Q3 2021 Macy's Inc Earnings Call

Please standby.

Good morning, and welcome to the Macy's, Inc. Third quarter 2021 earnings conference call.

It is our long conference is being recorded I would now like to turn the call over to Mike Mcguire head.

Head of Investor Relations. Please go ahead.

Thank you operator, good morning, everyone and thanks for joining us to discuss our third 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'll share after which we 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 and.

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 comparisons that we'll speak to you. This morning and can be versus 2019, as we feel that benchmarked our performance more appropriately.

We noted in our press release this morning that on Thursday December 2nd at eight o'clock am Eastern time, Adrian will be participating in a fireside chat at the Morgan Stanley Virtual global consumer and retail 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 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 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.

Our company delivered another strong quarter and exceeded our expectations on both top and bottom lines outperforming 2020, and notably 2019 with strong cash generation year to date, we were able to execute on our capital allocation priorities, including returning capital to shareholders. Our business has demonstrated brasilia.

And we remain confident in our ability to deliver on our Polaris strategy and as a result, we are raising and narrowing our full year 2021 guidance.

Our 'twenty one results demonstrate the progress we've made with our Polaris strategy operating it in a better economic environment as well as the strength of our digitally led Omnichannel model, we are poised for sustainable and profitable growth and we will continue to build and invest in our retail ecosystem to both maximize and.

Our opportunities.

Today I'm pleased to announce that we were making a significant investment to launch a curated digital marketplace platform to enhance the existing Macy's, Inc. Business fuel customer acquisition and drive growth across all of our channels, we will partner with the enterprise marketplace technology companies Miracle to build the plant.

Born.

Through this new digital marketplace platform, which will launch in the second half of 2022, we will connect carefully selected third party sellers with our customers in a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation.

Our digital business is on track to generate $10 billion in sales by 2023 and that figure does not include the incremental revenue. We expect this new marketplace platform to generate for Macy's Inc.

Now I'll provide some highlights from the third quarter.

Comparable owned plus licensed sales increased eight 7% an improvement in trend from the five 9% increase we saw in Q2, even after adjusting for changes in our marketing cancer.

Adjusted diluted EPS was $1 23.

Up significantly from Q3, 2019, and adjusted EBITDA was more than two times better than 2019.

Gross margin for the quarter improved by approximately 100 basis points driven by stronger regular price selling fewer markdowns due to leaner inventories and a number of pricing and promotion initiatives and offset by increased delivery expenses.

Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions.

When they first began in the fourth quarter of 2020, our teams activated plans to mitigate bottlenecks and since then stay agile and flexible leveraging our strong networks and relationships with international carriers and brands and diversify how we move products, both up and downstream <unk>.

Significantly as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season.

Total company AUR was up more than 12% across our three new place SG&A dollars were significantly lower driven by a combination of ongoing expense discipline and unfilled open positions.

Looking at each of our nameplates comparable sales for Macy's brand were up eight 4% on an owned plus licensed basis, which represents a nearly one point improvement versus last quarter. When you take into consideration that friends and family marketing shift.

Macy's brand full price sell through improved 610 basis points, while full price aur's increased by six 9% driven by high demand and our gross margin initiatives.

Bloomingdale's business performed well with comp sales on an owned plus licensed basis up 11, 2%, which was in line with the second quarter.

Results were driven by strong sales of luxury handbags fine jewelry home.

Men's shoes, and contemporary apparel in both stores and Bloomingdale's Dot com outperform 2019.

Blue Mercury continues to recover outperforming versus 2020, but was down two 2% compared to the third quarter of 2019, we see strong sales performance in private brands home fragrance and treatment.

Turning to the health of our customer base, we brought in $4 4 million new customers into the Macy's brand at 28% increase compared to 2019.

Approximately 30% of these new customers were dormant customers over the last 12 months, who have now re engaged.

In addition to growth in new customers customer loyalty is also increase star rewards program members now make up nearly 70% of the total Macy's brand comparable owned plus licensed sales up approximately 10 percentage points compared to 2019.

During the quarter, we saw platinum gold and silver customers Reengage with average customer spend in these tears up 16% compared to the third quarter of 2019.

<unk> members, who represent our youngest and most diverse loyalty tier continued to grow with the addition of $2 3 million members during the quarter and we're seeing average spend per customer increased 13% Brian.

<unk> is one of our best customer acquisition vehicles with approximately 35% of members under the age of 40 and 57% ethnically diverse.

Our star rewards loyalty customers have a more personalized and productive shopping experience with the most relevant offer presented to them right down to the particular homepage they see there.

This is leading to increased conversion higher revenue per visit and a decrease rate of customers, leaving the site.

Through targeted personalization of pricing science, we've been able to reduce the number of broad based promotional days and increased AUR.

Having a strong integrated retail ecosystem that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers.

The growth of our Omnichannel ecosystem is powered by our Friday online business relevant full line brick and mortar stores and growing off mall format stores, all assumed to be further accelerated by the new digital marketplace platform.

Our data validates that in markets, where we have a physical presence our online business is stronger.

The interplay between our digital and physical assets is more important than ever and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth.

Turning to merchandising, which we think about it in three buckets first our products and categories that were strong during the height of the pandemic such as fragrance watches jewelry sleepwear and home continued to perform well during the third quarter.

Second occasion based categories, such as dresses and men's tailored a luggage are continuing to see renewed interest from our customers, we're able to meet their shifting demand thanks to a wide range of assortment.

And third our emerging categories and new brands are expected to drive sustainable and profitable growth in the future. These complement our core categories, while satisfying the customer shopping journey and we're seeing encouraging results to.

To give you an example, since bringing the toys R us business to Macys Dot com in August our toy sales have more than doubled in stores and online compared to 2019.

And we continue to expand our assortment in these emerging categories during.

During the quarter, we added another important new brand partner fanatics, which offers our customers the largest selection of licensed sports products and increases our fans apparel offering twentyfold. This expanded assortment drove a 22% AUR increase and sports apparel and headgear compared to 2019.

Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships. One element of this is the <unk> monetization of our advertising partnerships that we realized through our in House Media Agency Macy's Media network, which continues to generate solid results and <unk>.

<unk> expanded its scope to include Bloomingdales.

We see a lot of potential to further strengthen our relationships with vendor partners and cultivate even greater customer engagement.

Overall through Polaris, we laid a solid foundation for digital growth and we're seeing that growth come to fruition. We are now able to focus on additional strategic investments to refresh the digital experiences to create more experiential customer engagements enhance our stores and further empower our colleagues who drive this.

Success of our business on every level.

Our important digital initiatives during the quarter included a refresh of Macy's mobile App the launch of life shopping at both Macy's and Bloomingdale's and a fragrance finder. We also rolled out our <unk> route planning expansion added Paypal and venmo to in store and online payments and launched our sustainability product cycling.

Yeah.

As a result of these and other investments digital conversion for the quarter was $4, two 5% up 14% compared to the third quarter of 2020 and up 27% compared to the third quarter of 2019.

Turning from digital to stores. We also continue to invest in our brick and mortar business and are seeing ongoing trend improvement in store conversion during the quarter sales in our non downtown locations continued to sequentially improve but due to the slow return of international tourism and office workers are.

Doors continue to significantly lag our other doors versus 2019.

A good example of stores recovery as our backstage store within store format with sales up 24 percentage points compared to full line stores backstage store customers are more diverse with 56% of customers ethnically diverse and have a higher spend.

Across our ecosystem everything we do starts with and is driven by our colleagues. They are our most significant contributors to our success and we are pleased with the strength of our performance. This year has made it possible for us to double down on our investment in talent.

Last week, we announced a plan to launch a best in class benefit program to give our colleagues access to debt free education. We are also raising our minimum wage rate to $15 an hour, which will be in effect nationally by may of 2022. This will increase our average total pay for hourly colleagues to about $20 an hour.

Our workplace culture and colleague engagement has never been stronger and we see it as a meaningful competitive advantage in this tight labor market.

Adrian will now summarize the financial details before I make brief closing remarks.

Thank you, Jeff and good morning, everyone as Jeff shared our third quarter results demonstrate the strength and momentum of our digitally led Omnichannel Polaris strategy topline sales continues to grow gross margin continues to expand SG&A continued to gain leverage and as a result, we delivered EBIT.

And EPS are above our expectations.

Additionally, we continued to successfully execute on our capital allocation priorities aimed at strengthening our balance sheet and returning capital to shareholders.

Our strong results combined with our continued comparable as we move into the holiday season are leading us to narrow in ways. Our full year 2021 guidance, which I will expand upon in a few moments.

Now as I do each quarter and summarizing our results I'll focus on the metrics that are most important to value creation sales gross margin inventory productivity and expense management and capital allocation.

First for the second quarter in a row, we generated topline sales above 2019 levels in the quarter net sales increased by $267 million or five 2% to five $4 billion, while we posted comparable owned plus licensed sales of eight seven.

Percent keeping.

Keep in mind that compared to 2019 October benefited from the pull forward of some sales from the fourth quarter into the third quarter. The early start of our friends and family sale in late October contributed to that added about 200 basis points of the Opus license sales comp. Additionally, holiday shopping and began earlier.

As it did last year, but we won't know the full extent of the pull forward until we get further into the season. Nevertheless, even when adjusted for friends and family. We produced solid sales growth and continued to expand our trend of sequential improvement.

Now I want to take a moment to highlight the progress. We've made is a true omnichannel retailer as we have become increasingly focused on the sustainability of omnichannel sales growth.

The true performance and potential of our Omnichannel performance is hidden when sales outcomes are viewed as digital results versus brick and mortar results recall that Jeff said, we see stronger digital sales in those markets, where we have physical stores.

We certainly saw this to be the case in the third quarter. Moreover, while digital sales continued to grow and store sales trends continued to improve notably more than 70% of our omnichannel market saw overall sales growth over and above 2019 levels, which represented approximately 85%.

<unk> of Macy's brand comparable owned plus licensed sales.

So digital is as merely benefiting from a shift of sales from stores. It is actually growing beyond that in our presentation. You will see several examples of these growing omnichannel markets.

Within these markets are different added potential to expand our market share further with the addition of new off mall locations. During the quarter. We opened five new locations in the Washington D C Dallas and Atlanta markets, we've seen a strong sales response and solid net promoter scores from customers.

Well above our client expectations.

We are very encouraged by the initial results and announcing a clearer path to new store off mall growth.

So it's really a combination of physical stores in the best malls. The most productive off mall locations and a best in class E. Commerce platform. Our sales growth is accelerating as we move customers whenever wherever and however, they choose to shop.

In addition, an Omnichannel view is also piloted the need for us to take a second and look at the timing of when we closed the approximately 60 remaining stores. We previously planned to close this part of collapse those markets that are performing best in aggregate, including many of the stores previously slated for closure.

With this in mind, we are considering the following points as we approach the optimization of our store portfolio.

First as it relates to underperforming mall based stores the loan closure of certain stores allows us to maintain a physical presence in the market, which is critical to our topline growth.

These stores are cash flow positive and support the funding of the investments needed to reposition our store portfolio over time.

And lastly, we're adapting our loading in the smaller off mall formats to more quickly introduce these concepts to more markets with plans to open more of these stores next year scaling our off mall formats will allow us to reposition our brick and mortar assets within markets to more effectively support omnichannel sales growth.

As a result, we expect to announce about 10 closings in January with more details on the remaining stores to come later in 2022.

Moving onto gross margin, we saw another quarter of great expansion to 41% an increase of 100 basis points compared to the third quarter of 2019, we continued to generate very healthy merchandise margin, which improved by 270 basis points to 45, 3%.

The primary drivers were the consistent improvement, we maintain and lower markdown and inventory productivity, which I'll expand upon shortly.

Markdown levels were the result of a combination of lower inventory levels and further scaling of pricing science, including location level pricing and pass pricing work.

And as Jeff noted these efforts drove higher full price sell throughs and full price AUR as compared to 2019.

We continue to rollout additional initiatives, including a new promotional effectiveness tools, given our teams access to advanced analytics to better understand the profitability of prior promotional events.

The improvement in merchandise margin was offset by a rise in delivery expense due to increased digital penetration.

<unk> expense was four 2% of net sales 170 basis points higher than the third quarter of 2019.

Even though the increase in merchandise margin more than offset the increase in delivery expense mitigation and reduction of this expense is a top priority for us and we have plans for cost savings in this area, which we've outlined in the presentation.

With regards to inventory productivity inventory levels were down 15, 4% compared to the third quarter of 2019, a product of ongoing market dynamics and our own Polaris initiatives.

Our sales to stock ratio remains healthy and the approved use of data science continues to enhance our inventory management practices from order placement all the way to customer sale.

Inventory turn for the trailing 12 months improved by nearly 18% while for the trailing six months inventory turn improved by approximately 22%.

Additionally, given the macro challenges facing the retail industry. We're staying ahead by making further shifted our inventory management practices and implementing a number of initiatives.

As we noted on our last call, we do not anticipate improvements to many of the macro supply chain constraints until mid to late 2022.

Moving on we again exercised strong expense management discipline, our net value creation metric SG&A expenses of $2 billion improved by about 10% or $229 million from the third quarter of 2019 levels.

As a percent of net sales SG&A expenses were 36, 3% a significant improvement of 630 basis points compared to the third quarter of 2019, as we continue to benefit from permanent cost savings and reduced costs due to elevated job openings.

The impact of the labor shortages are transitory and we expect them to moderate going into the next quarter as well as into the next year.

Improved bad debt levels, driven by strong customer credit health continued to contribute to the growth of credit card revenues to $213 million.

Up $30 million from the third quarter 2019, and ahead of what we expected credit card revenues were also ahead as a percent of net sales increasing by 40 basis points to three 9% and trending ahead of our prior annual guidance.

As it relates to our credit card program, we are close to finalizing our decision on a partner and expect to announce a decision in the upcoming weeks as.

As a digitally led retailer we must have a partner with strong digital capabilities today, and a strong innovation pipeline with the prospect of further expand that pipeline in the future our loyalty and personalization initiatives and serve as the key growth levers and our ability to obtain and retain more customers to drive omnichannel sales growth.

That said over the next few years, we expect credit card revenue levels will be slightly lower as a percent of sales in the 3% or sales that we have historically experienced.

Given our strong performance across these areas as well as the $50 million of asset sale gains recognized during the third quarter, we generated positive adjusted EBITDA of $765 million, notably.

Notably adjusted EBITDA margin of 14, 1% exceeded the margin in the third quarter of 2019 by 780 basis points on the strength of expense management discipline and gross margin expansion.

After accounting for interest and taxes collectively these results helped to generate quarterly adjusted net income of $386 million.

And adjusted diluted EPS of $1 23.

Versus $21 million and seven respectively in 2019.

Our final value creator is capital allocation and our meaningful free cash flow generation of $574 million year to date has served us well in this regard in.

In the third quarter, we repaid approximately $1 $6 billion of debt early which brings our leverage ratio well under our yearend target and while we drew on our credit facility to support the build of seasonal merchandise during the quarter. We did so at a much lower interest rate than that of the debt we retired.

Going forward, we expect to use the facility periodically based on the needs of the business.

Now we successfully gained an investment grade profile well ahead of schedule, we will continue to pay down debt that matures with an aim to achieve a leverage ratio of below two times in the upcoming years.

Additionally, we paid $46 million in cash dividends and announced our fourth quarter dividend earlier this month.

We repurchased 13 million shares or more than 4% of total shares outstanding for a total share buyback of $300 million.

With $201 million of authorization remaining and we plan to look for further opportunities to repurchase shares. These actions underscore our confidence in our business and our commitment to our capital allocation priorities that create shareholder value in the near term and the long term.

Turning to our outlook as mentioned, we are narrowing and raising our full year guidance, we have strong momentum entering the fourth quarter, but the headwinds that we noted on the last quarter's call remain in play.

Supply chain constraints.

Labor market elevated.

Elevated levels of holiday shipping surcharges and potential unforeseen impacts of Covid variance for the low end of our guidance considers the impact of these headwinds.

You can refer to our slide presentation with a complete fourth quarter and full year guidance metrics, but here are some of the highlights for.

For the full year, we now expect net sales to be between $24 1 billion.

And $24 3 billion.

Which at the midpoint of the range is an increase of over $400 million.

From our prior guidance.

We've now increased our adjusted EPS range to $4 57.

The $4 76.

From $3 41.

The $3 75.

An increase of more than one dollar compared to our prior guidance.

Now for the fourth quarter comparable sales on an owned plus licensed basis versus 2019 are expected to increase between 2% and 4%. This includes an approximately 125 basis point adverse impact due to the shift of the friends <unk> family promotional event from the fourth quarter into the third.

Quarter as compared to 2019.

Gross margin rate expectations are between 100, and 150 basis points lower than 2019.

SG&A expense as a percent of sales is expected to improve by approximately 75 basis points compared to 2019.

And adjusted diluted EPS is expected to be between $1 67.

And a $1 87, excluding the impact of any additional share repurchases other than those already executed in the third quarter.

Our progress to date combined with our Polaris initiatives already underway put us well on the path to profitable and sustainable sales growth as such we have increased clarity on our business outlook over the next few years.

In 2022, we see several incremental tailwind for our business beyond those from our prior initiatives. The consumer is healthy and we expect the strong demand to continue particularly as people return to work as board as OLED, we anticipate an uptick in tourism, although we don't yet see tours and returning back to <unk>.

2019 levels in 2022.

At the same time, we're keeping a watchful eye on headwinds as mentioned we are actively managing supply chain disruptions with success, we're continuing to navigate the labor shortages and competition for talent, while investing in our current and future colleagues. We are also focused on mitigating inflationary pressure.

<unk> on our customers by leveraging our pricing science, while continuing to provide our customers with clear value.

In summary, our team is committed to accelerating and sustaining top and bottom line growth through the continued successful execution of our digitally led omnichannel Polaris strategy, which in turn will strengthen the health of our balance sheet and deliver strong returns to our shareholders.

Next quarter, we look forward to sharing with you further detail on our guidance for 2022, and our outlook for 2023 and beyond with that I will turn the call back over to Jeff for some closing remarks.

Thanks Adrian.

So in summary, we remain focused on executing our <unk> strategy to position Macy's, Inc. For sustainable and profitable growth. We regularly review the structure of our business and our strategy and are open to all options that are likely to create long term shareholder value.

This past year, we conducted an analysis of our e-commerce and brick and mortar operations evaluating how each contribute to the value of the company as well as how each benefits from being integrated and working together in.

In collaboration with our board and with assistance from our advisers, we looked at multiple business models that would create long term shareholder value, while always respecting the omnichannel behavior of the customer. This work supported our digitally led Omnichannel Polaris strategy that we are successfully executing.

That said, we also recognize the significant value of the market is assigning to pure e-commerce businesses.

And as we look at the landscape today, we are undertaking additional analysis that could help inform our long term strategy to further unlock value for Macy's Inc.

To help in these efforts we have recently engaged alixpartners to work with our board and financial advisors.

It is too early to tell what the results of this additional analysis will be but we plan to update everyone. After the work is complete.

Before we take your questions I wanted to express my gratitude to the entire Macy's Inc. Team for deliveries another quarter of strong results I am confident that we have a lot more opportunity ahead, our colleagues focus on both strengthening the fundamentals of our business and driving innovation give me great confidence that a bill.

<unk> and brighter future for Macy's Inc. Lies ahead.

So thank you everyone and operator, please begin the Q&A.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal.

Okay.

Our first question comes from Chuck <unk>.

<unk> with Gordon Haskett.

Okay. Thank you.

That's on a great quarter.

Adrian just I wanted to ask about your gross margin levels, we're going to be approaching 39% share which is really impressive.

How should we think about that line item going forward do you think you can maintain it given some of the Polaris efforts and then more specifically on slide six you call out with $76 million benefit from the locally local pricing and Pls pricing will work where are we on that journey is there still a lot left you can you can gain from that.

Thank you.

Good morning, Chuck and thanks very much for your question.

We're very pleased with the gross margin performance that we've seen and I think it really speaks to just the traction that we continue to have with regards to our cloud strategy as we spoken about before we're using data science to inform how we how we are actually thinking about inventory allocation and how we're thinking about our pricing and promotion activities.

And so we feel really good about the progress that we're making and we do believe that as we continue to scale. Those initiatives, we'll certainly have additional opportunities as we move forward when I think about the $76 million that you are referencing my perspective on that is that is just continued progress that we're making with regards to our pricing and gross margin efforts.

And so if you actually look when you look at our overall gross margin performance year to date and in the quarter. It's really just a reflection of that and so we'll continue to lean into those initiatives and make sure that we continue to improve our margins position both on the gross margin rate side as well as on the merchandising margin side over time.

Thanks, Good luck.

Thank you.

Our next question comes from Matthew Boss with JP Morgan.

Great. Thanks, Congrats on another nice quarter.

So Jeff with <unk> comps further improving from the second quarter, how do you feel about the health of your customer base into holiday, maybe based on what you've seen in November.

And then with supply chain disruption lasting into next year as Adrian cited do you see AUR gains are sustainable in the front half of the year and as tourism a potential second half of the year opportunity in your view.

So on the health of the customer <unk> on the health of the customer we definitely see that continuing so when you look at the amount of active customers with us versus 2019, and you look at <unk> you look at the AUR.

And you look at it just theyre just theyre their spend overall all of those metrics are improving so we hark back to looking at the customers and how they are responding both online and as well as in our stores checked that box.

Improvements there and then when you just look at the new customers that are coming in to add another 4 million $4 4 million coming in some of those are re engage with the bulk of those are new to our brand and to see their spend metrics.

As you as we've talked about in the past, we always track, a new customer and how they shop with us in the quarter and the quarter. After that we're getting about 20% of new customers that are always shopping in the next quarter and another 20% in the quarter. After that so that that's consistent with what we're seeing so.

As it relates to kind of supply chain.

We really were in good shape right now.

Obviously, we want the inventory to be below where we were in 2019. When you look at our inventory level versus 2020 to be up about 19% that kind of sinks with our mid twenties.

Our volumes that we're guiding in terms of fourth quarter sales of 2020. So we're in good shape with that we certainly have pockets that are that remain tough.

But we're mitigating those spike all the things that we've talked about in the past. So that continues I mean, we expect to supply chain issues are going to continue into 2022.

Some categories are much better some categories persist, but I think overall, we've got a great handle on how we are mitigating that through all of our tactics.

As it relates to kind of tourism.

We have not yet seen a change really in international tourism, So thats about 3% to four points of total comp for Macy's and bloomingdale's that is going to be a tailwind for us we do expect that our investor come back in 2022, not fully to 2019 levels, but that will go into <unk>.

'twenty three as well so when you look at our downtown stores. There is still struggling our suburban stores are performing much better when that tourism comes back and when office workers come back with us with higher percentages, we do expect those downtown town stores too to really be benefited.

Great color best of luck.

Thanks, Matt.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Great. Thank you so much for taking the question Geoff I was very interested about your comments on the kind of.

The importance of both the digital and the physical assets at <unk>.

Sounds like you did a good deal of work here over the past year to understand the <unk>.

Interplay between these two channels.

I'm wondering if there are any sort of key data points, you could share with us from network. It sounds obviously very interesting and then secondarily.

Reassessing the store closures.

That you that you all talked about I'm wondering what are.

As you wind the clock forward, let's say a year from now what are you looking for those stores to produce that would give you. The all clear signal that you should and want to keep them open and is do you maintain your optionality on those stores that you choose.

To keep open do you have the option of option to close them at some future date should the financial performance change. Thanks, so much.

Kimberly Thanks for your questions I'm going to take the interplay and the Omnichannel behavior of our customer and then I'll have Adrian take.

That store closure question.

Absolutely.

I think any retail brand right now.

Is reaping the full benefit with the right investments and the Omnichannel customer and clearly what we've seen over the years expenses increased activity that's going on between the app between the website in store behavior and so those touch points now is on an average transaction for an omnichannel customers now around six different touch point.

Before a purchases consummated.

And versus where it used to be five years ago was in the two range. So clearly the more the more of the customer is engaging with omnichannel and the more they like it and Thats a reinforcing loop so.

We see huge interplay going on researches generally starting on App most of our digital business now the majority of that is now coming on via the App a much bigger chunk of transactions are going on via App, but a lot of that behavior is while they're in a store and you just split from research from pre purchase.

Discovery to purchase to post purchase engagement and then of course, what we're doing with all of our data and analytics and personalization to reach out and see that behavior is where this is going so it's just getting to be a tighter and tighter loop.

And we fully respect the omnichannel behavior.

We're making the appropriate investments to ensure that it's a frictionless experience for him and her so that's that's where that's going it's certainly.

Where we are going with the our entire market strategy. So the idea that the interplay that goes on with brick and mortar thats on model as well as testing now new off mall formats that has played out in the three markets that we said it would.

We're digesting all of those new openings of Adrian talked about in his comments and we will talk on our next call about what that looks like for our expansion of that in 2022, but that Luke is increasing and what we're saying is that the more brick and mortar business.

We're creating the more the digital is happening in those particular ZIP codes. So we'll give you more color on that when we when we speak next.

Adrian would you take on that store closures. Thank you Jeff Kimberly good morning to you very good question as it relates to store closures, but let me start by giving a little bit of context. So as we had mentioned early earlier we.

We spent about a year really trying to understand what the future footprint of our business will look like and part of that is really for us to focus on creating a growing and profitable omnichannel ecosystem that it's really a combination of our existing best mall or off mall stores opened with a digital experience now as you think about omnichannel grow.

<unk>.

We're very much focused on the fact that digital performance is stronger in the markets, where we have stores and as we shared on the call. Our Omnichannel performance is actually very critical to have both the digital footprint as well as the store footprint. So the kind of three things that we've really been thinking through as we are moving forward with regards to the store closures. The first is that the language.

Closure of certain stores really allows us to maintain that physical presence and that physical presence allows us to grow omnichannel sales, which is one of the reasons why we want to share some of the progress we're making in Omnichannel sales recovery relative to 2019. The second thing is that all of the deferred mall based stores are actually cash flow positive. So.

This becomes the funding mechanism for investments said repositioning that portfolio that we're working toward over the next several years and then the third piece is we're continuing to learn and adapt our off mall format.

Very pleased with the early results that we're seeing with this version two <unk>.

Of our market by Macy's Bloomingdale's small off mall locations and so we feel really good about the progress that we're making there but ultimately we are constantly reviewing all of these store locations.

Expecting to announce 10 closures at the beginning of next year and ultimately how many be closed and on what timetable continues to be a work in progress, but we'll continue to be very transparent on the pace of those closures as we progress.

Very clear and helpful. Thank you both.

Thank you.

Our next question comes from Paul Lajoie with Citigroup.

Thanks.

Filling in for Paul I was wondering if you could talk about what youre seeing on the inflation side.

And the cost to you and then how are you.

Talk about your strategy, I guess and how youre presenting that to consumers on the pricing side. Thank you.

Okay.

Hi, Tracy sockets that we've been through these inflationary cycles before and.

When you look at just if you had kind of make some generalizations about cost increases in some cases in fashion, we can pass that on.

Commodities are a different story now thankfully and I'm talking like shorts tanks Tees commodities that benefit.

Our competitors will compete with.

And that thanks Lee.

A chunk of those commodity business is really done through our private brands and we've work.

Excuse me, we've worked really closely with our overseas suppliers and our sourcing capability to really helped mitigate rising costs.

As you would expect we have we're very focused on testing and our pricing science. So all the way through this third quarter. We've had over 400 ADP pass pricing tests of where customers will accept cost increases and where they want and we're making all adjustments.

In future as well as promotion based on that we also have when you think about what with Macy's and bloomingdale's Brexit been doing over the years, we've really changed the historical practice of overlapping discounts. So the value that we're offering customers is much clearer and that gives you higher AUR and we're looking at that.

Market share events versus one day sales versus weekend events. So we're getting higher AUR shift because the clarity of our prices.

The big solve for US is two things one is we're really committed to maintaining leaner inventories and ensuring that those inventories are being allocated to the REIT portal for where we expect omnichannel behavior and then the second Big thing is the big tools, we're doing through data and analytics and automation, which is our opportunity to mid.

The gate price increases when they come in that would be personalized pls messaging, which will do through our personalization as well as.

The science that we're deploying against the discrete hardware cadence so our opportunity to now take a price decrease on a permanent basis at a store or channel level and doing that at a level that we've never been able to accomplish before that's going to help us with whatever price increases we might put into the second so.

We feel like we've got really good science and good history and experience on inflation and we will react as a commerce.

Great. Thanks very much.

Our next question comes from Stephanie Wissink with Jefferies.

Okay.

Hi, Good morning, it's Blake on for Steph, Thanks for taking our questions I was wondering.

I'm wondering on your digital marketplace.

How many skus and which categories are you targeting I wonder if you could provide any commentary there and then how should we think about this impacting your Macy's media network business.

Hi, Blake so.

The details of your question, we're not ready to answer yet so we will be giving you more detail on this as we launch it but a couple of headlines is that when you think about this we have a very successful digital business now and the marketplace announcement that we made today was the next natural step in our evolution as a digitally.

We've led omnichannel retailer such as check ground, we put down a marker on a couple of earnings calls ago that we were going to hit $10 billion by 'twenty. Three we are very committed to that marketplace would be on top of that and.

And what we found and just everything we've done to develop our digital business was really the customer behavior and the categories that they were requesting the new brands that they are requesting and what was the best way for us.

To.

Capitalized on that so we've been doing that through owned or through PBF and the opportunity now is for us to look at getting.

Shifting some of that through our marketplace platform.

As you would expect we studied all the types that are out there being the number two websites in our categories in the nation, we had a lot of competition in some of the other really strong players and all of them have marketplaces. So our ability to be able to study how they can do it what's the competitive landscape is how this is going to align against the <unk> strategy.

What are the risks what is the financial opportunity ensuring that we had a scalable model that really minimized our investment in incremental cost unless for both bloomingdale's and Macy's is what led us to our partnership with Miracle, which we think is best in class. So we're deep at work with them, we're standing up our discrete marketplace.

Team within our digital.

Our pyramid and we will be ready for a launch in the second half of 2002, we believe that the customer benefits of this is curated assortments because that is a must it needs to be curated a fashion and style.

Retailer it needs to be a seamless experience for the customer and then of course the business benefits are we know that we can grow digital our efficient business faster, we can generate more profitability, we can get more depth and breadth of assortment and really.

Dress with new brands and emerging trends for a customer who looks to us to be able to do that.

That's great color really appreciate it last one for me I think last quarter. You had said you were going to test a few stores.

With various fulfillment initiatives, including some automation in ship from store I was wondering if you had any update on that so far or maybe you could speak more broadly to just getting more customers comfortable.

Picking up from store as well in addition to do delivery. Thank you.

Thank you very much for your questions late with regards to the fulfillment operation we'll share a lot more detail about the success of that as we get into our next earnings call. Our Q4 earnings call. What I would say is that we're very pleased with the progress that we've seen thus far and the two tests will really come when we hit our peak season going through the holiday in terms of.

Really pressure testing the technology, but so far so good with the robotics with the investments that we've made in space as well as with the productivity that we've seen as we're ramping up as we think about pickup in store, we want to be able to have a flexible fulfillment operations that give the customer choice.

At any moment in time, where the customer will pick up from store, they're going to be moments in time, where you'll be shipping to his or her home I think what we're very much focused on is really bringing bringing downward in delivery expense, while also increasing speed to the customer and so as we begin to think about our downstream fulfillment capabilities in stores and continuing to expand that.

On where we are today in addition to the automation and all the investments, we're making upstream we feel that will be a bespoke rebound our delivery expense as well as increase the speeds of the customer. So we're just really focusing on a flexible operating structure that allows the customer to have real choice and how he or she wants to shop.

Yeah.

Our next question will come from Oliver Chen with Cowen <unk> Company.

Hi, Jeff and Jim Congrats on great quarter.

We upgraded the stock on a lot of the digital agility you are seeing in conducting Jeff.

Jeff what what.

Or your thoughts on as you look at value creation and the.

Undervaluation of the digital business, what might be key criteria or things or scenario of possibilities or a framework for.

For the next stage of that kind of analysis.

And then I'd also love your views as we approach Black Friday and holiday and what are some highlights.

This will be a season like no other.

Terms of whats most different or strategies that you will be focused on this time versus others. Thank you.

Got it.

Okay.

Hi, Oliver let me take the first question so.

Look our focus is to ensure the omnichannel behavior of customers is going to be respected at all costs I think the omnichannel behavior is irrefutable and we need to respect that but.

But we're looking at a range of things, including the net of cost benefits in execution, it's associated with operating as a one integrated business versus operating at two separate businesses.

And.

Ultimately, we just need to see to see additional shareholder value can be unlocked beyond the potential of our current approach with our digitally led omnichannel Polaris strategy. So we're working with our board and our advisers for some time on this but based on how the market is assigning value E. Commerce businesses, We just added Alex partners, which we announced.

This morning, as an objective third party firm to really pressure test all of our analysis and so we're in the middle of that work, we need to complete our analysis and we plan to provide an update after the work is complete.

As it relates to Black Friday, I think you hit it.

Could it be like none other.

What is it going to be like versus a 2019 versus what it was in 2020, what we saw in 2020 was the pull forward of demand.

Clearly we prepared for that again, you saw that in what we did with the moving of the friends and family event into October.

As.

To state. It now October was our best month of our third quarter, even when you take out the for instance family shifts Novell.

November has started out has started out strong, but what that means I mean, obviously the amount of business that we do from Thanksgiving cyber week going into holiday all of that is in front of us. So we are prepared we are closed on Thanksgiving day, which is a big change from where we were in 2019, but we expect our digital business to <unk>.

Obviously track very strongly all the way through now and the holiday as well as we are ready for all of the expected traffic that's going to start with <unk> on the day. After Thanksgiving. So the values are very similar in the context of categories, but we are ramping up on exclusive on premium products.

On products that customers have frankly been signaling all the way through the pandemic.

And so we are ready on all of that content and I really like our stock position on all of that going through the black Friday through holiday timeframe. So we're in good position and we're going to be ready to adjust all of our strategies based on how the customer ultimately shops.

Okay.

We'll take our next question from William Reuter with Bank of America.

Hi, I just have one.

You took down your leverage target by half a turn to turn to this quarter from second quarter.

Yes.

Does this indicate any increased interest in trying to actually obtain an investment grade rating and I guess would there be advantages to you of being <unk>.

Explicitly rated investment grade.

Yes.

Okay.

Good morning, and thanks very much for your questions. So I would start by saying that we're just very pleased with the effort that we've made to really delever, our balance sheet and we've been able to accomplish that well ahead of schedule.

You remember as you remember our previous target was to get under two five times and so now that we've been able to achieve that we're now saying look financial health and flexibility is really important for our business and so we've now targeted ourselves to get below two times. So edgier in conversations with rating agencies. This is something that we continue to feel really.

Good about but the additional thing I would point to is that we do also have the capacity to do all the other things that are really critical to the business investing in the business continuing to take advantage of increasing our sustainable dividend every year over time and also be purchasing shares. So I think that leverage ratio target of below two times its all in.

Financial health about the business and it gives us the capacity to be able to do all those things that we need to do to continue to accelerate profitable growth generate strong cash flows and increase our returns to shareholders.

Our next question comes from Omar Saad with Evercore.

Good morning, Thanks for taking my question Great quarter, a couple a couple of quick follow ups.

Obviously, you guys are generating strong demand plus seven comps ex the shift it sounds like October.

Strong November is off to a strong start.

But looking at the 2% to four guide for fourth quarter is there anything you were looking for in December January timeframe.

What might cause that sort of deceleration that's implied by the guidance is there kind of inventory.

And transit issues or other things that are going on.

Cost of sales that T cell, there and also really quickly.

I know tourism in city center, that's a drag.

Downtown stores are a drag can you give us a sense at a high level at least like what that plus seven might be like if you if the tourism and city center stores were back to normal.

Let me start Omar.

Omar with the 2% to four so when you think about the friends and family shift.

Improved.

Third quarter trend by two points versus the $2 19 stack. It basically decreases the trend by about 120 basis points from the fourth quarter. So take that takes that comp up.

Two to four to three to a five two when you look at that $5 two versus what we have been for the other two quarters restated its in that ballpark, what Adrian said in his comments would be that if you were on the lower is because some of these external factors more about COVID-19 more about if there is if there is something that goes on.

I don't think it's going to be a supply chain issue that could affect our trend. So that's that's where it's basically comparable to what we've been running.

As it relates to kind of the what's going on with the downtown stores.

We don't quote what the how that 3% to four points and the international tourism effects by location, but rest assured that there is a chunk of that that affects our downtown stores as a meaningful in the downtown sources of international tourism is.

Is the dearth of office workers. So if you look at New York City alone you've got about 28% of the office workers have returned to office that will grow into we believe the 60% range as you get into the second quarter of 2022, that's obviously going to be a big boost to those downtown locations.

<unk> that are served by those customers. So what I'd look at it as just the total of 3% to four points, that's going to come into our trend at some point, it's going to be a tailwind. We don't expect to see all of that in 'twenty to 'twenty two 'twenty three that's going to be a plus for us.

Our next question comes from Dana Telsey with Telsey group.

Good morning, everyone and so nice to see the progress back stage can you give an update on backstage what you're seeing there.

Inventory and then also on the small store format I think that debuted in Washington D C and it certainly feels like it's getting encouraging results.

The opportunity there and could that be square footage from existing stores that you may allocate to that for that format. Thank you.

So Dana let me take the backstage question and then I'll throw it to Adrian take the small door strategy.

Backstage had another great quarter and this is Ben.

Just a complete growth curve for us it is a profitable business.

What we see is it's mostly been in existing stores with very strong comps over any point of measurement great sell throughs that regular price sell throughs, just continue decline with each quarter. In this business you heard us say in our in our comments the backstage store within stores for 24 points.

Rather than the balance of the stores at the same stores of measurement.

We continue to add new stores in stores and you saw in the quarter that we also added some free standing which joined the first iteration of freestanding stores that we added in 2015. So we're going to continue to do that we've got some new stores.

On the docket for 'twenty two.

A slate of new ones in store within stores with like Herald square being one of those we're adding backstage in 'twenty two in Herald square, which is going to be a nice add but then also new freestanding stores that we will add again into the ecosystem ecosystem for us would be the opportunity to have all omnichannel behavior be at backstage for full line that could go into any location. So the opportune.

City for returns or buy online ship to store in the case. The main line pick up in store backstage locations would have that for the full enterprise so bullish on backstage.

Good morning, Dana and thank you for your question on off mall as I mentioned a bit earlier, we just very encouraged with the initial results and off mall locations really provide us with a clear path to new store off loan growth, which we're just very pleased with and that is within the context of how we're thinking about our.

Ecosystem, our omnichannel ecosystem, which is a combination of the best mall. So how many of those malls have longevity off mall, which gives us a clear line of sight too.

And then obviously, the overplayed with online and our mobile experience so.

We opened five format in Dallas, Atlanta, and DC, we continue to see not as strong sales response, but also with very strong customer response, SBC very elevated net promoter scores as well, but we are quickly learning. We're adapting we will open and introduce more context more of these contracts to more markets next year as we begin to see.

Grow this portfolio, but overall, we're feeling good about is that gives us a clearer path for off mall growth as we continue to work towards the optimal network omnichannel ecosystem for our business.

Operator, we'll take two more questions.

Our next question comes from Bob.

Triple with.

Guggenheim Securities.

Hey, good morning.

I guess just one quick question from me is on the credit card renewal can you talk a little bit about whether or not you think your terms will be better than the existing agreement I would just love to hear a little more color and update on you said that that's moving forward. Thanks.

Good morning, Bob.

We are very much in the final stages of a decision here with regards to our credit card RFP.

And where we are right now as we are.

A few weeks away, we will be able to share more specifics about the program and obviously as we get into Q4 earnings will be able to give much more details around where we are with the decision what the impact will be on that program, but I think the key thing that we're very much focused on is ensuring that we're actually with a partner that had strong digital capabilities are.

Robust pipeline and making sure that there is strong alignment and reinforcement of our our <unk> Omnichannel strategy and the integration of our loyalty program. Our credit card program, Our Star rewards program, our personalization program and the credit card is a critical combination in terms of our growth for our business.

More to come.

Our next question comes from Jay sole with UBS.

Great. Thank you so much Geoff to ask you if you could elaborate a little bit on toys it sounded like starting.

Starting off pretty promising, but how big do you think that business can get how impactful will be <unk> and then my other question is about <unk>.

Inventory coming in from vendors I mean, do you anticipate canceling a lot of orders as we go through the year.

Because maybe you were a little bit extra just in case the supply chain is a little bit more challenging if you could just really talk about how you feel about that that would be helpful. Thank you.

Hey, Jay.

Toys.

It's meeting our expectations and which is great news, obviously, we had a.

When you look at our market share in twice certainly opportunity toys R. US is at the moment, we made the announcement the digital business Sky rocket in and now you see it positioned in our stores, but the real growth is going to be in 'twenty two when we created <unk>.

Abstention larger shops in 400 of our stores, we're working with all of our partners right now on all the content for that.

And looking at exclusive content, we do believe we can be the premier brick and mortar destination for toys in America based on the.

The animation that we want to create the experience we want to create backed up with a just a really robust website, so and as you know toys the.

The customer skews to the millennial mom and dad.

A younger customer they've got a great profile, what we're seen as the new customers are coming in and toys, a higher proportion of new customers and then our opportunity to personalize touch.

Touch points with them after their purchase to be able to get in seed as opportunities in other categories. So it's a great on ramp customer for us so.

Very very happy.

With how that is going.

As it relates to cancellations JMP. Your second question right now, obviously, we're working with our vendors as well as our own private brands about what content that is we think we've got all the mitigation that you do have content that is on a boat right now thats going to Miss Christmas what do we do with that do we can.

So what do we do we hold it to the manufacturing partner Hall that throw a hotelier program.

Or do we do we take it and depending on if it's a longer life. If it's got Christmas. Most key then that that would be something that we wouldn't take but if it was something that had the lives because it's a cold weather product that might go into the first quarter, we're making all of those decisions with our manufacturing partners. So we are in constant communication with them and we have.

Got a great strategy across all of our categories and all of our brands and I feel good that these are going to be win win.

Decisions that we're making with all of our partners.

Okay, I think thats, the and I just wanted to say to everybody that.

The headline for us as a supplier strategy is working that we had another strong quarter as a digitally led omnichannel retailer, we beat expectations, both top and bottom lines and that our 'twenty. One results just demonstrate the effective execution of Polaris and that we are positioned for long sustainable and profitable growth in the future.

We thank everybody for your interest in our brands and have a great day.

And that does conclude today's conference. We thank you for your participation you may now disconnect.

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Good morning, and welcome to the Macy's, Inc. Third quarter of 2021 earnings Conference call.

It is our long conference is being recorded I would now like to turn the call over to Mike Mcguire had heard.

Head of Investor Relations. Please go ahead.

Thank you operator, good morning, everyone and thanks for joining us to discuss our third quarter of 2021 results.

With me on the call or Jack.

Chairman and CEO and Adrian Mitchell, our CFO Jasmine Adrian have prepared remarks that they'll 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've posted a slide presentation on Investor section of our website Macy's Inc. Dot Com. In addition to information from our prepared remarks 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.

Imperatives that will feature this morning, the versus 2019, as we feel that benchmarks or performance more appropriately.

We noted in our press release this morning that on Thursday December 2nd at eight o'clock am Eastern time, Adrian will be participating in a fireside chat at the Morgan Stanley virtual global consumer and retail copper. 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 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 Ah.

A detailed discussion of these factors and uncertainty 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.

Can find additional information regarding these non-GAAP financial measures as well as other views on our earnings release and our presentation on Investor section of our website.

And as a reminder, say to 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 our company delivered another strong quarter exceeded our expectations on both top and bottom lines outperforming 2020, and notably 2019 with strong cash generation here today, we were able to execute it in our capital allocation priorities, including return.

Capital to shareholders, our business has demonstrated resilience and we remain confident in our ability to deliver on the Polaris strategy and as a result, we are raising and narrowing our full year 2021 guidance.

Or 21 results demonstrate the progress we've made with our Polaris strategy operated in a better economic environment as well as the strength of our digitally led Omnichannel model, we are poised for sustainable and profitable breath, and we will continue to build and invest in our retail ecosystem to both maximize and access.

All right are opportunities.

Today I am pleased to announce that we're making a significant investment to launch accelerated digital marketplace platform to enhance the existing Macy's big business fueled customer acquisition and drive growth across all of our channels, we will partner with the enterprise marketplace technology companies Miracle to build.

Platform.

Through this new digital marketplace platform, which will launch in the second half of 2022, we will connect carefully selected third party sellers with our customers and a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation.

Our digital business is on track to generate $10 billion in sales by 2023 and that figure does not include the incremental revenue. We expect this new marketplace platform to generate for Macy's Inc.

Now I will provide some highlights from the third quarter.

Comparable one plus license sales increased eight 7% an improvement in trend from the five 9% increase we saw in queue to even after adjusting for changes in our marketing chapter adjusted diluted EPS was $1.23.

Up significantly from Q3, 2019, and adjusted EBITDA was more than two times better than 2019.

Gross margin for the quarter improved by approximately 100 basis points driven by stronger regular price selling fewer markdowns due to leaner inventories and a number of pricing and promotion initiatives and offset by increased delivery expenses.

Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions when they first of January 4th quarter of 2020, our teams activated plans to mitigate bottlenecks and since then state agile and flexible leveraging our strong networks and relationships with international care.

Weird and birds and diversifying how we move product both up and downstream.

Significantly as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season.

Total company AUR was up more of a 12% across our three new plants SG&A dollars versus significantly lower driven by a combination of ongoing expense discipline and unfilled open positions.

Looking at each of our nameplates comparable sales for Macy's brand, we're up eight 4% on our own plus license basis, which represents nearly one point improvement versus last quarter. When you take into consideration the president family marketing shift.

Macy's brand full price sale through improved 610 basis points, while full price aur's increased by six 9% driven by a high demand and our gross margin initiatives.

Our bloomingdale's business performed well with comp sales on our own plus license basis up 11, 2%, which was in line with the second quarter.

Results were driven by strong sales of luxury again back fine jewelry.

Many shoes, and contemporary apparel, and both stores and Bloomingdale's Dot com outperform 2019.

Bloomberg rate continues to recover outperforming versus 2020, but it was down to 2% compared to the third quarter of 2019.

We see strong sales performance in private brands home fragrance and treatment.

Turning to the health of our customer base, we brought in 4.4 million new customers due to the Macy's brand of 28% increase compared to 2019.

Approximately 30% of these new customers were doormen customers over the last 12 months, who have now we're engaged.

In addition to growth and new customers customer loyalty is also increase star rewards programs and personnel make up nearly 70% of the total Macy's brand comparable plus license sales up.

Approximately 10 percentage points compared to 2019.

During the quarter, we saw platinum gold and silver customers re engage with average customer spending these tears up 16% compared to the third quarter of 2019.

Barack members, who represent our youngest and most diverse loyalty chair continue to grow with the addition of 2.3 million members during the quarter Mrc's average spend per customer increased 13% Brown.

Brian is one of our best customer acquisition vehicles with approximately 35% of members under the age of 40 and 57% ethnically diverse.

<unk> rewarded royalty customers have a more personalized and productive shopping experience with the most relevant offer presented to them right down to the particular homepage Stacey.

This is leading to increased conversion higher revenue per visit and a decrease rate of customers, leaving the site.

Through targeted personalization of pricing science, we've been able to reduce the number of Rob based promotional days and increase aur's.

Having a strong integrated retail ecosystem that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers.

The growth of our Omnichannel ecosystem is powered by a thriving online business relevant full line brick and mortar stores and currently half mall format stores. All soon to be further accelerated by the new digital marketplace platform.

Our data validates that end markets, where we have a physical presence our online business is stronger the interplay between our digital and physical assets is more important than ever and we are focused on establishing an appropriate footprint and markets that drive are sustainable and profitable omnichannel growth.

Turning to merchandising, which we think about three buckets first of our products in categories were strong during the height of the pandemic such as fragrance watches jewelry sleepwear at home continued to perform well during the third quarter.

Occasion based categories, such as dresses in men's Taylor and luggage are continuing to see renewed interest from our customers were able to meet their shifting demand. Thanks to a wide range of assortment.

And third are emerging categories, and new brands are expected to drive sustainable and profitable growth in the future. These complement our four categories, while satisfying a customer shopping churning and we're seeing encouraging results.

To give you an example, since bringing the toys R us business to Macy's Dot com in August or toy signals have more than doubled in stores and online compared to 2019.

And we continue to expand on our assortment of these emerging categories during.

During the quarter, we added another important new brand partner fanatics, which offers our customers the largest selection of license sports products and increases our family apparel offering 20 fold. This expanded assortment drove a 22% AUR increase in sports apparel and headgear compared to 2019.

Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships. One element of this is the bdd monetization of our advertising partnerships that we realized through our in House Media Agency Macy's Media network, which continues to generate solid results and read.

Singly expanded to discover to include Bloomingdales.

We see a lot of potential to further strengthen our relationships with vendor partners and cultivated in greater customer engagement.

Overall troops Laris, we laid a solid foundation for digital growth and we're seeing that growth come to fruition. We are now able to focus on additional strategic investments to refresh the digital experiences to create more experiential customer engagements enhance our stores and further empower our colleagues who drive.

Success of our business on every level.

Are important digital initiatives during the quarter included a refresh that Macy's mobile app the launch of life shopping in both Macy's and Bloomingdale's and a fragrant finger. We also rolled out our <unk> route planning expansion added pay Pal with Venmo, Dan store and online payments and launch a sustainability product cyclists.

As a result of these and other investments digital conversion for the quarter was 4% to 5% up 14% compared to the third quarter of 2020 and up 27% compared to the third quarter of 2019.

Turning from digital to stores. We also continue to invest in a brick and mortar business and are seeing ongoing trend improvement instore conversion during the quarter sales and earn non downtown location continued to sequentially improve but due to the slow return to the international tourism and office workers are downtown.

Doors continue to significantly lag or other doors versus 2019.

A good example of stores recovery is our backstage store within store format with sales up 24 percentage points compared to full line stores backstage store customers are more diverse with 56% of customers ethnically diverse and have a higher spend.

Across our ecosystem everything we do starts with an is driven by our colleagues. They are most significant contributors to our success and we are pleased with the strength of our performance. This year has made it possible for us to double down on our investment in talent.

Last week, we announced a plan to launch a best in class benefit program to give our colleagues access to that free education. We are also raising our minimum wage rate to $15 an hour, which will be in effect nationally by may of 2022. This will increase our average total pay for hourly colleagues to about $20 an hour.

Our workplace culture and colleague engagement has never been stronger and we see it as a meaningful competitive advantage and as tight labor market.

Adrian will know summarize the financial details before I make brief closing remarks.

Thank you, Jeff and good morning, everyone as Jeff shared our third quarter results demonstrate the strength and momentum of our digitally led omnichannel per hour strategy topline sales continued to grow gross margin continued to expand SG&A continued to gain leverage and as a result, we delivered EBITDA.

Far above our expectations.

Recently, we continued to successfully execute on our capital allocation priority aimed at strengthening our balance sheet and returning capital to shareholders.

Are strong results combined with our continued confidence as we move into the holiday season are leading us narrow and wait a full year of 2021 guidance, which I will expand upon in a few months.

Now as I do each quarter and summarizing our results are focused on the metrics that are most important to value creation sales gross margin inventory productivity expense management and capital allocation.

For for the second quarter in a row, we generated topline sales above 2019 levels in the quarter net sales increased by $267 million or five 2% to five $4 billion, while we posted comparable opus license sales of eight seven <unk>.

<unk>.

Keep in mind that compared to 2019 October benefited from the pull forward sales from the fourth quarter into the third quarter a.

Early start of our friends and family sale in late October contributed to this at all about 200 basis points to the ultimate the license sales confidence. Additionally, holiday shopping began earlier as it did last year, but we won't know the full extent of the pull forward until we get further into the season Nevertheless, even wearing.

Just that for friends and family, we produce solid sales growth and continued to expand our trend of sequential improvement.

Now I want to take a moment to highlight the progress we've made in the Choo omnichannel retailer as we have become increasingly focused on the sustainability omnichannel sales growth.

The two performance and potential of our Omnichannel performance is hidden when sales outcomes.

Digital results versus brick and mortar results, we call that Jeff said.

Stronger digital sales in those markets, where we had physicals stores.

Certainly solve this to be the case in the third quarter.

Moreover, while digital sales continued to grow and store sales friends continue to improve notably more than 70% of our omnichannel market saw overall sales growth over and above 2019 level, which represented approximately 85% of Macy's brand comparable license sale.

Digital is is merely benefiting from a ship a salesman stores. It is actually growing beyond that in our presentation. You'll see several examples of these growing common channel markets.

Within these markets irrelevant added potential to expand our market share further with the addition of new off mall locations during the quarter. We open five new locations in the Washington D C Dallas and Atlanta market.

We've seen a strong sales response and solid net promoter scores from customers well above our client expectations. We.

We are very encouraged by the initial results and announcing a clear path to new store off Marlborough.

So, let's do a combination of physical stores in the best small and most of the dusted off my location and a best in class and Commerce platform. Our sales growth is accelerating as we meet customers whenever wherever and however, they choose to shop.

In addition, and Omnichannel view has also highlighted the need for us to take a second to look at the timing of when we closed the approximately 60 remaining stores. We previously planned to close this part of flowers those market that are performing best an aggregate include many of the stores previously slated for closer.

With this in mind, we're considering the following points as we approach the optimization of our store portfolio.

First I think related to underperforming mall based stores that loan closer to have surgery. So it allows us to maintain a physical presence in the market, which is critical to our top line growth.

Second these stores or cash flow positive and support the funding of investment needed to reposition our store portfolio over time.

And lastly, we're adopting are learning any smaller all formats to more quickly introduce these concepts to more markets with friends to open more of these stores next year scaling are all formats will allow us to reposition our brick and mortar assets within markets to more effectively support omnichannel sales growth.

As a result, we expect to announce about 10 chloe's in January with more details on the remaining stores to come later in 2022.

Moving on to gross margin, we saw another quarter of a great expansion to 41% an increase of 100 basis points compared to the third quarter of 2019, we continue to generate there is healthy merchandise margins, which improved by 270 basis points to 45.3%.

The primary driver to where the consistent improvement, we maintain and lower markdown inventory productivity, which up expand upon shortly.

Mark down levels were the result of a combination of lower inventory levels and further scaling up pricing science, including location level pricing and pass pricing work and as Jeff noted these efforts store higher fuel prices therapies and full price aur's compared to 2019.

We continue the rollout additionally initiatives, including a new promotional effectiveness tool given our team access to advanced analytics to better understand the profitability of prior promotional events.

The improvement in merchandise margin was offset by the rise in delivery expense due to increased digital penetration.

Delivery expense was four 2% of net sales 170 basis points higher than the third quarter of 2019.

Even though the increase in merchandise margin more than offset the increase in delivery expense the mitigation and reduction of this expense is a top priority for us and we had clients for cost savings in this area, which we outlined in the presentation.

With regard to inventory productivity inventory levels were down 15, 4% compared to the third quarter of 2019, a product of ongoing market dynamics in our home Polaris initiatives.

Our sales in the stock ratio remains healthy and the improved use of data spines continues to enhance our inventory management practices from quarter basement, all the way to customer sale.

Inventory turn for the trailing 12 months improved by nearly 18% while for the trading six months inventory join improved by approximately 22%.

Additionally, given the macro challenges facing the retail industry. We're staying ahead by making further shifted our inventory management practices and implementing a number of initiatives has been noted on our last call. We do not anticipate improvements to many of the macro approaching constrained until mid to late.

2022.

Moving on we again exercised strong expense management discipline or net value creation metric.

<unk> expenses of $2 billion improved by about 10% or $229 million from the third quarter of 2019 levels.

As a percent of net sales SG&A expenses were 36, 3% a significant improvement of 630 basis points compared to the third quarter of 2019, as we continue to benefit from permanent cost savings and reduce costs duty elevated job openings.

The impact of the labor shortages are transitory and we expect them to moderate going into the next quarter as well as going to the next year.

Improved bad debt levels, driven by strong customer credit help continued to contribute to the growth of credit card revenues for 213 million.

$30 million from the third quarter of 2019 and ahead of what we expected credit card revenues were also ahead as a percent of net sales increasing by 40 basis points to three 9% and churning ahead of our prior annual guidance.

As it related to our credit card program, we are close to finalizing our decision on a partner and expect to have not been efficient in the upcoming weeks.

As a digitally led detailer, we must have a partner with strong digital capabilities today, and a strong innovation pipelines with the prospect of further expand that pipeline in the future or loyalty and personalization initiatives and serve as a key growth levers and our ability to obtain and retain more customers to drive omnichannel sales growth.

That said over the next few years, we expect credit card revenue levels will be slightly lower as a percent of sales and a 3% or so that we have historically experience.

Given our strong performance across these areas as well as the $50 million of assets delegate you recognize during the third quarter, we generated positive adjusted EBITDA of $765 million.

Notably adjusted EBITDA margin $14, 1% exceeded the margin in the third quarter of 2000 19708 basis points on the strength of expense management discipline and gross margin expansion.

After a ton of interest and taxes collectively these results help to generate quarterly adjusted net income of $386 million.

And adjusted diluted EPS of one dollar from 23.

Versus $21 million.07, respectively in 2019.

Our final value creators of capital allocation and are meaningful we cash flow generation of $574 million a year to date has served us well in this regard and.

In the third quarter, we paid approximately one $6 billion of debt early which brings our leverage ratio well under our year end target and while we do on our credit facility to support the build a seasonal merchandise during the quarter. We did so at a much lower interest rate than that of the deck, we would talk.

Going forward, we expect to use the facility periodically based on the needs of the business.

Now we've successfully gained an investment grade profiled wellhouse schedule, we will continue to pay down debt that matures with an aim to achieve a leverage ratio below two time in the upcoming years.

Additionally, we paid $46 million in cash dividends and announced our fourth quarter dividend earlier this month.

We repurchased 13 million shares for more than 4% of total shares outstanding for a total share buyback of $300 million with $200 million with authorization remaining we plan to look for further opportunities to repurchase shares. These actions underscore our confidence in our business and our commitment to.

Our capital allocation priorities that create shareholder value in the near term and the long term.

Turning to our outlook as mentioned, we are narrowing and wasting our full year guidance, we have strong momentum insured in the fourth quarter, but the head with especially noted on the last quarter's call remain and play the supply chain concerns the tight labor market.

Elevated levels of holidays shipping surcharges and potential unforeseen impact of Covid bearing.

For the low end of our guidance considers the impact of these headlines.

You can refer to our slide presentation for the complete fourth quarter and full year guidance metrics, but here are some of the highlights.

For the full year, we now expect net sales to be between $24 $1 million and $24.3 billion, which at the midpoint of the range of an increase of over $400 million from our prior guidance.

We narrowing increase our adjusted bps range to $4.67 to $4.76 from $3 41 to.

For $3.75, an increase of more than a dollar compared to our prior guidance.

Now for the fourth quarter comparable sales on both of license basis versus 2019 are expected to increase between 2% and 4%.

Include that approximately 125 basis point adverse impact due to the shifts of friends and family promotional event from the fourth quarter into the third quarter as compared to 2019.

Gross margin rate expectations are between 100, and 150 basis points lower than 2019.

SG&A expense as a percent of sales is expected to improve by approximately 75 basis points compared to 2019.

And adjusted diluted Cps is expected to be between $1.67.

And a $1.87 events, excluding the impact of any additional share repurchases other than those already executed in the third quarter.

Our progress to date combined with heart <unk> initiatives already underway put as well on the path to profitable and sustainable sales growth at first we have increased clarity on our business outlook over the next few years in 2022, we see several incremental tailwinds for our business.

Beyond those from our prior initiatives that consumer is healthy and we expect the strong demands continue particularly if people return to work at borders open we anticipate an uptick in tourism, although the bills get see tours and returned back to 2019 levels in 2022.

At the same time, we're keeping a watchful eye on headwinds as mentioned we are actively managing supply chain disruption with success, we're continuing to navigate the labor shortages and competition for talent by investing in our current and future colleagues were also focus of mitigating inflationary pressure.

Our customers are leveraging our present time, while continuing to provide our customers with clear about.

A summary, our team is committed to accelerating and sustaining top and bottom line growth and the continued successful execution of our digitally led omnichannel per hour strategy, which in turn will strengthen that health of our balance sheet and deliver strong returns to our shareholders.

Next quarter, we look forward to sharing with you further detail on our guidance for 2022, and our outlook for 2023 and beyond with that I'll turn the call back over to Jack for some closing remarks.

I would say to record so.

So in summary remains focused on executing our employers strategy to position Macy's, Inc. For sustainable and profitable growth. We regularly review the structure of our business and our strategy and are open to all options that are likely to create long term shareholder value.

This past year, we conducted an analysis of R e-commerce, and brick and mortar operations evaluating how each contribute to the value of the company as well as how each benefits from being integrated and working together and.

In collaboration with our board and with assistance from our advisors. We look at multiple business models that would create long term shareholder value, while always respecting the omnichannel behavior of the customer. This work supported our digitally led Omnichannel Polaris strategy that we were successfully executed.

That said, we also recognize the significant value in the market is this time into pure ecommerce businesses and as we look at the landscape. Today. We are undertaking an additional analysis that could help inform our long term strategy to further unlock value for Macy's Inc.

To help in these efforts we have recently engaged Alix partners to work with our board and financial advisers. It is too early to tell what the results of this additional analysis will be but we plan to update everyone. After the work is complete.

Before we take your questions I wanted to express my gratitude to the entire Macy's 18 for deliveries another quarter of strong results I am confident that we have a lot more opportunity ahead, our colleagues focus on both strengthening the fundamentals of our business and driving innovation gives me great confidence that a bow.

<unk> and brighter future for Macy's Inc. Lies ahead.

So thank you everyone an operator, please begin to Q&A.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off July your signal to reach our equipment again that is star one to ask a question will pause for just a moment to allow everyone an opportunity to signal.

Our first question comes from Chuck.

With accordion haskett.

Hey, Thank you.

That's what a great quarter.

Adrian just I wanted to ask about your gross margin levels. They are going to be approaching 39% the share which is really impressive.

How should we think about that line item going forward do you think you can maintain a given some of the Polaris efforts and then more specifically on slide six you call out with $76 million benefit from the local local pricing and Pls pricing will work where are we on that journeys are still a lot left you can you can gain from us.

Thank you.

Good morning, and thanks very much for your question, we're very pleased with the gross margin performance that we've seen and I think it really speaks to just attraction that we continue to have with regards to our cloud strategy at least spoken about before reviewing lost data files to inform houses how we are actually thinking about <unk>.

Centaury allocation, how we're thinking about our pricing and promotion activities and so we feel really good about the progress that we're making and we do believe equity continuing to scale growth initiatives will certainly have additional opportunities as we move forward when I think about $76 million that you're referencing my perspective on that is that is just continued progress that.

We're making with regards to our pricing and gross margin efforts and so you you actually look when you look at our overall gross margin performance year debated in the quarter. It's really just a reflection of that and so we will continue to lean into those initiatives and make sure that we continue to improve our market position both on the gross margin right side as well as on the.

<unk> 19 months inside overtime.

Thanks to luck.

Vicky.

Our next question comes from Matthew Bastard J P. Morgan.

Great. Thanks, Congrats on another nice corner.

Suggest with three que comps further improving from the second quarter, how do you feel about the health of your customer base and the holiday maybe based on what you've seen in November and then with supply chain disruption lasting into next year is Adrian sighted do you see AUR gains.

Sustainable.

From half of the year and as tourism potential second half of the year opportunity in your view.

So on the health of the customer feedback on the health of the customer we definitely see that continuing so when you look at the amount of active customers with us versus 2019 and you look at.

You look at the age you are.

And you look at just they're just they're they're spanned overall all of those metrics or improvement. So we hark back to looking at the customers and how they're responding both online and as well as in our stores check that box <unk>.

Improvements there and then when you just look at the new customers that are coming in to add another $4 million $4 $4 million coming in some of those are re engaged with the bulk of those are new to our brand and to see their spend metrics as you as we've talked about in the past, we always track a new customer and have a shop with us the quarter.

In the quarter after that we're getting about 20% of new customers that are always shopping in the next quarter and another 20% in the quarter. After that so that that is that's consistent with what we are saying so.

As it relates to kind of supply chain.

We really were in good shape right now.

Obviously, we want the inventory to be below where we were in 2019. When you look at our inventory level versus 2020 to be up about 19% that kind of sex with our mid twenties.

Volume network guidance in terms of fourth quarter sales of 2020. So we're in good shape with that we certainly have pockets that are that remain tough.

But we are mitigating those bike all the things that we've talked about it in the past so that can changes I mean, we expect to supply chain issues are going to continue with it of 2022.

Some categories are much better some categories percent, but I think overall, we've got great handle and how were mitigating that through all of our tactics as.

As it relates to kind of tourism.

We have not yet seen a change really an international tourists.

So you know that that's about three to four points of total comp for Macy's and bloomingdale's that is going to be a tailwind for us. We do expect that in front of us to come back in 2022, not fully to 2019 levels, but that will go into 23 as well. So when you look at our downtown stores, they're still struggling.

Our suburban stores are are performing much better when that tourism comes back and when office workers come back with with higher percentages, we do expect those standards downtown stores to to really benefit.

Great color best of luck.

Thanks, Matt.

Our next question comes from Kimberly Greenberger with Morgan Stanley.

Great. Thank you so much for taking the question, Jeff I was very interested about your comments on the kind of.

Importance of both the digital and physical assets. It sounds like you did a good deal of work here over the past year to understand the interplay between these two channels.

I am wondering if there are any sort of key data points, you could share with us from network. It sounds obviously very interesting and then secondarily.

Reassessing the store closures.

That you that you all talked about I am wondering what are.

As you wind the clock forward, let's say a year from now what are you looking for those stores to produce that would give you. The all clear signal that you out should and want to keep them open and is.

Maintain your optionality on those stores that you choose to keep open do you have.

The option option to close them at some future date should the financial performance change. Thanks, so much.

Similarly, thanks for your questions I'm going to take the interplay and the Omnichannel behavior of our customer and then I'll have a dream.

But the store closure question.

Absolutely.

I think any retail brand right now is repeating the full benefit with the right investments and the Omnichannel customer and clearly what we've seen over the years expenses increased activity that's going on between the app between the website and store behavior and so those touch points now is on an average transaction for number.

Channel customers now around six different touch points before a purchases consummated and versus where it used to be five years ago was in the two range. So clearly the more the more of the customer is engaging with omnichannel anymore. They like it and that's a reinforcing load so.

We see huge interplay going on research is generally starting on the App most of our digital business now the majority of it is now coming on via the App a much bigger chunk of transactions are going on here via app, but a lot of that behavior is while they're in a store and you just split from research from pre purchase <unk>.

Scuppering to purchase to post purchase engagement and then of course, what we're doing with all of our data and analytics and personalization to reach out and see that behavior is where this is going so it's just getting to be a tighter and tighter Luke and.

And we fully respect the omnichannel behavior, and we're making up the appropriate investments to ensure that is a frictionless experience for him and her so that's that's where that's going it's certainly that's where we're going with the our entire of market strategy. So that the.

Yes at the interplay that goes on with brick and mortar that's on model as well as testing now new off mall formats.

That is played out in the free markets that we set a foot.

Were digesting all of those new openings of Adrian talked about it as comments and we'll talk on our next call about what that looks like for our expansion of that in 2022, but that Luke is increasing and what we're saying is that the more brick and mortar business or that we're creating the more the digital is.

Happening in those particular ZIP codes. So we'll give you more color on that when we when we speak next Hendrick.

Hendrick much take on that store closures. Thank you Jeff can really good morning to you very good question as it relates to the store closures, but let me start by giving a little bit of context. So as we've mentioned early earlier in the week.

Spent about a year really trying to understand what the future footprints of our business will look like and part of that is really for us to focus on creating a growing and profitable omnichannel ecosystem that is really a combination of our existing best mall are off mall stores ultimate by digital experience now as we think about Omnichannel growth.

We're very much focused on the fact that digital performance is stronger than the markets, where we have stores and as we shared on the call. Our Omnichannel performance is actually very critical to have both the digital footprint as well as the stores footprint. So they're kind of three things that we would've been thinking through as we are moving forward with regards to the store closures the first.

Is that the lane disclosure of certain stores will be allows us to maintain that physical presence and that physical presence allows us to grow omnichannel sales, which is one of the reasons why we want to share some of the progress we're making omnichannel sales recovery relative to 2019. The second thing is that all of the different all these stores are actually cash flow path.

So this becomes the funding mechanism for investment at the new position that portfolio that we're working toward over the next several years and then the third pieces were continuing to learn the that are off mall format. We are very pleased with the early results that we've seen with that version 2.1 of our market by Macy's blooming.

Dale small small locations and so we feel really good about the progress that we're making there but ultimately we're constantly review all of these two locations.

Expected to announce 10 closure to the beginning of next year and ultimately how many be closed and on what timetable continues to be a work in progress, but we will continue to be very transparent on the piece of those coaches as we progress.

Very clear and helpful. Thank you both.

And Keith.

Our next question comes from Paul Lajoie with Citigroup.

Thanks, Thank you.

Hogan.

For Paul.

Wondering if you could talk about what you're seeing on the inflation five.

And the cost to you and then how.

About your strategy I got can how Europe, presenting that to consumers price and fine. Thank you.

Hi, Tracy Saugus that we've been through this inflationary cycles before and and when you look at it to get kind of make some generalizations about cost increases in some cases in fashion, we can pass that on.

Commodities ready to or a different story now thankfully I'm talking like shorts tanks teased commodities.

We and our competitors will compete with.

And that thankfully.

A chunk of those commodity businesses release on throat private brands and reward.

We've worked early closely with our overseas suppliers from our sourcing capability to really help mitigate rising costs.

As you would expect we have we're very focused on testing and our pricing science. So all the way through this third quarter. We've had over 480 pass pricing task of where customers will accept cost increases and when they want and we're making them all adjustments in the future.

For tickets as well as promotion based on that we also have when you think about what what Macy's and bloomingdale's brands have been doing over the years, we've really changed the historical practice of overlapping discounts. So the value that we're offering customers as much clearer and that gives you higher AUR and we're looking at that market.

Sure events versus one day sales versus weekend events. So we're getting higher aur's, just because the clarity of our prices.

The biggest solved for US is two things one is we're really committed to maintaining leaner inventories and ensuring that those inventories are being allocated to the right portal forward will be expect omnichannel behavior and then the second Big thing is the big tools were doing to data and analytics and automation, which is our opportunity to miss.

The gate price increases when they come and that would be personalised, tos messaging, which will do through our personalization as well as the <unk>.

Science that we're deploying against the discrete hardware cage, so or opportunity to not take a price decrease on a permanent basis at a store or channel level and doing that at a level that we've never been able to accomplish before that's going to help us with whatever price increases we might put into the second so we feel like we got a really good.

And good history and experience on inflation, and we will react as of commerce.

Great. Thanks very much.

Our next question comes from Stephanie Wissink with Jefferies.

Okay.

Hi, Good morning, it's Blake on for Steph, Thanks for taking our questions.

Entering on your digital marketplace.

How many skews in which categories are you targeting wonder if you could provide any commentary there and then how should we think about this impacting your Macy's media network business.

I would like so.

The the details of your question, we're not ready to answer yet so we will be giving you more detail on this as we launch it.

But a couple of headlines is that when you think about this we have a very successful digital business now and the marketplace announcements that we made today within the next natural step in our evolution as a digitally led omnichannel retailer such as strict ground, we put down the marker on a couple of earnings calls now that we're going to hit 10.

<unk> bye twenty-three, we are very committed to that marketplace would be on top of that.

And what we found in just everything we've done to develop our digital business was really the customer behavior and the categories that they were requesting that new brands of narrow requesting and what what's the best way for us to to.

Capitalized on that so we've been doing that through one mortgage reviewed yet and the opportunity now what's for us to look at getting achieving some of that through a marketplace platform. So as you would expect we studied all the types that are out there being the number two website and our categories in the nation, we have a lot of competition and.

Some of the other really strong players and all of them have marketplaces, so our ability to be able to study housing too. It what's the competitive landscape is how this is going to align against the Polaris strategy. What are the risks what is the financial opportunity ensuring that we had a scalable model that really minimize our investment in incremental costs on this.

For both Bloomingdale's and Macy's is is what led us to our partnership with the Miracle, which we think is best in class. So we can keep it work with them were standing up are discreet marketplace team within our digital.

A pyramid and we will be ready for a launch in the second half of 2002, we believe that the customer benefits of this.

<unk> assortment ticket that is a must it needs to be generated a fashion and style.

Retailer it needs to be a seamless experience for the customer and then of course the business benefits are we know that we can grow digital are vicious faster, we could generate more profitability, we can get more depth and breadth of assortment and really.

Address with new brands and emerging trends for a customer who looks to us to be able to do that.

That's great color really appreciate it last one for me I think last quarter. You had said you were going to test.

<unk> stores.

With various fulfillment initiatives, including some automation and shipped from store.

Wondering if you had any update on that so far or maybe you could speak more broadly to just getting more customers comfortable.

Picking up from store as well in addition to do delivery. Thank you.

Thank you very much for your questions late with regards to the fulfillment operation, we will share a lot more detail about the success of that as we get into our next earnings call I keep our earnings call. What I would say is that we're very pleased with the progress that we've seen thus far and the two tests will really come when we hit our peak season going through the holidays in terms of.

Really precious cussing with technology, but so far so good with the robots with the investments that we've made in space as well as with the productivity that we've seen in through wrapping up as we think about speak up in store, we want to be able to have a flexible fulfillment operations that give the customer choice. We've been in a moment in time, where the customer will pick up from star.

Sure. They gave me a moment in time, where we shipping too if our her home I think we're very much focused on was really bringing bringing download the delivery of expense, while also increasing speak with the customer and so as we begin to think about our downstream fulfillment capabilities in store and continuing to expand out beyond where we are today. In addition to the automation.

In other investments, we're making a stream we feel that we'll be able to bring down a delivery expense as well as increase to speak with the customer. So we're just really focusing on a flexible operating structure that allows the customer to have real choices and how 'bout, he or she wants to shop.

Our next question will come from Oliver Chen with Cowen and company.

Hi, Jeff an agent Kratsa great quarter.

We upgraded the stock on a lot of the digital agility, you're seeing in conducting Jeff what what are your thoughts on as you look at value creation and the undervaluation of the digital business what might be key.

Area or things are a scenario of possibilities or framework.

For the next stage of of that kind of analysis.

And then I'd also love your views as we approached Black Friday and holiday what are some highlights.

This will be a season like no other.

In terms of what's most different or the strategy is that you'll be focused on this time versus others. Thank you.

Okay.

Hi, all of our Lymington first question so.

Our focus is to ensure the omnichannel behavior customers is going to be respected at all costs I think the omnichannel behavior is irrefutable and we need to respect that.

Looking at a range of things, including the net cost benefits and execution is associated with operating as a one integrated business versus operating at two separate businesses and.

Ultimately, we just need to see that the additional shareholder value can be unlocked beyond the potential of our current approach with our digitally let omnichannel flatter strategy. So we're working with our board and our advisors for some timelessness, but based on how the market is assigning value E. Commerce businesses. We just added a partnership between now.

This morning, as an objective third party firm to really pressure tests all of our analyses and so we're in the middle of that work, we need to complete our analysis and we plan to provide an update afterwards is complete.

As it relates to Black Friday, I think a head it's going to be like none other.

What is it going to be white versus a 2019 versus whether it was in 2020, what we saw in 2020 was the pull forward with demand.

<unk> would we prepared for that again you saw that in what we did with the moving of the friends and family event into October.

Has to.

<unk> stated now October was our best month of our third quarter of even when you take out the friends and family shifts.

November has started out has started out strong, but what that means I mean, obviously the amount of business that we do for Thanksgiving cyber week going into the holiday all that's in front of US. So we're prepared we are closed on Thanksgiving day, which is a big change from where we were in 2019, but we expect our digital business too.

Obviously track very strongly all the way through now and the holiday as well as we are ready for all of the expected traffic that's going to start at six am the day. After Thanksgiving. So the values are very similar in the context of categories, but we're ramping up an exclusive on premium products.

On products that customers have frankly been signaling all the way through the pandemic.

And so we are ready on all of that content and I really like our stock position on all of that coming through the the black Friday through holiday timeframe. So I went in good position and we're going to be ready to rip to adjust all of our strategies based on how the customer ultimately shops.

We'll take our next question from William Greater with Bank of America.

Hi, I just have one I think you took down near leverage target by half a turn to to turn to this quarter from second quarter. I guess does this indicate any increased interest in trying to actually attain an investment grade rating and I guess would there be advantages to you of being.

Explicitly rated investment grade.

Thanks.

Good morning, and thank you very much for your questions. So southern.

By saying that we're just very pleased with the effort that we've made to release lever our balance sheet and we've been able to accomplish that well ahead of schedule.

Remember as you remember our previous target was to get under two and a half times and so now that we've been able to achieve that we're now saying look financial health and flexibility is really important for our business and so we've now targeted ourselves to get below two time, so SVR in conversations with rating agencies. This is something that continue to feel really good.

[noise] about but the additional thing I would point to that we do also have the capacity to do all the other things that are really critical to visit and first thing in the business continuing to take advantage of increasing are available dividend every year over time and also be purchasing shares. So I think that leverage ratio targeted below two times is all about.

Financial how about the business and he gives us the capacity to be able to do all those things that we need to do we continue to accelerate profitable growth January strong cash flow and increase our return to shareholders.

Our next question comes from <unk>.

<unk> sighed with Everquest.

Good morning, Thanks for taking my question Great quarter, a couple a couple of quick follow ups.

Obviously, you guys are generating strong demand plus seven comps extra shift sounds like October.

With strong November is off to a strong start.

But looking at the two to four guide for fourth quarter is there anything you're looking for in December January time frame.

That might cause it's kind of that sort of deceleration that's implied by the guidance is there kind of inventory in transit issues or other things that are negative cost of sales to DSL, there and also really quickly.

I know tourism and city center, that's a drag.

Downtown stores are a drag can you give us a sense at a high level at least like what that plus seven might be like if you if the tourism in city centres stores were back to normal. Thanks.

Let me start term Omar with the 2% to four settlement when you're thinking about the friends and families shifts that improves the third quarter trend by two points versus the 219 stack. It basically decreases the trend by about 120 basis points in the fourth quarter, so take that take that.

A comp of two to 423252 when you look at that five two versus what we have been for the end of two quarters restated in that ballpark, what Adrienne inserted his comments would be that if you were on the lower end because some of these external factors more about COVID-19 more about if there's if there's.

Something that goes on and I don't think it's going to be a supply chain issue that could affect our trend. So that that's where it's basically comparable to what we've been running.

As it relates to kind of the what's going on with the downtown stores.

We don't quote what the how that three to four points and an international tourism effects by location, but rest assured that there is a chunk of that that affects our downtown stores as in meaningful in the downtown sources International Tourism is is the is the dearth of office workers. So if you look at New York City alone you.

About 28% of the office workers have returned to office that will grow into we believe 60% range as you get into the second quarter of 2022, that's obviously going to be a big boost to those downtown location.

That are certified those customers. So what I would look at it as just a total of three to four points, that's going to come into our trend at some point, it's going to be a tailwind. We don't expect to see all of that and 22 by 22 23, that's going to be a plus for us.

Our next question comes from Dana Telsey with Kelsey grammar.

Good morning, everyone. So nice to see the progress backstage can you give an update on backstage, what you're seeing there and.

Inventory and then also on the small store format I think that debuted in Washington D. C and it certainly feels like it's getting encouraging results what is the opportunity there and could that be square footage from existing stores that you may allocate to that for that format. Thank you.

So Daniel let me take the backstage question and then I'll throw it's Adrian Tech the small door strategy.

Backstage at it and another great quarter and this has been.

A complete growth curve for us, it's a profitable business.

What we see is it's mostly been in existing stores with very strong comps over any point in metro meant great sell throughs that regular price fell through just continue to climb with each quarter. In this business you heard a center in our comments that backstage towards been searched for 24 points.

Better than the balance of the stores at the same stores of measurements.

We continue to add new stores in stores and you saw in the quarter that we also added some freestanding which joined the first iteration a freestanding stores that we added 2015. So we're going to continue to do that we've got that new stores on the docket for 22.

Slate of new ones historic been stores with like Herald square being one of those we're adding backstage in 22 and Herald square, which is going to be a nice at but then also knew freestanding stores that we will add again into the ecosystem ecosystem for us would be the opportunity to have all omnichannel behavior B a backstage for full one that could go into any location. So the opportune.

D for returns or buy online shipped to store in the case of the limelight pickup and store a backstage locations would have that for the full enterprise. So.

Bullish on that section.

Good morning, and thank you for your question on off mall as I mentioned a bit earlier, we just very encouraged with the initial results and these off mall location really provide us with a with a clear path to new store off Manuel which which is very pleased with and that is within the context of how we're thinking about our.

Because of this.

Talent ecosystem, which is a combination of the best small so how many of those small to have longevity off mall, which this gives us a clear line of sight team and then obviously the overplay with online and our mobile experience. So.

We opened file format and Dallas Atlantan D. C. We continue to see not the strong sales response, but also very strong customer response, as we see very elevated net promoter scores as well, but we are quickly learning. We're adapting we will open and introduced more complex more of these concepts to more markets next year as we can see.

Kind of grow this portfolio, but overall, what we're feeling good about is that needs to be clearer path for alcohol growth as we continue to work towards the optimal network omnichannel ecosystem for our business.

Operator will take two more questions.

Our next question comes from Bob.

Triple which.

You can have securities.

Hey, good morning.

I guess just one quick question for me is on the credit card renewal can you talk a little bit about whether or not you think your terms will be better than the existing agreement will just love to hear a little more color an update on you said that that's moving forward. Thanks.

Good morning, Bob.

Much in the final stages of a decision here with regards to our credit card RFP and where we are right now as we are.

A few weeks away, we will be able to share more specifics about the program and obviously as we get into keep for earnings will be about give much more details around where we are with the decision what the impact will be on that program, but I think the key thing that we're very much focused on ensuring that we're actually with a partner that has strong digital capability.

These are robust pipeline and making sure that there is strong alignment in the enforcement of our our VW, let omnichannel strategy and the integration of our loyalty program or credit card program or Star rewards program. Our presentation program and the credit card is a critical combination in terms of our growth four are busy.

So more to come.

Our next question comes from J saw with UBS.

Great. Thank you. So much you have to ask you if you could elaborate a little bit on toys it sounded like.

Starting off pretty promising, but how big do you think that business can get how impactful will be <unk> and then my other question is about.

Inventory coming in from vendors I mean, do you anticipate canceling a lot of orders as we go through.

Because maybe you order a little bit extra just in case the supply chain is a little bit more challenging. If you just really talk about how you feel about that that would be helpful. Thank you.

Hey, Jay So choice.

It's midian and our expectations and which is great news, obviously, we had a.

When you look at our market share and toys, certainly opportunity toys R. US is at the moment, we made the announcement the digital business skyrocketed and now you see it positioned in our stores, but the real growth is going to be 22, when we create.

Substantially larger shops, and 400 or stores, we're working with all of our partners right now and all the content for that.

And looking at exclusive content, we do believe we can be the premier brick and mortar destination for toys in America based on the the animation that we want to create the experience we want to create backed up with a just a really robust website, so and as you know toys.

The customers Hughes to the millennial mom and dad, it's a younger customer they've got a great profile. What we're seeing is the new customers are coming in and toys higher proportion of new customers and then our opportunity to Personalise touch.

Touch points with non after their purchase to be able to get in seat on opportunities in other categories. So it's a great on ramp customer for us so.

Very very happy with without that is going.

As it relates to cancellations JC to your second question breakdown, obviously, we're working with with our vendors as well as our own private branch about what content that is we think we've got all the mitigation that if you do have content is on a boat right now that is going to Miss Christmas what do we do we do we can.

<unk> do we do we hold the just the manufacturing partner hold that through a hotelier program.

Or do we do we take it and depending on if it's a longer life. If it's got Christmas motif.

That would be something that we wouldn't tech, but if it was something that has the life because it's a cold weather products that might go into the first quarter, we're making all those decisions with our manufacturing partners. So we are in constant communication with them and we've got a great strategy across all of our categories and all of our brands and I feel good that these are going to be win win.

<unk>.

Decisions that we're making with all of our partners.

Okay, I think the and I just wanted to say to everybody that I think the headline for us about the player strategies working that we had another strong quarter as a digitally led omnichannel retailer, we beat expectations, both top and bottom lines and that are 21 results just demonstrated.

Straight the effective execution of Polaris and that we are positioned for long sustainable and profitable growth in the future. We thank everybody for your interest in our brands and have a great day.

And that does conclude today's conference. We thank you for your participation you may now disconnect.