Q3 2022 Macy's Inc Earnings Call
Okay.
Good day and welcome to Macy's, Inc. Q3, 2022 earnings call. Today's call is being recorded at this time I will now turn the call over to pen 20 Nano. Please go ahead ma'am.
Okay.
Yeah.
Thank you operator, good morning, everyone and thanks for joining us to discuss our third quarter 2022 results.
With me on the call today are Jeff <unk>, our chairman and CEO and Adrian Mitchell, our CFO , Jeff and Hadrian 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 single part question.
Along with our press release from earlier. This morning, a slide presentation have 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 data to assist you in your analysis of Macy's.
Also note that unless otherwise noted comparisons that we'll speak to you. This morning will be versus 2021.
Comparisons to 2019 arthritis, where appropriate to best benchmark performance given impacts from the pandemic keep.
Keep in mind that all forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 each.
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.
Finally, as a reminder, today's call is being webcast.
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 will turn the call over to Jeff.
Thanks, Pam and good morning, everyone and thank you for joining us today.
It's an exciting time at Macy's, Inc. Our teams are geared up for the peak holiday season and earlier. This morning, we shared our third quarter results were compelling product disciplined inventory controls and solid execution drove strong top and bottom line results.
Results are further proof that our Polaris strategy first introduced in February of 2020, it's working.
Before getting started I would like to thank our entire organization every single one of our colleagues has contributed to our success.
Thanks to them I am confident that we are serving our customer base and their unique needs better than ever across channels categories occasions and value bands.
Our products colleagues and customers mirrored the diversity, we see across the country. We are an anchor in a trusted resource for all of the communities that we serve.
While we were honored to uphold many of the traditions in the past like the Macy's Thanksgiving Day Parade and Santa land. We were also there for our current and potential customers as they celebrate the moments and holidays that are most meaningful to them.
Being a moderate department stores key to that relevancy. The concept of a trusted one stop shop is timeless. It works, but only if it reflects the preferences and needs of our customer and we have transformed our entire organization to do just that.
With our breadth and diversity of product across multiple nameplates that are not tied to just one value band category and use her life stage, our positioning as a strength, especially in the current environment, where the styles of our customers are looking for the categories. They are seeking and how much they are spending can differ dramatically.
From one season to the next.
<unk> is what attracts new customers to us.
We are committed to providing quality fashion newness timely flows and relevancy through first first.
Ration of premium owned and market brands, which we bring to life at Macy's through our own your style platform second a disciplined approach to inventory, reflecting conservative buying and a healthy receipt reserve that ensures flexibility when our customer pivots and signals new interests and third.
Modernize supply chain and pricing science tools, which yield higher turnover gross margin return on investment and higher cash flow.
These attributes have been critical unlocks to our success third quarter net sales of $5 2 billion were at the high end of our guidance provided in our second quarter call declining three 9% to last year and rising 1.1% to 2019 customer.
Customers continued to return to in person post pandemic shopping experiences and we're searching for occasion based products, including career and tailored sportswear dresses and luggage rather than popular pandemic categories, such as active casual sportswear sleepwear and soft home that skew more heavily towards digital purchases.
These factors contributed to the relative outperformance of brick and mortar sales, which declined 1% to last year digital sales declined 9% to last year relative to 2019 brick and mortar sales declined 9% and digital sales rose 35%.
During the quarter Macys digital traffic remained relatively consistent but conversion softened, suggesting that while discovery is still occurring online theres been a shift in person transactions.
Regardless of where our customer ultimately makes a purchase we strive to provide the best omnichannel experience throughout their journey, we are making digital investments to authentically communicate and serve their lifestyle needs whenever and however, they choose to shop with us.
That includes the introduction of personalization and like shopping as well as the ongoing refinement of existing online platforms, including our mobile App, where we registered an 11% rise in active customers on a trailing 12 month basis compared to our average macys customer active app users spend more per transaction.
And per year.
Turning to cops are owned plus licensed comparable sales declined two 7% luxury nameplates bloomingdales and Blue Mercury continued to outperform bloomingdale's posted four 1% comp sales growth and expanded its active customer file by 9% on a trailing 12 month basis well below mercury.
Comp sales growth of 14% and grew its active customer file by 15%.
Although in different stages of their evolution, we see a significant long term growth opportunity for both nameplates.
Macy's owned plus licensed comp sales declined 4% on a on a trailing 12 month basis active customer count grew by 2% and our star rewards active customer base, which is our most valuable customer represented 70% of Macy's owned plus licensed comparable sales five points higher than last year.
Throughout the quarter, our customer responded well to our mix of full price promotions and markdown items when combined with selectively higher tickets, we realized our eighth consecutive quarter of AUR gains end of quarter inventories were better than expected rising 4% to 2021 and down 12%.
To 2019, and we achieved adjusted EPS of <unk> 52.
Well above our guidance, while we are pleased with our progress we are committed to doing more our customers are savvy and they have a lot of options. Our team is aligned on what it takes to be successful and relevant today and into the future. This includes one an improved shopping experience for all customers through reducing friction.
Across omni touch points to more personalized offers and loyalty communications three a compelling mix of private label and branded product and for speedier checkout and delivery with the right service when our customer needs. It.
In addition to these ongoing initiatives. We are also enhancing other go to market strategies to inspire new and existing customers.
Last month, we introduced permanent toys R us shop in shops within all Macy's locations, providing an experience that does not exist on a national basis elsewhere.
These shops are adjacent to the kids department, making it easier to discover with room for kids to explore in a space designed for them. We are encouraged by the initial response overall the toys R. US customer is younger and more diverse in our macys customer and we have discovered that 85% of toys R. US customers are cross shopping.
Toys R. US is a great example of finding a hole in the market and strategically selling it gaining share and loyalty and creating lasting memories for children and adults alike.
Another example is the late September launch of Macys digital marketplace marketplace features a collection of new brands products and categories from premium third party sellers, representing a low risk way to introduce customers to new options without shouldering inventory liability.
Not the first to do this we believe our curated offerings, while keep existing customers on our platform, while bringing in new ones units per order are above the macys average and we are seeing customers cross shop with mixed bags, including owned vendor direct and marketplace items, which is encouraging and similar to toys R. Us at <unk>.
Further cements our status as a one stop shop.
Another way, we are staying close to our macys customer is by refining our in person shopping experience.
Market by Macys, which we introduced in February of 2020 place a unique role in our Omnichannel market ecosystem. These off mall stores are 25000 to 50000 square feet compared to our full line average of roughly 185000 square feet and offer a highly curated immersive shopping experience that celebrates discovery.
And convenience market by Macys conversion rates are generally higher than that of our full line stores and these locations continue to outpace their respective trade areas and acquisition of new customers today.
Today, we operate eight market by Macy's as we evaluate potential new locations. We are looking at areas, where we have a strong digital presence, but no physical footprint, where it no longer makes sense for us to keep a full line store and market by Macy's can act as a replacement a good example is the market by Macys in St. Louis, Missouri, which helped.
And last week and is a mile away and less than a fifth of the size of its mall based predecessor.
All of these initiatives taken together plus others like the ongoing re imagination of our private brands our own your style brand platform and our Macy's Media network are a testament to our focus of reclaiming Macy's voice as a multi generational influencer and arbiter of American fashion, and helping customers connect with the product.
That empowers inspires and speaks to their unique individual preferences.
We are focused on remaining relevant by doing so in an authentic way that honors our rich and unparalleled heritage that emphasis on bridging the past with our future at Macy's also applies to bloomingdales, where we're celebrating our 150 <unk> anniversary with a series of events and exclusive collaborations with top designers the collections along.
With pop up shops, and events with brands, such as Ralph Lauren Jimmy Choo and Dr. <unk> speak to our relationships with both established players as well as the next generation of luxury designers are customers or Craig.
Following seven quarters of comp owned plus licensed sales growth. We are excited about the opportunity at bloomingdale's and the expansion of our off mall smaller format Loomis nameplate.
Today in the Chicago land area, we are opening our second <unk>.
At 50000 square feet. It serves as a replacement of the 206000 square foot full line old Orchard locations.
Momentum has also continued to build at our other luxury nameplate blue Mercury, while we registered our fourth consecutive quarter of comparable sales growth.
Another way, we're maintaining a close relationship with our customers colleagues and communities and one which we are all proud of is the launch of spur pathways in early November with our partner momentous capital spur pathways as a multi year multi faceted program that ultimately will provide up to $200 million of funding to dive.
<unk> and underrepresented in businesses.
The program is designed to advance entrepreneurial growth close wealth gaps and address systemic barriers among minority owned businesses.
Spur pathways also represents an ongoing evolution of our mission, everyone social purpose commitment to people communities and planet.
Before turning it over to Adrian I would like to provide insight into the recent trends and our current thinking around the fourth quarter.
In the Middle of October there was an unexpected slowdown in sales, which continued into November markets that were on seasonally warm were the most affected over the past week. Our sales performance has improved we are evaluating the sustainability of recent trends and the drivers that we believe will impact holiday consumption.
When we think about last year, the consumer was flushed with cash and there was a pull forward of demand on well documented inventory constraints.
This year the consumers hearing about a glut of inventory they are under a tighter budget feeling the impact of inflation on non discretionary items and beginning to deplete their savings with that in mind. We believe they are waiting until closer to holiday to make purchases, especially as there was an extra day, which is a saturday between Thanksgiving and.
Christmas.
We now expect holiday shopping patterns to be similar to 2019 and are taking the appropriate actions to support anticipated higher peaks around black Friday, cyber week and the two weeks before Christmas.
Holidays are happening trips are booked parties and family gatherings are planned consumers will be spending but it is too early to tell how much they will allocate to our discretionary categories. We are confident in the amount and composition of our inventory timing of flows and marketing by cognizant that we do not operate in a vacuum.
The low end of our outlook assumes late October and early November sales trends continue pressure on the consumer persists and the promotional competitive landscape intensifies throughout the holiday and into January the high end assumes that sales patterns will be consistent with our 2019 trends and reflects recent adjustments to our <unk>.
Operating plan for holiday.
As we navigate this period of uncertainty our financial health and operational disciplines, along with our experienced leadership team are key advantages we.
We are flexible agile and well positioned for the fourth quarter and 2023, Here's why.
Our inventory is in great shape, we have roughly 55% newness for holiday 30 percentage points higher than 2019, and we're not saddled with older receipts and pandemic category over stocks across nameplates, we have products and brands that cater to our customers' lifestyle needs with a variety of price points.
Will allow everyone, including last minute shoppers to participate in the magic of holiday at Macy's, Inc. This includes exclusive cosmetics and fragrances from Dr and Armani established brands, such as Ralph Lauren the north face in Jordan as well as newer additions Kylie cosmetics NES candle the friends and <unk>.
With our strong vendor relationships and mix of private brand and licensed brands, we can chase into areas of strength that warranted and have a flexible pricing model to quickly adjust promotions and markdowns if demand does not materialize.
We believe we are taking are appropriate cautious stance on our outlook given the myriad of unknowns. However that does not temporary enthusiasm for holiday. We know we know our customer relies on us for an exceptional holiday experience and as we have for the past several years will deliver.
With that I'll pass it over to Adrian for a deeper look into the third quarter and details on the remainder of the year.
Thanks, Jeff and good morning, everyone. It has been two years since my first earnings call at that time I spoke to the three reasons I joined Macy's, Inc. Our iconic brands, our talented and dedicated team and the focus within our Polaris strategy on innovation and operational excellence all designed to capitalize on the <unk>.
Opportunities in the changing consumer landscape.
I also shared that my initial focus what they returned to financial health and the creation of additional capacity to invest in profitable sales growth, while returning capital to our shareholders.
Protecting our financial health is Paramount beginning in August 2021, our teams took a series of aggressive actions that paid out over $1 8 billion of long term debt and we ladder our fixed interest rate debt maturities. As a result, we are now benefiting from our vastly improved leverage ratio.
And more attractive debt maturity schedule.
Disciplined decisions around the governance of inventory are also a top priority.
Actively managing inventory gives us the flexibility and liquidity to respond to what consumers are buying at every customer touch point.
This is imperative as it impacts all aspects of our business, including that held up our margin profile as well as the amount of cash we have available to both invest in strengthening our omnichannel capabilities and to return to shareholders.
Investments, we have made in data and analytics from demand forecasting inventory allocation to pricing science has laid the foundation for continued inventory control now and well into the future.
We also have a disciplined approach to make pivotal decisions quickly across our entire enterprise.
Now, let me walk through the third quarter results and our five value creation levers before discussing our outlook for the remainder of the year.
First as Omnichannel sales, we generated $5 $2 billion in net sales during the quarter a decline of three 9% versus the prior year.
Comparable sales on owned plus licensed basis decreased by two 7%.
During the third quarter, 20% of Omnichannel markets grew sales year over year accounting for about 50% of Macy's brand comparable owned plus licensed sales.
We have been aggressive about right sizing our store base and we'll continue to prioritize asset monetization.
However, we continue to see the importance of maintaining locations within the best malls, particularly as we build out our omnichannel ecosystem.
We expect to announced less than 10 store closes in January consistent with our decision to delay the closure of our full line store base that we communicated last year.
The second value creation lever is gross margin for the quarter gross margin was 38, 7% down 230 basis points from the prior year period and better than our expectations.
The gross margin rate decline was driven by a 230 basis point decline in merchandise margin, reflecting an increase in promotional and clearance markdowns to sell through slower moving categories at Macy's, including casual apparel soft home and warmer weather seasonal goods.
Our pricing science, including location level pricing continued to drive incremental margin benefit and improve the effectiveness of promotions the Macy's Inc.
We are in the mid innings of our pricing work and are continuing to refine and invest in machine learning tools that will allow for more sophisticated competitive pricing analytics and greater automation at scale.
Partially offsetting the additional third quarter markdowns were higher ticket prices and favorable category mix shifts driving a roughly 3% improvement in AUR for Macy's Inc.
Delivery expense accounted for 3% of net sales relatively consistent with last year.
Higher fuel costs more than offset the impact of a two percentage point decline in digital penetration and reductions in delivery cost per package.
We continue to get smarter about where demand is and how best to service that demand as part of our continued efforts to increase the productivity of our physical assets, we have converted space and 35 stores to serve as many dcs.
The semi automated many dcs totaling nearly 1 million square feet allowed us to reduce shipping cost and split shipments better utilize inventory in specific markets and regions and improve delivery speed, which will be an advantage. This holiday season.
Relatively low cost complements to our existing fulfillment network. We have also made the appropriate process and technology investments to streamline fulfillment activities and all remaining stores.
The investments, we're making in our supply chain, both upstream and downstream are focused on simplifying our processes and modernizing our technology further enhancing our capabilities to move products to our customers faster, while driving greater supply chain cost efficiencies.
The third value creation lever is inventory productivity.
Inventory increased 4% year over year, which was better than our expectations and down 12% compared to 2019.
We have strategically brought in seasonal product earlier and have the added capacity to chase open season trends.
Inventory turnover for the trailing 12 months improved 15% from 2019 and was relatively flat to 2021 when levels were artificially low due to supply chain constraints.
Expense discipline is the fourth value creation lever SG&A increased $84 million or four 3% to $2 1 billion.
SG&A as a percent of net sales was 39, 3% 300 basis points higher than last year.
<unk> 2019, SG&A improved by 330 basis points.
SG&A reflects the investments we have made in our colleagues as we continued to adjust compensation to remain competitive and attract the best talent as.
As a reminder, in 2021, we benefited from an elevated number of job openings. The vast majority of which have since been sales.
During the quarter SG&A also benefited from Macys media network, which generated net revenues of $31 million up 21% from last year.
Credit card revenues were $206 million down $7 million from last year as.
As a percent of net sales credit card revenues were consistent with the prior year at three 9%.
Performance continued to be driven by lower bad debt levels than expected larger balances within the portfolio and higher than expected spend on co brand credit cards.
After accounting for interest and taxes. These results generated better than expected adjusted diluted EPS of <unk> 52.
Versus $1 23, and 2021 and seven in 2019.
Lastly, the fifth value creation lever is capital allocation.
Year to date through October we generated $488 million of operating cash flow and invested $983 million in capital expenditures.
Year over year operating cash flow was impacted by outflows from accounts payable and accrued liabilities as well as the net outflow from the change in merchandise inventories net of merchandise accounts payable due to the timing of receipts and payments year.
Year to date free cash flow inclusive of proceeds from real estate was an outflow of $373 million.
For the full year, we now expect capital expenditures to be $1 2 billion up from $1 billion.
Reflecting investments to improve our omnichannel capabilities and strengthen our competitive position in the marketplace.
We are committed to our overall capital allocation strategy, which includes maintaining a healthy balance sheet and investment grade credit metrics.
Best thing and value enhancing initiatives and capabilities and returning capital to shareholders through quarterly dividend and share repurchases.
In light of the current macroeconomic environment, our focus is prioritizing liquidity and balance sheet in order to maintain flexibility to respond quickly to a variety of opportunities and scenarios as they arise.
Next I'll walk through our updated outlook for the fourth quarter and fiscal year full details of our updated guidance can be found within the presentation on our website.
As we think about this critical fourth quarter. We believe that every sale has to be earned through fresh items that consumers want to purchase as well as quality product and clear about our guidance range contemplates the risk associated with softening consumer demand and the impact of the broader competitive landscape.
While we are comfortable with our inventory position, we will continue to proactively adjust promotions and take markdowns necessary to drive sell throughs and slower moving categories and ensure that we do not carry inventory risk into 2023.
In light of the late October and early November trends and the uncertain demand environment, We now forecast fourth quarter net sales of $8 $1 6 billion.
To $8 4 billion.
Gross margin for the quarter is expected to be no more than 270 basis points lower than 2021.
For the fourth quarter, we expect adjusted earnings per share between $1 47 and.
And $1 67.
For the full year, our expectations for Macy's, Inc. Is largely unchanged, we expect net sales of $24 $3 billion to $24 6 billion.
Digital as a percent of net sales to be approximately 33%.
Gross margin down roughly 160 basis points from 2021.
SG&A as a percent of net sales to rise approximately 120 basis points from 2021.
Net credit card revenues of approximately three 4% of net sales up from our outlook of three 3%.
Asset sale gains of $75 million to $90 million.
Benefit plan income up 21 billion compared to our prior outlook of $25 million.
Adjusted EBITDA margin of roughly 10, 5% in.
And interest expense of $180 million down from $185 million.
After interest and taxes, we are now estimating annual adjusted earnings per share up $4 seven.
To $4 27.
<unk> the increase in credit card revenues lower benefit plan income lower interest expense and a change in our shares outstanding expectation <unk>.
These changes resulted in the <unk> <unk> increase from our prior outlook.
Our outlook does not consider the impact of any potential future share repurchases associated with our current share repurchase authorization.
In closing our strong inventory management practices, along with our liquidity investment grade credit metrics and fixed interest rate debt amidst a rising interest rate environment allowed us to operate from a place of strength and flexibility even when the broader macroeconomic environment is challenging.
We believe we are well positioned to compete this holiday season.
We have the tools the data driven processes and the talented teams to manage through this uncertain time and are committed to building a better and more relevant Macy's Inc of the future.
With that I'll turn it back over to Jeff for some closing remarks.
Thanks, Adrian although the macroeconomic environment is uncertain, we are confident in our ability to win this holiday and beyond we believe Macy's Inc. Is poised for a future of profitable growth. We are committed to making strategic investments to provide a positive and consistent shopping experience for our customers rich careers for our colleagues.
And an attractive return for our investors, we will do this while bolstering our position as the leading modern department store.
And with that we're going to open it up for questions.
David participants if you'd like to ask a question on todays call. Please press star one on your telephone keypad to be doing a question. Please press star two.
We'll take our first question from Chuck Grom from Gordon Haskett. Your line is open. Please go ahead.
Hey, Thanks, good morning, and great great quarter for you guys.
Just another question kind of the near term if I can put back into the midpoint of your sales guidance. It implies about I think around the negative 4% comp in the fourth quarter, which on a three year Geos stack is about 300 basis points of the slowdown from.
The third quarter number I just wanted to confirm that's where October and then and I guess, where in November has started and then more near term. When you look at the last week of improvement are there any factors you can point to either regionally or from a category perspective.
Absolutely so I'll get US started Chuck and good morning to you and I'm sure Jeff will comment on some of the category pieces as well.
As Jeff spoke about in his opening remarks, there is just uncertainty that Jeff has highlighted and we've looked at a number of scenarios as we think about the fourth quarter looking not only at the overall trend for the third quarter, but also looking at the last couple of weeks, which was slower than we had expected and also trickle into that early.
Lot of November so look as we navigate this uncertain period or high end of guidance. It seems that the consumer reverts back to the Q3 trends more broadly outside of the last two weeks and that the holiday shopping patterns mirror a lot of what we would have experienced pre pandemic and as we think about the low end of the guide as you described.
As soon as the continuation of the trend that we saw in late October into the early part of November and so when we think about both ends of the guidance. The one thing that we are very disciplined around is making sure that both ends reflect also the markdowns to ensure that we dropped the southeast with slower moving categories that may vary based on what end of the range we actually.
And so.
So that's a bit of the context around how we're thinking about it.
And then Chuck on the categories.
The cold weather categories definitely responded better over the past week. So just increased sell throughs and business and when you look at outerwear, you look at boots sweaters fleece those categories into the geography question.
It's clearly got better in the northeast and upper Midwest, but it also got better and when you look at the southern part of the belt of the country as well so an improvement in <unk>.
And the trends closely to see which trend line sticks.
As a reminder, each participant only allowed to ask one question. Thank you we'll take our next question from Matthew Paull, Matthew Boss from Jpmorgan. Your line is open. Please go ahead.
Maybe key areas of the organization.
Or better positioned relative to 2019 how.
How you believe this is driving recent results relative to your peer set and then just opportunities you see from Acs to take market share during holiday and into next year.
Yes, Matt I think I got most of your question you were cut off a little bit at the front, but I would tell you that kind of pre and post pandemic kind of how I would characterize Macy's.
That we are the headline here is that we're a more modern department store.
I talk about it in kind of five buckets. The first one would be we have the right talent and team alignment and that everybody is very focused on executing the Polaris strategy with precision I'd say the second thing that is a pre post pandemic headline would be just for a much better financial health and when you look at we just.
Have materially less leverage.
To know that over the next five years and I think we are.
Executing a really disciplined capital allocation strategy.
But I think the third one is a big bucket is as inventory control and that starts with just really a big focus on strategic planning down into not only season quarter category brand et cetera.
That really translates into the buying team is more conservative than what theyre bind and Theyre also retaining a nice reserve so that they can respond to in season. We've also pulled in more data science to really give us where the customer shifts are going by category by brand by value bands.
Also included in inventory control is a more modernized supply chain and so we certainly have diversified our private brand manufacturing, we diversified our port entry and we're deploying more sophisticated forecasting and allocation tools.
I'd say the fourth bucket just is which I think is in the middle innings of our development is pricing science and just a real disciplined focus on sell throughs turnover of Jim Murray.
Then using just increased automation to help us respond to that and then if I had to pick a fifth I would say that and this is in a very early innings. It's just our vision and early execution with the private brand strategy.
I think we it's one of the biggest volume drivers that we're going to have in the future and as we see it right now with the IFC Women's brand, which has been a revitalized is one of our best trending brands in the store.
And we've got a lot of our pipeline of new content come in which we'll talk about in future calls. So just as an overall comment I just think that.
From where we were pre pandemic, we just have a real pipeline of innovation coming.
His loyalty and personalization, what we're doing with marketplace. It is a different company than we were back in March of 2020.
The only other thing I would add Matt is that Jeff second point, we do have the financial capacity and the wherewithal to continue to invest in modernizing our business as a modern department store. When you just look at the math, we're stronger we're more agile we're financially healthier. So that we can continue to make the investments in the business.
Jeff and I and the management team have a pipeline of other initiatives underway, but we're very much focused on profitable sales growth. That's our that's our longer term focus.
We will take our next question from Omar Saad from Evercore Partners. Your line is open. Please go ahead.
Thanks, Good morning.
This quarter.
Wanted to follow up on.
The E Comm stores mix, you guys alluded to E com, obviously, giving back some of the gains in.
But keeping it.
Well above pre COVID-19 levels, where our stores are coming back how do you think that plays out in the fourth quarter I'm not sure I quite discern what exactly youre kind of E com versus stores mix will be but in terms of that this year and the holiday season do you expect stores to be.
Maybe you can kind of continue that trend and then what does that mean for margins for you guys.
<unk> business has a lot of shifting.
<unk> costs during the holiday quarter typically.
Maybe quickly.
What your third quarter comp would've looked like at that mid October slowdown didn't happen that would be helpful for us too.
Yes.
Hi, Omar.
First off we're very focused on omni channel and.
The.
The headline here, what I would say on the digital versus the stores channel within the Omnichannel stack is that digital is referred is reverting back to kind of a mix between where we were pre pandemic and where we work during the pandemic. So when you look at our digital penetration of the business at 19, it was 25%.
During the pandemic it was 40% and as you heard from our call. We're now calling.
The 2022 at 33% down from our initial estimation that it was going to be in the 37% range. So that is down shifted we do expect that we're going to have a strong performance to 2019 across every quarter and we are mapping on that when you see what our trend was in digital in the third quarter versus two.
19, we were up 35%. So that is a similar when you kind of think about that when you embed that into our modeling for the fourth quarter on the high end of our guidance, that's where we see it.
All shipping costs on any scenario that we havent been contemplated so that is where you might have higher shipping costs. If you are on the higher digital model.
If you are on the lower digital model you might have higher SG&A costs, because it does that traffic might be shifting to stores. So those are the ways that we're looking at it in terms of how we're modeling it.
But.
When I look at when you think about Jim ROI are you think about what we're doing with turnover. All of that is is in our models on both ends of the guidance about which way it's going to go what we've done is when you look at the inventory allocation.
Got a lot of our inventory that is forward deployed. These 35, many dcs that Adrian spoke up it's about 1 million square feet of supply chain, we didn't have last year.
Looking at all of our ship alone categories to get those closer to the customer to increase speed of delivery and also mitigate shipping costs.
Got great automation thats going on in our Mega centers to make sure that we're hitting the customer expectations on time of delivery and reducing package cost. So all of that kind of modernize supply chain applies to whatever comes our way with digital business in the fourth quarter.
We will take the next question from Oliver Chen Your line is open. Please go ahead.
Hi, Jeff and Andrew and nice job on the quarter.
October has been fairly volatile just I'm curious about your thoughts on the consumer and the price consciousness, and what Youre seeing and also what you might extrapolate going forward are related to that is this risk of promotional environment and densification. Other other folks don't have inventories as well in control.
Would love your thoughts on how you may handle that because it really seems like others are over inventoried. Thanks a lot.
Yeah, Let me start out Oliver let's start with the consumer I think clearly when we looked at it was unexpected what we saw is kind of a downshift.
And if you look at on marks question about what happened in the course of the quarter. The last couple of weeks of October I think of that as being twice the negativity of the trend that we had in the first 11 weeks of the quarter. So we've been watching that carefully to see okay is that a is that where the customer or the consumer is going.
And when you started to think about where we were last year with all of the publicity that was going on about lack of supply and supply chain.
Issues and then if you don't get it now youre not going to happen in time for Christmas and you counter that with if you were to do all the pulse of what the consumer articles a ban on glut of inventory and wait for best prices, we really saw it in our conversion rate. So what happened in the last couple of weeks of October was not a downshift in traffic we didn't see.
Less traffic coming on the websites or in our stores, which we now track to retail next what we saw was a drop in conversion and so that conversion was a marked difference not from what the trend has been from the previous weeks, but from what we were up against in 2021. So that is that's what kind of showed us that this is probably a.
This idea that there might have been a supply concern and that with the supply concern being off the table. When we go back to usual demand patterns, where were watching it carefully to see which way we're going obviously, we wanted to make sure that our guide comprehended that if it was a slow down like we saw in the last two weeks of October and we took that all the way through the balance of the year versus this.
If it modeled 2019, so that's where we're at I think in terms of the where our inventory is because of the reserves that we have we.
We can peel that back depending on whatever we're seeing in the environment. It's as much important for me to say that when we've got a category that's really hot and it's really working and there is an opportunity for us to get fresh inventory, which there is always opportunity.
To jump on that if that doesn't materialize then we will just peel that back. So our intent is that by the end of the fourth quarter, we're going to be in a great inventory position and in the right mix of categories brands and value bands to enter what our expectations are going to be for 'twenty, three which we'll talk about on the fourth quarter call.
If I could just add a couple of things just to build on Jeff's point.
Punch line for Japanize, we feel good about the inventory positioned for holiday not only are we looking at our inventory position versus last year, which is we're up about 4%, but were actually down 12% to 2019, and we look we're very excited about the level of newness, 55% in units for the holiday season to your question about the promotions.
The inventory discipline that Jeff described is very much aligned with our pricing and markdown strategy, we will take the necessary markdowns based on demand versus the expectations. We had week to week as we progressed through the fourth quarter and we know that customers from a pricing standpoint are you looking for value. All the surveys that we've seen with indicate that the value is going to be an important driver.
For the customer so as we think about our initial ticket our promotions our markdowns, we expect to manage through that as best we can but the good news is we have the pricing science to be able to do that looking at sell through is looking at the available inventory by location looking at the product out dates. So we feel good about where we are starting the quarter MEP.
Real good about our plans going through the quarter.
We will take our next question from Ashley Higgins from Jefferies. Your line is open. Please go ahead.
Hey, good morning, Thanks for taking our question.
The initial learnings you can share about the new marketplace model and then we're just curious what's driving the larger basket sizes and units per order. Thanks, so much.
Alright, so let's talk about marketplace. So we launched it successfully earlier in the quarter and I think the big thing on the marketplaces that it's not a flip the switch like it's a fully formed organism and on our on our site. We are adding new content every single day.
As we continue to scale us.
Right now, we're really bringing on new brands products and categories really focused on premium third party sellers.
And the overall objective here is it's a low risk way for us to introduce new customers or take care of existing customers on signals that where we didn't have content in either owned or VTS inventory in the past and thats without shouldering the inventory liability.
It's too early to quantify a lot of the detail with it but let me just tell you a couple of headlines. The first one is that its attracting younger customers.
And when you think about that higher basket size and the higher units per order a lot of adverse mix baskets between either owned inventory or <unk> inventory. So that's a real positive sign.
What I'd say is that when you have new customers coming into the marketplace. Almost all of them are cross shopping and the balance of Macy's.
We're excited about the fact that we're going to continue to develop this we're excited about adding bloomingdale's marketplace next year and we're hitting our objectives too early to talk about any more specifics on it we'll give you more detail on future calls.
Okay, Great. That's helpful and then if I could just throw in one more.
Any color you.
That we lost you Ashley can you are you on mute.
We will take our next question from Kimberly Greenberger. Your line is open. Please go ahead.
Hey, Ashley.
On the call at Kimberly <unk> Ashley if youre on the call just E Mail US. Your next question and we'll take care of it Kimberly Europe .
Okay. Thanks, so much Jeff.
Obviously, it sounds to us like Youre really navigating the short term.
Ups and downs pretty well so I wanted to just turn an eye towards 2023, we understand you're not providing guidance for 2023 today, but.
But we're just interested in understanding how you're thinking about it kind of big picture.
Yes.
Here on our side don't have a lot of visibility and sales trends.
Sure how you feel about that so I'd love to hear your thoughts and.
If you think that visibility level as well maybe you can talk through how you're approaching your spring and summer inventory buys.
And Adrian if you could just call out any notable headwinds or tailwind that.
What you see on the horizon in 2023 that would be super helpful. Thanks.
Hi, Kimberly So let me, let me start with <unk>.
Some of this is predicated on how the balance of fourth quarter goes and what is what's the consumer buying pattern through this timeframe, but let me just say that we do think that this customer that this holiday is important to our consumers and the gift giving is going to be important family gatherings are going to be.
More plentiful than other we look at hotel reservations airline flights just all the survey so to say, how many nights theyre going to spend away from their home with family members. This gifting season is going to be important now that is when you look at savings rates starting to deplete you look at all the other just the cumulative effects of inflation on our consumers across all disk.
<unk> non discretionary spend.
There may be a slowdown and as we think about the first quarter bind that they will be tapped out in terms of their budgets. So while not giving you any guidance for 'twenty. Three we are looking very carefully to the base of your question, which is how might that come by quarter and ensuring that we have the right supply and not.
<unk> of content, however that quarter split might be out. So we think that the first quarter may be more pressed and we're thinking through that right now, we're making adjustments in our own ordering obviously watching our reserves very carefully on this.
And so spring summer, we have a better view of not sure yet about what fall holiday will look like all of that will obviously baked in to our full guidance, let me come back to you.
The at the Middle of February so anything I'd bring your debt, yes, I'll just add a couple of things and good morning Kimberly.
I would say is that within the context of what Jeff described we remain committed to our previously stated longer term targets, which are low single digit sales growth and low double digit adjusted EBITDA margins and I think as you think about what Jeff shared a bit earlier with regards to how we're thinking about the business I think that the actions that we've been taking.
To strengthen our competitive position is really important so we have a healthy balance sheet. We are investing in new capabilities. We have a talented team and we believe that positions us well for those longer term targets of profitable growth.
Investing in high return initiatives. These are the things that will strengthen our capabilities to be able to really go to the marketplace in a stronger position with the consumer really building on that foundation around disciplined inventory management investing in talent and all the things that we've spoken about earlier to your point about headwinds, we tailwind I think the biggest headwind still room.
<unk> around inflation, because thats really affecting the capacity for consumers to spend on discretionary categories. It's also as we look at look ahead one of the headwinds. We're also looking at what's the rate of demand how much will demand slow in a rising interest rate environment. The tailwind and we think we have is how we compete in the marketplace.
We know that the consumer.
Value is important to the consumer customer experience is important to the consumer relevance is important to the consumer. So we're really focused on what we can control and how we compete and I think that could be a real tailwind for us.
We will take our next question from Dana Telsey from Telsey Group. Your line is open. Please go ahead.
Good morning, everyone and nice to see the progress.
As you think about the real estate portfolio urban areas versus suburban areas, what youre seeing in backstage is the performance different at all from what Youre seeing in those areas and then next year as you think about supply chain broadly how do you how do you frame the tailwind from supply chain.
And what it could mean to the business. Thank you.
Let me start with your first two points Dana and then I'll have Eric Adrian take the supply chain question.
What I would tell you on the urban versus suburban is we definitely when you look at our downtown locations as we talked about on the previous call. Those definitely are some of our best performing.
Locations much of that is related to the return to office and just having introduced a lot of activity that is going around those particular buildings, we're seeing that with kind of the return of customers that were basically avoiding those areas based on being during the pandemic.
That contingent revenue good year, when you think about Herald Square Union Square 59th Street at Bloomingdale's.
So downtown D C. Philadelphia State Street, all of those stores are having a very.
A very strong year. So now they are they are still well below where they were during pre pandemic. So there is a lot that needs to come back and that is how we're looking at a potential tailwind maybe not in 'twenty three of international tourism, We thought it was coming back in 'twenty three not certain what the exchange rates.
Where that's going to come out, but we're watching that carefully to kind of get those buildings back to 2019 levels. So.
That's how I would characterize rise.
Or is that when you think about backstage backstage is equally doing well I mean, we now have it in 310 stores. We opened it just recently in Herald square it was already in our other kind of downtown flagships.
It's doing it's doing quite well so yes, there is really no difference between the performance of it in a.
On opening price small versus one that is in a premium Moe.
Backstage is just fantastic and what I like about it is that it basically is adding to the basket of existing customers and it's attracting new and more diverse younger new customers. So everything we've been talking about on the evolution of our backstage business. Since 2015 continues to pay dividends for us. So that's how I'd characterize that I will turn it to eight.
On supply chain. Thank you, Jeff Good morning, Dana So with regards to supply chain as we think about next year. There are two realities that we viewed our planning number one is that goods will be flowing we are certainly seeing the goods flow. This year, which has positioned us very well for the holiday season, we're set on our floors were ready for holiday, but we believe that.
The supply chain is going to continue to get healthier and healthier.
Key thing is that goods are flowing I think what's important for us for next year is really thinking about inventory control inventory control and inventory discipline is just going to be really critical.
Jeff highlighted earlier, we're buying conservatively and we built and the appropriate reserves going into next year to really be able to respond to any changing trends and thats because we fundamentally changed the way we buy we have a very integrated team and to and Thats looking at sourcing and allocation and planning all the way to fulfilling orders for the customer and the other thing that.
I think it's important as we think about the spring season is that we're not planning to do any pack away inventory. This year, we're planning to get into the next year in a clean inventory position because the pathway is just not a favorable thing for us as a fashion retailer. So as we mentioned a bit earlier, we are committed to the markdowns necessary to clear aged inventory the season.
And make sure that strategically we are in a better position to drive southeast and drive healthy margins going through the fourth quarter and into next year.
We'll take our next question from bulk ruble from Guggenheim Securities. Your line is open. Please go ahead.
Alright good.
Good morning.
Adrian just a couple of questions on if you could talk more about the credit card business and it was better than expected sort of what youre seeing what came in better than expected I think bad debt expense, but you can maybe just address some of the factors there and how youre thinking about it sort of into Q4, but even more problems you can give us some more color around your expectations into.
23 that would be helpful. Thanks.
Yes, absolutely so as we think about credit card going into Q4, what you'll see is our rate of sale as the seasonal adjustments. So we do have a lot of non loyal customers that do coming to our system in the fourth quarter. So they tend to use a variety of tenders beyond our proprietary credit card. So as the rate of sale, you'll actually see that soften in the fourth.
Quarter, which is just a seasonal adjustment as we think about the credit card business in the near term and in the longer term. There are really two factors that we think about the first factories around bad debt. What we've seen is that bad debt levels have remained lower than expected for a prolonged period of time that drove very healthy credit card revenues this year and last.
Year, but we do see evidence of that beginning.
Unwind as we're seeing more kind of payment opportunities in delinquency opportunities emerge. So we do feel that they will begin to be a more progressive reversion back on bad debt. The second lever. We look at is just the usage and what we're seeing is very healthy usage on the co brand side as well as higher usage on the broader proprietary credit card.
Our named placement within our network and so last year as you can imagine there's a lot of stimulus in the market. So theres a lot of cash payments and debit payments, but really credit card is back and so a lot of people are using their credit cards or building larger balances and that's really driven the health of our of our credit card business due to the pandemic year to date.
And we project that to be healthy into the fourth quarter SEC from our guide.
Okay.
Okay.
We will take our next question from Gabe <unk> from Deutsche Bank. Your line is open. Please go ahead.
Hi, good morning, congratulations on the nice results.
You've made a real improvement on your balance sheet over the past year. Just wondering if you could speak to how you're thinking about debt paydown and leverage.
Along with your capital allocation priorities moving ahead. Thank you.
Thanks for your question.
We follow a very disciplined capital allocation strategy and the first and most important thing is to make sure that we have a healthy balance sheet.
So looking at controlling inventory is very key to that as well as debt is an important part of that we've committed coming into this year that on an annual basis, we will have a leverage ratio below two times on an adjusted basis and so we're very committed to that and we're certainly looking at a variety of things as it relates to debt pay.
Down the second thing, though which is really important is investing in the business. We believe that the highest return for our shareholders is investing in high return initiatives that drive profitable growth over the near medium and long term, so really important for us to make sure that we're investing in those in those initiatives and then the third piece is really returning capital back to our <unk>.
Shareholders in the form of a predictable dividend and modest dividend, but also with excess cash being able to do share repurchases as it relates to debt Paydown. We're constantly looking at a lot of options and a lot of different scenarios. We do have the liquidity and the capacity right now we don't have any material debt maturities for 455 years. So.
Already in a very healthy position, but debt pay down is always an option that we looked at.
Okay. Thank you.
We will take our final question for today.
From <unk> Suisse from Citigroup. Your line is open. Please go ahead.
Thank you, it's Tracy Kogan filling in for Paul.
You are seeing in your market by Macy's stores, and maybe give us a little bit more detail about the assortments there what percent of your full assortment.
In those stores and then I know you talked about maybe relocating some.
Macy's stores off mall formats, how many how many markets do you have maybe a weaker performing full line Macys store, where you think there is an opportunity to relocate all fallen out market by Nathan format. Thanks.
So let.
Let me start with we're pleased so far with how market by Macy's is performing and so just.
Reemphasize, what what our strategy is here it really has three buckets on three purposes. The first one is just <unk>. The overall comment is that about 60% of business in our categories Thats done in brick and mortar is done off mall and so when looking at.
The majority of our portfolio would be non mall that really served up an opportunity for us.
Clearly omnichannel sales is what we're really focused on and when you look at wherever we have a sale or wherever we have a store you have higher concentration of digital sales being done in those <unk> codes. So it really is this kind of irrefutable loop that goes on with customer activity. So we had three objectives.
Objectives with respect to market by Macy's the first one was to.
What is a fill in location, where we already have a presence in that particular market, but we have ZIP codes that are underserved and we're seeing that in our digital signals, that's where we put a number of our locations from Atlanta, Washington D. C. Dallas Fort Worth then we have this replacement location mature that's part of your question that was one that we did last.
We're really proud of the this is the first one that we've done this was our Chesterfield mall that was in St. Louis and we found a very vital strip center there was a mile away from the Chesterfield mall in the Chesterfield mall just to be a thriving center Macy's was really all that was left the balance of the mall.
Either closed or was no longer there. So we had this handoff when we opened the market by Macys in St. Louis and the Chesterfield Strip Center, then we close the store we worked on the handoff of customers. We picked all the great colleagues, we move them over that's had a very nice start the third area that we're looking at which gets to the other party.
Your question is how we're thinking about new markets, either where Macy's brand used to be or Bloomingdale's brand has not been or where it's not it's a brand new market for us. So know that we are in 49 of the top 50 markets in the nation on the on the Macy's side, but I think we're only in 13 of the Bloomingdale side, so really getting.
The <unk> brand into some of those markets is quite interesting to us.
And then starting to do that on the Macys side is something that youre going to see from us in 2023. So the comment about curation. So when you think about our market by Macy's is let's call. It 30000 square feet and we have a full line store or it's like $1 80, thereabouts, so were making lots of decisions based on the localized environment about what brands we put in there.
What turnover, we expect how quickly we're able to bring things in and get them out.
And so and it's a very open palate. So we have lots of flexibility in those environments lots of opportunities for us to make adjustments. So we're very dogged about sell throughs and conversion. That's what the team is very focused on I think the format and the locations. We're picking is quite strong. So we need to make these stores work before we get to a.
Scalable model, but as you can imagine we're looking at that 60% of brick and mortar business being done off mall lots of opportunities when we get a model that scalable.
Okay.
That is all the time, we have for question and answer session for today now I will turn the call back to Jeff <unk> for closing remark.
Please go ahead, sorry, everybody.
Thanks for your interest in Macy's, Inc brands and watch the parade everybody have a great Thanksgiving.
Thank you for joining today's call you may now disconnect.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
<unk>.
Okay.
[music].
Okay.
Okay.
[music].
Okay.
<unk>.
Okay.
<unk>.
[music].
Okay.
Okay.
[music].
Okay.
Okay.
<unk>.
Okay.
Okay.
Okay.
Okay.
Okay.
Hey.
Okay.
[music].
Okay.
Okay.
Yes.
Okay.