Q1 2023 Macy's Inc Earnings Call
I.
Greetings and welcome to the Macy's, Inc. First Quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation.
If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad.
As a reminder, this conference is being recorded.
I will now turn the call over to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.
Thank you, operator. Good morning, everyone, and thanks for joining us. With me on the call today are Jeff Gannett, our chairman and CEO , Tony Spring, President, Macy's Inc., and CEO Elect, and Adrienne Mitchell, our COO and CFO .
Along with our first quarter 2023 press release, a presentation has been posted on the investor section of our website, macesinc.com.
Unless otherwise noted, the comparisons we provide will be verses 20-22.
Comparisons to 2019 are provided where appropriate to best benchmark performance.
All forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today.
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 on the investors section of our website.
Today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call.
With that, I will turn it over to Jeff.
Thanks, Pam. So good morning everyone and thank you for joining us.
Before getting started, I want to take a moment to acknowledge our team and how they have continued to navigate an extremely dynamic macro environment.
On that note, let's discuss the current macro landscape. On our fourth quarter earnings call, we said that we expected pressure to be more intense in 2023 compared to 2022.
Subsequently, demand trends began to worsen in mid-March and further decelerated in April . We believe cooler temperatures and headlines surrounding layoffs and the banking crisis were factors.
But so were the compounding effect of some previously identified macro headwinds.
The US consumer, particularly at Macy's, pulled back more than we anticipated as they reallocated spend to food, essentials, and services. We have planned our business for the remainder of the year assuming mid-March through April macro headwinds continue and potentially worsen and we have taken decisive actions in the second quarter and the back half of the year.
to ensure we are well positioned to compete.
We will go into more detail on these shortly, but first, let's discuss first quarter results.
We achieve adjusted diluted EPS of 56 cents.
versus our expectations, net sales were below, gross margin rate was above, and inventories were in line at down 7% year over year. February and early March performed largely in line with expectations.
As previously mentioned, trends worsened in late March. We entered April confident in our product and had several important events including friends and family at Macy's, the spring break season and Easter. As April progressed, demand worsened across nameplates. The decline was most pronounced at Macy's.
which has the largest exposure to the lower and middle income consumer, with roughly 50% of its identified customers and an average household income of $75,000 or under and about 85% at $150,000 or under.
By nameplate, Macy's net sales declined 7.7% and comparable sales declined 7.9% on an own plus license basis versus a 10.1% increase last year.
We began the quarter with limited inventory carryover.
Consistent with our inventory discipline, we had sold through the majority of fall and holiday product in the fourth quarter.
In hindsight, we converted to early. With spring-fashion well set by early March, but without enough balance in whether appropriate apparel and footwear.
Store traffic was healthy, but conversion was challenged. Most of the country experienced below average temperatures for an extended period of time, while we were over-indexed in spring and early summer fashion, including special occasion, and did not have enough colder weather and seasonless product.
Ultimately, cell thrills were below expectations, as our customer became increasingly more deliberate in how they are allocating discretionary spend and buying closer to need.
On the flip side, categories we are known for are less discretionary and weather dependent, including beauty, particularly fragrances, women's career sportswear, and men's tailored all outperformed.
We also began to experience a comeback in certain pandemic categories, including textiles, house swears, and top of table, which is encouraging.
At Macy's backstage, which curates lower price point merchandise in flows and freshness more often, store within stores, outperform the full line locations in which they operate by approximately 150 basis points on a comp-owned plus licensed sales basis.
These locations benefited from a greater emphasis on seasonless products and a strong value proposition.
We currently operate a 310 back stages, including 301 store-worthened stores, and plan to open nine more this year.
Our luxury name plates, Bloomingdale's and Bloomerquery, were also impacted by macro pressures, although not at the same rate or intensity as Macy's. Bloomingdale's results were roughly in line with our expectations. Net sales declined 2.3%, and comparable sales were down 4.3% on an OEM plus license basis.
versus a 26.9% gain last year. Bloomingdale's registered strength and beauty, particularly fragrances, men's and women's contemporary apparel, and housewares. Bloomingdale's outlet are relatively undeveloped part of the nameplate that appeals to the more value conscious luxury customer also continued to outperform.
Ablomerquery results once again exceeded expectations, benefiting from our differentiated product mix and unique competitive position as a luxury beauty retailer.
NET sales rose 4.4% and comparable sales increased 4.3% versus a 25.2% gain last year, benefiting from strength and clinical and medical skincare as well as color.
Quarter-to-date, demand trends have accelerated from April across name plates.
As the weather has turned more seasonal, our customer has been responding well to our compelling offerings and price points.
We are likely also benefiting from pent up demand.
Although encouraging, we do not have clarity on whether or not these improvements indicate a trend change reflective of a healthier consumer. These improvements have been strongest at Bloomingdale's in Bloomercary, potentially indicating a further bifurcation of customer behavior by income tier, which we are closely monitoring.
While first quarter adjusted EPS at Macy's Inc was ultimately better than our expectations, we did not end as strong as we would have liked.
We will not carry problems from one quarter to the next. We have moved quickly to improve the composition of our assortments for the back half.
and full-year guidance ranges, assume heightened macro pressures experienced in mid-marks through April that they persist.
while the low end of both condom plates potential deterioration as the year progresses.
If demand improves, we will use our ample inventory receipt reserve, which is above last year's levels, to chase into areas of strength as they materialize.
Availability of goods remains robust, and we are confident that with our strong liquidity position, we will be able to secure the right product to support demand curves if justified. Now let's turn to the specific actions we have taken to ensure we are well positioned to compete in the back half and longer term.
For the second quarter, we have accelerated the timing and depth of promotional events, mark downs and clearance of macy's to liquidate seasonal merchandise.
This includes slower moving first quarter spring transitional receipts, as well as made flows that we were unable to impact following the rapid deterioration in demand.
We are utilizing our pricing science tools to approach markdowns and promotions with precision to maximize merchandise margin.
We have also adjusted the timing, composition, amount, and value proposition of receipts.
For the third and fourth quarters, we are leaning into categories that are working, like beauty, career, sportswear, and gift-in, and are further reducing our emphasis on downtrending categories.
Looking specifically at the fourth quarter and our leading position as a gifting destination, this year we will have more nudist compared to last year, including exclusives that leverage our strong vendor relationships and beauty, where we had great Mother's Day and Valentine's Day performance, and in toys.
We also recognize the need for a better balance of cold and warm weather goods at Macy's.
Adjustments have been made to flow product closer to need. In addition, we are working with our partners to offer more seasonless year-round fashion content.
Other actions taken, improved receipt flow and in stock position within our core assortment, enhanced pricing algorithms to maximize sales, margin, and competitive positioning, and updated marketing messaging to speak to our even stronger value proposition.
It is imperative that we have the right assortment, including the appropriate mix of private and national brands that our customers care about, with compelling value and price points that appeal to our diverse fashion conscious base.
Value does not mean the lowest price. It means offering the right brands, fashion content, and elevated omnichannel shopping experiences.
This morning, we are excited to share that we are bringing Nike back to the Macy's name plate this fall. This mutually beneficial relationship reflects our strategy to provide customers with an enhanced and elevated offering.
Starting in October , an expanded Nike selection, including a peril, plus size women's, big and tall men's, kids, bags and gear will be available online and in key locations nationwide.
Footwear will continue to be sold in our finish line license locations. We look forward to scaling our Nike partnership with additional locations in spring of 2024.
We remain focused on the long term. Balance sheet health and cash preservation are critical to achieving our goals. About six months ago, we embarked on a cost savings project to reimagine our ways of working, drive clearer prioritization across key enterprise capabilities, and reduce complexity.
Given late first quarter trends, that work was accelerated. And we have identified an additional $200 million of cost savings for this year and roughly $300 to $350 million of savings in 2024.
We have also reduced this year's plan CAPEX spend by roughly 50 million. Adrian will discuss the specifics, but investments in our five growth vectors remain protected. Our ambitions are greater than our recent results. As a seasoned retailer, we understand the challenges that we are facing and will continue to pull the levers.
needed to achieve our aspiration of low single digit sales growth and a sustainable low double digit adjusted EBITDA margin beginning in 2024. The biggest risk to achieving that goal is if pressures on the consumer further intensify at an accelerated rate next year. I am confident that we have the right strategy and team to lead us into the
Adrian's first call as chief operating officer and chief financial officer, a promotion that is well deserved. Adrian's strategic thinking and financial acumen have enabled us to achieve our current position of financial strength and has set us up to continue to make crucial investments for future success.
Congratulations to you both. I look forward to what you will achieve together. And I know you're all excited to hear from Tony, so I'm gonna turn it over to him for some brief comments.
Thank you for the introduction, Jeff, and for your mentorship and tremendous support. And thank you to our Board of Directors for their confidence and support. I also want to acknowledge the entire leadership team and our colleagues for their ongoing commitment to our brands and business. Please know how humbled and honored I am to have been chosen to take on the business.
know, I began my career at Bloomingdale's roughly 36 years ago. During my tenure, I've split my time somewhat equally between merchandise, marketing, stores, and senior leadership.
As I look back, I've always viewed the area I was in as the engine that was driving the business.
Today I realize how complimentary and intertwined they all are. As a merchant, our products must be curated in compelling. As a marketer, our strategy must be engaging, inspiring, and personalized.
Of course, our digital experience is closely linked. There's a window to our brands and a large source of commerce.
As a stores leader, we must rally our colleagues around an enjoyable and differentiated experience centered on the customer. Finally, as a senior leader, we must ensure that our recipe includes the right balance of all of these elements.
Over the last decade, I've had the distinct privilege of leading Bloomingham's. I want to take a moment to acknowledge my team there. During my tenure, we achieved record sales and customer and colleague engagement. Coming off our 150th anniversary, Bloomingham's offers a curated merchandise assortment and has a loyal following. Our loyalty program is best in class.
and our marketing is distinctive with events, activations, and pop-ups animating many campaigns which underscores my personal belief in Retailist Theatre.
I view Macy Zing as an incredible and unparalleled portfolio of name plates and brands. Representing off-price delivery, on-multi-off-multi-private to national brands, our multi-channel, multi-generational, and multi-category platform gives us opportunity to satisfy the customer's appetite for all of our categories.
It's important to acknowledge the tremendous progress we've made as we modernize our business. We've set the sub-perculture success. But it's also important to recognize that across name plates we have room to improve.
That is what makes our potential so exciting to be a partner. My experience of Limigill's bringing an outsider insider perspective to the Macy's brand, which is beneficial during this heightened period of uncertainty.
Over the next several months, I intend to continue to listen and learn and lead my new areas' responsibility, which include merchandise, marketing, and digital strategy. I will do so with clear eyes and focus on what's possible long-term while maintaining a disciplined approach to near-term controllables. I look forward to sharing my thoughts and observations.
as these are progressives.
One thing I know for certain is that this is a renowned business and one which I'm incredibly passionate about. Recent results in our revised outlook have not changed my view. However, we were out of balance in the first quarter, over emphasizing spring season of merchandise rather than cold weather and seasonal as merchandise. We are containing the related markdown to the second quarter and have adjusted the timing of mountain top
we believe that each will be a meaningful contributor to the future.
First, let's start with Macy's private brands. I firmly believe that our success has tied to the right combination of compelling private brands, popular national brands, and the curation of unique brands appropriate for our target customers, all of the compelling value of wages.
That has been one of our formula's of success at both Blymmy Delta Blimmer 3.
In my new role, I have had the pleasure of working even more closely with the Macy's private brand team on their strategy. During the first quarter, I empty women's and club remends, both of which have been reimagined, outperformed their respective broader parallel segments of Macy's. Looking ahead, we are excited about the launch of our newest brand.
which will offer women's apparel and accessories later this summer. Stay tuned.
Our second growth vector is small format stores. These allow us to optimize our total store portfolio at both maintenance and limiting, through replacement, densification, and new market opportunities. They balance our traditional large format on-mall locations with a more low-delighted, off-mall experience that's physically closer to our existing and target customer.
license sales group. Customer experience scores, particularly regarding the physical environment, ease of check-out, and colleagues being helpful and available are high. Interestingly, we are experiencing limited to no cannibalization in existing markets where we open off small formats, instead customers are making additional shopping trips. Long-term, we remain bullish about the small format store opportunity as well.
band and categories, which resulted in increased basket size.
During the first quarter we added approximately 450 brands, ending the quarter roughly 950 brands.
We're seeing indicators of a strong growth rate, with marketplaces gross merchandise value increasing over 50% compared to the fourth quarter of 2022. An average order value and UNICE for order approximately 50% above those customers not shopping in marketplace.
Needless to say, we are very excited to watch a Blooming Niles marketplace for leading the fall.
Our fourth birthday is luxury. With this goal 2022, representing record sales at both Bloomingdale's and Blooming Mercury, we're excited to continue to invest in both name plates.
The teams are attracting sought-after brands leveraging their distinctive marketing and satisfying their fore-customer.
At Macy's we've made a commitment to elevate our beauty business with a larger luxury of one resource.
We first began to offer a more luxury beauty at Macy's in 2018 and as since added many brands including Caroleena Herrera Beauty which is exclusive Armani.
Saaloran, Tom Ford, Gucci, Mason Marjela, and LaMaire, just to name a few. This is an area that even in the current environment, we're seeing very limited price resistance and even more partnerships on the horizon. Last but certainly not least, our fifth growth vector, personalized offers and communications.
The power to talk to over 40 million consumers with the right offer at the right time really resonates with me. I believe it will be a true unlock for both our promotional offerings and merchandise messaging.
During the first quarter, we leaned into personalization of a customer's offer within our typical event structure. These tests, which were based on predictive behavioral models, allow us to show different customers various value propositions by level of discount and category of offer. This is in addition to loyalty lifecycle offers such as data service.
Now, before I turn it over to Adrian, let me say how excited I am to be working even more closely with him and to have his counsel, leadership and partnership. What makes this transition so seamless and the succession so thoughtful is the complimentary skills that Adrian and I bring to this company. He has had a noticeable impact on the organization since he joined almost three years ago.
Our balance sheet health, including no material debt maturities until 2027 and fixed interest rate debt, give us the financial flexibility to continue to invest in our long-term opportunities and return capital to shareholders, despite the uncertainty within the macroeconomic environment. With Jeff's support, we will return the Macy's Inc. to profitable roads.
I look forward to getting to know all of you and sharing our progress. Now I'll turn it over to Adrian. Thanks Tony and good morning everyone. I want to start by thanking Jeff and the board for their ongoing belief and trust in me. From bringing me on three years ago as chief financial officer to recently expanding my responsibilities to include stores, supply chain, and technology.
With my new responsibilities as Chief Operating Officer, I have the opportunity to go deeper into the design and execution of our long-term goals.
As we aim to maximize opportunity and value, I am hyper focused on building a faster, more flexible, and more efficient operating model that drives sustainable sales and margin growth by creating alignment on those priorities that will have a meaningful longer-term impact on this business.
That's a multi-year effort. And as I think about how to tackle it, I've started with several fundamental questions.
What can we do to better serve our customers and improve the end-to-end on the channel shopping experience?
How do we optimize our physical store footprints with the small format stores to accelerate growth while enhancing our inventory flow, merchandise planning, and localize the sort of and capabilities? And evaluating our updated growth aspirations, how do we further modernize our supply chain and technology infrastructure to support the Omnichannel shopping experience we aspire to deliver?
retention and turnover and have been impressed with the talent across these teams.
I've also spent a significant amount of time with Tony. His experience in merchandising, marketing, and stores serves as a nice balance to my years in large-scale transformation and consulting and my background detail operations, including data and analytics, technology, strategy, stores, and supply chain.
He is a seasoned operator that understands department stores and fashion inside and out, while Army Transformational Specialist focused on modernizing our retail operations.
We are fully aligned on what is needed to propel Macy's ink into the future.
We will maintain a discipline approach to our inventories and markdown liability, offer differentiated product and value to our customers, and will not chase unprofitable sales.
For us, that's now table stakes. Looking ahead, we will continue to strengthen the foundation of our core businesses while simultaneously investing in our five growth vectors.
Despite recent headlines, Tony and I remain committed to our aspiration of achieving low single digit sales growth and a sustainable load up of the digit EBITDA margin starting in 2024.
Now, let's walk through the first quarter results of our five value creation levers before I provide an update on our 2023 outlook. First, Omni Channel Sales. We generated net sales of $5 billion, a kind of 6.8% versus the prior year.
Comparable sales on an own plus license basis decreased 7.2%. Macy's end-owned AUR rose 4.7% driven by ticket increases and category mix.
For the year, we continue to expect an improvement in AUR year-to-year through a combination of ticket increases, lower markdowns, and category mix.
Next, other revenue. As a reminder, beginning this quarter, we are reclasting credit card revenues and Macy's Media Network Revenue to other revenue. Credit card revenues were previously reported as their own caption while Macy's Media Network Revenue was reported within SGNA.
During the quarter, other revenues were 3.8% of net sales. Credit card revenues were $162 million, down $29 million from last year.
As a percent of net sales, credit card revenues were 3.3% or 30 basis points lower than last year, primarily reflecting the impact of higher-bad debt within the portfolio.
Macy's Media Network Revenue was $29 million versus $26 million in the prior year. and all those.
Moving to the second value creation lever, Gross Margin. Our Gross Margin rate was 40%, 40 basis points above prior year. Merchandise Margin was flat, benefiting from lean beginning of your inventory levels and lower clearance mark downs, offset by promotion and category mixed shifts.
As it relates to delivery expense, continued cost mitigation efforts contributed to a 40 basis point improvement versus last year, primarily on better contracted rates, reductions in packages per order, and a one point decline in digital penetration. The third value creation lever is inventory productivity.
Inventory decline, 7% you over year, in line with our net sales decline.
Trolling 12 month inventory turnover was down 2% to last year, reflecting that the client and sales versus the comparable period.
Adjustments to the timing, amount, and composition of receipts beginning in the second quarter are expected to drive back half selfies and strengthen inventory productivity.
Expense Discipline is a fourth value creation lever. SG&A increased $45 million or 2.4% to $1.95 billion.
SG&A is a percent of total revenue was 37.7%, 350 basis points higher than last year.
As a reminder, the increase in minimum wage for stores colleagues was fully implemented on May 1st last year. The higher year over your SG&A dollars and rate reflects the lapping of these increases and includes continued investments in colleagues across competitive pay, incentives, and benefits. SG&A also includes the increase in depreciation and amorphousization.
We continue to take a thoughtful approach to capital allocation, prioritizing a healthy balance sheet, investments in our business and our five growth vectors, and returning capital to shareholders.
In the first quarter, we generated $105 million of operating cash flow compared to $248 million last year, primarily due to lower earnings in the current year quarter versus last year.
We invested $296 million in capital expenditures.
Three cash flow, inclusive of proceeds from real estate, was an outflow of $166 million.
As part of our open-ended share repurchase authorization, we bought back approximately 1.4 million shares for $25 million.
We also paid $45 million of dividends.
Now onto our outlook. Let's start with a discussion of our cost savings efforts.
As just mentioned, we have identified an incremental $200 million of cost savings for this year versus our prior outlook.
For 2024, we estimate the savings to be between $300 million and $350 million impacting both Rosemarjan and S.G.NA.
Roughly 30% of the savings in 2023 will be in Gross Margin and the remainder will be in SGNA.
A small portion has been recognized in the first quarter. Savings build as the year progresses and will be most significant in the fourth quarter.
Now, let's discuss our full year and second quarter outlooks, both with which constant played ongoing pressure on our customer.
The low end assumes macro pressures worsen while behind assumes they remain stable with levels experienced in mid-march through April .
With so many mixed signals, it is proven to take a cautious stance. We will continue to embrace the financial and operational disciplines that we have implemented over the past several years. If the man improves, we will leave into our reserves and chase interquarter. But we are going to wait for proof points to do that, and our improved May trends are not enough.
Alternatively, if the man transworse in, we have the flexibility to make further adjustments.
We can and will do better. We have been course correcting and have made adjustments to the second, third and fourth quarters.
Looking at the full year, our expectations from ACES Inc. are now as follows.
Net sales of $22.8 billion to $23.2 billion.
Comparable sales on a 52 week homeless license basis to be down about 7.5% to 6% year over year. As a reminder, compare his ease in the third and fourth quarters.
Other revenue to be about 3.6% of net sales with credit card revenues accounting for 82 to 83% of that.
The reduction in our credit card revenue outlook is primarily a result of our reduced annual sales expectations. A gross margin rate of 38% to 38.5% on our expectation for a deeper markdown in the second quarter to drive selfies and ensure we enter the third quarter in a clean inventory position.
The second quarter should be viewed as an exception, not a changing course. Our philosophy remains unchanged. We continue to be focused on protecting Gross Margin. We will navigate the year with the intent to stimulate increased conversion in margin dollar expansion. Our annual Gross Margin rate outlook also includes an estimate
for increased shrink, which we call shortage, relative to our initial expectations.
Starting in Q2, we have further enhanced our pricing science capabilities to automate strategic promotions from vendor direct to owned inventory. This gives us the opportunity to bring an automated pricing solution that incorporates category lastisities, maximizes inventory turnover, and optimizes unit sales left and margin dollar expansion.
to our own inventory portfolio. In addition, we also continue to refine our competitive intelligence, which provides us a better understanding of the competitive landscape and enhances our decisions around location-level pricing.
SG&A is a percent of total revenues expected to be about 35.4% to 35.5% reflecting the reduction in our sales expectations along with the cost savings work discussed earlier.
and adjusted EBITDA as a percent of total revenue of roughly 8.8% to 9.4% or 9.1% to 9.7% as a percent of net sales.
After interest in taxes, we are estimating annual adjusted diluted EPS of $2.70 to $3.20.
This takes into account a roughly 12 cents negative impact from increased shortage relative to our previous expectations.
Our adjusted EPS guidance does not assume the impact of potential share repurchases, but does consider their proactive actions taken for the back half.
For the second quarter, we expect net sales of $5 billion to $5.1 billion.
Gross March and rate to be down no more than 100 basis points to the second quarter of 2022. The second quarter includes clearance marked downsteroreddress remaining first quarter seasonal inventory and may receive that we were unable to adjust and time to align with our updated sales expectations.
We expect this to be the only quarterly deterioration to prior year. Adjust the downloaded EPS is expected to be 10 cents to 15 cents.
While we cannot control the macro environment and how our consumers respond, we remain focused on offering our customer the best product, experience, and value.
There is no finish line for this work. Over the past few years, we have made significant progress across the organization.
We have reduced our reliance of markdown allowances, shifted to an upfront cost negotiation model with vendors, incentivized merchants at the Macy's ink level, rather than by their respective category performance, and built data and analytics into our processes.
Looking ahead, the Macy's name plate is shifting to cost accounting in 2024, which should help in court-grade further disciplines.
These actions together speak to how we are running our business from a much healthier and more educated place than in the past. So while we recognize the macroeconomic climate has created a larger headwind on our business than originally anticipated when we first introduced our annual outlook in early March.
We are responding and remaining agile to ensure we meet the needs of our customers. The disciplines we have built into our decision-making and culture gives us the foundation to balance the current environment while executing with clarity on our long-term growth goals. We remain committed to our aspiration of achieving low single digit sales growth.
and a sustainable low-double digit, a Jeff at EBITDA margin, beginning in fiscal 2024, even with the assumption that macro pressures persist. With that, I'll turn the call back over to Jeff for some closing remarks. Thanks, Adrian. We are a modern department store with a rich history that is weathered these storms before, and we will do so again.
Our financial health, operational efficiencies, and data-driven process and tools are unique advantages that allow us to navigate through uncertain periods as we continue to invest in the future.
We are a competitive team here at Macy's. We are not standing still. We are committed to better serving our customers and improving our business.
Our teams are fully aligned and we remain focused on protecting and preserving the second half of 2023 in our future growth opportunities.
including achieving our sales and EBITDA goals. And with that operator, we will open it up for Q&A.
Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone t-pad at this time. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to move your question from the queue.
For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask you to please them yourself to one question and if needed one follow up. Once again, that's Star One for any questions today.
Today's first question is coming from Matthew Boss of J.P. Morgan. Please go ahead. Great, thanks. So first, Tony, congrats on the promotion. Maybe high level. Where do you see the largest low hanging fruit for acceleration opportunity?
you take the helm. Jeff, could you elaborate on the cadence of top line trends? And in particular, where have you seen this most recent acceleration, whether by category or across income cohorts? And then finally for Adrian, with this dynamic backdrop, what's your comfort with inventory on hand and just your confidence?
the February hit our expectations as did early March. It started to deteriorate in the later part of March and then it decelerated even further in the month of April . So what we saw there was, when you look at the seasonal categories, so we basically had, we thought the appropriate level of carryover in
at regular price and when we started to market down. So that's the piece that when we're starting to see those inventory levels come up, which is where we kind of bucketed where we're going to be in the second quarter to deal with that to have the appropriate units going into the third quarter. So that would be kind of the cadence of the top line. When you look at the recent trends in the month of May, you definitely saw a bounce back.
environment. We don't know that answer yet. So when you look at our guide for both the second quarter and the balance of the year, just to reiterate where we're at, we looked at the trend from the end of March through April and extended that by brand, by category, all the way through the rest of the year. We obviously have lots of penetration differences between quarters. Certain
get worse. So that is what's implied in our guide. Know that when you look at our overall strategy, our objective is to make sure that we are responding, you know, in the moment to how customers are transacting. What I would tell you about the customer right now, particularly on the Macy's side, is they're buying much closer to me. So our opportunity to have the receipt reserves that we have to be able to respond in time.
with all the abundance of inventory in the market is prudent. So I'll turn it over to Tony to answer your first part of your question. Thanks, Matt. I would say first off, I'm obviously excited about the opportunity and I'm excited about the team that I see at Macy's is being really dedicated, passionate and certainly committed to the overall business results despite the challenging business climate.
Macy is a beloved brand with a multi-generational customer base. The scale of the business really should be an asset. I do see however opportunities to simplify our operation, make the experience easier for our colleagues to execute and more enjoyable for our customer.
I believe the Macy's ink portfolio should be one that we can leverage more fully from both off-price to luxury.
I think we've done a good job of leaning into the opportunity on data science or the stem part of our business. I think if you think of STEAM, the art part of our business, we have more work to do on curation, imagination, storytelling and inspiration. It's a wrap it. Latin morning to you, just to speak and close out on the topic of...
We ended last year down 3% in inventory. We ended the first quarter down 7% in inventory. We expect to end the second quarter down low to mid single digits on inventory. So we are confident given our capabilities and our tools. Now just to put in context, the way we think about inventories in terms of the volume, the mix, and having fresh content.
And the reality is what we experienced in the first quarter is that we transitioned early. That was a clear bet for us because we were able to have limited carryover coming out of the fourth quarter and coming out of holiday. So we entered in a very solid position, but the weather cooled. But when you look at our content, beauty, healthy numbers, career sportswear, healthy numbers, men's tailored healthy numbers.
Warm weather, spring seasonal for most of the quarter, soft numbers. So we're putting in our tools and our actions in place, which we have a clear track record on. And we are confident that we will be able to work through the inventory and get back to a balanced perspective on inventory and turn the fall season. So we're going to be able to work through the inventory and turn the fall season.
Thanks. Best of luck. Thank you. The next question is coming from Oliver Chen of TD Cowan. Please go ahead. Hi, Jeff, Tony, and Adrian. I was curious about merchandise margins and promotions for the back half and what's implied in guidance.
as you do take the markdowns Q2, what's the duration of those and how do you do those most sufficiently? Would also love your take on just things you're monitoring with the consumer and that behavior. And I assume that the comp volatility is likely in transaction counts. Would love your thoughts on that.
And lastly, Tony, what do you think about the younger customer and the opportunity there more broadly? How are you dissecting strategies with respect to that? Thanks everybody.
Hey Oliver, let me take two of your questions. So the merchandise margins, when you look at that, as we indicated, we think that we're going to be above last year's levels for obviously we saw that in the first quarter. We're anticipating that in both the third and the fourth. And the second we thought was going to be within 100 basis points of last year. The full year will be higher than the previous year. What you see and can expect from us is that when you look at the...
or price points. As we know that the customer is looking for promotional value right now, you can see what we're seeing in our price arms in both outlet as well as backstage. But what we're doing with specials and what we're doing with flash sales, those are all going to be comfortable to where we were last year. And we're looking at the content right now where that is going to be. So we have a lot of confidence when we look at the back half with respect to where we're going to be.
and the promotional as I've described.
Tony, Oliver, thanks for the question. Let me say first, we will continue to attract a multi-generational customer. I think it's an advantage of being a department store that we have five generations shopping with us, but in terms of your question and how we target and grow the younger customer base.
I started with I'm proud of the fact that the Bloomingdale team has generated more business with the younger customer than we did years ago. It starts with first having the brand's consumers are looking for. So challenging our merchant team to be in the market and wiring through marketplace or through our own distribution channels. Those brands, second, is obviously a strong digital strategy. We know the under customer starts first.
Good morning, all of it's great to be with you. Let me amplify a point that Jeff made on March and then I'll speak to the consumer. With regards to the March margin, just want to be very clear that the deterioration of no more than a hundred basis points is isolated to the second quarter.
When you look at our annual outlook for the year on gross margin, it is going to be higher than last year. And as we think about the back half of last year, we have the opportunity to actually be just given the softest on margin that we experienced in the third and fourth quarters. With regards to the consumer for the year, we're being cautious about the consumer. Now, in the month of May, we have seen slightly better trends and will be saw coming back.
Is it pent up demand? Is it a new trend? For us, it's too early to tell, so we're taking a cautious stance.
Thank you. Best regards. Thank you. Thank you. Thank you.
Thank you. The next question is coming from Brook Roach of Goldman Sachs. Please go ahead.
Good morning and thank you for taking our question. Jeff I was wondering if you could provide a bit more context on the customer engagement trends that you're seeing between your higher income demographic cohorts and your lower income demographic cohorts as you ended the quarter and moved into May. Are you seeing evidence of trade down or further pressure on traffic or ticket among any specific sub demographic? And then for Adrienne can you provide a little bit more context on the additional...
cost savings that you identified. Where are these cost savings being sourced from? How much do you expect to drop to the bottom line? And are there further opportunities to continue to optimize your cost structure? Thank you.
So Brooklyn, let me start with your question on customer behavior. As we've reported in past quarters, we're not seeing a trade down. Not yet. What we have seen is that all customer types, I'll speak to the Macy's brand, is been basically down about the exact same percentage. What we're seeing is that in some cases,
with customers that are responding to either backstage or they're responding to market-by-mases. It's entailing another trip and we're seeing more spend out of them. When you look at the dynamics of our transactions, what you see across all of our customers is basically an increase in AUR about the exact same basket size is what they had in their visits last year. So what they're doing is they're buying less units, they're buying with the higher AUR.
separation of the trend, the improvement of the trend of blue mercury as well as blooming nails. So there is something that's on a radar screen to see, does that more of a fluid customer, are they, are they, is it showing up right now that they're healthier than the Macy's customer? Raj, obviously watching that one very carefully.
Good morning to you, great to be with you as well. With regards to cost savings, let me give a little bit of context. We started this work about six months ago. And so we've been doing given the trends that we've saw in the first quarter, and year to date is really accelerating those activities. The source of the savings comes from two places. The first is Gross Marching, which represents about 30%.
SGNA and it's about reducing the complexity within the business, repositioning the organization for growth, and identifying operating expenses on the non-PARO SGNA side that we can actually take out of the system. This year we've identified an incremental $200 million of opportunity. Next year the annualized run rate is $300 to $350 million.
In addition to responding to the environment, we've actually reduced our CAPEX forecast if you allow me to add that dimension from a billion to about $950 million. But to be clear, the growth vectors are protected. We're investing appropriately in the team and the initiatives to get back to growth in 2024. So we've been very surgical, very disciplined, and we're making adjustments, and it's just gonna be good for the business longer term.
Thank you very much. I will pass it on. Thank you, Brian . Thank you. The next question is coming from Dana Telsi of Telsi Advisory Group. Please go ahead.
Welcome Tony, can you please expand on the AUR improvement you're expecting to see in the back half of the year which categories and also can you expand a little bit on the store strategy both for blooming dais and for maces in the small store component. And lastly welcome Tony.
What do you see as bringing over from blooming gals to Macy's? Thank you.
Hi, Dana. So let me take the one on AUR. And what you saw from our first quarter post was about an almost 5% or 4.7% increase. We do expect that we're going to have a higher AUR in the back half. A lot of that is category mix. So when you look at some of the higher AUR categories are trending for us. And that is driving up that what you see there.
There's other categories in which RAUR is below last year, based on where we see the environment, how we're looking at price matching when you look at our competitive cycle, ensuring that we've got the best value for our customers as they're searching in that particular time. So we do expect an improvement in a UR year over year. I think that outlook reflects our expectation for all of the heightened mark downs that we're talking about in the second quarter and the planned mark downs that we have.
the name of the game in our business and we always have available content that's out there in the market to purchase. So any demand signal that our merchants have, just remember that our merchants are all rewarded based on the collective Macy's brand and how it's doing. So there's huge opportunities for us to ensure that the right customers are being addressed with the right content at the right time.
So, you know, there is going to be a U.R. improvement, but through all of that, but at the end of the day, we're making sure that our receipts are consistent with where our customers are voting.
Dana, nice to connect again. I appreciate the question. No one is a bigger fan of the Bloomingdale brand and business than I am, but I would reframe your question as how do we develop a stronger portfolio where we can learn from each other without becoming one another. Bloomingdale's strength is certainly curation, bringing variety versus redundancy to the expanded assortments that we offer. Bloomingdale's has a great, strong, best customer experience.
forward to what we can do going forward.
Dana, good to be with you as well. With regards to our store strategy, the focus is on growth and our small format stores is actually part of that. You know, as we think about the store strategy, we feel good about the box size we're looking at, the format we're looking at, the locations and the power centers that we've been having conversations with. Have a good one.
But the thing that we are very excited about is what Tony spoke to earlier in the conversation which is on a comp basis on small stores, what we are seeing is no cannibalization against the big box, as well as comp positive growth in those stores that are now able to comp. So we are onto something quite special here, and we will share more information as things progress. Thank you.
Thank you. The next question is coming from Paul Leshway of Citi. Please go ahead. Hey, thanks guys. I'm curious how your e-comm business performed over the quarter versus stores. If you saw a similar fall off at e-comm or was it more isolated to the store? I'm curious how your e-comm business performed over the quarter versus stores. If you saw a similar fall off at e-comm or was it more isolated to the store? Please go ahead. I'm curious how your e-comm business performed over the quarter versus stores.
level and then I'm curious if you just talk about how you came into the year thinking about how you would manage inventory in the second half versus how you're planning inventory is currently. Thanks. Hey Paul. So dot com and stores were very similar in terms of what happened to their performance in the in the first quarter.
We came into the year expecting that that was going to be the case, that however, we were modeling dot-com and stores. So just remember where we were in terms of penetration in dot-com. This is basically the resettling of that as customers are coming more back to the stores channel. Obviously, very influenced by what they see digitally. Either they transact there or they do research.
quarter, pretty consistent with what we expected. I would tell you that on the big headline with respect to both stores and digital, is that the traffic has been relatively good. So basically, flatish online, slightly up in stores, conversion down in both at about the same rate. So we do expect that this is the reset year with the penetration between them, but we do expect more aggressive growth in with at that pressure times.
to have our marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past. So when it relates to the way that we kind of plan inventory, I think that outside of what happened to us with spring seasonal content.
and seeing the drop-off and cell thrills across all different value buckets. Everything else is pretty much performed as we expected it. Again, just to remind, we have a very healthy reserve. So if we're buying into a sales plan, we hold back in the receipts. We've worked all that out by our new model of working an upfront costing versus working on an MDA model, or a Markdown allowance model that we used to have in the past.
So we're not buying really needless receipts where we have not seen the signal for customer demand. And we are not perfect here. We have so much opportunity. We've got a really good pricing science as it relates to how we mark down goods. We are developing much better pricing science in how we promote goods based on demand signals and personalized marketing, and just the opportunities that we see there, as well as being very responsive to where in common items like Levi's or wherever it might be that a lot of retailers carry, of making sure that we're well priced, based on what they're selling where right now.
to align with our sales volume expectations for the balance of the year. The important actions were taken in Q2 to minimize liability going into the back half really gets into the mix for the back half of the year. The one thing I would amplify that Jeff spoke to earlier is we're gifting the destination.
And when you think about the shift in our content getting into the back half, we're going to be leaning more into beauty and gifting, which is 30% of our business in the first quarter, but exceeds 40% in the fourth quarter. And the beauty business has been growing going through the first quarter, so we feel that we're really moving ourselves into a position of strength. And with newness, we'll have more newness this year than we did last year. And we don't want to forget about the Disney distortion in toys, as well as Nike being in the fourth quarter.
Thank you, Dan. Thanks for all. Thank you. The next question is coming from Alex Straighten of Morgan Stanley . Please go ahead. Great. Thanks so much for taking the question. I just have a couple for the group here. First, I know that higher private label penetration was an opportunity for the year. So I'm just wondering where that stands now. And if your view has changed it all there. And then second, just a quick follow-up on the call savings question from earlier.
at all on the demand slowdown.
And as you heard us talk about in this particular call about INC and Clubroom, which have been brands that have been touched and basically you know, they basically have been burnished. So they're performing quite well. And then when you look at what we've got coming, we've got a whole portfolio. We have 24 private brands that are all being touched over the next two and a half years.
We're actually quite excited about where that will be and we'll give you a full rundown on that. But we do think that the private brands will race in penetration in out years and it is why it's one of the big growth factors. Not only is the when you look at the mugs opportunity, the margin opportunity, but really importantly, when you look at the five things that we are doing with private brand, brand identity against customer types.
original design, really strong strategic sourcing, relevant size and fit, which is one of the biggest pain points for our customer, and of course, compelling value. So we are very bullish on private brands and look forward to sharing all of those learnings as we develop those strategies and launch them. Michael Bock Alex, I think what you are hearing from Tony, Jeff, and I today is the importance of navigating the near term in terms of what's in front of us.
$50 million in terms of our current projections for this year. The key thing to keep in mind is that we will continue to invest in growth, whether that be tech, whether that be people. So as we move through this on certain periods, we're taking the necessary aggressive actions to protect growth investments that will get us to positive growth and profitable growth in future years.
So we'll continue to drive efficiencies in our operating model, we'll continue to invest in the growth vectors, and we'll find ways to be more productive with our assets.
to drive efficiencies in our operating model, we'll continue to invest in the growth vectors, and we'll find ways to be more productive with our assets.
Thank you. The next question is coming from Chuck Grom of Gordon Haskett. Please go ahead.
Hey, thanks very much. Jeff, you talked about flowing product closer to need, and I think that's interesting and important for the business. And I'm wondering if you could just elaborate on that a little bit further and how deep the conversations have been on that one with some of your suppliers. Yeah, Chuck. So as I mentioned, when you look at the receipt,
when a customer is signaling something in season, we're able to jump on that. So that is a discipline that has been well honed over the past year that you will see play out for the balance of the year. We did though do receipt cuts when you look at total to make sure that we retain that liquidity and we didn't take our full reserve to respond to where we took sales down.
that those receipts are really company assets to serve our customers and not their own and that has expect that discipline to continue with us. So as soon as I mean we're ordering every single week based on how things are trending and as I mentioned we find there's plenty of inventory in the market to be able to respond to that.
Okay, helpful. Thank you very much. And then from a category perspective, we want to be able to elaborate across the board what you saw in a parallel and other areas. And in particular, you call that textiles and top of table and housewares, improving which is interesting. So I was going to be able to elaborate on that and what that tells you about trends over the next few quarters in that area.
Yeah, so what we're seeing right now in apparel is that, you know, when you think about the bulk of our drop in the first quarter from our expectations, was been in the seasonal categories and men's, women's, and kids. So that would be all the spring and early summer content. And again, too early to tell whether or not that is content or whether or not that is environment. So we're working through that right now, but we're gonna, as mentioned, all the pricing
opportunity that you're gonna see from us in the fourth quarter. The housewares and the tabletop, they were quite depressed based on coming out of kind of the pandemic and the demand curve there. We're starting to see signs of life there. On our last call, we talked about looking for signs of life there. We started to see that in the first quarter. We really see it in the Bloomingdale's brand right now where the home business is quite robust.
We're starting to see signs of that on the Macy's side. So again, when you look at the overall categories, think about a comment that Adrian made to Paul Leszwe's question earlier. What you need to look at is look at the categories and how they penetrate in each quarter. So this idea about beauty and gifting being our two strengths that are trending positively in the first quarter. This is a really
Thank you. We're showing what time for one final question today. The final question is coming from Jay's Soul of UBS. Please go ahead.
Great, thank you so much. I wanted to ask about this new Nike partnership. Maybe can you tell us a little bit about how that partnership came together and maybe how big was Nike as a percentage sales back the last time Macy's had it? And do you expect this to be a long-term partnership, or is this getting inventory for a couple quarters and then sort of we'll see from there? Thank you. Long-term partnership. So I look at it as we took a pause.
We've been out of the Nike brand outside of where we are, footwear, and certain licensed businesses and kids, really, for the last year and a half. And we're committing to a long-term partnership together and our opportunity to basically provide our customer a multi-brand or a multi-category experience that is elevated and enhanced.
And so we're not quoting what we used to do, but obviously it's one of the most important brands for our customer. We had lots of customers that were disappointed that we didn't carry it over the past year. So this is very important to uniform for many of our customers. It gives heft to the balance of our active assortments. We're excited about things like our Reebok engagement. Obviously what we're doing with the other brands. So this is gonna be, we believe, a real catalyst without cannibalizing much else in the balance of the apparel assortments.
So this is a win for us. And we think it's a win for Nike. When you look at our 40 million plus customers that come to us for curation across multi categories and wanting Nike. So those are the conversations that we had with Nike management on the pause that we took. So you're gonna see it come in in the month of October . You have it in apparel, that's including plus size women's, it's big and tall men's, it's the kids area that we weren't carrying them through the licensed areas, it's badge, it's gear.
Just thank you everybody for your interest in Macy's and everybody have a great summer. Look forward to talking to you again in August with our second quarter results.
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