind in the certain brands and categories on our marketing for them. It's just.
It's all interrelated so we'll give everybody at an update on that again in February about where we stand at the under 40 customer in some categories were quite strong of them, where there were one of the top retailers in the country and there's all the or other areas in which we have strong ambition to get much stronger with end market share of that we see that we can gain and the and so we will detail on.
All of those plans when we talk next.
Thank you happy holidays.
Thanks all of it.
Next we moved out of like Sanjay of effect of Goldman Sachs. Please go ahead.
Good morning, Thanks, so much of the taking on questions that I'm going to walk the question about the income.
<unk> growth rate the gross like the the corporate was a little slower than on the price of course, that's a tremendous amount was at the supposed to be items can you comment on the cadence of how much growth over the course.
All of the on sports on how we should be thinking about Hamas called into all the book or going into next year, what's the right run rate.
On well should we be thinking about penetration moving to 20.
On the one.
The house, so what I'd say on the on this we definitely will continue to have strong robust growth in digital so when you look at it you know, we expect that where we're lapping obviously, a non high spend attrition of the digital is in the fourth quarter at all ways for.
Yes, but we're ready and so when you look at the the different let me just kind of back up and just say, we've really focused on everything that we can do to improve the us. So when you look at what we've done to re platform. You know we've gone after Google search, we basically of really improved the browse and filtered features weve enhance all the product pages.
You know we've tested at scale product recommendations, we've added monetization on that we've added like Claro net which is a huge component of the under 40 customer of the whole curbside experience, what weve done the door dash because as much about what we do on digital is also what we can do on fulfillment. So we've really focused on all of us and so I think when you look at our website at <unk>.
GAAP today, its end far better shape and from where it was a year ago and all of those enhancements just continue into 2021 very happy with a with the that the product Uh huh.
The the plans that we have for all the product upgrades coming up so we expect robust double digit growth of digital going all the way through 2021 and and that's what we're planning for as the penetration you know what you saw in the in the third quarter was about a 38% penetration of the total business, it's always going to be.
I think with either a three or four in front of it as it builds on the it's going to continue to grow as an important penetration in our overall business. We were at 25% in 2019, obviously with the stores closed for three months, it's going to be higher in the 20 than I expect it is going to be at 21, but it's still going to be in the mid thirtys. So on expect double the.
Just continuing the [noise].
Thank you so much and all of that.
Thanks, Alex.
<unk>.
Thank you. Our next question comes from check growth of Gordon Haskett. Please go ahead.
Hi, This is actually a gear agree but did show.
Pull sort of asked about if you guys probably look at all on the sales cadence throughout the quarter.
As kind of quantify what the.
The impact of the shift from the family that was.
So maybe if you could elaborate on what you're seeing of course engage the though the slogan code. The cases, the six and then the impact on store traffic. Thanks.
I apologize I could not understand your question could you just say that more clearly please.
Yeah.
All of these he's going to go to the of the third quarter.
As was kind of quantify the shift of the friends and family of of course that's.
Oh, yes.
Yes, the friends of the obviously like other retailers of responsibility to elongate the holiday demand if we can and so in the month of October you saw what the all of US did to try and start at early so we did that by basically on bringing up the friends and family events into the third.
Third week of October and you can see what we're doing now with the Black Friday specials kind of dry and those off of you know the black Friday on event in bringing on earlier into the month of November we did have some volume the pull forward of or not quantifying what that is but it is a you know we're trying to see how the customer response to it and so far there.
They're biting and liking what what we're seeing on that we were making at we made the decision to close on Thanksgiving day, we're definitely expecting that we're going to bring down the traffic at brick and mortar on black Friday itself on and getting that end getting that the man earlier, but also at the customer decides to shop in the last 10 days or during.
Cyber Monday, or we're going to be ready for that so as you can see what we've done with our events of you look at our calendar a word but just the long getting the demand as our competitors. Some of that did come into the last two weeks of October on based on the actions that we took.
Yeah.
Thank you we take our next question from town at Tenda say of Tennessee Quaint. Please go ahead.
Good morning, everyone as we get past 2020 and into the 2021, Jeff how are you thinking about the first half of the year end planning, whether it's regarding inventory marketing or how you're thinking of the stores channel versus the digital channel moving forward at all the new customers that you gained from the time period.
Thank you.
Hey gain of so.
Factors here that are going to affect first half is going to be what is the scalable vaccination look like and does that come in at the <unk> in the second quarter does that kind of we're anticipating that it's going to be in the back half of the year, where at scalable up at the first half of the are looking at some level of stimulus package.
At the Congress would put through and that's certainly can motivate the sort of like consumer confidence and what that would look like so when you think about the first quarter were kind of holding our trend from the fourth quarter forward and we are expecting gradual improvement as we get into the second quarter and then improving end was we'll get into the back half based on on the potential for.
Oxygenation, we do have another scenario that would would suggest that we don't have the of vaccination. The scalable will be ready for either but we're looking for signals on that in terms of the composition of the business depending on the vaccination it could be as is or it could be as we as people returned back to normal occasion, we have started the amplify those category.
Most of them are ready to go from an inventory of perspective, we're being conservative on we know we can chase demand. We know we have more room and regular price sell throughs, we're not going to get ahead of ourselves, we're going to keep our inventory lean and ready to react to customer Central's end demand at.
At the fashion retailer, that's an absolute at must and we're committed to it. So the more we are doing at the better sell throughs forgetting the more on national margins will improve it puts us on a good position to be flexible the wherever the customer gross.
Thank you.
Thank you. The next may of TJ, so enough you'd be at please go ahead.
Great. Thank you. So much you have to sounds like you're really pleased with the jewelry business.
In the jewelry strategy overall could teach the some of you some of it really works.
I know you've tried in different categories, but you can see sales any thoughts you have to try to extend that strategy. The other categories in other areas of the business.
Just to try to continue to of leverage those learnings in other areas.
Yeah. So so Jay clearly when you looked at the jewelry business. It really is the you know it's the combination of value products serve as the marketing and in store experience and there's definitely other businesses sort of clearly doing that right now in the big ticket business of women shoes or you look at the entire book.
On the business a those are all categories that we're doing that very carefully with when you look at home tech sales because of the price points. We sell a you know we've learned a lot from bloomingdale's and Bloomingdales, you know does that in more categories. They do it through a combination of of different partners that they use some of those or at least.
But you know we look at their category management and their customer how they how they are tracking and hold the customers and that gives us a lot of learnings about what we do in our businesses. When you look at you know when you get back to the new normal when that does happen you look at the clothing business the men's clothing business the women's clothing business a those are all categories.
That will benefit from the learnings that we got from the jewelry category. So jewelry is an interesting because when you think about our market share of when you look at of where our competitors are frankly, you know that is a that is a you know the apparel is a much more crowded plainfield of so it doesn't always the translate directly into apparel, but there's enough work.
Is there and the categories that we have strength and that it does so we look at bloomingdale's, we look at jewelry that certainly on forms. The you know the answer to your question.
Got it thank you so much.
You bet.
Thank you at no time, we have no further questions at this time.
Okay, everybody. Thank you happy holidays.
Yes.
Thank you, ladies and gentlemen by way of completes today's conference call. Thank you for your participation you may now disconnect.
HM.