Q1 2021 Macy's Inc Earnings Call
Okay.
Good morning, and welcome to Macy's first quarter 2021 earnings conference call. Today's hour long conference is being recorded I would now like to turn the call over to Mike Mcguire head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us on this conference call to discuss our first quarter 2021 results with me on the call today are Jeff can at our chairman and CEO and Adrian Mitchell, our CFO, Jeff and Adrian have prepared remarks that they will share after which.
We will host of question and answer session. Given the time constraints of the number of people who want to participate we ask that you. Please limit your questions to one.
In addition to this call and our press release, we have posted a slide presentation of the investors section of our website Macy's Inc. Dot com the presentation summarizes the information in our prepared remarks and include some additional facts and figures.
Also note that given the pandemic impact on 2020 results most of the comparisons that we'll speak to you. This morning will be versus 2019, we feel that benchmark our performance more appropriately I.
I do have one housekeeping item for sure Adrian will be participating in a fireside chat at Cowen New retail ecosystem CEO Summit conference on Wednesday May 26 at 815, a M. Eastern time. This event will be webcast on our Investor Relations website. So please mark your calendars keep.
Keep in mind at all forward looking statements are subject to safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today.
Detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission.
In discussing 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 others used in our earnings release and our presentation of the investors section of our website.
As a reminder, today's call is being webcast on our website of <unk>.
They will be available of approximately two hours after at the conclusion of this call and it will be archived on our website for one year.
Now I'd like to turn this over to Jeff.
Thanks, Mike and good morning, everyone and thank you for joining us Adrian I will share details today about our first quarter financial and operational results and discuss our revised guidance for 2021.
The consumer is healthy with lower debt and strong household savings after a year of reduced activity consumers are ready to get out reconnect with family and friends and celebrate life. Our customers are ready to spend and demand is rising and categories. We are positioned to win at.
We began 2021 at a healthier position than our first quarter financials were strong we exceeded our expectations on both top and bottom lines inventories were clean merchandise margin was improving and we were more efficient with our SG&A. Our gross margin rate increased 40 basis points and SG&A was 17.
1% lower than the first quarter of 2019, all three of our brands Macy's Bloomingdale's and Blue Mercury built on their fourth quarter of momentum.
As you saw on our press release. This morning, we're comparing our first quarter of 2021 with the first quarter of 2019 to more appropriately benchmark our performance given the impact of the pandemic last year will also show the momentum from last quarter of 2020 into the first quarter of the year.
Starting with sales we delivered a comparable owned plus licensed sales decrease of 10% versus Q1 of 2019 at trend improvement from the $17, 1% decrease in the fourth quarter of 2020 adjusted diluted EPS was <unk> 39.
Significantly outpacing our prior guidance and minus asset sale gains exceeded Q1 of 2019.
In addition to the continued execution of our Polaris strategy. The U S stimulus package and vaccine rollout certainly contributed to the momentum.
The stimulus encourage more customers to use cash and debit cards instead of credit and the increased level of vaccinations boost at store traffic all encouraging signs as consumers move towards a post pandemic lifestyle and start to spend more for in person activities travel and events.
One of our most improved categories in the quarter was luggage clearly our customer is ready to get on with life.
With these encouraging macro trends with stronger than expected Q1 performance and with positive results from our Polaris strategy. We are raising our full year 2021 guidance. We don't see this as a short term pop there of pent up demand opportunities in our categories that give us confidence for accelerated profitable growth.
In 2021 and beyond we are now expecting full year 2021 sales of $21 7 billion to $22 2 billion and adjusted EPS of between $1 71, and $2 12.
Adrian will go into deeper detail about the revised guidance and our financial results.
But first I wanted to give an update on the enhanced Polaris strategy that we outlined on last quarter's earnings call, which is our blueprint for transforming Macy's Polaris is helping us improve the broad fundamentals of our business and helping us build a stronger Macy's for the future. It will help us deliver a seamless experience for our customers as they shop.
On line and in store from off price to luxury.
Looking at our customer base, we're seeing our core customers coming back to shop, and they're spending more we're also accelerating customer acquisitions, bringing new customers into the Macy's brand and re engaging customers who've returned after being dormant during the height of the pandemic.
Behavior is improving among our credit card star rewards loyalty customers platinum gold and silver while active customers. In this group remained down in the mid teens versus Q1 of 2019, the average customer spend 10% more than the first quarter compared with the same period in 2019 at 11 percentage points.
Trends of improvement from the fourth quarter and these customers are shopping more frequently with the average number of visits per customer up and the average unit retail up 7% compared with the same period in 2019.
We benefited from strong customer acquisition trends, which continued into the quarter, reflecting the reengagement of our core customer base as well as the acquisition of new customers to the Macy's brand in the first quarter, we welcomed a total of $4 6 million new customers. This reflects a robust 23% improvement versus <unk>.
2019, and shows a significant trend increase from the fourth quarter of 2020, which was up 2% from a year earlier customer spend in the first quarter was up 8% versus the plus 4% in the fourth quarter of 2020.
All of these new customers $3 million of brand new to the Macy's brand, while the remaining $1 6 million were dormant customers who of re engaged.
Encouragingly of new customers acquired last year, 17% returned for additional purchases in this year's first quarter.
Our digital channel is feeling much of this activity, 47% of our new customers in the first quarter made their initial transaction through digital and increase of 74% compared to Q1 of 2019.
And even more encouraging is that 82% of digital orders in the first quarter came from repeat customers at the highest penetration of repeat orders we've seen in a single quarter I'll speak more about our digital platform in a few minutes.
We're also happy to see a 5% increase in the number of new customers coming into our stores compared to Q1 of 2019, which was largely driven by the reengagement of our dormant customers.
Bronze loyalty category continues to be one of the best customer acquisition tools. It is our youngest and most diverse group with approximately 25% under the age of 40 and more than 50% ethnically diverse one 7 million new bronze members enrolled in the first quarter at our active brands customers are on average spending up to <unk>.
14% more compared with the first quarter of 2019 four points better than the increase we saw in the fourth quarter.
Expanding customers payment options is another way we are continuing to attract new customers, we launched Florida on the Macy's website in October and we sense scaled at across Macy's Bloomingdale's and Blue Mercury, both online and in stores with Florida, We continue to see higher spend per visit and at an increased acquisition of new younger customers.
45% are under 40.
Our goal is to convert all of these new customers to Macy's loyalty customers, who return for future purchases.
For a full breakdown of our star rewards loyalty members and new customers. Please refer to slide nine of our earnings presentation, which can be found on our website.
Moving on to merchandising a key tenant of the Macy's brand and specifically of our Polaris strategy is that we our customers fashion and style source from off price to luxury we generated strong sales in the first quarter. We also saw higher AUR and stronger regular price sell throughs across the bulk of our business.
Including beauty home and kids. This gives us continued flexibility at our inventory position.
Through the fashion and style pillar of Polaris, we are hard at work on reconstructing our private brands and working closely with our national brands premium brands and emerging brands as a partner of choice for many premium brands, we are delivering more collaborative and profitable relationships with vendors who are leaning into our distribution channels.
<unk> us to do more business together with our share of customers as a fashion retailer, we are constantly adding and re prioritizing brands in our assortment to address our customers' style needs as customer trends shift continued flexibility at our inventory allows us to respond to these needs.
And at what worked in the first quarter at is best explained in three buckets first our products and categories that were strong during the height of the pandemic remains strong second our improvements in dorman categories that are showing life again, and third our emerging opportunities where customers have signaled interest for us to expand our assortment.
Many of the categories fueled by the pandemic, having slowed down our home store continues to deliver growth across textiles, and furniture sleepwear remains a standout and thats a category that is more than half private brand product. This is reflected across the full value of spectrum from off price backstage shoppers continued to shop home.
Kids designer of handbags in casual apparel led by warm weather.
Customers are still demanding luxury items like fine jewelry and fragrance and we continue to see strong performance in sunglasses and watches at bloomingdale's luxury handbags are particularly popular.
And our second bucket, we're seeing renewed life in categories that were underperforming during the height of the pandemic during the first quarter of 2021, Macy's apparel saw at eight percentage point improvement from the fourth quarter of 2020 as well as sequential improvement throughout the first quarter as the weather warms up and vaccines are more readily available customers.
Our feeling increasingly confident to get dressed up and venture outside they're also starting to attend events again accordingly, we're seeing an improvement in dresses those special occasion like prom mother of the bride and casual at Bloomingdale's, we see signs of improvement in dresses and dressy sandals were also experiencing of.
<unk> increase on the men's side of the business and tailored clothing.
We are ready for the shift and we will continue to take a balanced approach in our assortments.
Denim is another area that is improving across styles and price points. We also saw an improvement from the fourth quarter and kids driven by Easter and a return to in person learning at many schools across Macy's and Bloomingdales, we are continuing to see trend growth in shoes, and handbags as consumers start to travel again, they're shopping our brands to prepare for their trips.
Including warm weather standout categories like sandals swim and luggage.
And then the third bucket categories that are starting to emerge we of the liquidity and flexibility in our inventories to respond to customer needs in categories like toys, pet food and wine health and fitness either through vendor direct or our owned inventory we have.
<unk> added hundreds of new brands and categories in apparel home and beauty over the past year, allowing us to capture additional spend with new and existing customers.
Another strategic pillar of Polaris is delivering a clear value across products and categories through our pricing science and reduced promotions, we are driving stronger regular price sell throughs and higher merchandise margins.
To ensure we have products in stock in the right locations and to better meet customers' desire for speed and convenience, we continue to update our supply chain infrastructure and network, while leveraging improved data analytics capabilities and our fulfillment strategies the.
The continuing supply chain disruptions across the entire retail industry are impacting our inventory levels and causing delays across some categories. We're navigating the disruption by adjusting our freight strategies working closely with our overseas carriers and brand partners and pushing for earlier deliveries we're cautiously optimistic.
At the Port delays will improve this summer.
Now, let me get a little deeper into the strong performance of our digital platforms. As we stated last quarter, we intend to generate $10 billion in sales from digital by 2023 as you recall, we began to reorient our business as of digitally led a year ago. When we start of consolidated into our digital team into New York today, It's fully <unk>.
Integrated with our merchandising marketing and supply chain teams collectively they are working to enhance the customer experience on our websites and apps by constantly improving our digital platform and launching new offerings.
This work is delivering results in the first quarter digital outperformed our expectations sales were $1 7 billion accounting for 37% of total sales up from 24% in 2019, we saw an 11 point trend improvement from the fourth quarter and digital sales growth. It is also worth noting that mobile devices.
Approximately 60% of digital demand sales.
We're also seeing a sequential improvement in average order value end units per transaction.
As we shared in our last call under our Polaris strategy, our digital focus is bifurcated into fundamental improvements and new differentiated experiences.
As part of our fundamental improvements we've re platform at our search function and redesigned our product detail pages for a clearer more curated experience. These actions helped us increase conversion by nearly 9% in the first quarter compared to 2019.
After the successful launch of curbside pickup last year, we are now focusing on providing more specific delivery dates and launching and improve returns experienced within our app. We believe our initiatives will continue to drive conversion and incremental sales across our platforms with increasing customer satisfaction.
As we further strengthen our digital platforms, we have an opportunity to increase meaningful customer experiences and explore new sales channels as a way to deepen our competitive moat in key categories and best position our brands to serve customers.
Accordingly, we are enhancing our focus on differentiated experiences across three main areas immersive categories, expanding our shopping channels and redesigning the overall digital experience.
With immersive categories beauty is one category, where we are doubling down we are building out experiences that will enhance our makeup skincare and fragrance businesses, including virtual trial, and we're also allowing customers to access the experience through social media channels, including the test on Instagram.
Live video shopping is an emerging channel that we are currently developing to enable our vendors and store colleagues to host live events. Our goal is to create the best of our store experiences virtually to make online shopping justice social and fun as in person.
We are also beginning of a multi year to redesign of the Macy's website to modernize our brand presence and elevate our image as a source of style guidance and inspiration we plan to launch some of the refreshed shopping experiences on the site and App before this holiday.
We remain hyper focused on attracting a younger customer and showing our product shows up in the right way for them. For example, during the first quarter, we launched of contemporary site within Macy's Dot Com a key initiative in our redesigned targeted to women and men under 40. It highlights the latest trends offering of our younger customers inspiration from future brand.
And trending categories in apparel footwear and beauty, we're already seeing positive response from these customers online and we will expand this under 40 merchandising strategy.
Personalization is one of the biggest digital opportunities for the Macy's enterprise through personalization, we can develop of true understanding of of customer style. We can help our customer assemble outfits in design rooms with products that inspire them. We can suggest the right sizes and colors and even customize the entire browse experience around what we know about our COO.
Customers.
In February we shared with you the successful launch of the Macy's Media network, which monetize our digital traffic increase of new income stream.
You've seen of men's support from vendors across categories.
Adding up to mother's day. The network ran 130 vendor funded advertising programs in the first quarter alone Macy's media network delivered more than 300 million Offsite media impressions, resulting at a traffic increase of more than $3 million to the Macy's website, we're seeing strong revenue generation from this and are well on our way to achieve.
Our 2021 goal of 60 million of revenue from the media network. We are pleased with the results to date, which are helping us to create value for our customers partners and our ecommerce business.
So we have an exciting digital roadmap for 2021, and the future and we are well on the road to 10 billion by 2023.
Turning to stores, which remain a key piece of our strategy is at digitally led omnichannel retailer.
Our stores outperformed across all metrics in the first quarter and continued to show signs of recovery earlier than expected with a sequential improvement in comparable sales from the fourth quarter of nearly 890 basis points as expected in states with stronger of a vaccine rollouts and in areas where restrictions have loosened we're seeing of correspond.
The increase in foot traffic.
As our customers return to shop in stores. They are seeing cleaner safer stores with improved layouts for easier navigation by keeping our inventory levels lean we've been able to remove the clutter to provide our customers of more streamline shopping experience and most of our colleagues are now trained across our categories with new technology tools to deliver a better shopping.
Experience at.
At our flagship stores traffic is slowly improving as local customers returned to shopping in store as travel restrictions lift we're anticipating tourism levels to pick up gradually as a reminder, we don't expect international tourism to improve until 2022, which historically has been 3% to 4% of our Macy's and Bloomingdale's annual business.
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And we know based on our customer experience scores that our customers are excited to return to our stores first quarter NPS scores improved four points versus 2019 and were in line with the fourth quarter. The increase in customer satisfaction is driven by the measures. We've taken as part of Polaris to ensure stores represent the best of our brand and we are.
Making investments in stores to ensure they are the nexus of convenience and discovery.
Bloomingdale's, not only provides us with access to higher price points, but at as a test platform for innovation sharing and the application of lessons learned across our brands Bloom.
Bloomingdale's comparable sales were down seven 1% compared to 2019 that was an 11 point trend improvement from the fourth quarter as we continued to see strength in luxury businesses across all categories.
And Bloomingdale's continues to have the highest net promoter scores across our brands with significant strength in stores.
Hello, Mercury continues to provide an important venue for us to test and learn for our beauty strategy. The brand's comparable we're down 15, 4% versus 2019, but a six point trend improvement from the fourth quarter.
Backstage our on trend off price nameplate continues to deliver we've increased our planned store within Macy's store openings for 2021 of 12 additional locations for a total of 47 locations. This year. We opened 33 locations in the first quarter and now have 250 locations, we expect to end of year with 200.
At 70 these stores within stores provide of healthy sales lift for the entire store ranging from 3% to 7%.
We are also continuing to test and expand the off mall presence and our omni market ecosystem at the end of this month, we'll be opening of freestanding backstage store in the Dallas Fort worth area. The first of two freestanding backstage stores. In 2021 later this year, we will open three new off mall market by Macy's locations in the Atlanta, and Dallas areas and.
Our first small format blue means location in the D. C Metro area together with our existing off mall formats. These stores will allow us to test and iterate on new strategies to drive omni sales and convenience for our customers, while attracting new shoppers as a reminder, our ecosystem strategy is being tested in these three market.
Its because theyre growing metropolitan areas and had a strong digital presence and store base, but also have gaps in our current store coverage as we shared last quarter. We plan to discuss the results from these off mall locations on a future call.
Critical to our clear strategy is how we enable our transformation by accelerating the pace of change through a modernized technology platform and revamp data and analytics capabilities and our performance driven operating model.
While data informs everything we do we're putting particular emphasis on advancing our data led initiatives in such areas as merchandising pricing allocation and personalization as we see these as areas of competitive differentiation, we're seeing early wins, including markdown and promotion optimization that contribute meaningfully to.
Of our strong AUR and margin performance in the first quarter.
To support these efforts in April we welcome Laura Miller as Macy's, New Chief Information Officer, Laura brings strong experience driving technology transformation and consumer focused businesses and is bringing a customer focused lens to all of our technology investment decisions. She is continuing our pre pandemic efforts to modernize our technology found.
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Before I turn this over to Adrian let me say that I am very pleased with our fast pace of enhancements across our digital platforms and in our stores, where we are seeing encouraging signs of recovery and our resulting performance in the quarter Macy's.
Macy's, Inc is a healthier business coming out of the pandemic than we were going into it.
And moving towards the post pandemic future, we envision a fully integrated experience for our customers as they shop online and in store that goes for our full product spectrum from off price of luxury our team is laser focused on key initiatives and Polaris to meet customers' demand for curated stylish products, coupled with speed and convenience at.
All about delivering on the Omnichannel experience in which the customer journey increasingly begins in digital.
Our work isn't done certainly, but I am extremely proud of the entire Macy's team for executing during this crucial recovery quarter and for staying focused on our shared mission everything we're doing as a team is about transforming Macy's Inc. Into a digitally led omnichannel retailer debt wins with fashion and style our accomplishments in the first.
<unk> and the resulting momentum are clear signs that we're making significant progress in our transformation and all of the positive signals in the macro environment further fuel our confidence.
Now I will hand, it over to Adrian to walk through of more of the financial details.
Thank you Jeff Good morning, everyone. Thanks for joining us this morning as Jeff shared we are pleased with our first quarter results, including adjusted EBITDA and adjusted net income that exceeded the guidance. We provided on February 20, <unk> and we have raised our outlook for the remainder of 2021.
Mentum, we had coming out of 2020 built throughout the first quarter end has carried into the second quarter.
Solid results at our improved outlook reflect the benefits from the rapidly improving macroeconomic conditions driven by the government's stimulus program as well of heightened consumer confidence, resulting from the rollout of the COVID-19 vaccinations.
Importantly, the results and outlook also reflects the early returns of our enhanced Polaris strategy and we're pleased with our progress and Readouts as we take the essential actions to grow profitably as a digitally led omnichannel retailer well beyond the COVID-19 recovery.
To start I will walk through our first quarter results focusing on our most important value creation metrics sales gross margin inventory productivity expense management and debt management.
I'll, then walk through our revised expectations for the remainder of the fiscal year and provide our second quarter guidance. As a reminder, given the pandemic impacts on 2020 results most of the comparisons I speak to will be versus 2019, as we feel these benchmark our performance more appropriately.
First improving sales trend across categories sales totaled $4 $7 billion for the first quarter as Jeff noted our comparable sales trend meaningfully improved from the fourth quarter continuing the upward sales recovery that began in the second quarter of 2020.
This was broadly driven by the strength in each of our brands the continuation of new customer acquisitions, including the reengagement of dorm at customers and the sales strength across merchandise categories.
Beginning last March the temporary closing of our store locations of the accelerated at the ongoing change in the trajectory of our business strategy and we leaned heavily into our digital channels to support our customers. Fortunately our digital business has already benefited from years of investment leading up to 2020, and we were prepared for this acceleration.
Of growth in the channel.
We have continued to advance our focus on digital as our pathway to profitable growth.
As Jeff shared earlier the growth here has been significant and we continue to gain momentum at first quarter of digital sales were up 32% from Q1 2019 levels and while we were certainly benefiting from the improvement in macroeconomic environment. The strength of the business. During the first quarter was also underpinned by successful.
<unk> of many of our digital improvement projects within Polaris.
In store sales also benefited with owned plus licensed comp sales down 24% compared to 2019, an improvement from the decline of 33%. We saw in the fourth quarter and up 35 percentage points from the first quarter of 2020.
Moving to improving gross margins are.
Our rate of 38, 6% in the first quarter was certainly above Q1, 2020, but even when we compare against first quarter 2019, and despite higher penetration of digital sales gross margins were up 40 basis points.
This represents a significant acceleration in the improvement of gross margin trends versus 2019, driven largely by improvement in merchandize margin.
Here are some of these numbers.
Merchandize margin was approximately 325 basis points better than Q1, 2019, which were achieved largely through higher full price sell throughs and higher full price of <unk> combined with lower markdowns for the Macy's brand full price sell through improved by nearly 19% compared to Q1 of <unk> 19.
Full price AUR has increased by 7% we drove these results in three ways.
First we began fiscal 2021 at <unk>.
Clean inventory position recall that we ended fiscal 2020 with merchandise inventories down 27%.
Second we're seeing a payoff from the investments we've made in our pricing strategies with the enhanced use of data and analytics. These include improving and expanding location level pricing and strategically shifting our markdown cadence.
With regards to location level pricing, we're exceeding our performance expectations and we will be live and at scale in more than 500 departments by the end of Q2 compared to the handful of departments. We're piloting in Q4. Our teams are embracing the advanced analytics that are of powering our decisions.
These analytics, we have already successfully executed several meaningful improvements to our markdown algorithms. This year and we have several more planned for the second quarter.
We're accruing benefits from this in real time, when we make incremental improvements in the algorithms, we realized immediate sales and margin benefits.
With regards to markdown cadence, we have effectively adjusted our markdown flow both by weak end by months to optimize sales and margins, which has resulted in improved store workload efficiency.
These changes started in 2020, but we've made a meaningful improvement in markdowns by month. This year versus 2019, we have driven this by making strategic adjustments to the timing of permanent markdowns.
So that's sort of take on pricing and its impact on merchandise margin.
Third we are improving merchandise margin relates to REIT tests of simplified promotions for our customers essentially testing the impact of promotions that are not as deep.
These are showing encouraging early results we performed one such successful tests during the quarter at mens and would you be leveraged product elasticity is driven by advanced analytics to simplify our pricing and improve the value perception with the customer as a result, we saw higher AUR is greater top line sales and improved <unk>.
<unk> margin.
We'll continue at the test and iterate these types of changes to our promotions throughout the year.
These efforts to improve merchandise margin inventory management better pricing simplified promotions helped to offset the negative margin impact of our merchandise mix during the quarter, which was caused by higher sales penetration in lower margin merchandise categories, such as housewares and toys.
Partially offsetting the improvement in merchandise margin was of rising delivery expense caused by the increase in digital penetration in the first quarter delivery expense accounted for 480 basis points of the drags on gross margin compared to 250 basis points in the first quarter of 2019.
To address this we are focused on making deliveries more efficient.
We're doing so by increasing our use of regional carriers, which allows us to spread volume across the carriers improving our delivery success rate, while avoiding surcharge fees. We're also piloting a new transportation management system for customer delivery that improves our carrier networks and enhances customer order visibility.
<unk> in turn helping us improve customer communications.
Were also partially mitigating the impact of higher digital penetration by continuing to shift customers to the lower cost store pickup channel and increasing store fulfillment of digital orders in the first quarter approximately 22% of Macy's digital sales were fulfilled in our stores.
We are also acutely focused on improving our inventory allocation, while using data and analytics to better place inventory at our stores and distribution centers as well as across our markets. So we will continue to become more efficient as we get smarter on allocation.
Which brings me to inventory productivity the third of our five key value creation metrics. We started the year with a healthy stock to sales ratio and maintained at through the first quarter ending with balance sheet inventory down 23% compared to the first quarter of 2019 against a net sales decline of 14, 5%.
As Jeff mentioned, while some of this decline is attributable to the challenges we're experiencing in our supply chain at its most reflective of our approach to inventory and chasing sales as opposed to winning every sale at any cost as a result, the first quarter trailing 12 months inventory turns improved 8% compared to the same.
Period in 2019, while the trailing six months of inventory turn improved nearly 16% versus the same period in 2019.
So we're pleased with how well we've been managing our inventory and are confident in our ability to continue to do so for the balance of the year.
During the quarter, we continued to reduce the amount of our business is driven by markdown inventory highlighted by a four point improvement in sales volume driven by regular price inventory compared to both 2020 and 2019.
As I mentioned earlier, we drove a nearly 19% improvement in our full price sell throughs.
Expense management is our next value creation metric our disciplined efforts to reduce SG&A expenses continued to generate benefits this quarter.
We spent approximately $1 $7 billion on SG&A about 17% or $364 million lower than 2019 levels as a percent of net sales SG&A expenses in the quarter were better than our expectations more encouragingly at 37, 1% expenses improved by one <unk>.
And 30 basis points over the first quarter of 2019, and that's on 14, 5% lower net sales.
This improvement reflects disciplined expense control and incorporate savings achieved as a result of the Polaris initiatives.
We continue to focus on enhancing productivity, particularly within stores for <unk>.
Instance, in Q1, we further expanded our in store technology to both provide customers with a more seamless omni channel shopping experience and boost colleague productivity.
Our stores have continued to operate in a more streamlined structure that began in mid 2020, which gives us much more flexibility to move our colleagues to where they are most needed stores continue to receive elevated customer experience scores when compared to 2019, all while achieving unprecedented levels of productivity.
And while our initiatives over the past several quarters are certainly driving greater efficiencies and cost reductions we were impacted this quarter by a tightening job market, which led to a higher level of open positions across the business with the accelerated sales demand within our stores, leading to even higher expense leverage the productivity we saw in Q.
One match levels, we typically only see during the holiday season as sales soared, which is not sustainable.
We still positions to match increasing demand the benefit will Wayne and as a result, we don't expect to realize this level of productivity in future quarters. This year.
I'd also like to touch on one other contributor to our results credit card revenues, which outperformed expectations on both an actual dollar basis and as a percentage of sales.
<unk> $169 million during the quarter down $13 million from 2019, but ahead of what we expected.
As a percent of net sales credit card revenues was three 4% compared to three 1% in 2019 trending ahead of our annual guidance of 3%.
We continue to see good credit, helping our customers. Despite the decline from last year, which is largely attributed to a lower account balances in 2021 due to the drop in sales last year.
Given that most of new account openings are generated at the store new accounts were down in the quarter compared to 2019 by approximately 33%. However, new accounts opened digitally we're up 30% driven primarily by stronger approval rates consistent with the health of your credit customer.
As part of our Polaris initiatives, we have been focused on driving more engagement with our credit card and loyalty programs on line, especially as our business shifts more to digital.
For the quarter credit card penetration was 42% compared to 46, 3% in the first quarter of 2019, one big factor here is the government stimulus, which has fueled consumer cash flow, prompting more people to use cash and debit products for purchases, we continued to pursue personalization initiatives encouraging shop.
<unk> to use our proprietary cards by providing differentiated offers to our most loyal customers. We still have work to do here and further value to generate from this very profitable part of our business.
Now, let's look at the bottom line numbers given our strong performance in the key areas. We just talked through we generated positive unadjusted EBITDA in the first quarter of $454 million.
Just at EBITDA was $473 million.
Exceeded our February expectations by more than four times in fact, our adjusted EBITDA margin of 10, 1% exceeded the margin in Q1 of 19 by 200 basis points and when you remove gains from asset sales from both years. The first quarter 2021 margin exceeded first quarter 2019.
Approximately 255 basis points, even with a lower contribution from credit card revenues. We are extremely pleased with the strength in our EBITDA.
After accounting for interest and taxes collectively these results helped generate quarterly adjusted net income of $126 million versus $137 million in 2019 at <unk>.
Adjusted diluted EPS for the quarter was 39 <unk>.
Compared to 44 cents in 2019.
This significantly exceeded our expectations and even more is that when we exclude gains from asset sales adjusted diluted EPS during the quarter actually exceeded Q1 2019 by four cents.
Now onto our fifth and final key value creation metric debt management.
On capital allocation, we continued to derisk the business by lowering the debt maturity towers for the next four years. This includes completing a Q1 issuance of $500 million in eight year senior unsecured notes and are equally successful $500 million tender proportions of our maturities and 22% to 25 with these at.
Actions to deleverage the balance sheet. We believe we are well on the path to returning to investment grade metrics. Additionally, we completed the quarter without having to draw on our $3 billion asset backed credit facility.
We ended the quarter with $1 $8 billion in cash we generated approximately $403 million in free cash flow.
Which represents a significant increase compared to the first quarter of 2019 as well as a sizable beats where expectations. The comparative strength versus 2019 was driven by our EBITDA growth as well as lower payables driven by longer payment terms lower spending levels and the extended timing of the payments cash.
Capital expenditures in the quarter at $99 million and we are benefiting from the more efficient use of capital as a digitally led omnichannel retailer does.
Efficiency is allowing us to continue to keep capital spending below pre COVID-19 levels for the foreseeable future with our priorities being investments in the digital channel and data and analytics technology infrastructure and in stores to leverage them for any efficiency supply chain experience.
So with that walk through our financials I now want to update our thoughts on expectations.
Our achievements this quarter driven by the momentum we are seeing from our Polaris initiatives combined with the faster than anticipated economic recovery gives us the confidence to raise our expectations for the year.
Specifically, our digital business continues to perform well we're on track towards our goal of $10 billion in digital sales by 2023.
As we continue our work to reshape how we engage with customers as an omnichannel retailer our Polaris strategy is leading to improved revenue and profitability.
Given these improvements we are now updating our full year 2021 guidance to reflect the increased certainty we have in scaling the privacy initiatives as well as our cautious optimism at the resilience of the recovery customer satisfaction is top of mind for us and our guidance reflects of our consideration not only of continuing elevated consumer.
A man, but also of possible further supply chain disruptions.
Here are the highlights.
We expect Macy's, Inc, 2021, net sales to be between approximately $21 7 billion and $22 $2 billion with digital contributing at about $8 billion of sales to the total.
This is a significant increase on our top line of more than $1 $7 billion at the midpoint compared to our prior fiscal year guidance.
We expect our gross margin rates of improve up to eight percentage points from 2020 levels. We remain confident in our ability to drive clear value and execute effective pricing strategies and are keenly focused on managing delivery expense.
Continue to expect SG&A expense dollars to be lower than 2019 levels. Additionally, as a percent of sales. We now expect them to improve from 2019 levels by approximately 135 basis points.
We expect our adjusted EBITDA margin to come in between approximately nine at nine 5%.
That's two percentage points better than we previously guided.
This improvement reflects a combination of updated outlook on gross margin as well as improved SG&A rate as we continue the disciplined expense control we've illustrated over the last year.
And we expect our adjusted diluted EPS to be between $1 at any one and.
And $2 12 that mid point is nearly three times better than that of our prior guidance you can refer to a slide presentation for the complete full year guidance metrics.
For the second quarter, we expect net sales to be between approximately $4 9 billion and $5 billion with adjusted diluted EPS in a range of three to.
To 12 <unk>.
The strength, we are forecasting in the first half of the year, we expect to generate approximately 40% of adjusted EBITDA, excluding asset sales gains in the first half an increase from 25% we previously guided to.
However, the magnitude speed and longevity of this current macro shopping enthusiasm remains a moving target and we expect that sales and profits could shift between quarters. This guidance represents our best estimate of how this plays out over future quarters.
As a reminder, during the first quarter of 2022, we are expecting to receive an income tax refund associated with the carry back of 2020 net operating losses permitted under the cares Act currently estimated at $520 million.
Our goal as we look beyond 2022 is to achieve low single digit long term comparable owned plus licensed sales growth, while maintaining high single digit adjusted EBITDA margins, we plan to continue to monetize our real estate assets, which play a key role in funding our growth initiatives at the same time, we will.
To maximize the value of our core assets and support our communities. Our recent unveiling of our vision for our flagship Herald square location, which leverages the underlying real estate to build a commercial office tower above this iconic store shows. This planet work, we expect our Herald square plans to unlock a significant.
Mount of cash to support future initiatives.
So in summary, we're confident at that we are on the right path to achieve topline and bottom line sustainable growth. We're working diligently on the Polaris initiatives investing in growth areas that generate the highest returns working to achieve a healthier capital structure and progressing towards investment grade metrics.
As we take these actions we remain keenly focused on delivering strong returns to our shareholders over the long term.
With that I'll turn it over to the operator to begin Q&A.
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We will take our first question from Matt boss from Jpmorgan.
Great. Thanks.
So maybe Jeff could you just elaborate on the sequential improvement in the business that you've seen as the first quarter unfolded, maybe what have you seen now in the first couple of weeks of May so far relative to the first quarter and just any notable changes in category leadership, maybe if you could elaborate on that Youre seeing.
<unk> that you think is tied to recovery of the underlying consumer.
Hey, Matt happy to do that so.
Definitely the trend that we saw from the fourth quarter.
We had momentum coming into the first quarter and it got better each month end.
At that positive trend momentum continues into the second quarter. So a very strong mother's day clearly America loves their mothers. So that has been the trend of the overall business.
It's been good to see that digital has really held up quite strongly as just dramatic improvement in stores. When you look at kind of the categories.
Home store just continues so that at that was very strong during the pandemic for us those trends continue to hold up really well when you look at big ticket all the way end of the soft home categories in the new categories. We added at home as a result of opportunities we saw during the pandemic all strong all very positive signals.
When you look at the center core areas of those are dramatically those of improved and so when you look at the strong business that we got in fragrance and fine jewelry those continue at very strong.
Alan Times of day going into the mother's day time frame of.
Big change has really been the apparel areas and you really see that in some of the categories that.
Or just indicative of customers their confidence level changing wanting to get back to kind of normal activity.
So when you look at dresses. So dresses had of 29 point trend shift from fourth quarter into first quarter swim was up 45 points of men's clothing up 13 points.
And as mentioned you of some of these standby categories that have just been has been strong and then in the emerging categories. They are those just by us going after new brands and categories that are really working for us those have been quite strong. So look we expected with the with the stimulus that the trend increases that we got.
And we definitely saw that in the spend from our credit portfolio moving more of the debit platforms as well as into cash.
What we didn't expect was the speed of the vaccinations and how much that affected customers buying behavior. So we believe that those are pretty indicative of where customers are going to go off of the balance of this year and as mentioned in the comments earlier, we expect of tourism will gradually return, but international tourism won't return until 'twenty two.
And beyond so we don't believe this is of short term pop. We do believe this is momentum that we that can sustain us through 'twenty, one and going into 'twenty two.
Okay.
We will now take the next question from Marine Hutchinson from Bank of America.
Thanks, Good morning, I wanted to follow up on the gross margin.
Clearly one of the positive surprises of the quarter.
But then the guidance of.
Eight point assumes that this gross margin goes back below 2019 levels for the full year can you just parse out how you're thinking about the next three quarters in terms of both delivery expense and merchandise margin.
Absolutely Lorraine I can take that question and it's thank you very much for your question.
So we continue to expect headwinds on gross margin from delivery expense, particularly as we looked at the back half of the year in conjunction with holiday, where we actually expect our digital penetration to be at its highest point of the year. This quarter. As we mentioned earlier, we observed a margin degradation of about 250 basis points compared to Q1 of 2019.
Now that being said, we're pleased with our stock to sales ratio at the end of Q1 as our inventory position was 23% compared to 2019 and down from a sales standpoint fourth at 5%. So we really feel good about that stock to sales ratio. We do expect to build inventory later this year for holiday, but we remain conservative on our <unk>.
As we look to chase sales in the back portion of the year and the rest of Q2.
Now from a merchandise perspective, we are optimistic about our achievements, thus far where we have really leverage predictive analytics applied to different parts of our operation whether it be inventory allocation of demand forecasting whether it be promotional efforts or personalization efforts. So in conjunction with this we are seeing really early signs of.
Well of a dressed of your power of categories really beginning to return whether it be back to school back to work and this also gives us a bit of encouragement as we think about the merchandise mix for the back half of the year.
So I think as we're looking at our margin we're very pleased with what we've been able to achieve in the first quarter, but we do recognize the headwinds that are ahead of us and we also have a bit of confidence in how we're actually managing debt as we go forward.
We will now take the next question from Jay sole from UBS.
Great. Thank you so much.
Jeff asset prices are rising across many asset classes, how does that make you feel about your.
Real estate portfolio right now does it does it increase your interest in selling some of your assets at the same time with the.
Surprising influx of cash flow that you had this quarter and probably continues the rest of the year, how does that change your perspective on what opportunities might become available to you, whether it's balance sheet or other strategic opportunities to improve the business fundamentals. Thank you.
So let me start Jay with the real estate and I'm going to turn it over to Adrian Day finished the real estate question and also talk about the cash flow of opportunities that we see.
Look we've been hard at work and looking at our real estate for a number of years now and when you look back and look at the asset sale gains that we've achieved over the past five years of almost $2 billion.
We have many irons in the fire with respect to looking at our extensive portfolio and how best to advantage that for shareholder value. So.
You probably read we just issue an RFP about 17 of our assets that look at full developments and a chunk of those look at.
Managing developments that would be in our excess parking lots and then looking at out parcels. So looking at opportunities for developers on that.
Probably of read about what we're doing with some of our ambition for Herald square and really revitalizing by making a big chunk of investment into the infrastructure of a rapid transit.
As well as the you know the above ground assets around Herald square that would be funded basically through the proceeds that we would get if we were to construct of tower. So we're going through the <unk> process on that right now we're always looking at at opportunities.
On every site.
And doing that in conjunction of looking at how real estate influences, our brick or our overall digital business at our Omnichannel business. So.
That's our path, we as you can see from our guidance, we expect asset sale gains to all be in the fourth quarter. It comes in a little lumpy through the course of the year, but we have we have of line of sight of how we're going to achieve that the RFP and then the Herald square projects would be the ones that.
Our on the or on the radar screen. So Adrian what would you what would you finish on that and then once you take the cash question.
Absolutely. So you you shared that very well Jonathan the only thing I would add is that we do believe that the role of stores is very important for us. So we talk a lot about the right sizing of our stores, we talk a lot about the investment that we're making in store is really around the omnichannel dimension of our investment, but as Jeff shared you know, we're also actively and proactively looking.
At right now opportunities to monetize our real estate assets as we look over the next several years, let me pivot a little bit now to kind of the cash question that you raise J b.
We look at our capital structure, we're just really intensely focused on creating as much operating flexibility as we can while supporting profitable growth. As you mentioned you know our cash levels at the quarter was $1 8 billion and that really helps us maintained at that level of flexibility that I. Just mentioned now we do anticipate in 2022 as an example of that.
Of our capital expenditures will be higher than 2021, but less than what we had anticipated in terms of pre pandemic levels now in order to achieve this and how we think about using our cash. We're just very much focused on investing in growth initiatives that continue to position us well to take market share in addition to reducing our debt.
And paying down debt debt as debt matures. So this combination will just really give us the opportunity to continue to improve the health of our business as we accelerate growth as we improve margins and as we generate more cash for the business, which ultimately will increase.
Returns for our shareholders.
Okay.
We will now take the next question from Omar Saad from Evercore. Please go ahead.
Thanks for taking my question and thanks for all of the Great information.
Good morning.
I wanted to ask a follow up on the kind of comments you made around the returning and improving platinum and gold members.
I'm, assuming there's a lot of older customers, there, who probably were more cautious during the pandemic can you give us a sense.
Of that customer behavior are they returning online are they coming back to stores how are they behaving when are when they're back end stores.
And really at a lot of my line of questioning is around this idea of your core older platinum customer with a lot of retail franchises of seeing kind of act more cautiously during the pandemic coming back in the meantime, you've also gained a lot of new customers of younger customers. So you know.
There's the potential to keep both sets I think is interesting dynamic I'd love you to discuss more thanks, yes. Thanks, Omar So I mean, I think you set it up well I mean, what we're looking for is kind of a balanced customer portfolio.
Let me just start with your first one which is kind of is this older core customer.
Think about our star rewards program any of our customers, who are silver gold platinum and and that definitely was the customer base that was dormant.
Relative to what they had been pre pandemic.
What I would tell you is that the accounts is still down so there is still down in the mid teens.
But it's as we mentioned in our comments of eight four point improvement of the of those returning customers in the first quarter versus where we were in the fourth quarter and the ones that are return of your spending much more so their spend is up 10%, where it was basically flat in the fourth quarter.
So we expect them to continue to join US and to your question about how they come in and of your brand. It's interesting. They are the they are coming in kind of more in stores than in digital at slightly higher rates than our overall penetration of digital at about let's call. It 37% of our overall total they're coming in they're coming back to store.
Ores at about 65.
No.
You know that's that's how they are when you look at the new customers.
Look we had a.
Very strong results with new customers. It was up 23% versus the first quarter of 2019 and their spend was up 8% versus that same measurement is in momentum from there because we were up 2% of new customers in the fourth quarter and their spend was up 4%. So.
Very excited about the new new customers. So we had about $4 6 million new customers come into the brand and about half of those came in via digital about 47% and and so and what they are spending.
Has been quite strong.
So $3 million of brand new to the brand and $1 6 million were dormant customers that we hadn't seen for over 12 months. So.
The new customers are spending more they are coming and equally between digital more digital than in stores and the core customer is returning still.
Still down double digits, but we expect that to continue to improve with the vaccinating with of vaccinations improving.
We will now take the next question from Dana Telsey Telsey group.
Good morning, and nice to see the progress at.
Do you think about inventory levels in the port congestion that's out there how do you see inventory levels coming back into the fold as we move through the year and then you had mentioned SG&A and frankly, the productivity enhancements that you've seen but as you hire labor that that doesn't continue at the same rate what's the balancing act of.
The two and how do you see labor coming back in and do those wage rates differ from what you had previously thank you.
Okay.
Hey, Dan why don't I take our inventory and then I'll throw SG&A to Adrian so with inventory and as you can see we're starting to build our inventory back we were down.
We were down 23% at the end of the first quarter versus being down 27% at the end of the fourth quarter.
I think as you know, we've got opportunity to turn our inventory faster.
We're hyper focused on S of fashion retailer of of of basically getting higher regular price sell throughs getting higher AUR, that's working I'm.
Getting our markdown complement of our overall inventory down marking things down faster as soon as there is we're starting to see signs of if it needs of the stimulus that we need to take of markdown on it we're taking this much faster than ever before so I think that the inventory levels are certainly improving we're really focused on a replenishment areas.
There are categories that we're continuing to chase. So those are categories that continue to have supply chain issues. So you know when you look at categories like Big ticket, that's been particularly strong for US we continue to have some supply chain issues with that there's categories like at some of the casual assortments some of the denim categories, because we're back into of denim cycle.
Those are some products we are chasing on that.
But we're working very hard with our manufacturing partners at our own private brand suppliers to get our stocks in line with where we anticipate sales.
We're aggressively going after when aggressive father's day timeframe based on how well mother's day performed we're going after a very strong back to school and of course with Macy's and Bloomingdales you can expect of really good gift strategy for holiday of 'twenty. One. So we're working with all of our partners to get that so.
I think where we are hyper focused on an or of stock to sales ratio that is really giving us full flexibility to react in season get higher average unit retail and get better sell throughs of regular price so that discipline will continue and.
And we're really chasing stocks in some categories, but <unk> got very strong strategies that were debt, we're leveraging with our manufacturing partners on getting stocks back in line and other categories. So Adrian why did you take the SG&A question.
Absolutely good morning Dana.
With regards to the topic of wage rate in SG&A as we looked at the first quarter will be effectively saw was that customer demand accelerated faster than we had anticipated back in February and this is really driven by the improved economic environment as well as a number of initiatives that we've that we've executed within Polaris now we do recognize.
We have a number of open positions, particularly within our stores and our distribution network that we are currently actively working to fill in and address so we're effectively focused on bringing in great talent and retaining that talent and what we've done recently has made a number of investments in our pay structure to achieve pay equity make investments in terms of.
Our store compensation, so our pay structure is locally competitive and it takes into consideration any market and regulatory changes that we see and it gives us the ability to act very quickly, but if you think about our guidance that we provided this morning, our guidance does contemplate this with the fulfillment of our open positions at competitive wages within the markets that were off.
Great again.
We will now take the next question from Jenna Giannelli from Goldman Sachs.
Hi, there. Thanks, so much for taking my question I'm curious of those new customers that you're starting to see come in and familiarize themselves with the brand I'm curious if they're sharply shopping more heavily in certain categories at their profile differs from some of the legacy customer at and then similarly, where do you think youre picking them up.
Is it from other existing retailers or perhaps more so because of because of some of that.
Why rationalization that we've seen over the past year. Thanks, so much.
Yes, so the new customers are theres, a lot of onramp categories that they have so fragrances women's shoes big ticket fine jewelry.
Those are of men's clothing, those are all kind of on ramp categories for us at a lot of these younger customers transact with us on.
And when you look at the again these new customers are spending at much better rates than they have in the past I think the thing that we're most proud of is that when you look at these new customers that we added in 2020, how many of them came back for a second third or fourth purchase in the first quarter of 2021.
So we at about 17% of them come back that's been about the trend that we're seeing so our opportunity to make sure that theyre not of one and done but they're not coming in for a single purchase but based on their data and based on what they've signaled with us and what their shopping for gives us an opportunity to reach back to them. So.
All of what we're doing with data analytics everything that we're doing with personalization is really helping us make sure that these customers that we're moving them through our loyalty channel and if you can get them into they start with us can they become a bronze member they start on Klara do they go into the Star rewards program. So that's what we're very focused on and so the momentum on new customers and their behavior.
And then staying with us is really improving and so that's that's momentum that we're going to build from.
Now of take the next question from Carla Casella from J P. Morgan.
Hi, Thank you.
Just I wanted you talked a bit about the debt reduction you've done at quarter and has got some tax.
Refunds coming I think you said third quarter I'm, just wondering your priority for free cash flow end at what point do you can look at shareholder activity versus further debt pay down.
Absolutely I can take that question. So we do expect about $520 million of the refund from the cares Act are expected in the first half of 2022. So in terms of timing. That's one we're actually looking at receiving those payments.
Now I think the second question you raised was how do we think about debt with regards to other things for example of dividend and share repurchase what I would say in terms of dividends is that we're committed to getting back to reissuing dividends at the appropriate time, yet before we do that we're really targeting of our ability to achieve a higher level and a sustainable level of sales.
Margins and cash flow. So we continue to monitor the progress here and really we'll engage with our board at the appropriate time to think about the dividend, but as we've spoken to you you know on the last earnings call at on this earnings call, we're really targeting to get back to investment grade performance metrics and for US that's defined at around less than three times leverage ratio and greater than.
Six five times interest coverage ratio. So we're really kind of focus on getting back to those level of metrics, but we're certainly spending the time and looking at our options with regards to dividends share buyback at other things, but really with a focus on really the health of the business overall.
Okay.
We will now take the next question from Paul <unk> from Citi. Please go ahead.
Thanks, It's Tracy Kogan filling in for Paul.
Many of you guys could talk about your marketing spend in the quarter end also where you'd expect it to be for the year. Thanks.
Yeah, we don't quote what our marketing spend is during the quarter or forecasting for the year, but but obviously the mix of our marketing has changed dramatically over the years.
From the mix from print into digital what we're doing with personalization, what we're doing with affiliates and and so that is we feel like we've got the right mix and we feel like we've got the right approach. We're obviously going after new customers in an aggressive way for all of our expanded categories.
As well as making sure that we've got the right offerings and we're communicating the right offerings to our core customer.
Thanks, Andy.
The Capex I know you Havent changed your expectations for this year, but wondering if your results continue to exceed your expectations might you consider investing more maybe in stores or in omnichannel initiatives. Thanks.
Thank you Tracy for your question you know as we mentioned a bit earlier.
Capital spend or projection for capital spend this year is about $650 million, but you know from the initiative standpoint, we're really focused on investing in growth initiatives and we've talked a lot about the several polaris initiatives that we believe will really strengthen our business in the near term and the medium term end and the long term.
Our investments as we describe of really heavily focused on digital supply chain technology initiatives, including a lot of predictive analytics across our operation from inventory allocation to demand forecasting to promotional optimization of personalization. We're just really excited with the momentum that we're seeing in these initiatives and that's really what's necessary.
The rest of really increase our competitiveness in the marketplace and we believe that those investments are the type of investments at really gives us the highest return. So we will continue to remain flexible with our liquidity to be able to fund. These high priority initiatives, while in parallel bringing ourselves to more of an investment grade profile by deleveraging the balance sheet over time.
Yeah.
We will now take our next question from Paul Trussell from Deutsche Bank.
Hi, Good morning. This is Debbie carbone on for Paul Congratulations on the strong quarter.
So your off price concept backstage continues to deliver strong results I believe you set of sales lift of 3% to 7%, but was wondering if you could talk about the off mall opportunity for backstage isn't at potential did at all digital opportunity. Thanks.
Hey, Debbie.
So as you were Mike just.
Just to remind everybody of that when we looked at price and how it started under the backstage banner started back in the fall of 2015 and it started with a full at.
Started with a freestanding concept.
Of those stores are still up and operating and are still giving us strong returns strong comps strong customer satisfaction, but based on just the challenges that we had in our mall base fleet. We moved the backstage concept into our store within store concept and so built that out and as we mentioned on the call will be at to about 270.
Locations by the end of 'twenty, one and that's what is your as you mentioned is lifting the overall business at the store by 3% to seven points.
That was at work in progress, we're continuing to push that.
<unk> heard me say in the past at I believe at backstage at.
We have the ability to put it into every one of our stores and over time, you might see us do that but it was time for us to get back into kind of the freestanding conversation.
Looking at off mall, and so that's what we're going to start to experiment with and these new off mall backstage locations.
We will be anywhere from about 25% to 30000 square feet and they will have full omni capability across the enterprise. So you want to buy something from the Macy's brand and you want to pick it up in one of these locations because it's more convenient to your house or you want to return something youll have full capability to do that so our intent on this is really the kind of <unk>.
Out of an ecosystem end to have both off price and full price small door concepts that are off mall and just see how they work for the ecosystem in that trade area and for the long term or for the the customer lifetime value of those customers and so that's what we're getting and that's what we're starting to experiment with with building out backstage in these new markets and <unk>.
Dallas as well as Atlanta in 'twenty, one we've got our sites on more stores in the future at the same time that we're experimenting with.
The off mall format for the Reg price format, which we call market by Macy's on the Bloomingdale side, we've already got freestanding of off price, which is the outlet by bloomingdale's as well as we're at as mentioned we are adding a new of small door concept on the full price side called <unk>, which is going to open in Washington D. C. So we will measure.
All of that.
Expect that the off price piece will do quite well and I really want I am curious to see what it does for the overall ecosystem of customers, who shop between off price and full price how many additional purchases they give us what goes on with their lifetime value. So as mentioned, we will give everybody an update on debt probably at the beginning of 'twenty two as we get these thing.
<unk> up and running and we have better data to share with everybody.
We will now take our next question from Chuck Grom from Gordon Gordon Haskett. Please go ahead.
Hi, This is actually Gary at Greenbrier on for Chuck I was wondering just piggybacking off of that last question.
As we think about the 3% to 7% comp lift how should we think about the maturation of this over time, let's say three to five years.
So on that one Derek as you know is when you look at the history of of backstage in Macy's stores.
It just continues to give us positive comps here in your route so they'll hire of those comps go the more of it has the potential lifting of the individual stores. So.
We're very pleased with the with the strategy and how it's working.
When you look at the top side comps when you look at the gross margin in really good shape as the business starts to scale of the logistics costs coming more in line with some of our larger competitors and then really looking at the profitability swell as a result of that looking at the cross behavior that goes on between the full price and off price I think one of the.
Biggest concerns from.
Vendors and analysts had been that they expected to see more cannibalization than we than we have witnessed or experienced when you have an off price full price customer, they're our best customers. So.
We expected at is going to continue to grow at the rate that we've seen in the past five years.
We will now take the next question from Oliver Chen from Cowen and co. Please go ahead.
Hi, Thank you, Jeff what do you see at thinking about Macy's as the platform in terms of vendor managed inventory data piece and door of the marketplace model and all of my that evolved with respect to the financial model longer term.
And Adrian I, just love your thoughts on store closures and anything Youre seeing as this evolves would transfer rates as well.
How youre thinking about the next stage and blending stores plus digital what's what is still lower hanging fruit on the changes that will happen there over time. Thank you.
Hey, Oliver So let me just.
So obviously, we're working very closely with all of our key vendors at.
We do share a common customer and.
<unk> much more fluid about data sharing than ever and ensuring that when you look at our respective.
So we put against the share of customer how best do we spending at together and to make sure that we're reaching the right customers.
At the right products and that we have joint profitability visibility to that so data sharing has been very very high for us. When you look at the Macy's Media network I think that's a that's just a key.
<unk> point of of how we're working with our vendors and really using just the power of our website to expand their brands to new customers in mutually beneficial ways. So we're in the nascent earnings of that and watching that expand over time I think there's going to be quite exciting we have a lot of our competitor.
Or is that do this quite well so theres good roadmaps out there and we're making our version of at or around that works for both bloomingdale's and Macy's.
As your question about marketplace, clearly that's something that.
When youre thinking about of business, it's going to be $8 billion in 2021 with sites to get to $10 billion.
We know we can do at we have a good line of sight on that certainly we are we have looked at marketplace in the past we've got to make sure that it works for us and at what we would do if we were to do at it would need to be curated at would need to work with respect to being a style and fashion destination for our customers. So something that is under consideration.
At Adrian I'll turn it over the other question to you.
Thank you Jeff Good morning Oliver.
There are a couple of context points as we think about the role of stores, especially in terms of driving our digital strategy. The first pieces that we recognized at the role of stores is evolving and so we've made and are making investments to really support that omnichannel capability within the store. The other pieces that we know that our digital sales from the math that we've done.
Is that our digital sales per capita is two to three times higher end markets, where we have stores today versus markets, where we don't have stores. So we recognize that in terms of the integration of digital end stores in this omni ecosystem that we have to be exceptional on things like Baps curbside pickup in same day service.
Think about our store fleet more broadly we're really focused on four priorities. The first is really around right sizing. The number of stores. We spoke last year about closing of 125 stores. We have about 60 more stores on the list of close but this is something we're constantly looking at in a post pandemic world to really understand what that right sizing number is especially at speed.
Progress our strategy over time as I mentioned earlier, we're also at the second party, making really deliberate omnichannel investments in our stores, including how we think about our supply chain end to end. So that's a pretty exciting dimension for us we are testing as of third priority of this potential the potential productivity and profitability of the smaller formats that Jeff mentioned debt.
We're focused on in Dallas as well as in the Atlanta markets and really try to understand the level of productivity of that level of profitability and how it allows us to gain market share at any market as we think about the full breadth of our assets from off price to luxury in our off mall as well as of on mall assets and in the last.
Piece of it we're very focused on is really around monetizing the real estate assets wherever we have the opportunity. So getting this mix of on modern off more right thinking about the role of real estate monetization in this full ecosystem around markets is an important dimension for us, but that's how we're thinking about all of these activities as it relates to supporting our digitally led.
<unk>.
Okay.
We will now take all of our next question from Stephanie Wissink from Jefferies. Please go ahead.
Hi, This is Corey Grady on for Steph I wanted to ask about your emerging categories.
Can you share more about your plans and opportunity of employees' health wellness home decor at that.
So I think when you look at.
All of those categories.
Our big our big focus on new and emerging categories is making sure. We've got a right portfolio for this under 40 customer and so we have been hyper focused on that with respect of toys, recognizing the millennial mom. The op and we were we had a small toy business up huge market share opportunities with respect to that and then just kind of.
And then when you look at hair categories. When you look at our beauty business and the extent of at and you look at hair and nail you look at food and Gourmet has opened up new customers for us.
Clearly during the pandemic there was opportunities for home office, there was health and fitness when you look at the extent of dial that we're able to do through the EDF, that's where you've seen a lot of the extension of those categories really responding to the new customer and really responding to what customers have signaled for us were failed searches or how we've been able.
To add debt. So we're going to we would continue to do that through the course of 2021 with a real focus on the end of 40 customer and we're really looking at how we attract them. If you look at our website today and you look at our new contemporary site. What we just launched you look at what we're doing in starting in the beauty category.
And if you go in there and you start to see some of the new brands that we're adding that's our objective is really how do we be more attractive of the under 40 customer we're starting on digital and then by the end of the year Youre going to see a curated level of products and services that will be in a number of our stores that will be the physical expression.
Of the under 40 strategy in our brick and mortar.
I think operator, we might have at a time for one more question. If there is one.
If there's no further questions in the queue Sir.
Okay.
Thank you everybody.
Yeah.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Okay.
Yeah.
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