Q2 2021 Macy's Inc Earnings Call
[music].
Good morning, and welcome to the Macy's second quarter 2021 earnings Conference call today's our long conference is being recorded.
I'd now like to turn the conference over to Mike Mcguire head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us to discuss our second quarter 2021 results with me on the call are Jeff <unk>, our chairman and CEO and Adrian Mitchell our CFO.
Jeff and Adrian have prepared remarks that they will share after which will provide time for questions. Given the time constraints and the number of participants we ask that you. Please limit your questions to one.
Along with our press release, we have posted a slide presentation on the investors section of our website Macy's Inc. Dot Com. In addition to information from our prepared remarks. The presentation includes additional facts and figures to assist your analysis of Macy's also note that given the pandemic impact on 2020 results unless otherwise noted the comparisons that will speak to this.
Morning will be versus 2019, as we feel that benchmarks our performance more appropriately.
We noted in our press release this morning that on Thursday September 9th at $7.30, a M. Eastern time, Jeff and Adrian will be participating in a fireside chat at the Goldman Sachs Annual Global Retailing conference. This event will be webcast on our Investor Relations website. So please mark your calendars.
Keep in mind that all forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today a detailed discussion of these factors and uncertainties is contained in our filings with the.
The Securities and Exchange Commission and.
In discussing the results of our operation, 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 on the investors section of our website.
And 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.
With that I'll turn the call over to Jeff.
Thanks, Mike and good morning, everyone and thank you for joining us.
Zinc continued to build momentum in the second quarter, our business results across our three nameplates exceeded our expectations on both top and bottom lines.
Polaris transformation, our blueprint to bring macys back to growth is working.
Our results this quarter demonstrate the power of an omnichannel model with a robust offering of categories brands and price points.
We delivered a comparable owned plus licensed total sales increase of five 9% and nearly 16 point trend improvement versus the 10% decrease we saw in Q1 of 2021 adjusted diluted EPS was $1.29 significantly exceeding our prior guidance.
Total digital sales penetration, which continues to outperform expectations was 32% and we saw meaningful improvement in our stores business, which was up 18 percentage points versus the first quarter trend.
Gross margin for the quarter improved by approximately 180 basis points, driven by tighter inventories as well as initiatives focused on pricing and promotion.
Total company AUR was up more than 12% across all three nameplates Adrian will cover this improvement in more detail.
We are generating a significant amount of cash in this financial flexibility allows us to simultaneously invest in our business and pursue significant actions to return capital to shareholders.
We are reinstating our quarterly dividend and our board has authorized a $500 million share repurchase plan.
And earlier this week, we used cash to repay our $1.3 billion secured senior notes, putting us right on track to be below our target leverage ratio with an investment grade financial profile by the end of the year.
Our results in the quarter were strong across Macy's, Inc. As many people return to in person shopping while still continuing to shop online.
From off price to luxury we are emerging from the pandemic a stronger company than we were before it began in.
In the second quarter, we attracted nearly 5 million new customers to Macy's, which is a 30% improvement versus 2019.
Average customer spend in the quarter was up 10% compared to 2019 and up two points compared to the trend in Q1 of 2021.
We saw continued strength in dress the apparel fine jewelry and fragrance as our customers prepared for in person social events and back to school, we saw enthusiasm for newness with a pent up desire to feel fresh and look current at gatherings and occasions in school and on social media.
We had strong gifting business for mother's day father's day, and graduation with customers, making up for lost time, and Miss milestones with gifts of fine jewelry fragrances and accessories.
Throughout the quarter, we seized every opportunity to capitalize on rapidly changing consumer demand analyzing shopping and spending patterns and adjusting purchasing and allocation strategies.
I am proud of our teams who made sure that when consumers were ready to spend again, we were ready to deliver across all channels.
Comparable sales for the Macy's brand were up five 2% on an owned plus licensed basis, and nearly 16 point improvement to last quarter, our ecommerce conversion was up 10% and traffic was up 22%.
Our stores also exceeded expectations with both existing and new customers returning to in person shopping.
Our Macy's backstage store within store locations opened more than one year continue to outperform up 28 percentage points when compared to the full line stores and our freestanding backstage locations also delivered positive results on a comparable basis.
The Bloomingdale's business was strong online and in stores comp sales on an owned plus licensed basis were up 11, 5% and nearly 19 point trend improvement versus the first quarter.
Performance was driven by strength of elevated designer products across all categories with the majority showing double digit growth.
Results also reflected better sell throughs at full price and improvement in average unit retail.
So blue Mercury business also showed a trend improvement versus the first quarter with comp plus license sales up two 2% and nearly 18 point improvement to last quarter.
Loyalty customer performance improved across all tiers of our star rewards program.
Combined platinum gold and silver average spend per customer increased by 15% and average spend per visit increased by 11%.
The bronze tier of this program saw average spend per customer increased 15% and average spend per visit increased 19%. The bronze tier is one of our best customer acquisition vehicles with approximately 26% of members under 96% ethnically diverse.
Loyalty program members are important to our omnichannel business, comprising approximately 65% of our total Macy's brand comparable owned plus licensed sales for the first half of 2021.
Our omnichannel customers shop with us more often make three times as many trips our single channel customers purchase across two to three times more product categories and spent two five to three five times more they are our most productive and most valuable customers and we are working to ensure that their experience with us is outstanding.
Sure.
We also want to maintain our best in class digital experience as we continue to make investments in foundational improvements to keep our online platform current and differentiated digital experiences that provide greater service discovery and value for our customers. We made advancements in enterprise wide data and analytics capabilities.
To improve inventory placement pickup and delivery options boosting speed and convenience for online orders.
And these omnichannel investments are showing strong results, we saw customer spend increases across both new and retain customers.
We are effectively serving customers with new more contemporary products across all categories, and we continue to add new categories and brands as we look to unlock additional opportunities with our future core customer who is under 40 and increasingly diverse and.
In some cases, we're expanding upon current brand partnerships or investing more in our private brands are launching entirely new private brands, such as <unk> and now this a contemporary mens and womens apparel line of elevated basics and sophisticated styles that we introduced in the second quarter.
Younger customers are reacting positively we're seeing consistent full price sell throughs, both online and in stores and we are confident that the exploration will unlock opportunities for us with younger customers.
We are building upon our expertise in the home category with brands such as hotel to launch.
Our new private label home textiles brand for our more socially conscious customers oak will be featured on a new site launches in a few weeks, which will make it easier for customers interested in Macy's full range of environmentally conscious products to see those brands and merchandize in one place.
We're taking this approach based on the success of our contemporary site led which is already drawn younger customers to Macy's Dot Com. We're also applying a physical expression of this strategy and 160 of our stores, where these contemporary boutiques will sit in your front entrances for maximum visibility.
We also seek to gain market share from younger consumers by attracting and retaining the millennial mom, who we know shops for back to school holiday year round gifting and for herself.
The breadth of our offering creates a unique opportunity to make Macy's her go to in most satisfying convenient one stop shop.
A great example is the growth of our toy business during the pandemic, which we saw was a category that helped us attract millennial parents.
And then also lead them to higher margin products and apparel and accessories.
<unk> I am pleased to announce that Macy's has entered into an exclusive omnichannel partnership with toys R. Us to help us more fully realize the toy category more information on this relationship can be found in the press release, we issued this morning.
By offering a wide assortment of categories products and brands from off price to luxury we're able to meet the needs and flex to the demands and preferences of a broad diverse range of customers for.
For example, during the second quarter casual and home categories continued to see strong demand levels. They experienced during the height of the pandemic.
While categories that were quiet during the same period, such as traditional wear to work and dressy showed increases.
As a department store with our breadth of offering we were able to analyze data to drive cross category shopping within our ecosystem think about exposing our significant customer base in fragrances to all the newness, we havent denim or connecting with that millennial mom when she's in the store for back to school apparel. She can also pick up new sneakers at finish line tore.
For when the homework is done and cosmetics for herself and if she has enrolled in star rewards. She has star money to make her feel like she is not only checked everything offer list, but it's also been is having shopper.
Our commitment to delivering a dynamic seamless omnichannel experience across the customer shopping journey has never been stronger and that journey increasingly begins with research and initial exploration online we have a fully integrated business with a portfolio of product categories and brands that allow us to meet our customers.
Based on who they are and how they want to engage with us.
To me it is clear that a comprehensive retail ecosystem with physical stores in the best malls in the most productive off mall locations integrated with the best in class E. Commerce offering is a powerful combination and is moving us forward as a strong digitally led omnichannel business.
With all this said the pandemic is of course still very much a reality as we move into the back half of the year and we will keep a watchful eye on headwinds will.
We will pay close attention to the Covid variance and make decisions with the health and safety of our colleagues and customers in mind.
We will continue to mitigate supply chain shortages and other disruptions through surgical buying close collaboration with our key brand partners and reduced reliance on manufacturers without transnational capabilities.
We will also continue to chase inventory to help us achieve higher sell throughs turnover in AUR I'll also mention that our scale has allowed us to provide support for our brand partners because we were able to take on more of their inventory.
And we will navigate the labor shortages and intense competition for talent through multifaceted recruitment strategies, including incentives for our hourly colleagues to make referrals.
And now let me turn it over to Adrian who will walk you through the financial details.
Thank you, Jeff and good morning, everyone as you've already heard the second quarter exceeded our expectations. In addition to the market recovery. Our positive results benefited from the effective execution of our Polaris strategy and the strong performance of our teams lean inventories the expanded application of pricing science and better.
Sell through has led to healthier gross margins and our expense leverage continued to improve our results over the last three quarters have strengthened our business and helps us achieve many of our financial targets much earlier than we had anticipated.
We have also given us the opportunity to more quickly advance the additional initiatives intended to profitably grow our top line sales, we are testing and scaling several of these initiatives and have pilots in place that are showing promising results.
And with the excess cash we generated we have taken additional actions to delever, the balance sheet and return capital to shareholders.
As I summarize our results I'll focus on the metrics that are most important to value creation sales gross margin inventory productivity expense management and capital allocation.
First topline sales exceeded 2019 sales levels with a larger digital business and approximately 10% fewer stores net sales increased by $101 million or one 8% in the quarter to $5.6 billion.
And our comps were solidly positive we saw.
Saw strength in each of our nameplates across all merchandising categories, driven by new customer acquisitions and reactivation of dormant customers.
Digital sales grew 45% in the quarter accounting for 32% of Q2 net sales. Meanwhile, more customers were backend stores significantly improving the stores owned plus licensed comp store sales sequentially by about 18 percentage points down just five 5% to 2019 levels.
Our 150, Macy's growth stores outpaced non growth doors by nearly seven percentage points in the quarter and we saw improved trends across all regions with particular strength in the south east and southwest regions.
While our urban doors continued to be negatively impacted by the lack of international tourism and the continued fluid state of remote and hybrid working the reopening of borders and the return to a more normalized work environments are expected to be tailwind for our business once they occur.
Shifting to improving gross margins the momentum we built in the first quarter continued in the second as our gross margin rate expanded 180 basis points from Q2, 2019% to 46%, we're making headway on our commitment to achieving sustainable margin expansion, which remains one of our top.
And this level of margin expansion combined with our sales outperformance is a significant achievement for us.
Our progress on merchandise margin has been the most notable improving by 350 basis points during the quarter to 44, 9% as a result of consistent improvements in inventory productivity and lower markdowns driven by three factors.
First healthier inventory levels, which I will expand upon in a few minutes.
Hundreds of Pos pricing tests in our stores that resulted in $85 million of margin improvement from the optimization work such as significant marketing calendar changes simplified pricing and reduced promotions and third location level pricing initiatives that resulted in a benefit of $25 million.
Location level pricing achieved scale across 500 departments in the quarter and together with Pls pricing tests. These initiatives drove about 45% of the improvement in merchandise margin compared to 2019.
So the Macy's brand our initiatives contributed to full price sell through improvement of 500 basis points, while full price AUR has increased 11% as.
Digital penetration increased the related ryzen delivery expense, partially offset the improvement in merchandise margin.
<unk> expense was four 3% of net sales 170 basis points higher than the second quarter of 2019.
We made good progress with our initiatives to improve delivery expense management, but we continue to have work to do.
With regards to inventory productivity market dynamics combined with our own initiatives led to inventory levels that were down 14, 5% compared to the second quarter of 2019, our sales to stock ratio is healthy and we remain focused on leveraging our data and analytics tools to most efficiently plan.
Place and price our inventory.
Inventory turn for the trailing 12 months improved by 15% while for the trailing six months inventory turn improved by 18%.
Of course inventory productivity has benefited from constrained supply as a result of global supply chain disruption, while we've been successful in leading most customers' needs reduced supplies ultimately detrimental offering them a more limited selection, we anticipate improvements in many of these constraints by no earlier than midyear 2020.
Two after which we expect inventory levels will normalize and at healthier levels than they were before the pandemic in order to sustain margin benefits.
However, our inventory strategy is still focused on chasing sales and exercising very disciplined buying behavior. In fact, even with the current constraints, we have been able to source more supply then plans to successfully chase sales.
Moving on we continue to show strong expense management discipline, our next value creation metric SG&A expenses of $1.9 billion improved by about 13% or $279 million from the second quarter 2019 levels as a percent of net sales SG&A expenses were 33.
6%, a significant improvement of 570 basis points compared to the second quarter of 2019.
This was primarily driven by the $900 million in annual expenses, we removed from our cost base last year through Polaris.
Macy's Media network also contributed the partners that joined in 2020 have invested more heavily this year as they have recognized its ability to drive results at.
At the same time, there are more vendors investing resulting in increased expectations of more than $75 million of net revenue this year.
Additionally, as mentioned earlier labor shortages contributed however, while expense levels were aided by the shortages. We are diligently working to fill open positions in order to best serve our customers.
The contribution of expense savings from the tight labor market is not sustainable over the long term.
We generated $197 million in credit card revenues during the quarter up $21 million from the second quarter of 2019 and ahead of what we expected.
There were also ahead as a percent of net sales increasing by 30 basis points to three 5% and trending ahead of our prior annual guidance strong customer credit health, resulting in lower bad debt levels continue to be a benefit in the second quarter.
Given our strong performance across these key areas, we generated positive unadjusted EBITDA of $753 million and adjusted EBITDA of $836 million.
Notably adjusted EBITDA margin of 14, 8% exceeded the margin in Q2 of 2019 by 760 basis points on the strength of our expense management and gross margin expansion.
After accounting for interest and taxes collectively these results help to generate quarterly adjusted net income of $411 million and adjusted diluted EPS of $1.29 versus.
Versus $88 million and 28, respectively in 2019.
Our final value creator is capital allocation and we generated meaningful cash flow in the quarter ending the quarter with $2.1 billion of cash and cash equivalents and leaving our credit facility untapped.
Year to date through Q2, we generated $769 million of free cash flow with capital expenditures of $230 million combined with the momentum from our Polaris initiatives, our ability to generate these levels of cash gives us the runway to increase our prior expectations and further invest.
And profitable sales growth over.
Over the next couple of years, we expect our capital spend to increase from $650 million. This year to approximately $1 billion annually. These dollars are and will continue to be heavily focused on strengthening our omni channel capabilities with investments in digital shopping experiences data and analytics.
Technology infrastructure and more efficient fulfillment capabilities, all supporting profitable growth. In fact, we expect these types of investments to represent around three fourths of our total capital spend over the next two years.
We are now well positioned to focus not only on deleveraging the balance sheet, but also returning cash to shareholders as Jeff mentioned.
First we redeemed our one $3 billion secured bonds earlier this week in cash this action along with our planned repayment of $294 million of unsecured debt. Due in January 2022 is expected to result in a year end leverage ratio of no more than two five times.
All in it saved us more than $6 million on a cash basis versus calling the debt in June of next year. This.
This is a significant step towards our goal of returning to investment grade metrics this fiscal year, which would be far earlier than we originally expected.
We are reinstating our dividend our first cash dividend since the startup of pandemic, which allows us to return approximately $95 million of cash to investors. This year.
Starting with <unk> 15, a quarter, we expect to grow this dividend over time subject to board approval, which will depend upon market and other conditions.
And third our board of directors authorized a $500 million share repurchase program, which we intend to exercise to opportunistically buy back shares.
We're very excited about the momentum we created coming out of the second quarter. So what does this all mean for the rest of the fiscal year.
While we incorporated a healthy amount of conservatism into our prior guidance our performance in the second quarter combined with a relatively more confident outlook in the macro environment has led to a material increase in our full year guidance.
There are still headwinds, we continue to face the supply chain constraints, a tight labor market.
Elevated levels of holiday shipping surcharges and potential unforeseen impacts of the Covid variance and so we built our expectations for these headwinds into the low end of our guidance, which still doesn't contemplate a return to government mandated shutdowns should they prove necessary.
But at the same time today's economic data reveals that consumers have money to spend and are confident in spending it even when faced with possible restrictions.
All of this combined with the ongoing success, we've seen from our Polaris initiatives, which is growing and expect it to contribute more to our performance leads us to believe the back half of 2021 will be strong.
You can refer to our slide presentation for the complete full year guidance metrics, but here are the highlights.
Full year net sales expectations increased by more than $1.7 billion with positive comps versus 2019 in the back half of the year driving the majority of the increase.
Gross margin rate expectations improved by 100 basis points, notably now only slightly below 2019.
SG&A expense as a percent of sales is expected to be up to 250 basis points better than 2019 also a significant increase from our prior guidance.
Adjusted EBITDA expectations have also improved and the margin is now expected to be as much as two percentage points better than 2019.
And the midpoint of adjusted diluted EPS expectations is nearly two times higher than that of our prior guidance, reflecting the better outlook and lower interest expense. It does not include any impact from the repurchase of shares for which we will provide quarterly updates.
We planned the remainder of the year significantly higher than when we first set our targets back in February the back half is expected to be solid as our Polaris initiatives continue to take hold but we are also coming off a quarter that benefited from a very healthy response to the reopening of the country and our range is also reflect the headwinds I mentioned.
And earlier.
So for the third quarter, we expect net sales to be between roughly five and $5.2 billion.
With adjusted diluted EPS in the range of 17 to 26.
We're increasing our long term adjusted EBITDA margin target to remain in the low double digits. Beginning next year. This reflects the confidence we have in our ability to sustain healthy topline and bottomline growth while at the same time getting back to investment grade metrics and returning cash to share.
Holders all sooner than expected with that I'll turn the call back to Geoff for some closing remarks.
Thanks Adrian.
Had a strong first half of the year as we executed our Polaris strategy, while operating in a better environment.
We have come through what I hope will be the worst of the pandemic and emerge to even more focused more determined and more strongly positioned to succeed in the future.
To thank and recognize all of my colleagues across Macys, Inc. For their contribution to our performance and who are working every day to serve our customer and transform our business.
The Macy's Inc. Portfolio is digitally led because theres no doubt that consumers expect us to do this exceptionally well we are.
Our robustly omnichannel, because stores and sites and mobile apps are stronger together than any one is alone.
We are well represented from off price to luxury because we know consumers participate in more than one tier of the market.
We are well balanced across categories products and brands, because we know our customers look to us for all expressions of fashion and style.
And we are proud of our department store routes, because we believe in the relevance appeal and opportunity of a trusted brand name, bringing forth a breath of offering.
Our results are clear the Polaris strategy is working not only to improve the fundamentals of our business and our balance sheet, but also to build a bolder brighter and stronger Macy's for the future. Thank you.
And we're now going to open up the line for questions and answers.
Thank you.
Do you wish to ask a question. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off two lines youre sticking up to reach our equipment. Please limit yourself to one question. Thank you. We will now take our first question from Matthew Boss from Jpmorgan. Please go ahead.
Great Thanks, and congrats on a nice quarter.
So Jeff maybe with the business improving to positive mid single digit comps versus pre pandemic this quarter.
Really two questions first what do you attribute the magnitude of the improvement, particularly with tourism I imagine, which is still a headwind and then second what have you seen from August and back to school that provides your confidence in mid single digits continuing in both the third and the fourth quarter, which I think is the high end of your forecast.
Hey, Matt.
Thanks for your questions. So when you look at the kind of the beat of our business in the second quarter I think it comes from a couple of places certainly kind of the economic tailwind.
And.
When you think about the new jobs, the stimulus with the child tax credit continuing.
Just a lot of pent up demand that when customers, who kind of re emerging from.
The pandemic and resuming life.
So when you look at our business I would tell you that really the pillar strategy is taking hold and you look at the <unk>.
16 points that we were better when you compare it to 2019 between the quarters and what happened in our business. The stuff that was working for before just continues to be quite strong. So our digital business very strong on a two year stack you look at the home categories Fine jewelry, you look at the programs.
It happened in the quarter that was unique was the doormen categories the dress up categories like dresses.
Men's clothing, one of the biggest piece was our mortgage business as the domestic tourist businesses starting to Rev up.
We also had a lot of new categories that we brought in during the pandemic and expanded and as a department store you would expect us to do that so if you look at one of the Bds categories toys, which we announced this morning to broaden our relationship there has been a home run for us.
Getting into really looking at categories that respond best to this under 40 customer we've been really hard at work at that and getting lots of good results there. So.
That's really what happened in the second quarter when you to your question about <unk>.
Tourism, we don't expect international tourism, which as you know is about historically about 3% to 4% of the entire Macy's Inc business.
Coming back in 2002, so those are potential tailwind that we're going to see in 'twenty, two and 'twenty three that's good news for us Thats coming.
When you think about the third and fourth quarter of this year I'd start with back to school. So.
It's been a strong start and we.
Sure.
Well into it right now high single digit improvement versus 2019, and it really is across the board you look at it and in girls and boys. It's certainly the categories of denim and Tees uniforms active have all been strong when you look at it kind of a gen Z areas of men's and women's young.
Men's and juniors.
Times called you.
Really the brands are doing extremely well there. So when you look at the Levi's brand. The Armani brand guests all really strong denim, it's been a stand out and then you look at the categories like back to dorm in the home category as you look at backpacks.
Huge increases so high single digits that is.
It's been obviously, a chunk of our business in the third quarter and then the last part of your question about kind of fourth quarter, obviously thats. The gifting timeframe of the holiday time frame is where Macy's and bloomingdales shine. So we've got a great lineup, we're going to be ready, we expect that it's going to be a very strong holiday season with customers coming back together.
For the first time in a couple of years.
We will now take our next question from Chuck Grom from Gordon Haskett. Please go ahead.
Okay, Great results guys.
Your sales guide for the year implies.
Sales per square foot of.
$225.
I think if my model is right is the highest ever.
Adrian I'm curious when you think ahead to maintaining the low double digit EBITDA guide, which is really the big surprise in the print today in my opinion I'm curious, what you're assuming for that sales outlook going forward.
Chuck it's great to be with you. This morning, So a couple of things when we think about the top line sales for the business. We're looking at not only the sales within our stores, which we expect to continue to be highly productive, but we're also looking at digital sales as well and so we're very pleased with the strength of the digital business.
We're seeing we're very pleased with the recovery that we've also seen in our stores as it relates to the margin profile in terms of low double digit adjusted EBITDA, It's really pushing on three key things. The first piece is really around our merchandise margins were being much more disciplined about the depth of promotions, making sure.
We're having more full price sell throughs and so we're really pleased with the health of our merchandise margin in order to help achieve that margin expansion. We do have work to do on delivery expense, we're very much benefiting from the pace of digital acceleration, which is actually increasing our delivery expense rate as you saw in our performance in the last quarter.
Particularly relative to 2019, but we have work to do to reduce split shipments.
The number of orders that are actually picked up from our stores by our customers and just a number of things that we're doing to really mitigate that we're very deliberate about our SG&A expenses as well. So we did have a lot of improvement partially driven by the $900 million of permanent improvements based on the restructuring you did last year.
In SG&A.
All in all as we think about the performance in terms of low double digit performance going forward, it's really pulling those key levers recognizing that you still have work to do but given the traction that we're seeing with Polaris, we feel that we have real confidence and achieving those goals as we look forward into 2022 and beyond.
We will now take our next question from Kimberly Greenberger from Morgan Stanley. Please go ahead.
Okay, great. Thank you so much.
Thank you.
No Jeff if you could just touch a little bit more on the <unk> partnership and how youre thinking about that both heading into this holiday season and in the future.
And then if I.
Can you just dig a little bit more into the gross margin in the cooperative advertising comments that you made.
Gross margin I think.
Adrian you indicated would be a touch below 2019 levels on a full year basis.
It's sort of you know.
Nicely above 2019 levels here in the first half of the year. So.
And are there some pressures youre anticipating in the back half of the year that would.
That would sort of.
Pushed down your expectations.
And then on cooperative advertising.
I think you indicated that <unk>.
Level Theyre running.
Above the historic about history.
Sticky is that.
Is that sort of I guess, it's a contra SG&A account, how sticky is that.
And if you have any quantification of that that would be helpful.
So Kimberly let me good morning, let me start with toys R us and so we're obviously excited about this partnership and it really started just based on.
On how we started out with kind of a toy business in backstage and it was one of the standout categories for US we did have it to a limited degree during the gifting time frames at holiday in the full line store got huge increases really over the past couple of years and.
And our market share in toys is quite small so it was an opportunity for us to look at hey, what's the entry category for toys.
Toys R. US kids that are now millennial parents and opportunity for us as part of our under 40 strategy to go after this category with a lot more vigor and recognizing that those footsteps are those eyeballs.
Translate into other purchasing.
As if we do all of our offer engines right. So and that's really was the emphasis of starting out with how did we want to do that so we've got into this partnership with them. You go to our website is now live on that that's the beginning you will see in 2022, you will see it to a limited degree in 2021.
In 2022, there will be 400 stores that will have full out shops, we will have access obviously to their private brands, we're going to expand the categories. We will do lots of marketing together.
You will see them in the parade as an example, there we're embedded now for a category that we think we can quintupled the size of the business and so it's a big growth vector for us, it's actually a pretty decent margins and obviously those those footsteps eyeball to be able to translate into other categories is the <unk>.
Big win. So this is the beginning of our relationship and we have lots of opportunities to expand it both online and in our stores.
And Andrew do you want to take on the gross margin question.
Yes, absolutely good morning, Kimberly so with regards to the gross margin. What we would say is that you have had great performance. So far this year a lot of that is driven by the health of our merchandise margin in our efforts to mitigate as much of our delivery expense, but the reality is that we're heading into our peak season and in our peak season, we tend to have our.
Our highest level of digital penetration, which puts pressure on gross margin. In addition to anticipated surcharges that were expecting given the demand that's happening in the marketplace in the back half of this year. So some of that conservatism and that measured approach to our guidance with regards to the gross margin is really around the delivery expense metric there.
With regards to Macy's media network, we continue to see some real gains here, we had originally forecasted about $60 million and revenue from Macys media network and our previous guidance. We're now guiding that that's going to be more around $75 million and the good news here is that this will be an offset to our SG&A based on how we.
Think about the Macy's media network within the context of our marketing efforts.
We will now take our next question from Jay sole from UBS. Please go ahead.
Yeah.
Great. Thank you so much Chuck I wanted to ask you about some comments that.
Some of the off price retailers have made recently about increasing price to this going forward.
How does that impact your strategy.
Does that allow you to take price as well, especially if there's going to be more inflation next year or do you see this as an opportunity to improve your value proposition.
To know about that and then secondly on.
Just if you could elaborate on your expectations for adjusted EBITDA margin.
Many of the low double digits in 'twenty, two and beyond can you just elaborate a little bit on what gives you the confidence in that given some of the inflation pressures that are out there and lapping signals from some of the things that the market is talking about thank you.
Hey, Jeff So, let's let's start with where we're going with in terms of.
Kind of inflation. So we already have when you look at some of the home categories. We have been working on ticket prices and that has been going on over the past number of months and.
We have a number of levers that we're playing when you look at what's gone on with our gross margin retail expansion as well as our AUR improvements as well as our regular price selling improvements I think it starts when you think about.
Where we are with margin it starts with having a very healthy inventory base that we're building on so if you look at being down about 15% on a two year stack in inventory and we <unk>.
Massively exceeded our sales plan in the second quarter, and we were able to secure a lot of additional inventory to fuel those sales were buying much closer to the disciplines of lag. If you look at our turnover being up almost 20% on the year. Those are really healthy scenarios for us to really play with our pricing and promotional strategies and so you can.
See that we have reduced the amount of promotion.
The amount of overlap reduce the amount of couponing and we've reduced the amount of the depth of our pls discounts. So when we take a price increase sometimes we don't raise the ticket because we're just reducing the amount of pls discounting and obviously claim with thousands of tests every week.
To see how the customer responds to that both online and in stores.
Some categories in which we can raise the ticket price and we had and we use the same kind of promotional tactics to get to a higher AUR. So the Devil's in the details what I would say the difference between our brand from where we were a year ago. We suggested the degree of sophistication that we have on pricing science and how we're applying that not only in allocation but.
All of our promotional ladders, all of our seasonal content and so.
The other thing I'd say is that there are some categories in which we are really playing with putting more make into the goods more fashion more content and that commands a higher retail so we're able to kind of massage some of those pricing.
Increases and there are some categories in which the customer rejects price increases and we might take a shorter margin, but it's compensated from all of the expansion that we're getting in the other areas. So.
Inflation is happening right now, but I think we've got a very solid plan to drive it within the strategies that I've just articulated.
And so Jay it's great to be with you. This morning, just with regards to your question around the adjusted EBITDA and maintaining low double digits EBITDA over time, we kind of look at this in three pieces. The first pieces around the merchandise margin and Jeff spoke to a bit of this a bit earlier, which is we're really making real progress.
Around the pricing and promotional science, that's in our business and so whether it's having a higher regular price penetration, reducing and simplifying the depth of our promotions looking at location level pricing to reduce a portion of our markdown sales. These are all a lot of the science that we're putting into our business to be able to sustain those behaviors.
In addition, we are actively chasing sales, which allows us to manage our sales to stock ratio. So that as we go forward, we're relatively lean on inventory. So that we can maximize the full price sell through as it relates to delivery expense. This is an area, where we're continuing to work towards we're continuing to make a lot of investments and but the kinds of things that <unk>.
Doing is increasing the percent of digital orders picked up by customers at the store that delivery expenses.
Free for the customer and free for us.
So looking at ways to improve allocations you reduce the distances that packages travel because theres a high correlation between distance and cost of parcel shipments.
So looking at our operation and saying look if we can improve the way we allocate our inventory we can do a much better job of reducing splits which is just an extra package and much more costly to us and not something that we can pass on to the customer. So we do see a lot of improvement and I think from a gross margin standpoint really attacking that delivery expense piece is going to be an important.
<unk> for us as we think about the SG&A piece, we have a lot of benefits, we talked a bit earlier with Kimberly about the offset of the Macy's media network. We also recognize that increasing digital penetration with our business is really a leverage sales leverage point for SG&A and we're constantly looking at ways for our sales.
Teams in our stores, our selling team and our stores to find ways to be even much more productive while maintaining that our stores REIT brand standard. So those are the kinds of things that we're doing but I think it all adds up to traction in the Polaris strategy are tests are working we're scaling things that are working and yet we have a portfolio of strategic initiatives that we're implementing later this year.
<unk> and implementing into next year. So that's what gives us confidence is just that traction and the fact that the full portfolio in our toolkit is not fully deployed yet.
We will now take our next question from William Reuter from Bank of America. Please go ahead.
Hi.
I just have one you mentioned that you are going to be achieving the investment.
Investment grade credit metrics earlier.
Earlier than you previously expected later this year.
Is it a goal to actually attain investment grade ratings or more or less are you just going to be focused on those metrics, which you.
Believe should be representative of investment grade.
Good morning, Bill Thanks for your question.
We're just very pleased with the health of the business and the fact that our plan with the $1.3 billion Paydown that we did earlier. This week. In addition to the payment at maturity of the upcoming note in January that we expect to end the fiscal year at less than two five times and the purpose of this is really a combination of not only invest.
Thing and the highest return investments in our business deleveraging the balance sheet and returning capital to shareholders, that's pretty much our balanced strategy, but all of that really speaks to just a healthy business and a healthy business gives us flexibility to compete.
And any initiatives and opportunities that come up that may be a bit on plan and so for us achieving an investment grade profile is really critical just because it really speaks to the health and resiliency and sustainability of Macy's Inc.
Thank you.
Thanks Bill.
We will now take our next question from Carla Casella from Jpmorgan. Please go ahead.
Actually I have a follow up on that one.
You paid down $1.3 billion your biggest tranche of secured debt that you have a few other smaller tranches of secured debt do you think that that you needed to address those before you can get to investment grade.
While we do have about $361 million of additional secured lien we do not anticipate paying that at this point in time, we are very much paying the towers that are maturing over the next several several years and so that's really very much our focus but again, we're very much focused on the financial health of <unk>.
Flexibility of the business and we feel that given our current leverage ratio and what we anticipate for the end of the fiscal year that brings us into a healthy position and gives us a lot of flexibility to think about further investments in the business returning capital to shareholders and really having a balanced capital allocation strategy.
We will now take our next question from Steven.
Was it from Jefferies. Please go ahead.
Thank you good morning, everyone I'd like to ask a question about the 5 million new customers that you added to your profile I think you mentioned, 40% came in through digital and about 40% were in the bronze tier of your loyalty program, maybe just talk a little bit about.
Those merch categories, where they're shopping does that give you any validation on some of your merchandise strategy or even.
Identified some opportunities where you think you might be able to expand over the next several years. Thank you.
Yes.
Hi, Steph so.
When you look at the 5 million new customers that came in you hit some of the headlines so.
They are they're younger they're more diverse.
You have a little over 40% came in via digital and they came in through a lot of the categories that we have great strength and they came in for fragrances. They come in through some of the millennial categories that we're building out they come in for denim and it gives us the opportunity for that first purchase to then okay. What's their behavior in that first purchase how do we see it in.
Get a second and a third purchase with them. So one of the SaaS that we're really focused on is what percent of the customers that come in in one quarter and are they shopping with you. The second quarter. So as an example, if we look at the first quarter will be brought in $4.6 million customers and we're really measuring okay. How many of them came back during the mother's day.
Father's day gifting in the second quarter and that percentage is continuing to build with us so our personalization techniques our data.
With its capabilities is really is really coming to the floor and it's really helping us see additional messaging, we're obviously, making great incentives for them to come into our loyalty program.
But what we find is those categories that we have the highest market share is generally where the customers. The new customers are coming in and our opportunity to give them new content new categories.
And new offers is seeding long term behavior and many of them moving up our loyalty chain. So we have the younger customer very much in mind and when you look at the 5 million customers that came into the brand.
For having not seen the bulk of them before with very encouraging.
Thank you.
We will now take our next question from Omar Saad from Evercore. Please go ahead.
Good morning, Thanks for taking my question and thanks for all the color.
You guys mentioned a couple of interesting trends.
But I'd love to hear you guys explore a little bit more both the dynamic that youre seeing customers returned to stores and still shopping online.
Andrew You also mentioned that pandemic categories and the recovery categories are both showing signs of strength here. So maybe you can if you look through the customer data profiles youre seeing in this activity maybe you could talk about is this the same customers returning to the stores. The younger customers that you attracted online are you seeing them shift to stores or is this the old.
Existing customers kind of reactivating them coming back in the stores and same thing on the categories at the Saint customers buying across both pandemic and recovery categories or that different customers.
So Omar it's different depending on what part of the country you're in so, but what I would I would first say is that the customers just increasingly omnichannel and it's really hard to tease out their behavior. It used to be like five years ago, you would have to touch points for <unk>.
Customer before they were consummated transaction. It's now at six so you've got customers are going into stores that are buying later online or on their device Theyre doing research theyre getting inspiration and our social channels. We've got our colleagues in stores that are basically doing virtual selling so there is a but I would say in general what youre seeing in the second.
We've got a lot of our core customers that we're basically not shopping and they were not comfortable going into a store. They have they kept they had shifted their behavior. During the pandemic to online purchasing you saw some of that shift back into stores the younger customer who's shopping in both channels with vigor. So there is.
And in the categories.
We saw it come back strongly where those that was really about wearing occasion and gifting occasions. So those were categories that those younger and our core customers were responding to so.
Hope that answers your question, but what we've seen is that when you look at the southern parts of the country that business came back more strongly there is still pockets of the country, where the stores business to our average is off and it is not it's not correlated to vaccination rates, it's really kind of the psychology of those customers and many of those.
Customers are not buying online or in store and so we believe that we will get a recovery with those customers over time that will come into 'twenty two and beyond.
As a reminder to ask a question. Please press star one on your telephone keypad, we will now take our next question from Donna Tesla from <unk> Group. Please go ahead.
Good morning, everyone and nice to see the progress Geoff can you give any comment on what you're seeing in the urban area stores versus suburban.
Manhattan for example is it still the same cadence of what it had been and then Adrian on the delivery expense. How are you planning that going forward and how do you see the digital business. We took up the sales for the year is there any more efficiencies that you see perhaps with in store pickup that we should be monitoring as we go into the holiday.
Susan Thank you.
Hey, Dana So I'll take the first question about urban versus suburban definitely our city stores are still our most challenged and when you think about kind of the three buckets of shoppers in the stores you've got your resident of those cities and we're engaged with them very strongly and we've got our colleagues are.
Hyper motivated to make sure that we're building out.
All of those customers and their business. You then have the second bucket, which is playing out right now which is kind of back to office and you've got these office workers, which were really strong customers for us in normal times during the lunch hour and after work and as you see with all the Delta variance.
Those reengagement onto back to office are always shifting so we haven't seen the impact of that yet and that will certainly affect all of our city stores as that plays out and then the third bucket is really tourism and in particular international tourism and that has dried up I don't see there.
Certain signs of life in certain countries, but I would tell you on balance all of our city stores are still suffering from a lack of that traffic and that historical volume. So again that will be a that'll be a tailwind for us in the future as the as the variance play out so urban stores are still dramatically lower we've got many.
Suburban stores that are Comping ahead of 2019 levels and they could be like if you look at the Manhattan timeframe or the Manhattan, you could look at a Herald square and you look at the 59th Street, but then you go out to long Island and you look at our Roosevelt field and it is a hopping center.
We're all benefiting from that so there definitely is a different psychology with the suburban and the urban customers right now.
Good morning, Dana as it relates to delivery expense. Your instincts are right. We do want to continue to focus on delivery expense, especially given the momentum and the pace of digital sales growth as well as digital penetration as it relates to in store pickup we do identify that as an opportunity and.
So we're doing a number of things to try to encourage our customers to take advantage of that service. It's quick it's convenient it's easy it's free and so those are the kinds of things that we have to continue to work on in terms of increasing our pick up in our stores. In addition, this fall we exited planning to roll out a number of tests that would actually help complement this.
So we're taking a small population of our stores, we're looking at ways to improve the productivity and efficiency of all of the store fulfillment activities and that also includes putting in stores varying levels of automation to support pick up speed efficiency and also ship from store capabilities, So delivery expenses definitely.
We're looking at we're working actively test this fall during the kinds of things that will allow us to really get after the delivery expense and get that much more under control as we think about our ambition going forward.
As there are no further questions in the queue I would like to turn the call back to your speakers for any additional or closing remarks.
Okay.
Thanks, everybody and have a great day.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.