Q1 2022 Macy's Inc Earnings Call
Good morning, and welcome to Macy's, Inc. Q1, 2022 earnings Conference call Today's conference is.
Is being recorded I would now like to turn the conference over to Mike Mcguire head of Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thanks for joining us to discuss our first quarter 2022 results.
As always with me on the call today 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 your questions. Given the time constraints, we ask that participants in the Q&A. Please limit your questions to one hopefully single part question along.
With our press release from earlier. This morning, the slide presentation has been posted on the investors section of our website Macy's Inc. Dot com.
In addition to information from our prepared remarks. The presentation includes supplementary facts and figures to assist you in your analysis of Macy's.
Also note that unless otherwise noticed the comparisons that will speak to this morning will be versus 2021 comparisons to 2019 or provided where appropriate to benchmark our performance given the impact of the pandemic in 2020.
I do have one housekeeping item to share with you. This morning, we noted in our earlier press release that on Tuesday June seven at eight o'clock a M. Eastern daylight time, Jeff and Adrian will be participating in a fireside chat at the Evercore ISI consumer and retail conference. This event will be webcast live on our Investor Relations website. So please circle that date on your calendars and plan.
Tuna.
Now for the good stuff keep in mind that all forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
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.
Finally, 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. Thank you for joining us.
The first quarter presented a unique combination of challenges across a highly dynamic and uncertain operating environment with mounting inflation rising interest rates, a volatile stock market COVID-19, Lockdowns in Asia and the war in Ukraine.
Nevertheless, I am pleased to say that Macy's delivered solid results. Thanks in large part to the efficiencies we built into our business through the Polaris strategy throughout the quarter. Our teams stay focused on the customer and we executed on our plan for long term growth.
We leveraged our transformation muscle and quickly pivoted to satisfy customers with what and where they wanted to shop.
As a result quarterly net sales were in line with our expectations at $5 3 billion, a 13, 6% increase compared to the prior year comparable owned plus licensed sales increased 12, 4% and average unit retail was up approximately 8%.
We beat our earnings expectations, we generated $211 million more in adjusted EBITDA in the first quarter than in the same period in 2021, and our adjusted diluted EPS was $1 eight for the quarter almost three times higher than the prior year's 39.
Looking at each of our nameplates comparable sales for the Macy's brand increased 10, 1% on our own.
<unk> license basis, we saw a notable shift in consumer shopping behavior between channels with better than expected sales in stores and lower than expected digital sales. This dynamic underscores the resilience of our Omnichannel strategy, which I'll talk about in a couple of minutes.
Macy's sales were also affected by an accelerated category shift away from the popular pandemic categories, such as casual in activewear as well as soft home and into more occasion based apparel like dresses women's shoes, mens clothing and furnishings. This shift accelerated faster than we expected it contributed to an increase in store foot traffic.
As consumers are more likely to shop in person for occasion based apparel, we were pleased to see that our balanced assortment allowed us to meet the shift and capture sales.
Our macys customer base remained healthy during the quarter on a trailing 12 month basis, we now have $44 4 million active customers.
A 14% increase over where we were in the first quarter of 2021, and the highest active customer level in four years.
We are also encouraged to see strong engagement by our most loyal customers on a trailing 12 month basis, our $29 1 billion Star rewards program members made up 69% of Macy's brand owned plus licensed sales.
Up nearly six percentage points from the prior year.
Our bloomingdale's brand performed strongly exceeding expectations, both in stores and online as luxury consumer spending remained robust comps.
Comp sales on an owned plus licensed basis was up 26, 9%. This was driven by strong sales of dresses men's tailored mens and womens contemporary and luggage.
About 4 million people shop with Bloomingdale's brand for the trailing 12 months ending Q1, that's a 21% increase compared to where we were as of the first quarter of 2021. Overall. This robust broad based performance is a testament to how the bloomingdale's team has evolved the product assortment to be relevant for new younger generation.
That is investing in both their wardrobes and their homes.
At Blue Mercury the team continued to build on this momentum and posted another improved quarter comparable sales on an owned plus licensed basis were up 25, 2%. This was driven by an increase in store traffic coupled with better than expected growth in private brands.
During the quarter as mask restrictions lifted Bloomberg, where you saw the return of color, particularly in lip face ni categories.
Now, let me circle back to the importance of our Omnichannel strategy.
Across our nameplates, it's clear that our customers, we're changing how they shop during the quarter and we were ready as COVID-19 restrictions loosened in the U S people grew more comfortable returning to normal activities.
Went back to the office at least a few days a week. They attended group events and celebrations and resumed in store shopping our strong performance underscores the strength of our Omnichannel ecosystem and our success in building a seamless shopping experience that accommodates changes in customer behavior, notably more than 88% of our omnichannel.
Markets grew sales.
Breaking this down further between channels growth in our digital channel slowed from last quarter, but sales remained elevated over 'twenty, one and 2019 levels digital sales were up 2% versus 2021 and up 34% versus 2019.
For Macy's, which represents the lion's share of digital sales traffic was up 1% from the quarter of 2021.
As consumer shopping behavior shifted from digital to in person, we took steps during the quarter to increase traffic, including paid search and personalization, which helped to attract more visitors.
At the same time Macy's saw conversion declined by 5% driven by consumers online shifting back to in store purchases, which was partially due to the return of occasion based apparel.
We know that the consumer shopping journey, often begins online even when the ultimate purchase happens in the store, we're continuing to drive traffic to our digital platforms with that in mind and further underscoring the benefit of our Omnichannel ecosystem.
We're focused on personalization is an important growth engine and we continue to ramp up our capabilities to increase engagement, particularly with our highly engaged omnichannel shoppers are best segments.
Today, we are starting to see the results of this personalization work with revenue driven by personalized product recommendations up 13% during the quarter, while we're still in the early innings of these initiatives were pleased with these results and we continue to test and iterate to find the best communication channels frequency messages and offers.
Our apps performance continued to be a standout with active customers, increasing 14% to $7 4 million in the quarter and we continue to make progress in preparing for our new Macy's marketplace, which will launch during the third quarter and we expect to scale. It over the course of the second half we will share more on this as we get closer to launch.
As I mentioned sales in stores grew as consumer comfort levels rose along with our desire to return to in store shopping but these gains were also a result of the investments we made to make our stores a style destination through our new brand platform on your style. They're also benefits of our focus on trend merchandising, which.
Our customers to shop for full looks rather than just items. We're also investing in our customer service experience by enhancing extra service centers in every store.
Additionally, we continue to make progress scaling our smaller off mall store formats like market by Macy's These will be integral in supporting our digitally led omnichannel ecosystem.
During the quarter, we also benefited from international tourist traffic, particularly from Central and South America as well as Europe 18 stores like our flagships at Herald Square in New York and Union Square in San Francisco, along with many of our downtown locations, while our downtown locations continue to lag in performance versus 2019.
We saw year over year improvement in their sales trend with these locations outperforming the balance of the stores.
We're also continuing to see strong performance from our backstage store within store locations. These locations open more than a year posted a high single digit comp increase versus last year driven by continued strong performance in kids apparel men's dresses, Missy sportswear and luggage as well as higher AUR.
We're also expanding this off price presence in strategic spots that advance the macys value spectrum strategy during the quarter, we announced that we will open 37, new backstage store within store locations nationwide.
In the month of May we opened our 300 backstage location as well as our largest store within store location in our Herald square flagship both of which are significant achievements for our off price portfolio.
So in summary, we're pleased with our results this quarter, particularly our ability to navigate the difficult macro economic environment now I'd like to provide more details on how we're dealing with the economic headwinds.
First I'd like to share some color on supply chain and inventory productivity.
As I mentioned earlier, we saw a rise in consumer demand and occasion based merchandise categories. While at the same time, we experienced a deceleration in casual active and soft home categories. Both at a faster pace than we anticipated simultaneously supply chain constraints relaxed, resulting in a higher percentage of receipts than we expected.
The combination of these factors created an imbalance in our overall inventory levels as well as by channel.
The good news is that we were able to navigate these demand and supply trends. Thanks to our underlying work to improve pricing science and our disciplined purchasing behavior, coupled with leaner inventories entering the year as a result, we delivered strong improvement in both inventory turn and gross margin compared to about 2021 and 2019.
Levels at quarter end, our work resulted in inventories rising 17% from 2021 levels on a 13, 6% increase in net sales.
And this shift in consumer demand for more occasion based categories like dresses and tailored clothing is a good thing for Macy's. It is where we shine with our broad assortment base, we're pivoting to those categories and building replenishment stock and our best sellers.
We are continuing to closely watch supply chain dynamics, while constraints loosened up in the first quarter. There is still a significant amount of uncertainty with the lockdowns in China and the ongoing labor negotiations in the La Porte factors like these drive us to continue taking a prudent and disciplined approach with our lead times and Ford.
Casting.
We're making adjustments as needed with ongoing communications with our partners to ensure that we can adapt to changing consumer demand and have the right inventory available at the right levels and at the right time.
We're also closely monitoring the evolving shopping behaviors relating to the abbvie to the Covid pandemic combined with mounting inflation and macroeconomic volatility.
During the first quarter all income tiers continue to engage with US led by the higher income and middle income consumers luxury sales remained a standout for our business as shopping behavior. Among high income consumers has so far remained less affected by inflation.
These trends show the benefit of our balanced portfolio across nameplates, we operate across the value spectrum from off price to luxury this coupled with our wide assortment of categories products and brands gives us the ability to flex with consumer demand.
Now I'll pivot to our merchandising strategy for the Macy's brand, we're putting a lot of focus here as we look to engage more customers and grow market share.
We are in the early stages of re imagining our private brand portfolio and realigning our private brand team under new leadership in partnership with our broader merchandising and sourcing teams. Our goal is to have a private brand portfolio that is differentiated defensible and durable.
But the team is developing original designs and distinctive brand identities values and principles that foster brand love with a modernized size and fit approach. So that all of our customers who are empowered to own their personal style.
This work is underscored by customer data and analytics to ensure that we have the right value equation and competitive pricing architecture, and while specifics its composition are not yet ready to share we're considering all avenues, including the launch of new brands as well as a rethink and refresh of current brands all centered around giving the customer what.
They want.
Looking forward to sharing additional details on this work in the future.
Before I pass it over to Adrian I want to thank our colleagues for their continued hard work and dedication, they're demonstrating tenacity and executing our strategy and building a seamless shopping experience all while keeping our customers at the heart of every decision their spirit and ingenuity drive US forward as we continue to navigate this dynamic environment.
<unk> and I wanted to acknowledge and thank them for that.
And with that Im going to turn it over to Adrian for additional color on our first quarter results and the outlook for the rest of the year.
Thank you, Jeff and good morning, everyone driving shareholder value remains our top priority and we're doing this by combining effective operational execution with the strategic deployment of capital.
Our disciplined actions have improved the financial health of our business and have allowed us to successfully navigate today's volatile and uncertain operating environment.
As Jeff said, we delivered first quarter sales as anticipated, while our bottom line exceeded expectations.
Ill highlight our successes as I walk through our results focusing on our high value creation metrics Omnichannel sales gross margin inventory productivity expense management and capital allocation.
First omnichannel sales, we generated $5 $3 billion in net sales during the quarter up $642 million or 13, 6% versus last year comparable sales on an owned plus licensed basis increased by 12, 4%.
As you May recall, our first quarter last year did not fully benefit from the accelerating economic recovery and stimulus payments that were just beginning to thrive macro trends in the market.
These had a larger impact later in the year.
Nevertheless, we are pleased with our performance, particularly in light of the channel and category dynamics that written navigating with debris.
Now onto gross margin, where we saw another strong quarter of expansion that contributed to our outperformance for the quarter gross margin was 39, 6% up 100 basis points from the prior year period and above our expectations.
Merchandise margin increased 50 basis points benefiting from higher AUR.
Our AUR performance was driven by three factors first lower promotions, particularly on a regular price goods. This was driven by our Pos pricing optimization work.
Second higher ticket prices.
The contributors here were fragrances, mattresses, textiles, and fine jewelry.
And third category mix, driven largely by furniture and fragrances. In addition to the increased penetration.
Occasion based apparel category.
Full price sell throughs were down slightly in the quarter impacted by the shift away from pandemic categories like active wear and soft home that Jeff discussed however, full priced <unk> increased 10% for the Macy's brand.
With a gross margin delivery expense accounted for four 3% of net sales.
50 basis points lower than last year, reflecting the four percentage point decline of digital penetration.
If we step back for a minute, we know that our ability to maintain margin depends on our understanding of customer demand within and across categories to improve this understanding and better forecast demand in a highly uncertain environment, we're leveraging predictive analytics and data science. They also allow us to apply.
You have some tactics.
First we are shifting our promotional profile to be more personal lines.
Portable here are the personalization efforts that Jeff spoke about earlier.
Second as we improve our ability to predict demand, we expect to improve the accuracy of our upfront buys and how we allocate inventory within and across markets.
This should help us drive better sell throughs and higher inventory productivity.
Third is our use of pricing science, we utilized dynamic pricing to change the timing cadence and size of markdowns based on factors such as inventory availability sell throughs and demand patterns.
This leads me to inventory productivity as Jeff discussed, we acknowledge that the dynamics around inventory are challenging including those within the supply chain.
The faster than expected shift away from pandemic categories resulted a higher inventories largely within decelerating categories at.
At the same time, the loosening of the supply chain resulted in a higher percentage of receipts lending at rpc's earlier than expected.
Despite this we managed inventory as effectively as we could during the quarter and continued to deliver productivity gains. Our efforts resulted in an 18% improvement in turnover versus 2019, and even a 9% improvement compared to 2021, which had abnormally low inventory levels at the beginning of the year.
Effective inventory management remains a key strategic priority for US we are working actively to get inventory metrics better aligned to actual sales trends by driving faster sell through of our slow moving merchandise and adjusting our buys to reflect the changing environment. The data science, we have built into the bid.
This is key to the success of this work and helping to ensure we maintain strong margins.
Next expense management.
In the quarter SG&A expenses increased by $131 million or seven 5% to $1 9 billion.
SG&A as a percent of net sales improved by 200 basis points to 35, 1%.
This was primarily driven by disciplined expense management in the face of sales growth and we achieved this strong performance, even with material wage inflation across the organization.
As we exited 2021 first quarter with a significant number of open positions due to the tightening labor market.
Since then we have made major progress on either billing or eliminating open positions. Today are remaining open positions generally reflect the normal course of business or new positions, we need for expanding operations such as those for marketplace and personalization tools.
Additionally, as it may 1st of all our colleagues in stores and distribution centers are now at a minimum wage space of $15 or above depending on the legal minimum wage within the municipality.
During the quarter. We also benefited from the growth of Macy's Media network, which saw net revenue nearly doubled to $26 million in the quarter.
Credit card revenues were $191 million up $13 million from the first quarter of 2021 as a percent of net sales credit card revenues were up 20 basis points to three 6%.
Our outperformance here benefitted from three primary factors, one continued low bad debt levels.
Two higher credit sales and three greater co brand credit card spending.
Our better than expected bad debt levels continue to benefit credit card revenues as the consumer remains healthy our strong sales performance over the last couple of quarters also helped to drive higher balances within the portfolio and lastly, we saw higher spending on the co brand credit card, where we benefit from usage.
Outside of our own channels.
While credit card revenues exceeded our expectations for the quarter, we continued to expect inflation to outpaced wage growth and weigh on consumer health. We expect this to contribute to an increase in bad debt.
Partially offsetting this will be the continued higher balances in the portfolio and higher spending on our co brand credit card both benefiting from the shift in consumer spend away from debit cards.
This will be a reversal from the last year when consumers were flush with stimulus cash.
As we look ahead to the rest of the year, we expect credit card revenues to rise more than we expected three months ago, I will give more detail of that in a moment.
Now for Bottomline profitability.
Adjusted EBITDA margin came in higher than expected at 12, 8% or 270 basis points higher than 2021. This includes asset sale gains of $42 million, which was $36 million higher than the last year.
This outperformance was driven by the better than expected results for gross margin and credit card revenues that I spoke of earlier after accounting for interest taxes, and the share repurchase which I'll address in a moment. These results generated adjusted diluted EPS of $1 eight.
Up from 39 in 2021.
Which leads me to our final value creation metrics capital allocation.
The strategic deployment of our cash over the past year has been one of the most critical drivers of our transformation journey.
Our solid execution of our capital allocation priorities, we are now able to invest in the business and return capital to shareholders.
I will take you through this quarters highlights.
We generated $248 million of operating cash flow. This was driven by higher adjusted EBITDA and merchandise payables and partially offset by an increase in merchandise inventories and a decrease in accounts payable and accrued expenses.
Capital expenditures were $261 million and free cash flow was $60 million.
Our continued capital investments remain critical with a large portion of the geared towards growth investments and focus on omnichannel investments, including the digital marketplace automation and data science capabilities.
During the quarter. We also took significant actions to increase our financial flexibility.
With the upgrade of our credit ratings at February we were able to remove the collateral for our bonds. So that now all our long term debt is secured.
Another action, we took was amending and extending the term of our $3 billion asset based credit facility by three years to March of 2027, further strengthening our financial flexibility and liquidity.
As we've said before we expect to use the credit facility periodically based on the needs of the business.
The third movie took to increase financial flexibility was using cash on hand, along with the proceeds from the issuance of $850 million of new longer term maturity unsecured notes due 2030, and 2030 Q to redeem approximately $1 $1 billion of debt.
That was maturing in 2023 and 2024.
As a result, we have no material debt maturities for the next five years, giving us significant financial flexibility to invest further in our <unk> transformation.
And the debt maturities between 2027 of $71 million.
In 2028 of $206 million are very manageable.
Lastly, we continue to return capital to shareholders. In addition to our dividend payment of $15 75 per share or $45 million, we repurchased approximately 24 million shares for a total spend of $600 million during the quarter, leaving $1 $4 billion of our $2 billion share repurchase.
Authorization available.
This represents 8% of our shares outstanding recall that our guidance does not include buybacks and they contribute to our outperformance at EPS.
Turning to our full year outlook, we are reaffirming our sales guidance and raising our earnings guidance based on the strength of our credit portfolio and share repurchases we.
We acknowledged at the level of macroeconomic uncertainty is continuing to intensify and we believe that this updated guidance appropriately reflects the associated risks we see.
To highlight the changes within our net sales guidance of flat to up 1% versus 2021, we now expect digital sales as a percent of net sales to be approximately 35% in line with 2021 down from our prior estimate of 37%.
This reduction in digital penetration and associated increases stores' penetration is the result of two primary expectations.
First the continuation of the shift in consumer behavior from online to in store that we experienced this past quarter and second the accelerated shift to occasion based apparel, which we know has a higher return rate than pandemic categories, such as home and beauty.
During the quarter, we saw a higher than expected increase in returns on Macy's dot com within the accelerating categories and have adjusted our outlook Accordingly.
Overall, we havent changed our net sales expectations, we only changed the contribution of each channel.
Additionally, we now expect credit card revenues of approximately three 1% of net sales up from two 9%. This is driven largely by the improvement in bad debt, we were sold compared to our original expectations as well as balances within the portfolio trending higher than expected.
As a result of this adjusted EBITDA as a percent of sales is now expected to be between 11, 2% and 11, 7%.
Our adjusted EPS for the year is now expected to be $4 53.
The $4 95.
Which not only reflects the change in EBITDA, but also reflects the impact of buybacks completed in the first quarter note that this excludes any consideration for future buybacks.
In the second quarter, we expect net sales to be between $5 5 billion and $5 6 billion.
We expect the gross margin rate for the second quarter to be no lower than the second quarter of 2019.
This reflects our anticipation of higher fuel costs within our supply chain network for markdowns needed to correct inventory levels within overstock categories, and the possibility of an elevated promotional environment given the high inventory levels that we see in the industry.
For adjusted earnings per share, we expect between $80 or 94 for the quarter compared to $1 29 in 2021.
While we are pleased with our first quarter performance, we recognize that our work is certainly not complete.
The world is changing rapidly, but our financial health provides us the capacity and flexibility to make the necessary investments and operational changes to keep up with the pace of change.
With that I'll turn the call back over to Jeff for some closing remarks.
Thanks, Adrian in summary, we delivered a solid first quarter. Despite the unprecedented macroeconomic environment, demonstrating our improved operational agility driven by our Polaris strategy.
As we move forward, we recognized this coming year presents unique challenges for both our business and our customers. Our strength is in our omnichannel ecosystem, we operate across the value spectrum from off price to luxury and have a balanced portfolio that can shift and flex with consumer demand.
Our Polaris strategy has proved durable and we have confidence that it enables us to weather any storm, we may face in 2022 and in the future.
And with that let's begin the Q&A.
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We will take the first question from Chuck Grom from Gordon Haskett. Please go ahead.
Hey, Thank you good morning, and great results to the team.
I'd be curious on your top performance during the quarter.
But also by income cohort you touched on a little bit in terms of the low versus the high given the wide range of customers or can you share any color on that.
And then in the evening.
So the gross margins how should we think about the puts and takes here in Q2, I think you said no lower than the $38 eight you've posted in 19.
Just trying to just trying to get utilized head. If you think about all the balance of the year for gross margins.
Hey, Chuck on the let's talk first about when we talk about the customers and who are affected by.
Whatever it might be happening in the macro environment I think what we one of the headlines is that we saw the customer count and the customer spend across all of our kind of income buckets go up in the quarter.
When you look at the customer that's under 75000 of annual income they were the most affected but they still the spend was up account was up.
And their shift is into those categories that when you've got a brand like backstage is helping them when I look at kind of the mid tier customer as well as the luxury customer above 150000, very healthy and spend levels were quite strong I think the when you think about just kind of aggregate comment about category.
While we saw about the spend levels were definitely a downshift in the casual active and soft home categories from the trends that we saw in 2021 and definite up shift in the categories versus fourth quarter and first quarter.
When you look at the dress up category special occasion travel categories.
When we look at the month of May the month of May is.
Started out quite strong and so we look at the kind of quarter to date the performance really related to kind of three things. The first one was mother's day gifting was was very strong and that gives us some confidence as we think about our gifting strategy for the back half of the year and what we learned and mother's day.
<unk> was the kind of high octane events like one day sales were very strong and so we had one of those in the month of May thus far and.
Good performance in the last one and importantly is really what we're seeing going on in the apparel areas, particularly as kind of serving our own your style platform that we launched so when you look at mens.
Women's and kids those apparel businesses in the amount of linkage products. We're getting so were sent were selling full outfits versus just particular items.
That is working for us.
Our customers are responding to great brands and great values from off price luxury gifting and special occasion destination and we expect that demand to continue but as we've said at.
At the top lots of uncertainty and we're being prudent in our outlook.
Good morning, excuse me good morning, Chad just to speak to gross margin kind of the big headline on gross margin is that we are managing gross margin pretty tightly.
One of the things that we signaled in on this call is the decrease in digital penetration, which would typically imply that you will see some favorability in gross margin, but as we think about kind of what we're working through in the second quarter.
<unk> reflects the markdowns that we need to clear some of the excess inventory on those decelerate reading categories that Jeff spoke to in addition to the rising fuel costs that we do incur as part of our delivery expense, but we spoke about in the previous earnings call. Some of the work that we're doing around our delivery expense initiatives and were beginning to see some of those gains.
So we're just really balancing the benefits and the headwinds we are seeing reduced splits or reduce packages per order. We are making good progress on placing larger fulfillment operations across 36 stores before holiday and that's progressing well and we're also seeing that we are fulfilling more orders from the stores up about three five points versus.
The first quarter of last year, which is a good thing in terms of the distance at packages have to travel to get to the customer but again. This is really offset by higher fuel costs as we progress through the balance of the year, we typically have holiday surcharges as well as the fuel costs continuing to rise is something that we've contemplated in our in our guidance for the balance of the year.
<unk>.
Great. Thanks very much.
And connect the.
The next question comes from Matthew Boss from Jpmorgan.
Great Thanks, and congrats on a nice print.
Thanks, Matt, Jeff So, Jeff maybe to elaborate on the shopping trends that youre seeing by category. How are you thinking about the duration of occasion spending for apparel and then what's your comfort with current inventory on hand, and just how quickly can you pivot the assortments if trend shift across.
Both apparel and hard goods as we think about maybe the back half of the year and into early 'twenty three.
Yes so.
So Matt I think we are definitely pivoting and have pivoted. So I would let me just characterize to give you a little more detail on what we're seeing.
So the first thing is really if we wanted to talk about kind of the down shift in the pandemic category. So casual active soft Tom.
We had about a 20 point down shift from the fourth quarter to the first quarter.
And we didn't anticipate it to be that extreme so those categories.
Inventory levels have certainly built up there and this is where all the work that we've done on our pricing science tools is really helping us.
And we as Adrian talked about in his comments, we've incorporated that particularly in our second quarter margin guidance.
So I think we're we've adjusted all of our go forward orders, we don't think thats going to get better, particularly when you look at our inventory levels and that of the competitions that is building and customers are clearly signaled a downshift there Conversely to the other part of your question on Big acceleration address subcategories and those have gone up 10 full points.
When you look at where the trend was in the fourth quarter and the first quarter and Thats getting even better in the in the second quarter. So we've been very aggressive with additional receipts. We've got very strong vendor partnerships. We're working very closely with them on all the right brands and as Adrian mentioned this is really where we shine as we think.
Kind of the trends that we're looking at for the back half of the year I kind of bucket it into like five things.
The first one is just this the.
Pull back on the pandemic categories, the acceleration of the dress up things.
I talked about.
The second is really the gifting strategy and just based on where we did what we did in the mother's day father's day, what we're planning in fathers day for holiday.
Plenty of gifting off price to luxury great price points feel very good about that we're very focused on the new categories. So when you think about toys R. US you've talked about marketplace and just what we're doing with premium brands brands like Ralph Lauren or Pandora, where prestige fragrances lots of growth initiatives coming there.
The fourth thing I've mentioned would just be personalization and just developing prowess. There. We are in the early innings, but really following the customer with relevant communications and relevant content is a big opportunity for us that we're starting to get some <unk>.
Traction some green shoots there thats just going to build in the back half of the year and then the last thing I would talk about is the stores bounce back and it it really depends on what area of the country, you're in or what type of store. It is but what I'd say is that the downtown flagships are definitely a Mac a marked improvement not as much about.
Tourism, which is a piece of it but a lot because of the return to work and the return to special occasion and them being really big destination for that.
Backstage is becoming an increasingly important piece in our fleet. The 300 stores. We've opened gives us a good breadth of there and then the on your style initiative that I talked about earlier the other thing I talked about in terms of the back half of the year than on the Bloomingdale's brand.
That one is quite hot right now and we're really banging on all cylinders and we're super excited about 150, <unk> anniversary of the Bloomingdale's brand and all the initiatives that the team is creating to be ready for the customer on that and then also we had a really good print on bloomery and just where that is going to is kind of a premium beauty brand.
When you look at the masks are coming off and you look at customers and their need for <unk>, and Lyft and chief needs Blue Mercury as a great destination for that so new leadership, there and making great traction with Blue Mercury brands.
That's great color best of luck.
We will now take the next question from Bob <unk> from.
Please go ahead.
Hi, good morning.
I guess if.
If you could I think you talked about the marketplace initiative.
Is there any more information you can give us either timeline or expectations or just the development in terms of where it is today and then the second question I have is.
Can you just talk a little bit about big ticket items and really what youre seeing.
In those areas of the business. Thanks.
Hey, Bob.
I'll take both those so.
I think the headline here is that we're going to provide more details on marketplace. Later this year.
We are very excited about this one we're launching in third quarter with the expectation to scale it over the second half.
We're going to be test and learn from from day, one what I can tell you about it is that our initial focus is going to be in categories that we have meaningful market share opportunities.
Categories that we don't have developed businesses in either <unk> or in owned inventory so categories like pets.
<unk>, which would include portable and home home improvement gardening video games those should be categories that you would expect us to launch with so stay tuned do hope to have an update while we will have an update for everybody. When we next speak so that would be.
Marketplace.
Big ticket.
Big ticket is what we're seeing in there is similar to what we talked about on the last call that the supply chain is starting to loosen up a bit there definitely when you look at the what's going on in the costs in those businesses. What we talked about before was you can pass some of those costs onto the consumer the bigger the items or the more of a brand new.
It is but when you were in a price pointed business like a 499 couch or a $5 99 couch on opening price mattress, we're very careful about what we're doing with pricing. There. So we're catching up with all the demand that is now delivering from the previous orders and we're watching the environment carefully about how the customers votes.
By category by price point, and we're making those adjustments.
Alright, Thank you very much.
You bet.
The next question comes from Dana Telsey from Telsey group.
Good morning, everyone. Congratulations on the nice progress.
Can you expand on the relax supply chain and what Youre seeing there and how you see it move.
Moving to the balance of the year and then just to touch on.
Our increase of 8% how are you thinking about that for the rest of the year.
Thank you.
Daniel Let me take those so what I'd say is that what happened in supply chain. We didn't anticipate the loosening of order replenishment on this so generally what we were getting on each of our orders was a fallout of about 30% that we kind of built into our estimates and that was what we were getting in the back half of 'twenty one.
So and that fallout has become more like 20% when you look at the first quarter. So.
And that really is kind of across the board, we've been getting and Theres certainly exceptions, but the vendors have been shipping better that doesn't mean that the supply chain is loosening. What we're seeing is that there is definitely some headwinds coming particularly as you start to see about the Shanghai Port that's how that's going to affect.
Have like 30 tankers right now that are in the La Porte down from about 120, we do expect that to build as some of that freight moves from the far east.
So the way we're approaching it we've got to protect back to school, we've got to protect the fourth quarter. So we're going to ensure that some of the lead times that we did during the pandemic and certainly during 'twenty. One we're actually we're moving that those kind of those same lead times in terms of our orders so it might be lumpy, how we receive goods.
In the second and the third quarter, it's all built into kind of our forecast that we shared with you earlier, but we will be ready for the customer based on what we anticipate to be issues.
When you think about kind of be domestic supply chain I think we're in pretty good shape. Obviously when you look at our science in terms of forecasting receipts and the allocation of those receipts were in much better shape than we've been in the past we've got great.
Focus when I look at it and what we're going to be doing for the last mile. So I feel I feel good about that when you look at it you are in your question about as you saw our pumps that were up 8%.
In the first quarter, you heard us when we talked about AUR and our expectation for the year on the previous call. We thought it would be in the 5% range I'm still thinking about them.
Forecasting about that amount, we do think that we're going to continue to see great AUR improvement, particularly on those trending categories. So the dress up special occasion, the travel categories. Those are going to continue to go up but I do expect them to be more constrained and more flattish in those categories. The pandemic categories, where we have buildup in.
Inventories and importantly, our competitors had buildup in inventories so I think that supply.
Is out of whack with the demand and where.
We're using all of our pricing science to deal with it.
Our gross margin expectations are all incorporating what we expect that to go and I think when you look at the blend of all of that Youre looking at a mid single digit improvement for the year.
Thank you.
The next question comes from Omar Saad from Evercore. Please go ahead.
Thanks. Good morning, Thanks for taking my question I wanted to.
A follow up on a couple of things in terms of the pandemic categories versus the post pandemic categories. Maybe you could you dive in a little bit deeper on active casual hall, which are there segments. Within these categories that are holding up better than others that are.
Pulling that youre seeing thats been pull back faster.
Or is it just very broad across all things athletic casual and home and also any other signs of some price sensitivity you mentioned opening price point mattresses.
And.
Couches any other areas of your business, where youre seeing the customer balk at higher prices.
Yeah, So omar.
Your questions are related it's really kind of the same answer in the casual active and soft home categories. We're definitely seeing some balk at some of the prices and we're going to we've made adjustments there I would expect us to continue with those adjustments.
With our pricing science, we have the opportunity to do that at a store level.
And that obviously gives us more margin versus what it would be if we didn't have that tool, but I do expect those are going to be the ones that are most under duress I think that when I look at.
The opportunities in the other categories.
And let me give you some more color on that when you look at soft home. The ones that are most affected will be categories like textiles top of table housewares.
Typically where we would have a soft category like luggage is off the hook that that really goes into our travel trend. So we are very very high double digit increases there, but those categories, which we had really good run for the last two years textiles top of table housewares, they're most affected so we're pulling down our expectations. There we're looking at real list.
<unk>.
We're going to be we're going to play where it's really important for the customer and those categories are important we'll be there with great values, but they are going to be less of the penetration of our business and what they were in 2020 one.
So that's.
Look at so when I've looked at was how I would look at it when you look at the trending categories, we're getting AUR improvement across all of our value bands. So we have over 50 categories. There is a different story for each of them. Some brands carry real premium and you were getting massive increases in AUR there I'll.
Looking at Ralph Lauren, where we're enjoying big AUR increases, but that's more of a premier brand they've reduced their distribution, we've really ramped up our efforts to make sure that we're giving a fulsome lifestyle presentation of that content both online in our stores. We're building when I look at our fragrance business Youre seeing more of our business go into.
You like Jumbos and building the higher AUR gift basket building value into things that we can uniquely create that drive higher AUR as it might be different from our competitors. So each sob has a different story.
Got it thanks, Jeff.
We will take the next question from Jay sole from UBS.
Great. Thank you so much Jeff obviously, it was a strong quarter and you're raising guidance in an environment, where some of your off price competition is doing the opposite.
With your quarters lowering guidance for the year excuse me do you think this difference is really just about the income demographics and maybe some of your off price competitiveness airbag, and maybe a little bit better execution on your part and they're part of the quarter.
Taking a step back do you see the company really closing the gap in terms of your competitive position versus those retailers, where you feel like that.
Your ability to take share back from them is improving or at least maintain shares improving thank you.
Yeah, Jay I think it's I do think the plot our strategy is working which incorporates all the kind of the contours of your question I do think that as a department store and having 50 categories that we can really shift where the customer goes and you got some of our competitors that may not have had great posts that may be more their business may be more focused in there.
Penetrations may be higher in those categories, where the customer is not signaling as much interest it gives us the opportunity to really shifted into those categories that are.
And I do think that when you look at the the affluent customer we're not seeing a slowdown there and so that touches some of the of the macys businesses, but it's a real testament to the strategies that are working right now at bloomingdale's and blow Mercury and when I look at that middle income customer again count up spend.
And we've got a real breadth of offering to be able to ensure that they stay with us. So I would tell you that the strategy deploy our strategy is working it definitely helped us with the headwinds increasing from the fourth quarter into the first quarter and I think we're having a good quarter right now and obviously have.
A lot of confidence as I look at the back half of the year based on the muscle that we've developed through kind of the pandemic transformation that we went through so I think Polaris is working couldnt be prouder of the team and how they're responding always following the customer with a lot of tools to be able to do so.
Got it thank you so much.
Okay.
The next question.
Question comes from William Reuter from Bank of America.
Hi, I just have one.
In terms of the share repurchases in the quarter, which accelerated can you talk about given the.
Large authorization, that's still remains how youre thinking about that and if you currently have a leverage target. Thanks.
Terrific so.
Thanks, very much for your question and good morning.
As we think about share repurchases in this dynamic environment. We're very much focused on flexibility flexibility is really our key priority and that flexibility at this point in time is defining our ability to lean into those consumer demand trends that Jeff spoke about earlier, while at the same time, making sure that we maintain our commitment to a disciplined and <unk>.
<unk> balance sheet as well as continued investments in the Polaris transformation, which Jeff spoke about this really working for US. The third commitment. We've made is to return capital to shareholders and as you pointed out we did receive the $2 billion authorization earlier this year, but it's been open ended which gives us the ability to be flexible in how we.
Our cash and so we're just going to be very balanced in this pretty dynamic environment and continue to make sure that we are returning value to shareholders, but at the same time, making sure that we're making investments in the growth of the business as we think about our leverage ratio. We really entered the year with a lot of strength our leverage ratio target last year was two five times or below.
Ended the year at one eight times and we continue to pay down debt in the in the first quarter, we paid down an additional $300 million of debt. So very disciplined as it comes to you the leverage ratio very disciplined on the balance sheet and we will continue to be very.
Thoughtful about how we allocate our capital.
Thank you.
Youre welcome.
The next question comes from Stephanie Wissink from Jefferies.
Hi, Good morning, it's Blake on for Steph, Thanks for taking our question.
Given a lot of good detail. So far we just we're curious on Macy's media network and.
How that's performing versus your expectations and.
Maybe how the conversations are going in this environment of increased uncertainty it sounds like loan growth is still pretty strong, but curious if there is.
Any change in the conversation tone and then.
Also you've talked about the category shifts I'm wondering if that's maybe playing more into your strengths and the conversations. Thank you.
I'd like so Macy's media network. It continues to grow and it's above expectations. So continuous growth in the number of advertisers and frankly, the volume of the campaigns that we're doing so as you heard in our post the first quarter net revenue was $26 million that was nearly.
Double the previous year.
Little more color.
Macy's and Bloomingdale's, we had more than 320 vendors that are participating in the program to date with just lots of pent up interest for this we do expect that that the vendor and the campaign Cowen is going to continue to grow.
As the company as Macy's and Bloomingdale's, as we expand our vendor base and as well as with the upcoming launch of the Macy's marketplace, which is going to be in the third quarter. So.
We're quite bullish on this as it relates to category shifts, yes, I do think that when you have categories that are trending where Macy's shine that is certainly helping us and when you think about there's big benefits of us having the omnichannel engine that we have so as you have a customer thats shifting more to stores, we've got a great store base for them, they're still strong.
<unk> most of their journey online, they're doing lots of research lots of price checking looking at what Influencers sign.
They may be looking online, but then purchasing in store. So the channel shifts that we talked about going from 37% and empower them to 35% in where we're now expecting it is still in a very healthy digital business, but the categories themselves as I mentioned in the answers to other questions I think as <unk>.
Our success and also having when we're dealing with those that are down trending of having all of the analytics and the pricing engines to basically respond. Accordingly. So we have I think we've responded quite well with that and that's going to maintain exactly where we need to be in our margins and ensuring that we have all the receipts.
And the firepower to put against that which is trending so we follow the customers and we've got a very flexible model to do so.
We will take the next question from Oliver Chen from Cowen. Please go ahead.
Thank you Hi, Jeff and Adrian.
Your remark you mentioned intensification of uncertainty this would love for you to elaborate on the factors that you are paying attention to from the consumer and what indications may be leading and then as you think about promotions it sounds like youre prepared for promotions.
How will you execute those in a customer right manner.
To preserve.
Brand equity in your relationships with customers to ensure that you're executing them against the competitive environment and yet balancing what's right for the business. Thank you.
Okay.
Hi, Oliver So your first question about kind of economic indicators, we have.
A little chart that it's like Hey, what are the tailwind what's neutral what are the headwinds and obviously when you look at the tailwind the label market.
Tourism is start we're starting to see good seeds of that as we've talked about 3% to 4% of Macy's Inc. Business. Historically has been in international tourism, that's starting to come back which is good news. This return to office has been quite interesting and when you look at a lot of companies now based on their kind of hybrid work environments. There are wardrobe.
That need to be refreshed, we're clearly seeing that.
If you look at the Blazer, if you look at the dress. If you look at all the dress up categories as well as accessories that go with them that is a great tailwind. What's neutral is when you think about the personal disposable income and what the savings rate looked like a year ago and what it is now it's still good but it's not as good as it was a year ago, So I call that a neutral.
Consumer credit is still good theyre open to spend is still good but we're watching consumer sentiment very carefully to see how they want to spend it.
And then promotions that we I would say neutral because we're not adding promotions, we're just being more surgical on the ones that we do when I look at the headwinds clearly inflation. When you look at what's going on with housing or gas prices what might go on with the interest rates.
Political those are all things that we're watching carefully but again all factored into our estimates to your question about how are we going to talk about these great values.
<unk> is it's a different story, depending on <unk>, but I would tell you is that a clear price point always works well for us and when you start to think about those categories that are down trending those casual categories.
And active categories, those lend themselves well theyre generally key items. There has got good depth behind them. They have good fixture fill having a price point, that's really cleared the customer that they understand it's not too complicated.
We're going to approach it so we want to make sure that with all of our online scrapes, we know where our competitors are going to be on an hourly basis, we're making adjustments we will get through that inventory and we've made adjustments on future inventory in response to that.
Okay got it thank you.
Thanks Oliver.
As there are no further questions I would like to hand, the call back over to your host for any additional or closing remarks.
Thanks, everybody I appreciate.
And everybody have a great day.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.
Yes.
Okay.
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Yes.