Q4 2020 Macy's Inc Earnings and Polaris Strategy Update Call

Ladies and gentlemen, good morning, and welcome to Macy's incorporated fourth quarter 'twenty 'twenty earnings Conference call. Today's 90 minute conference is being recorded.

And I would now like to turn the call over to Mike Mcguire head of Investor Relations for Macy's incorporated. Please go ahead.

Thank you operator, good morning, everyone and thanks for joining us on this conference call to discuss not only our fourth quarter and full year 2020 results, but also our update to our long term strategy with me on the call today are Jeff can at our chairman and CEO and Adrian Mitchell our CFO.

Jeffrey during her prepared remarks that they will share after which we'll host a question and answer session. While we've expanded the scope of 90 minutes of time constraints of the number of people who want to participate we ask of you. Please limit your questions to one.

In addition to this call and on our press release, we have posted a slide presentation on the investors section of our website Macy's.

Dot com.

The presentation summarizes the information in our prepared remarks and include some additional facts and figures.

One housekeeping item to share, Jeff and Adrian will be participating on the fireside chat at the bank of America consumer at retail Technology Conference on Tuesday March 9th at 830, a M. Eastern time, because that will be webcast on our investor Relations website. So please mark your calendars.

Keep in mind at all forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 19 at spot.

These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations of assumptions mentioned today, a detailed discussion of these factors and uncertainties is contained on our filings with the Securities and Exchange Commission at this.

The results of our operations, we will be providing certain non-GAAP financial measures you can find additional information regarding these non-GAAP financial measures as well as other he is at our earnings release and a presentation on your debt your section of our website.

As a reminder, today's call is being webcast on our website a replay will be available approximately two hours. After the conclusion of this call and it will be archived on our website for one year.

Now I would like to turn this all of its Jeff.

Thanks, Mike.

Good morning, everyone and thank you for joining us today.

So today, we're going to share our fourth quarter and fiscal year results discussing our outlook and near term guidance and reviewing our updated Polaris strategy. We also look forward of taking your questions on a Q&A session. Following our remarks.

But the costs were coming out of an unprecedented year one of the delivered a series of external challenges that would've seemed almost unimaginable not so long ago, let me start with us.

When COVID-19 on leased its challenges consumer trends shifting quickly and we've learned a lot about our strengths and opportunities. Our Polaris strategy designed to allow us significant flexibility was tested profoundly and approve durable, allowing us to adapt and innovate with great agility.

Facing these challenges only some of our results show improvement from 2019.

But our business performed better than we might have otherwise had expected under the stresses and we've shown that we are well positioned to adapt to customers' needs and to new forces on the external environment.

Against this backdrop of many of our fourth quarter results sales EBITDA and earnings per share exceeded the expectations that we shared with you at the end of third quarter and we ended the year in a very good cash position.

Sales for the quarter were $6 8 billion with all brands outperforming expectations in the quarter and the back half of the year. This solid performance has continued into 2021.

Significant growth in digital sales supported these results as did a series of actions to win over new customers, while some of our core customers paused spending with us during the pandemic.

We accelerated our focus on digital shopping extended our assortment to help customers on expressing their unique style for a growing number of categories Inc.

Clarified and simplified our customer value equation.

We adjusted our merchandize mix, reflecting consumers increased embrace of categories like her casual apparel jewelry and fragrance and we made changes in stores to make them safe and easy to navigate.

We harnessed data analytics to sharpen our offers and outreach to customers lease.

These and other steps attracted nearly 7 million new customers in the fourth quarter alone many of them under 40.

At the same time, we significantly improved our overall customer satisfaction scores.

Notably we saw solid holiday demand in November and December which continued into January as a result, we delivered adjusted EBITDA in the fourth quarter of $789 million, which brought the full year two of positive $117 million. We also saw sequential top line improvement from first quarter the weakest.

Point of the year.

Our sales momentum and profitability are due to our investments in advanced analytics and enhanced collaboration with our vendor partners to drive gross margin.

We also maintained our persistent focus on managing SG&A, we generated free cash flow of $296 million in 2020, which we will continue to improve through the continued execution of our Polaris strategy.

As a result, we ended the year with healthy liquidity of approximately $1 7 billion in cash and approximately 3 billion of untapped capacity in our revolving asset backed facility that we closed in June.

All in a year that delivered unprecedented shocks to our industry or country into our colleagues and our families. It could have been a terrible year for Macy's.

Instead, we battled through the store closures and reopened to deliver unexpected wins and some promising tests.

So no one would ask for a repeat we did in the end learned a tremendous amount that has informed us on how to best adapt and improve our outlook and I'm incredibly grateful to the team who got us there.

Our experience in 2020 increases our conviction to take bolder actions to drive our business forward as of digitally led omni channel retailer.

Under the Polaris strategy, which we introduced to you last February we have shifted a large proportion of our current and future capital to digital supply chain and technology platforms to better integrate our digital and physical assets and deliver the most relevant shopping experiences.

In part enabled by these shifts we expect that approximately $10 billion of sales will come from the digital channels by 2023.

We also plan to continue our focus on right sizing of SG&A, improving working capital efficiencies and modernizing our supply chain to support the omni shopping experience and customers evolving expectations around fulfillment speed.

We understand there is much work ahead to capitalize on the opportunities now available at Macy's. However, we have the aspiration, the fortitude and the agility to successfully transform our legacy.

However, we had the aspiration of fortitude and the agility to successfully transform our legacy business in the months and years ahead.

From a financial perspective, we are targeting longer term run rate sales growth for Macy's, Inc, and the low single digits with sales and profitability of growing off of pandemic was our plan is underpinned by our capital allocation strategy that enhances long term financial stability and returns for our shareholders.

We are committed to returning to an investment grade credit profile by paying down debt as it matures, enabling us to target our leverage ratio goal of less than three times.

Today, we will share more detail on our 2020 financial results and drivers of our performance will also address key pillars of our Polaris strategy and our outlook for 2021. After recapping. The key themes, we will open the call for Q&A.

So first Adrian will offer more details on our performance.

Thank you Jeff Good morning, everyone. Thanks for joining us this morning as Jeff shared we are pleased with our fourth quarter results as they reflect improvement in both sales and margins from the lows of the year, we're committed to updating and accelerating Polaris taking the actions essential for Macy's to grow at a digitally led on the.

Channel retailer and delivering higher levels of profitability and free cash flow.

I will start today by sharing the key drivers of our fourth quarter and fiscal year results in particular, I will focus on Macy's five most important value creators accelerating sales growth at <unk>.

Moving gross margins, increasing inventory productivity, managing SG&A and reducing our debt.

Later, I'll go a bit deeper on how our omni channel businesses from stores to digital it's of credits are combining to help us meet our strategic goals.

We're accelerating sales growth.

Salt comparatively strong holiday of the med in November and December and that carried into January with sales totaling $6 8 billion for the quarter.

With the pandemic upon us this reflects a decline of 17, 1% for the quarter on an owned plus licensed basis compared to 2019 and a drop of 18, 1% for the second half of the year.

We pivoted quickly to product categories with higher consumer demand such as active loungewear and home.

We benefited from new customer acquisition, and we invested in the digital channel while improving our in store experiences. We also benefited from the improvement in merchandise return rates and the increased engagement with our younger and more diverse customers. Both vital segments I'll spend a couple of minutes talking about each of these.

In terms of consumer demand our focus on the soft home category led by textiles, and housewares was a big benefit during the fourth quarter at sales rose, 11% compared to the prior year.

Beauty incentive core categories also performed relatively well with double digit increases in fine jewelry and fragrances. This growth partially offset the pressure from the decline of total apparel, which was down 32 per cent of the quarter.

New customer acquisition was strong in the quarter, partially offsetting the drop in active customer accounts, nearly 7 million new customers transacted with us at most of them came to us through the digital channel.

So we can more than 6 million digital only customers a strong 50% increase over the prior year quarter.

That said, we recognize we have work to do to retain at a larger portion of our active customers.

Our investments in improving our digital platforms began to pay off with fourth quarter digital sales growth growing 21% from 2019 3 billion.

In particular, Macy's brand digital platforms saw double digit increases in site visits and conversion rates.

This growth partially offset the overall decline in store sales as mall traffic continue to suffer due to the pandemic. Importantly, however, the work we did to create safer easier to shop experiences began to pay off with improvements in our net promoter score driven largely by positive customer assessments of their safety while shopping.

Lower merchandise return rates also benefited net sales the return rates in the fourth quarter were down 220 basis points from 2019, our shifts in category mix helped us number along with consumers more purposeful buying habits as of.

Apparel sales recovery in consumer returning to prior habits, we expect return rates to go back to historical levels.

We also saw some encouraging numbers on customer engagement with a 45% increase in bronze tier members of our star rewards loyalty program over the entire year of <unk> customers are by far the youngest and most diverse in the program.

A vital segment in our under 40 strategy.

This increase partially offset the overall drop in at the Star rewards members, which was caused by declines in more established tiers that we believe will reverse as the pandemic abates and dormant customers Reengage Stark rewards provides exceptional value to our customers, while allowing us to use advanced analytics to personalized.

It offers and shopping experiences driving higher and more profitable customer spend.

So that's sort of look at sales.

Now onto our work to support gross margin.

For the fourth quarter. It was 33, 7% down 310 basis points from 2019.

Two areas, where particularly important to bolstering this number during the holiday season.

<unk> merchandise margin and minimizing delivery expenses.

Merchandize margin was relatively consistent with the prior year quarter.

Some of the underlying drivers include shifts in product mix of lower margin categories, such as home at the expense of higher margin categories like apparel.

These were largely mitigated by reducing the intensity of promotions coupons and markdowns the boost sell through rates closer to full price, while providing customers with pricing clarity and value they expect.

These moves also helps us improve inventory productivity, which I'll talk about in a moment.

The investments we've made in analytics to support improved sell through rates are being accelerated in 2021.

In the fourth quarter delivery expense increase materially above last year cash.

Surcharges were about one third of this increase this increase in delivery expense was the main driver for 310 basis point year over year decline in gross margin rate as digital demand rose, we were able to partially offset the impact with higher delivery costs for instance by shifting customers to store pick up channels.

Approximately 25% of Macy's digital sales were fulfilled in our stores.

Okay.

We've made very good progress on improving our inventory efficiency. This year as we aggressively address flow sellers and reduce clutter in our stores and ended the year with the balance sheet inventory down 27% compared to 2019 resulted in a healthy stocks of sales ratio.

We are hyper focused on continuing to improve inventory turns which improved 18% in the back half of the year, giving us momentum heading into Q1 of this year.

Now onto our efforts to reduce SG&A.

We recorded approximately $2 billion on SG&A in the fourth quarter about 18% or $464 million lower than 2019.

As a percent of sales SG&A expenses in the quarter were generally in line with expenses in the fourth quarter of 2019 at 32%.

Given our progress on cost efficiencies, especially from the restructurings in February and July.

At the year with annualized run rate Polaris cost savings of approximately $900 million, which is permanent in nature.

This improvement reflects disciplined expense control Ethernet sales exceeded our expectations during the holiday season, we.

We continue to be highly focused on maintaining expense control in the future.

Beyond what we discussed already there are a number of other contributors to our results.

Credit card revenue performed well above our expectations of the fourth quarter at $258 million up $19 million from 2019 with profit sharing income at key components.

This was driven by the relatively good at credit health of our customers.

Thing at lower than expected delinquencies and bad debt.

Asset sales gains were $40 million for the quarter versus $95 million in 2019 at brought our full year of 2020 games to $60 million slightly better than our expectations at that.

Sales continued to be an important component for funding our growth initiatives as we continue to monetize our real estate assets.

As a result overall, we were pleased to deliver positive adjusted EBITDA on the fourth quarter of $789 million. This performance on the back of our performance in the third quarter led us to a positive full year adjusted EBITDA of $117 million at much strong.

Result than we had expected six months ago, underscoring our ability to quickly adapt and be focus.

Continuing on during the quarter, we incurred net interest expense of $84 million, an increase of $42 million year over year for the full year net interest expense was $280 million, that's $95 million higher than a year earlier. These increases were primarily driven by the.

Long term secured debt we took on during the second quarter.

Additionally, we recorded tax expense of $154 million in the quarter.

Effective tax rate was 49%, primarily reflecting a true up some of our full year rate due to better operating performance, including the impacts of the anticipated benefits from the cares Act.

For the year, we saw at tax benefit of $846 million.

Representing an effective tax rate of 17, 7%.

At the annual rate reflects the non deductable components of the goodwill impairment charge offset by the impact of the carryback of net operating losses permitted under the cares Act as a result of the carryover at <unk>.

Currently estimate you also received approximately $520 million in income tax refunds during the first half of 2020.

As a result quarterly adjusted net income was $253 million versus $661 million in 2019.

On an annual basis, adjusted net loss was $688 million versus income of $906 million.

For the fourth quarter adjusted diluted earnings per share was <unk> 80 cents on the quarter compared to $2 12 in 2019, which exceeded our expectations for the year adjusted diluted earnings per share of showed a loss of $2 21 versus 2019 income of $2 91.

The last of our important value creators that I'd like to discuss today is our capital structure and debt.

Here, we believe we are well on the path to returning to investment grade metrics by deleveraging of the balance sheet in.

In January we paid approximately $530 million of debt at maturity.

Just as noteworthy we repaid this debt with cash on hand, and did not have to draw on the $3 billion asset backed credit facility at the same time capital expenditures in 2020 were $466 million down from 2019 as expected.

We improved our cash generation in the fourth quarter, we generated $296 million of free cash flow for the year driven by the efficiencies gained with working capital, which improved year over year by 5% of $16 million and by focusing our capital spend on the highest priority projects.

So that's at four or five most important value creators accelerating sales growth improving gross margin, increasing inventory productivity, managing SG&A and creating a healthier capital structure.

Now I'd like to go a bit deeper and discussing the performance of our omni channel businesses did give you some new insight into the progress we're making towards our strategic goals. This concludes the relationship between our stores and digital channels and how big of our so vital to supporting each other.

I'll also discuss the important and continued contribution of our credit card program.

I'll start by reiterating what you shared earlier Macy's is a digitally led omnichannel retailer.

The Polaris strategy is designed to ensure we accelerate topline growth and increased profitability across all our channels.

Through Polaris, we continue to work hard to improve the profitability of our core businesses digital and stores.

We all know if at the pandemic has accelerated the use of digital channels, including our own and that our customers' preference for digital shopping experience is a permanent shift.

We're excited by the opportunity to lead into digital growth, but make no mistake. Our strategy revolves around growing omni channel sales and profitability, regardless of whats channel of our customers use.

We created our strategy knowing that having both stores and digital acting in concert is critical to maximizing our sales and relevance with our customers in any market for instance, we know that Macy's digital sales per capita are two to three times higher end markets, we have Macy's stores.

Conversely from our store closures over the past five years, we have also observed at the growth rate of digital sales drops meaningfully when we close a store in a multi store markets and significantly when we exit a single store market.

Stores are providing the critical nodes to our digital customers.

One of the important lessons, we learned at 2020, what's that we'd need to meet the rising digital demand from our store inventories. If we are to satisfy our customers' need for speed and convenience and achieve our inventory productivity and turn goals.

We know that channel such as buy online pickup in store curbside pick up and same day delivery will continue to be critical operating practices for us at a digitally led omni channel retailer.

So how do we measure performance across our digital and store channels.

One way is to focus on contribution margin directly attributing sales gross margin and channel specific expenses to each channel within our financial systems.

Specific expenses include selling costs location specific real estate costs and logistics and delivery expenses on.

On this space, we're pleased at our digital channel is contributing positively to our profitability and in fact, it's doing so at a higher rate than our stores channel and.

In 2019 at the contribution margin from digital was higher than in stores by mid single digit percentage points. So the shift to digital is actually a very good trend for us.

<unk> to be able to capitalize on this over the short medium and long term.

One of the biggest challenges the digital margin since delivery expense. However, given that digital's cost model is primarily variable in nature, while at the stores channel encourage more fixed costs. We note at the lower payroll and benefits on the digital channel can help to offset the pressure from delivery expense that resulted in a higher contribution.

Margin from digital as do lower real estate costs.

Nonetheless, whilst of though it is vital to improve our delivery efficiency and better manage and reduce delivery expense.

One critical focus area to accomplish this is our supply chain. We are therefore working to improve the placement and allocation of inventory across our network.

In addition, we are focused on reducing packages per order increasing the percentage of orders picked up by customers at our stores and making our best shipping offers more directly to our royalty program and Macy's proprietary credit card holders.

By pursuing topline digital growth you can minimize the impact of digital fulfillment and technology infrastructure expenses. We're doing this in several ways, including driving average number of monthly unique visitors to our sites improving conversion and raising average order value average unit retail on average I'd.

<unk> per transaction.

With all of these in mind in the fourth quarter, our digital sales accounted for nearly 44% of sales up from 30% in 2019.

Now, let's shift to our credit card program as a reminder, net credit card revenues consist of profit sharing income in addition to sales royalties and you account balance sheet.

Our acquisition of new customers on our focus on retention and loyalty work in tandem with our credit card program to accomplish these goals. It is vital for us to increase personalization to drive customer growth and retention.

Heading into 2021, our goal is to increase the spend of those active customers with rising line of credit and spend capacity and to improve more account acquisitions new.

New accounts dropped significantly in 2020 compared to the prior year, primarily due to temporary store closures. Although we did opened 14% more new accounts digitally last year than we did in 2019.

New accounts in the fourth quarter were down 34% from the prior year. Our focus in 2021 is to seize upon the momentum we gained in 2020 and aggressively promote new account openings through digital channels with an easier more seamless process.

Overall, we are pleased with how our credit business performed during the pandemic and its role in strengthening engagement with our customers.

Credit card revenue accounts for a large percentage of our profitability, which we expect to continue.

Our Polaris strategy will help us engage customers vigorously.

Personalization and other initiatives that are designed to drive more transactions on Macquarie.

We will continue to report out on the progress we are making.

To wrap up this discussion on performance I want to stress that we understand that our business model was challenged prior to the COVID-19 crisis at <unk>.

At the pandemic has underscored the need for us to rapidly evolve toward a more compelling omni channel model.

Start 2021, with a solid foundation, our digital business is profitable.

Unified priorities to accelerate growth and profitability in the upcoming years, such as reducing net delivery expense as a percent of digital sales at.

At the same time, we are leveraging our stores to deliver better service and more convenience for our customers by investing in a more seamless omni channel experience and finally, we are pleased with the resiliency of our credit card business and our star rewards loyalty program, even while navigating the crisis.

While we are confident that our initiatives will drive market share gains we know our competitors are not standing still so we are continuing to realign our costs, our supply chain and our fixed asset base to ensure that we leverage our expense space to capture the bottom line benefits of our recovery business for our shareholders now.

I'd like to turn it back over to Jeff to speak about our strategic priorities.

Thanks Adrian.

So as I shared earlier, the Polaris strategy that we introduced last year has proven to be a critical enabler of our performance in 2020 early actions dictated by Polaris help us broadened fashion offerings across categories and improve our digital experience the cost control that we committed to last year was critical to weathering the pandemic.

And this year when we needed to make hard choices on our investments Polaris gave us the clarity of focus first on the areas most critical to future growth.

Okay.

Now I will discuss mostly Macy's here, both bloomingdales and Blue Mercury experienced a strong recovery in the fourth quarter and we believe they are well positioned to outperform the market as the pandemic receipts, we plan to spend more time on these banners on a future call.

In recent months, we have recommitted to Polaris and refined at to achieve our mission to accelerate growth, while improving profitability and returning to growing cash flows.

This will require us to deliver better fashion and style options for customers and an improved digital and omni channel experience.

We are also boosting our focus on delivering clear value to our customers and modernizing our supply chain to enhance our value proposition and our gross margins.

Actual results further improve with initiatives to unlock SG&A opportunities and boost the returns on our capital investments Polaris also helps us reshape our footprint to meet customers, where and how they want to shop now and in the future.

So the six pillars that underpin the Polaris strategy.

We need with fashion and style <unk>.

Delivering clear value at.

Selling and digital shopping repositioning of our store fleet in enhancing omni experiences.

Modernizing our supply chain and technology infrastructure.

And enabling transformation through data analytics, and a performance driven operating model.

Given its importance to our goals into our future results today I'm going to give a little more detail on each of these six pillars as we discuss these it is worth noting that we have continued to refine polaris with a deep understanding of the Macy's customer and how they're shopping has changed in the past year.

Where the retaining of our core customer our acquiring the next generation of new once the pandemic has accelerated the shift of digital with lots more trying now digital channels at a meaningful portion of expected to continue purchasing predominantly online post COVID-19.

Other elements of also changed many of our customers have shifted their wallets towards new categories, such as home, while others are increasingly focused on more closely managing their budgets to.

To win with these customers, we must continue to help them discover their personal style, while offering an enjoyable experience that is convenient reliable and provides the right value regardless of channel we have and we will continue to adapt the Polaris strategy to win with these customers.

So this brings me to the first pillar focused on the one in three American households, who shop at Macy's each year and for some of those who don't yet the first pillar focuses on winning the customer with fashion and style.

Style is how individuals' express themselves through fashion choices, including for accessories, and home decor, helping our customer express and satisfy their style needs across our core and emerging categories will continue to be a prime competitive differentiator for Macy's, Inc. From off price of luxury and from offline to online.

In 2020, we made significant progress in response to the pandemic and consumer behavior at ushered in or accelerated we rapidly expanded our assortment across Macy's in categories, such as home office outdoor furniture loungewear active in fleece. We also added new categories to meet emerging demand including data.

<unk> in skincare devices home fragrances outdoor recreation gourmet food on.

All told we added more than 1000, new brands to address the demand.

In store, we accelerated the editing of excess of assortment, reducing our inventory levels to make our stores easier to shop, we improved our stock to sales ratio, while realizing better sell throughs at regular price.

Looking ahead, we will continue to improve our assortment, especially for the under 40 customer with the right mix of categories within each category. We are building, a new and relevant assortment across our private and national brands as well as emerging brands as we build out of our assortment plans. We know the timing of the ability to balance of our products will be.

Key.

Have a clear plan in place to shift of career and special occasion apparel and accessories. When our customers are ready to return to the office community functions outside of events and entertaining.

This plan includes keeping the appropriate balance with our casual assortments.

Notably backstage will continue to be a significant element of our assortment strategy last year backstage outperform comp sales on Macy's stores by more than three times and we plan to open about 35, new store within stores in 2021.

As we improve our assortment. We are also continuing to improve inventory allocation and receipt management to make sure of that product is in and is flowing to the right locations as a way to maximize inventory productivity and customer convenience concur.

Concurrently we are working to strengthen vendor relationships by building new vendor partnership models that helped drive improved profitability product innovation and best in class customer experiences.

With these efforts underway, we expect to drive faster category growth plus higher sell through with faster inventory turns.

Our second pillar involves delivering clear values, which we will achieve through simple easy to understand pricing and promotions along with sharper hyper personalized communications to customers through our loyalty ecosystem.

Specifically over the past year, we have made significant strides at improving our customer value proposition. For example, we overhauled markdown capability, including adding a new location level tool and advanced analytical powered algorithms. The first of several major pricing capabilities, we are adding to our merchandising function. We also saw.

Both sequential and year over year improvement in regular price sell through in.

In 2021, we plan to continue to simplify and de layer promotions optimize our markdowns and improve and localize our pricing to create better value clarity for our shoppers all while improving our merchandise margins.

Additionally, we are also continuing to build on our customer value ecosystem, which would be loyalty monetization and personalization enabled by our star rewards loyalty program.

In August we grew this ecosystem by launching the Macy's media network to connect strategic brand partners to our customers, which created a new fashion and beauty publishing model. This venture has already grown total generate more than $35 million annually at a new income stream.

Looking ahead, we see a lot of promise and our ability to expand our monetization engine, while cultivating greater customer engagement with more relevant and personalized content and offers and taken together. We believe these actions will drive more customers into our star rewards and credit card programs and up to $60 million on modernization of income in 2020.

One.

Number three excel in digital shopping as Adrian outlined digital is a large growing a profitable channel for Macy's, Inc, and with one of the largest digital shopping platforms in the U S. Based on the latest NPD data, we maintained our market share for the categories. We serve over the course of 2020.

Holding the number two spot.

And we know our investments in this space are critical to Macy's growth over the next three years.

In the past year, we made strong headway on digital thanks, largely to a new team that is transforming our capabilities. We exited our corporate office in San Francisco last year and stood up a new team with some of retail as most talented digital innovators, who have found a new energy and focus on our digital customer. This team has already improved.

Our customers digital journey in many ways, including our browse product recommendations and checkout. This along with our robust plans to transform our digital assets and experiences over time make us very optimistic about Macy's opportunities in digital.

To build on this momentum and realize our goal of growing digital sales to 10 billion within the next three years, we will continue to make fundamental investments, while delivering new immersive content driven experiences for customers. For example, we are launching of refreshed homepage with curated visual content and more precise search end.

Browse functions as well as of more intuitive bag and checkout experience with broader ways to pay and high engagement categories. Like beauty, we are creating immersive online experiences so customers can discover new products to shop with confidence these.

These experiences augmented with virtual reality, plus virtual consultations, which we of staff with our own beauty consultants are already showing tremendous power digital growth and our beauty category within Macy's in 2020 grew more than 60%.

This elevated digital experience in beauty is only at the beginning we will carry our learnings here into other categories in 2021 and beyond.

Over the next three years, we expect to see continued double digit growth in digital with increasing channel profitability.

Number four reposition of our store fleet and enhance omni experience.

Our fleet continues to have high value relevant and vibrant stores, mostly in A&D rate at malls, which will remain a critical part of Macy's future. We have already invested considerably in these best of Macy's stores across the remaining fleet. We are committed to the 125 store closures that we announced on 2020.

Approximately 60 stores have closed or will close soon further reducing our footprint in C and D malls.

Following the closure of all of 125 stores at least 85% of our sales will come from a and B mall stores and we will ensure through targeted incremental investments that all remaining Macy's represent the best of our brand.

This year, reflecting consumers' increasing demands for speed and convenience. We are concentrating on two initiatives first we are enhancing our omni channel shopping experience by focusing on scaling store fulfillment baps curbside pick up at the same day delivery services.

Second in an effort to more closely connect online and offline and deliver a seamless customer experience. We continued to invest in technology that enhances the way, we engage our customers and elevate our in store experiences from category of merchandising in store last two transactions and staffing models together. We expect these efforts will drive down our cost per <unk>.

Transaction, while increasing our customers' conversion at the store.

At the same time, we continue to test how off mall stores can lift our digital business, while profitably filling gaps in our geographic markets at.

As we test new store ecosystems in three markets, Dallas, Atlanta, and DC Metro we continue to find significant synergies between digital and stores, adding off mall locations will provide customers with a fuller omni experience by providing more convenience selection and speed whether they are shopping the digital horsepower.

Channels.

We look forward to sharing findings from tests in these markets and the early part of next year.

Number five modernizing our supply chain and technology infrastructure.

The other element of our Polaris strategy that was elevated this year as our focus on rebuilding our infrastructure and network to better meet customers' desire for speed and convenience at.

Adrian mentioned, we are hyper focused on building of supply chain that can handle more sales volume and reduce friction for customers on fulfillment and returns, while managing and reducing our delivery expense through these actions. We are also better managing and placing our inventory to meet customer demand and to minimize markdowns we.

Expect these efforts will deliver higher productivity in our customer fulfillment centers and in our stores lower delivery expenses and improve customer service across our network, we know customer expectations. In this area of rising and we are committed to meeting their demands.

Last we have added of pillar to our strategy that will enable our transformation strategy and accelerate the pace of change. This includes first a modernized technology platform to support of friction free customer and colleague experience.

A revamp data and analytics foundation to drive growth and profitability through all of our decisions and third and the most critical to our success of performance driven operating model enabled by clear incentives for our colleagues.

We recognize that the next 12 months to 18 months of our transformation journey will require great focus and superb execution. Our team has never been more aligned in their urgency to deliver the advances, we discussed which will strengthen our growth of profitability.

Our colleagues and our leadership team are all in their passion dedication and excitement as measured by their willingness to step up during the pandemic is extraordinary.

And further proof of their commitment our colleague engagement scores across our organization are the highest they've ever been on I'm excited to see how this will translate into better sales and styling support, especially in stores, where we're targeting of significant improvement in customer conversion rates.

With that I'll turn it over to Adrian who will share our guidance for 2021.

Thanks, Jeff as we look ahead to the rest of this year and beyond as we get beyond the pandemic and our business normalizes. We are focused on delivering on the metrics that will cement our position as a digitally led omni channel retailer that means sustainable sales growth across channels resilient gross margin.

And EBITDA margin solid free cash flow and a healthier capital structure, considering the profound changes over the past year and the lessons. We have learned we are to date, providing updated short term guidance as well as some guideposts towards where we see the business moving longer term.

These are based on our current strategic priorities with a recognition of ongoing uncertainties in the marketplace.

Also reflected more significant and faster lead it's right digital growth efforts as well as the continued right sizing of our mall based stores within the highest quarterly malls, while testing new off mall concepts.

I'll first talk about our long term objectives and cover our shorter term outlook for 2021.

We consider it to be a recovery and rebuilding year.

In the future for Macy's, Inc. We target annual sales comps of low single digits at the business normalizes past the full effects of the pandemic.

Digital penetration of exceeding 40% while for our stores channel. We acknowledged at malls in general will continue to face headwinds that will lead to low to mid single digit comp store sales declines after recovering from the pandemic in 2021 and 2022.

We see gross margin as a percent of sales stabilizing in the mid <unk>.

This will be driven by improvements in delivery costs and merchandise margin faster inventory turns and the ongoing shift to the digital channel.

The credits we're targeting this channel to stabilize at roughly 3% of sales.

Our adjusted EBITDA margin, we see continued growth moving into high single digits.

For debt, we will remain disciplined and are committed to paying down debt as it matures deleverage the balance sheet, we're targeting investment grade metrics, which include a leverage ratio of under three times at an interest coverage ratio of greater than six five times.

We do not plan to reinstate the dividend or share repurchase program in the near term as we're focused on investing in our growth initiatives and paying down debt. However, we will monitor our appliance continually in this area and we will consider with board approval. When the time is appropriate to consumer dividends and repurchases.

Now, let's look more closely at 2021, which as I mentioned, we view that sort of recovery and rebuilding year as we approach the resolution of the COVID-19 pandemic of.

Of course, there are still questions about the rollout of vaccines and the resulting shifts in consumer behavior. As a result, no one truly knows what the near to medium term will look like but we do expect our 2021 performance to be bifurcated with continued pandemic challenges into spring season, and more post pandemic like mobile.

<unk> starting in the fall.

Our annual guidance reflects this view here of some highlights.

We expect Macy's, Inc, 2021, net sales to be between $19 75, and 27 5 billion.

Of 14% to 20% over 2020 number.

Remember that we are lapping a year of significant declines in store growth due to store closures are expected stabilization of performance in 2021.

And these metrics.

We expect our gross margin rate to improve by high single digit percentage points from 2020 levels up to 37%.

Credit card revenue is expected to be substantially lower than 2020, approximately 3% of sales due to unexpected rise in delinquencies and bad debt that did not materialize last year.

SG&A expense dollars are expected to be lower than 2019 levels, primarily due to savings of $900 million will be accomplished in 2020.

As a percent of sales SG&A is expected to improve from 2020 levels, but the cure rate by approximately one five percentage points compared to 2019 driven by at the sales deleverage.

Asset sales gains are expected to total between 60 and $90 million.

Adjusted EBIT margin is expected to be approximately seven to seven 5%.

Net interest expenses expected to be approximately $325 million for the year.

The adjusted tax rate for 2021 is estimated at approximately $23 two 5%.

Adjusted diluted earnings per share is estimated between 40.

At 90.

Finally, we're committed to delevering, the balance sheet and as such expect to repay debt at maturity in January 2022.

To support the growth I've outlined both in the near and long term, we plan to invest a large percentage of our capital at the digital experience as well as our supply chain and technology transformation.

As we go forward, we expect to spend about half of our capital supporting these which will be an increase of roughly two and a half times from what we've done over the past several years in total the 2021 capital spend is estimated at approximately $650 million and its targeted to grow over time.

Now from a channel perspective digital sales are expected to make up approximately 35% of net sales. This past year saw an unprecedented year of digital growth and our outlook reflects a more normalized growth cadence, but one heavily focused at a digitally led business.

The stores, we anticipate strong comp store sales numbers as we cycled the pandemic related closures stores are targeted to represent about 65% of net sales for the year do you anticipate that customers will be increasingly more comfortable and public spaces at vaccine distribution reach at scale, but we haven't made any significant assumptions.

Round tourism base sales recovering in 2021.

Spect that store gross margin will help improve total enterprise gross margin compared to 2019, as we prioritize our promotional and markdown practices, while improving inventory productivity and churn.

On a seasonal standpoint, our guidance contemplates continued pandemic related challenges in the first half of the year with momentum building in the back half.

Next our profits to be weighted more towards the back half of the year as sales continue to improve.

<unk> at about 75% of our adjusted EBITDA, excluding asset sale gains will be generated on the second half with the majority of that coming in the fourth quarter given the importance of holiday.

The seasonality of our profit is expected to be most apparent at SG&A.

While we've made significant progress on cost reductions.

<unk> deleverage is expected to continue elevating our first half SG&A rate as a percent of sales compared to 2019.

Once we cycle into the back half of the year. The sales improvement is expected to drive SG&A rate to be more in line with the levels. We saw in the back half of 2019.

Keep in mind Q, let me try on all of our asset sale activities for the fourth quarter. So asset sale gains are not contemplated in our guidance over the first three quarters of the year.

Within our expectations for the first half we expect first quarter net sales to increase significantly compared to the first quarter of 2022 between.

Between $4 $2 billion at $4 3 billion with adjusted earnings per share between a loss of 52.

At 45.

Compared with a loss of $2 <unk> in 2020.

So in summary, with our updated and accelerated Polaris strategy Macy's has a clear path of sustainable growth driven by the digital channel by right sizing of our mall based stores to better quality malls as well as exploring more convenience and productive off mall formats that are closer to our customers at.

At the same time, we'll continue to address the gross margin opportunities and gain SG&A leverage as sales recover in 2021.

Target to return to stabilized growth longer term at the effects of the pandemic Wayne where.

We are keenly focused on delivering strong and sustainable shareholder returns investing in growth initiatives that generate high returns achieving a healthier capital structure and progressing towards investment grade metrics with that I'll turn it back over to Jeff for some closing remarks.

Thanks, Adrian so in closing I'd like to leave you with a few thoughts as we look towards a healthier economy in the coming months of years I am optimistic about the way we are re imagining and repositioning our business in line with our Polaris strategy.

We have a strong focus on our customer end market trends. We are building out our digitally led omni channel experience and we are well positioned to better capture customer demand across the total market from off price of luxury and from offline to online.

We know what's important to customers, we will empower them to find their personal style through curated and distinctive products clear value and enhanced digital and store experiences optimize by a modernized infrastructure and performance culture, and we will be at a better position to be increasingly relevant to the next generation of customers.

I am encouraged by the talent and focus of our teams across Macy's, who persevere through 2020, and who are committed to our future growth.

A diverse leadership team that includes a blend of new talent with outside perspectives, along with our tenured invest develop leaders and I am confident that together, we will build towards a sustainable profitable future. This concludes our formal remarks and now we'll take your questions.

Yeah.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to a lot of your signal to reach our equipment.

We ask that you. Please limit yourself to one question again at Star One if you would like to ask a question.

And we will take our first question from Chuck Grom with Gordon Haskett.

Hey, Thanks, Good morning, Thanks for the thoughtful update Jeff on the on the pace of recovery in 'twenty, one how are you.

Are you planning the business by category, particularly areas that may take longer to recover but also areas of the business that could see at release of some pent up demand and then.

Adrian when we think about the gross margin structure in the 'twenty, One guide of 37% with digital where it is do you think you can get back to 40 to 41 per cent or is the mid <unk> the best run rate. Thanks.

Hey, Chuck good morning.

So what we're expecting is that we're going to see much of what we saw in the fourth quarter going through the first half. So we expect that the home businesses are going to continue to be strong on elevated and then when you look at some of the luxury businesses that customers have been spending on like fine jewelry and fragrances.

Some of the design of skin care all of those categories are strong. So when you look at the fourth quarter on those businesses. We were up about 14%. When you look at all of how you look at fine jewelry fragrances, sleepwear and I would expect the debt.

Of those would continue.

<unk> is up the sell throughs are better on those particular areas. So we're definitely funding those and thats across bloomingdale's as well as Macy's I would expect of negative categories to continue so I think all of apparel remains challenge whilst we are while we are doing well in the casual categories of address categories remain depressed our inventory levels remain in.

In line with our sales.

We have we have of ramp up strategy with all of the relevant vendors as well as our private brands is that if we start to see seeds of of improvement at the vaccination starts to get scale and customers are starting to book of events weddings.

Youll start to see those businesses improve for us. So we expect the first half is going to be very similar to fourth quarter and at the back half will start to see an improvement in apparel, but remains strong in the categories that have been strong as well as the new brands and categories that we have at it.

And Scott Thanks for your question and thanks for joining this morning.

To your point about gross margin the things that you would keep in mind is that we're targeting adjusted EBITDA margin moving towards the high single digit range in order to achieve this we're driving both the top line as well as efficiencies in both of our SG&A and our gross margin non truck Youre absolutely right from a gross margin standpoint, we are planning to stabilize in the future of the business normally.

<unk> is in the mid <unk> in the future, but we're actually working diligently to improve merchandise margin as well as at the delivery costs on getting efficiencies in our SG&A, So really elevating the profitability of the overall business.

Think about the merchandise margin, obviously category mix will have an impact on margin level as the current pandemic mix tends to be geared towards on lower margin categories, such as home as we discussed a little bit earlier, but at the same time, we do believe that as recovery happens apparel sales will return and debt will also help offset some of the declines in gross margin rate.

Due to the mix shift that I just mentioned, but we're also going after pricing and promotions were trying to minimize the unnecessary promotions in markdowns and discounts to achieve a higher full price sell through which will help our merchandize margins at ultimately help our gross margin. So we've gotten a lot of momentum from what we've seen in the fourth quarter of last year.

We've talked at length of at about the delivery expense is all about better allocation of inventory, where the customer wants to transact at.

Split shipments is improving our AUR as the number of levers we're going after but as you can.

Think about the contribution margin piece of it talks about a bit earlier, we're really focused on not just gross margin hitting in the mid 30 percents in the future, but really elevating our EBITDA margin adjusted EBITDA margin closer to the high single digit level over the longer term.

Thank you.

Okay.

And we will take our next question from Paul <unk> with Citi.

Hey, Thanks, guys just thinking about the contribution comments by channel that you laid out.

On the gears, leading up to the pandemic with digital penetration increasing your overall EBIT margins were going down so I'm kind of curious what do you think has changed that would reverse that as digital continues to grow.

In terms of overall penetration and along the same lines and that longer term algorithm low.

Single digit topline growth that you laid out at the store closing factor into that are you talking overall sales is that of I've got a comp number.

Just want to make sure I understand how youre thinking about stores.

Long term on how attractive of into that top on thanks.

Great. Thank you very much for your question Paul So as we think about the contribution margin it's important to understand the difference between the channels right and so as we are looking at contribution margin would be recognized at improving margins in the digital channel is all about elevating delivery expense.

I'm, sorry, improving delivery expenses to elevate our.

Digital gross margin from a store standpoint, its really just leveraging more of that asset for baps for curbside for Boston a lot of at digitally led initiatives that we have underway while at the same time getting them getting back just comp store growth. When you think about the low single digit growth in the future of that's really on a comp basis as.

As you probably know with regards to the announcement of the 125 store closures that we announced in January of last year on of 2019 basis, that's about $1 billion to be in sales. So that provides a real headwind as we actually rightsize, our mall based stores, but with the ambition to grow digital to $10 billion in the next three years with the with the work that we're doing to.

Reduced digital.

Digital and delivery expense and also the permanent seat at the $900 million of SG&A savings some of the restructurings that we had in February and July of last year, we should be able to elevate those EBITDA margins relative to what you'd seen pre pandemic. So those are some of the major levers that were focused on as we look ahead.

Thanks, Good luck.

We will take our next question from Kimberly Greenberger with Morgan Stanley.

Oh, great. Thank you so much.

Thank you and I.

At all kind of stay at this has been extremely hopeful end illustrative of what.

I want to clarify.

And we're at two things on the 500 basis point differential on contribution margin between stores and digital.

If you were sort of reflect back over the last five years can you give us some context around the performance just in your stores channel.

And have you seen store margin fall over time, and then secondarily on the longer term financial targets with gross margin in the mid thirties I think.

This year 2021 year, providing a preliminary gross margin outlook of 37% if I heard you correctly so should we.

Consider that 37% target this year, what where you would expect gross margin to be sustained out. Thank you so much.

Thank you Kimberly Thanks for your question. So in terms of in terms of the contribution margin the mid single digits end.

At mid single digits profitability contribution for our digital channel relative to our stores at actually quite really net based on our 2019 numbers I think to keep in mind is over the last five years, we've been built tremendous scale in the digital channel. So when you think about the leverage of the technology infrastructure and the improvement of scale, we're really seeing.

The increased benefits in terms of profit contribution in the digital channel and contracts, we've actually seen with a large fixed asset based on stores our store sales of declining so what we're working to do from an omni channel standpoint is really leverage our store assets for the digital experiences around box and curbside in store fulfillment of those capabilities.

But what we do see very clearly is that as our business on the digital side skills, we have great opportunities to continue to improve the profit contribution margin of that business.

Delivery expenses of real focus for us as we think about ways to reduce packages encouraging customers to pick up from our stores improving our AUR is even with the pricing of promotion work that would be Denver really get gains that will all continue to contribute.

Year end more profitable digital business, while also taking advantage of the physical assets that we have within the business now as we think about Q1, we're only share on that expectations around the sales on adjusted EPS as we think about the first quarter were very comfortable with our inventory position going into 2021. So we do expect.

A healthy level of gross margin as we think about the first quarter of the year. So we're starting the year with really healthy inventory as you know were down 27% over last year in terms of our inventory going into the first quarter.

Really happy with our stock to sales ratio, we plan it conservatively because of what we describe as of kind of a pandemic like activity. We expect in the first half and four stores, providing clear value with simple easy to understand pricing of promotions that allow us to maintain a strong margin bills of the kinds of things that we're at.

We focused on so we do expect to move into the first quarter any healthy position, but at this time, just really providing Q1 guidance you want on the sales and the adjusted EPS level.

Okay. Thank you.

And we will take our next question from Matthew Boss with Jpmorgan.

Great. Thanks.

Your sales guidance for this year, I think 17% to 18% below.

Pre pandemic base at the mid point, so as we think about potential consumer recovery in the back half end I think you've laid out $10 billion or more and competitor revenue was up for grabs what's your flexibility.

Day sales in key categories, and then secondly, as we think multiyear how should we think about your ability to recapture of that four to $4 5 million in revenue.

At potentially get back to your 2019 revenue base overtime.

Hey, Matt So we have a lot of flexibility with obviously, we're in a very good liquidity position with our inventories right now and so as we were when you. When you saw how we came out of the second quarter end, our opportunity with our inventory position for third and fourth quarters. So those of those categories that were really true.

<unk> and trending for US we were able to respond to there were some supply chain snacks in certain businesses like home store. We had we didn't have as much flexibility on that but we're certainly looking at at the front half of the year and really the full year based on where the consumer goes on this so we had the seeds of where we see that those runways, but as things of that.

As I mentioned on my first answer to Chuck's question that as those things start to pick up. So if you think about the address of the soup business the clothing business.

As people go into more of a occasion based dressing we'll be ready with our main wholesale partners. So those would be where I know, we're going to be able to react based on and we have longer lead time businesses like home store, we're placing those bets. So as an example, if you look at our textiles business, which is mostly private brands.

We expect those great trends to continue all the way through 2021, and so we place those bets based on what we were seeing through the second and third quarters.

And we've been when you think about our overall inventory levels from before we had opportunities for better sell throughs, we had opportunities certainly for faster inventory turns and so even though our inventory levels are down and on our sell throughs are really way up and particularly on a regular price sell throughs. That's obviously, helping our margins. So I think we have opportunity to do more with.

The inventory than we have than we've done historically, so it's not just buying into kind of lag. If you will future markdowns on sales of our quarter on how we plan on receipts, but it's also getting better sell throughs and so with the markdown optimization that we have the ability to mark goods at a store level to decrease our Pos sales that we're doing based on having more hyper.

Localized offering through our personalization engine with customers, that's all helping us on the margin conversation and having the liquidity in our inventories is giving us the opportunity to respond to all customer needs by going after categories that theres always stock available on in virtually everything that we sell and we can also go into new categories New bra.

<unk>, new categories, and where we are.

Doing that through either <unk> or we're doing that through our owned inventory. So that's our that's what we've been doing and I expect all of those trends to continue.

Yeah.

We will take our next question from Omar Saad with Evercore partners.

Good morning, Thanks for taking my question Great presentation.

I wanted to ask about the 7 million new customers. It's great that you guys are attracting a lot of new fresh faces to the franchise.

Do you have a sense from where they are coming from.

And why Theyre discovering Macy's at this point in time and then I also wanted if you could also address the existing customers. So many new customers kind of implies the existing customer base is spending a lot last year over year.

Is this predominantly older customers, who arent necessarily digitally active and haven't felt comfortable to go back to the stores.

What are the strategies, we're bringing those existing customers at historical customers back into the franchise, while keeping a lot of these new entrants.

You've attracted.

Hey, Omar how to take these questions. So, let's just talk about the in the fourth quarter of the number that you're quoting of 7 million of new customers.

This was a good quarter for us because of this new customers that came into the brand that was at 2% increase over what we had in 2019 levels. So it was really good to see thats on a quarter that we were down 17% of sales to have the customer base increase that gives us some momentum going into the new year. So the new customers that have been coming.

On into the brand has been steadily improving.

Each quarter fourth quarter was our best performance and when you look at those customers.

They are much more young and more diverse than what we've had historically.

$4 million of those 7 million came in through digital so obviously with the digital engine that we have that has opened up lots of new customers to us that are shopping more on digital or now experiencing new brands digitally. So when you think about the 4 million new customers that came in through digital that was of 36%.

<unk> versus the previous share so.

We're encouraged by those trends.

On new customers coming in to your let's just talk about on on an annual basis, because when you look at the full annual profile of one of the things that we're proud of is that we had 4 million new customers come to us because of what we changed with our star rewards loyalty program. We added a bronze tier of two years ago, and that's starting to get some real tracks.

<unk> for us. So in 2020, we had 4 million new members join us on that that was at 50% increase and again those are predominantly when you look at our overall base of customers a younger cohort so 38% of those customers were under 40, and that's versus the total company of being about 28%.

So the other part of your question about kind of customer retention and what happened with our existing customer base, we definitely saw a slowdown in our goals on our platinum customers based on where they are on their feelings about shopping in the pandemic. They are an older cohort vs.

Once the new customers I'm talking about are the ones that came in from brands. We do expect in and listening to them that this is they are really kind of stalling their buying habits overall and we do expect that they will return to more normalized behavior as the pandemic subsides.

The other thing I talked about would be is just as corna that also has been a nice accelerant for us in terms of new customers. So we added that in you know.

That has really been about when you think about all of the new customers that we've had coming from Florida about two thirds of those were previously unknown to Macy's and sort of new customers and they also are predominantly under 40% of 45% of those are under 40 again versus the 27 28 per cent for Macy's in total so on.

On the customer front I guess, we definitely have some momentum and so and it's good to see that it's good to see younger customers coming on they're responding to our values on our products.

And really the big engine here they are coming in through digital.

Interest in color, Jeff Thanks, Good luck.

Thank you.

We'll take our next question from Michael Binetti with Credit Suisse.

Yeah.

Hey, good morning, guys. Thanks for all of the detail here.

Jeff asked you about the inventory comments, you mentioned you of a plan to ramp of inventory and some of the categories.

As your indicators start to improve could you offer a few thoughts there or the vendors are going to be holding inventory, what's making them more comfortable holding that inventory before you're comfortable and then maybe just as you look at the shape of the year for inventory, maybe you can help us triangulate around your sales growth plan on how you.

Think about the base case of where inventory will grow in the first half versus second half of the year on as you see at today.

Yeah, Hi, Michael.

So we're really just to restate, we're happy with where our inventory position ended the year end. So looking at the stock to sales ratio on where we stand.

And just having the liquidity that's built into where we believe customer demand may or may not go we're going to be ready with with putting receipts against that we have not seen an issue in vendors predominantly in the categories that are dormant right now of they'll have they do have inventory ready for us if we were to buy it and so that when you.

Look at all of the kind of dress up categories. That's predominantly a couple of very strong wholesale partners that we have deep relationships with and they are ready with us across multi brands across those categories.

And those are the sort of the big engines of suits on both men's and women's as well as all of the dress up categories on the dress up accessory categories dress shoes on more of the bags at work with it. So those are those are categories, where we have worked with our vendor partners on that so we're very focused on and when you look at the back half of the year, we had an <unk> 18 per.

Were sent improvement in inventory productivity.

As a number that is.

We're looking at that continuing to really hold in terms of improving that productivity for the first half of 'twenty. One so as mentioned I think that where we're most focused right. Now is can we get the home inventories that we need we've made all of the adjustments that are required on our private brands of making sure that we have that on the housewares categories. We clearly have a supply chain.

And have had on the supply chain issue in both furniture and mattresses. The mattresses, one is largely behind us the furniture, one day persists. The demand is quite high the supply we're still having some issues with some of the categories that are coming out of.

Vietnam and in China, So, but we expect that all to be behind us by the end of the first quarter. So when I look at the inventory levels. We're planning those to definitely be below where our sales are going to be we are planning to lag of were planning for higher sell throughs. We're planning for less markdowns. When you look at the composite of our business and our inventory.

On regular price inventory versus markdown, it's dramatically lower in markdown inventory.

It's basically still below last year at regular price inventory at Hudson, a much healthier position on where we are with markdowns, which is planned. So I think we're on a good position of way, we're thinking about our inventory moving forward.

If I can ask one follow up on vendor direct and I know that that's been a bigger focus around the space I think at instead of I think you sort of 20% of of digital.

Can you speak to the unit economics, there maybe just an update on the unit economics and is there an opportunity to increase debt program as you talk to the vendors.

Going forward.

Yes, I think the big thing on vendor direct has been has been quite strong for US one of the things that we're always balancing is the is the customer and when you have a customer thats coming into your brand and are you does that vendor kind of be shipping at in exactly the time of they put it on the right is at in the right condition. So we're always watching the customer.

To all of vendor direct and we've done at very good job of our merchants have done a good job with all of our vendor direct partners and really improving on that level of service. So we're pretty pleased with it you get down to you know whether or not these.

The orders don't come in where it's at pure vendor direct order vs versus our owned inventory. So oftentimes that does increase of split shipments, which can be of customer and convenience. So we're always watching that when you look at a lot of our vendor direct of we're looking at single category single purchase. So when you look at a lot of of home categories, where a customer will purchase that think of <unk>.

And it'll be shipped directly from that vendor that's been a very positive experience when it ends up being a split between vendor direct apparel order or in accessories of order and they're ordering something else thats on our owned inventory is coming from two different.

It's either coming from of stores coming from of warehouse and it's coming from the vendor direct warehouse that can be.

An experience that we're very watchful of to ensure that it matches the customer expectation, but I do expect under direct to continue to grow in the right times certainly when you look at the level of peak that we have between kind of black Friday, and cyber week looking at vendor direct to kind of alleviate some of that of some of those peak pressures that's always a.

Factors for us.

But when we're going forward with a $10 billion strategy. We're looking at all elements to be able to satisfy the customer when you looked at the number of new brands. We brought in at the number of expanded categories. The end.

Just the continued number of failed searches we have of guide as to where the customers are looking for the Macy's and bloomingdale's brands to play we're going to look at all avenues to be able to satisfy that end vendor direct is part of that engine.

Thanks, so much of it.

We will take our next question from Dana Telsey with Telsey Advisory group.

Good morning, everyone. As you talked you asked about new partnership models of vendors can you expand on that and policy exactly what you're meaning and then the tourist impact, which I think was 290 basis points of a headwind in the third quarter to 10 in the second what did you see in the fourth quarter. How are you planning for 2021.

And just lastly, it sounds like Youre seeing good results on backstage, how you're planning the growth there. Thank you.

Hi, Dana So let's talk first about vendors so.

What we're working on ways as we kind of brand new Chief merchant, who basically was at Macy's veteran and did great stuff for us and the beauty in the center core worlds. So she has taken over the reins and so it's always a great opportunity to work with our top partners and so we're working with those and things that we're really looking at together because in many cases, we share at the same.

We're looking at we're at kind of ticking through the the opportunities first off is just being really transparent about kind of of our joint profitability and one of our investment decisions against the share of customer. So we're looking at that we're looking at what are the brand experiences both online and on store with our brands can come really fully to life, we look at elevated fashion.

Ex that or balance across wearing occasions, we definitely look at data and the customer data that we have of their brands and and what they know about their brands that can help us and so what do we do with data together that.

That can help build lifetime value of really getting much.

Better with our own data analytics and looking at their opportunities with that when you look at marketing and brand opportunities to deepen the brand engagement.

Clearly look at all of our gifting and our special location opportunities that were brands that were of high consideration set for those of those occasions for our customers and how to our brands play with that so we look at that obviously, we of our base of our private brands. We look at our National brands and then we look at our new emerging brands on that so those are kind of the new the new partnership.

<unk> that were that were working on let me answer your at backstage question. This has been one that as you well know Dana we started this in 2015, we started out as a free standing format than we do.

Ryan it quickly into our stores, because we had productivity opportunities in our brick and mortar store fleet and and that's really where we've been spending most of our efforts and what <unk> comment was earlier that that has been a strong gross strategy for us obviously during the COVID-19.

We had about they were down those backstage areas were down about one third of what the balance of the brick and mortar stores were so much better productivity level the sell throughs of really good so.

So the top line and the margins have been quite strong there we're going to expand that as one of the 35 stores. So we're well over 200, we're going to get close to 300 stores in stores with backstage through the course of our rollout in 2021, and then we're back to adding freestanding backstage stores into those three markets that we announced with Polaris.

Back in February of 'twenty, so getting back to freestanding backstage, which has full omni channel fulfillment capability for returns in store pickup across the full network. We continued to rollout back stage around the bloomingdale's equivalent of that with Bloomingdale's outlet, we're continuing to do that so we're still bullish on.

On off price and when you think about our brands of being off price to luxury that's what's been so interesting about 2020 was how well those great values of backstage work for us as well as half of luxury the bifurcation of the luxury products worked across Macy's and bloomingdales. They were both standout performers on both ends of the value of spectrum.

Okay.

Got it.

Yeah.

We will take our next question from Steph Wissink with Jefferies.

Thanks, Good morning, everyone I have a follow up of Paul's earlier question on gross margin optimization.

Talk a little bit about what you're assuming in your $10 billion digital target in terms of debt centex fulfilled from stores I think in the fourth quarter of around 25%.

What should we think about the optimal penetration of fulfillment.

Thank you.

Hi, good morning, Steph, So youre, absolutely right about 25% of our digital demand was fulfilled from stores and that includes store fulfillment Baps curbside and same day as well. The reality is that we're keenly focused on inventory placements. So that we can actually leverage our stores asset to.

To allow us to meet the expectations on cost and speed and efficiency for our customers and for our business as you remember earlier in the year, we had actually turned on curbside within just a couple of weeks and we are already in our curbside to point out. So we believe on the convenience standpoint that debt.

The idea of continuing to leverage our stores for store fulfillment for Bobs and curbside is an important kind of target for us. So we hope as we think about the 25% and you want to figure out are there ways to increase that where it makes sense and also think about our upstream fulfillment choices as well because from our perspective, it's really about how the customer wants.

At a shop us the customer may want to have the delivery sent to his or her at home or the customer wanted to pick it up at at nearby store within an hour or two and so we just want to make sure that you have the flexibility to meet that demand and response of where the customers taking us from a digital and omni standpoint.

That's great that's what I put one more question out of will find out of inventory plans.

I can't have an idea of working with your vendors.

How are you thinking about the trend cycle and the inventory composition or are you seeing vendors presenting you with tons of trend in SaaS, and maybe taking a bit more risk on me and that's on the back half of it would come back to stores going back to retail.

Yes. Good question stuff I think that when you think about our merchants on where we do really well is where we have great fashionable product in categories of customers wont be at trend products or trend categories, or otherwise and so and we found our vendors very receptive to that.

We're aligned with our vendors about building AUR by putting more value into those products and that's our sweet spot is really pushing the edges of that so even in our brands that are more widely distributed.

In many cases, they've got great premium pieces of their lines that we really like to dive into with them because our customers expect that and they love it when we get it right. So we found good receptivity from vendors on that subject.

Thank you.

Okay.

We will take our next question from Paul Trussell with Deutsche Bank.

Hi, Good morning. This is got to come down on per Paul. Thanks for all of the color of the day one.

Wondering if you could dig a little bit deeper into the work youre doing around at a whole team that digital experience and on your presentation. You mentioned on online business model types of bank of outlet stores.

Wondering if you could share any details around that at missiles.

Yeah.

I'm sorry. Your question was a little garbled could you just repeat the first part of the question I heard the second part.

Oh, Yes, I was just wondering if you can talk about the work youre doing your on enhancing.

Yeah.

So let me let me take that so obviously when you think about what we've let me just talk about what we've got planned for 'twenty. One so when you've got two big initiatives within digital one is to continue to improve the functionality of the site remove all of the friction and the other is to be much more experiential and then really look at.

The format of our ability to tell stories and brand stories.

So when you think about expect on increased beauty enhancements that Adrian talked about earlier on the site in the first and the second quarter. We're also going to be later on in other categories like some of our lease businesses some of the luxury businesses as well as us sunglasses and eyewear. When you think about the back half of the year of lot of it is going to be customers.

<unk> tools for products Livestream shopping experiences that's something that we've been experimenting with bloomingdale's has done a great pace of car for us on that that's going to continue across the Macy's brand I'm really looking at kind of the advisor shopping experience is going to be in at an add on that.

And as you just mentioned or you asked at the second part of your question testing and developing at off price online with.

With bloomingdale's as our pace of car on that we're also going to be having a total site redesign that has a multi year project at the first incantation of that is going to be launched for the fourth quarter. So that is that's also going to be in time for the holiday. We've got other plans that are of theyre looking into future years, but both of the ones that are on the docket at <unk>.

Experienced through 2021.

Yeah.

And we will take our next question from Lorraine Hutchinson with Bank of America.

Thanks, Good morning.

Follow up on your comments on credit.

At the film sales nicely in 2020 of ties a little surprised at sea.

For 2021 guidance called for sure.

Can you speak a little bit about your assumptions behind the 3% of guidance on where that could be outside of the downtown.

Hi, Lorraine, it's Adrian here good morning.

As you as you describe you know our guidance for credit card revenues of about 3% for 2021 and also as we think about the normalization of the business. That's our guidance as well. If you think about 2021, specifically our guidance is really reflective of an expected increase in bad debt and delinquencies, what we didn't realize from bad debt in delinquency levels in 2000.

'twenty is expected.

Effectively show up in 2021, if you look at the presentation will be posted on the website you see fundamentally is an elevation of credit card income as of right of sale in 2020 relative to prior year. So were effective at getting back to more normalized levels, but also recognizing that we do expect some degradation.

<unk>.

<unk> happened because of bad debt of delinquencies. There's also some degradation and lower account balances driven by the simply the lower sales level in 2021, we do expect in the first half of the year to be more pandemic like activity.

So that will certainly suppressed some of the sales opportunities that we do see especially as Seth mentioned earlier around some of our higher tier credit card users. So that's really kind of how we're thinking about it.

How we are actually projecting credit card income for this year.

Okay.

Operator, I think we have time for one more question.

Perfect. We will take our next question from Oliver Chen with Cowen <unk> Company.

Alright. Thank you very much we were curious about the opportunities of headwinds price.

Clarity on how youre balance price clarity relative.

The promotions on offering good value yet maintain some nice merchandise margin.

Also would love your take on the concept.

And how that may be an opportunity as you think about it.

By chain end ore delivery to customers, where you see opportunity with speed. Thank you.

Good morning Oliver.

Youre absolutely right, we are focused on simplifying our pricing promotions and discounts for our customers. So that we can really just deliver value of our product at a much clearer way the key to this work, though it was that would reduce promotions that customers are just not responding too which will allow us to reinvest in those categories at can actually help us accelerate growth.

If you look at 2020.

I think we lost favor.

Adrian.

Adrienne you back on.

Okay.

We have many of garbled.

Adrianne can very rapidly.

Yes, sorry about that so during the holiday, we will focus on increasing our full price sell through and protecting our margins and that allowed us to actually do you sort of Pos promotions.

Think about permanent markdown cadence of the launch of on markdown tool. We believe that that will enable us to have more location level of markdowns at scale as you move into 2021 indebtedness at at the low we believe at about $90 million opportunity. So as you also think about our pricing and promotion of markdowns. It's also important for us to be very.

Conservative with our buys.

Combined with being just more surgical with our pricing promotions markdown activity, we want to make sure that sort of very measured in deposits that were making going forward and so that will certainly help us on from that standpoint, as it relates to shipping speed.

Part of what we're focused on is just being competitive on delivery speed by providing our customers with convenient options. They want to choose whether they are shipping to home quickly you're picking up from store from a store within a couple of hours and so we are keenly focused on building of supply chain that will really help us handle more sales volume increase delivery speed.

Reduce the cost of fulfillment and also reduce a lot of friction that may exist today in our returns process. So we're leveraging our stores to be a big part of that rebuilding our network with tapping on the technology needed to do that with predictive analytics to help us make sure we have the product and the right amount in the right place. So we're making a lot of progress on the speed of <unk>.

Mentioned as well, but we're really following the lead at the customer and taken advantage of the customers. When you look at digital where we feel we have a strong advantage.

Okay.

And ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.

Okay.

Yeah.

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Sure.