Q2 2023 Macy's Inc Earnings Call

Speaker 1: Greetings and welcome to the Macy's Inc. 2nd Quarter 2023 earnings call. At this time, all participants are in 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-zero on your telephone keypad.

Speaker 1: As a reminder, this call is being recorded.

Speaker 1: I will now turn the call over to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.

Speaker 1: 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 Springs, President Macy Zink, and CEO Lunt, and Adrienne Mitchell, our COO and CFO .

Speaker 2: Along with our second quarter 2023 press release, a presentation has been posted on the investor section of our website at macythink.com. Unless otherwise noted, the comparisons discussed today are versus 2022.

Speaker 2: Comparisons to 2019 are provided where appropriate to best benchmark performance.

Speaker 2: All references to our prior expectations, outlook, or guidance refer to information provided on our June 1 earnings call, unless otherwise noted. All forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Religations Reform Act of 1995.

Speaker 2: 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 files with the Securities and Exchange Commission.

Speaker 2: In discussing the results of our operations, we will be providing certain non-GAF financial measures.

Speaker 2: You can find additional information regarding these non-GAF financial measures as well as others used on the investor 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.

Speaker 2: You can find additional information regarding these non-GAF financial measures as well as others used on the investor 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 am going to hand it over to Jeff.

Speaker 3: Good morning everyone and thank you for joining us. I'm going to begin today's call with a review of our second quarter results followed by a discussion on the macro environment and how that is informing our approach to the remainder of the year. As always, thank you for currently accepted Lydia and thanks for joining the IIR present at the SC detective section yesterday on the Marveleled universe online Did you go? large 22 instrument web,

Speaker 3: Tony will then give an update on our five growth factors and the merchandising strategy. From there, Adrian will provide additional detail on the second quarter and our third quarter and full year outlooks. He will also discuss opportunities under his expanded role as COO.

Speaker 3: Before we dig into the results, I want to acknowledge the devastating wildfires on Maui. We have accounted for all our colleagues on the island, but a few have been directly impacted by the destruction and loss caused by the wildfires. We're supporting those colleagues via our North Star Relief Fund and are engaged with the American Red Cross through our...

Speaker 3: Turning to second quarter results, we achieved net sales of $5.13 billion, a gross margin rate of 38.1% and an SG&A rate of 37.5%.

Speaker 3: Adjusted diluted EPS of 26 cents primarily benefited from better than expected sales, gross margin, and SG&A.

Speaker 3: Taking a step back, we exited the first quarter with excess spring seasonal receipts at Macy's due to lower than anticipated demand trends in the back half of the quarter. On our earnings call, we committed to entering fall in a clean inventory position. Ultimately, we ended the second quarter with inventories down 10% to last year and down 18% to 2019. We were disciplined with our approach to inventory commitments and flexed the cadence and depth of promotions and markdowns.

Speaker 3: utilizing our data-driven tools to reduce the length of seasonal clearance activity by several weeks. Promotional sell-throughs were better than expected and clearance markdowns were not as deep.

Speaker 3: Thanks to our cross-functional teams for being nimble, flexible, and embracing new ways of working.

Speaker 3: Entering the third quarter, store floors and online are less cluttered and easier to navigate.

Speaker 3: Content is fresh and seasonally appropriate with open to buy and the ability to chase into areas of strength, all of which improves the omni-channel shopping experience.

Speaker 3: At Macy's, net sales declined 9.3% and comparable sales declined 8.2% on an owned plus licensed basis.

Speaker 3: Aged inventories were roughly 20% below last year's levels, and warm weather inventories were about 40% lower.

Speaker 3: We also continue to realize improvements in the soft home categories including textiles and housewares. Active, casual and sleepwear remain challenged. We are working on solutions to improve trends in these categories. In the near term, active should benefit from the reintroduction of Nike men's, women's and kids online and in 75 doors in October and the rollout to more than 200 doors this spring. This morning we are also pleased to announce that select Under Armour men's product will be available in 150 stores and online beginning in February .

Speaker 3: Bloomingdale's outlet outperformed Full Line Bloomingdale's locations by about 800 basis points. Later this month, we will be opening our 21st outlet, which will be located in Christiana, Delaware. At Blue Mercury, net sales rose 5.6% and comparable sales increased 5.8%. Customers continue to respond well to our skin care and color cosmetic brands. While second quarter results largely exceeded our expectations, they were promotional and markdown driven, which makes it difficult to decipher any potential shifts in consumer health. As we plan the remainder of the year, and we think about 2024, we will be opening our

Speaker 3: we remain cautious on the pressures impacting our customer, especially at Macy's, where roughly 50 percent of the identified customers have an average household income of $75,000 or under.

Speaker 3: They are not converting as easily and becoming more intentional on the allocation of their disposable income with an ongoing shift to services and experiences. We cannot predict when macro pressures will ease and are focused on controlling what we can control. However, we believe our strong balance sheet, continued discipline approach to inventories, and fortification of fundamentals position as well. Today we are reading and reacting to shifting consumer preferences in real time.

Speaker 3: on a weekly basis and a further streamlined decision making to efficiently find and execute compelling opportunities that have a positive impact both near and longer term.

Speaker 3: At Macy's for back to school we have a compelling mix of relevant national brands including Jordan kids, Levi's and Ralph Lauren and are also offering a better selection of everyday basics including uniforms.

Speaker 3: For Holliday, we are further amplifying our strength as a gift-giving destination. We have elevated the quality of our products. We have built strong value across our categories from top market to private brands.

Speaker 3: And beauty and gifting are a more significant piece of our fourth quarter strategy, accounting for over 40% of Macy's brand sales versus mid-30s during the rest of the year.

Speaker 3: We anticipate a strong holiday for toys and we will be offering a Disney 100th anniversary collaboration in store and online. This is the start of a longer term strategic partnership with Disney and Toys R Us that will have elevated, differentiated products across categories brought to life through engaging retail experiences.

Speaker 3: At Bloomingdale's, this holiday season we are partnering with many of our luxury brands to introduce high touch, unique experiences, events, and pop-ups curated around the interests and shopping patterns of our best customers.

Speaker 3: These activations have been designed to create animation and inspiration in our stores and strengthen our client relationships.

Speaker 3: And at Blue Mercury, we have an expanded fragrance offering for holiday and we will launch our newest proprietary brand which is focused on body and back products.

Speaker 3: We are excited to the back half in all the ways we will serve our customer.

Speaker 3: Adrian will discuss our full year guidance in detail shortly, but it is important to note that despite elevated headwinds for credit card revenue and asset sales relative to prior outlook we are reiterating our full year adjusted diluted EPS guidance.

Speaker 3: Before turning it over to Tony, I want to congratulate our teams on several milestones.

Speaker 3: At Macy's, we recently introduced our newest private brand, On 34th. Its target demographic is the 30 to 50 year old woman on the go. Commentary has been very positive with approximately 80% of product reviews receiving four stars or above.

Speaker 3: At Bloomingdale's, we soft launched Marketplace in July . Members have been discovering and responding well to the new categories and brands offer.

Speaker 3: And at Blue Mercury, we moved our headquarters from Washington, D.C. to New York City. The team is energized by this important step in its growth trajectory, which places them in one of the major beauty centers of the world, brings cost efficiencies, and allows them to further benefit from the existing infrastructure of Macy's, Inc.

Speaker 3: Looking ahead, we believe that our improving underlying fundamentals, five growth vectors, and elevated customer experience are key components to relevancy and success as a modern department store.

Speaker 3: With that, Tony is going to discuss our five growth vectors and his approach to merchandising.

Speaker 4: Thank you, Jeff, and good morning, everyone. I want to begin by recognizing our teams for their dedication and the innovative work they are leading. I have always believed the balance of tenured and newer colleagues working together brings the most thoughtful and fresh perspectives. And I see that coming to life across the Macy's Inc. organization.

Speaker 4: Last week we announced the arrival of Max Monnier, our Chief Customer and Digital Officer. Max has over 20 years of experience at McKinsey, most recently as a senior partner co-leading their Next Gen Commerce and Consumer Growth Practices. We're excited to have Max join us and look forward to his contributions.

Speaker 4: This has been a key enabler of our transformation and the advancement of our five growth vectors.

Speaker 4: These vectors are intertwined with the overarching strategy of keeping the customer at the center of everything we do.

Speaker 4: Our first growth vector is Macy's Private Brand Reimagination.

Speaker 4: As Jeff mentioned, we recently launched On 34th, which has been informed by direct consumer research. Results are encouraging, with sales exceeding expectations, and we believe On 34th has the potential to become one of our biggest private brands.

Speaker 4: Our team has been thoughtful in both the development and planned rollout of our updated private brand strategy. The reimagination work has been built on three key pillars. First, brand stewardship. Second, design with intention and execute with attention. And third, provide a meaningful value equation.

Speaker 4: From sourcing to marketing to merchandising, the teams have worked together to reflect our customers wants and needs.

Speaker 4: They have considered life stages to create product and brands that authentically resonate with and capture the hearts of current and prospective customers.

Speaker 4: With the reinvigoration of our proprietary portfolio, we expect to further drive customer loyalty by complementing our national brand matrix with differentiated products which should ultimately benefit sales and gross margin.

Speaker 4: Through 2025, we will be refreshing or replacing all existing brands in our portfolio and plan to introduce four new ones, including on 34th.

Speaker 4: As part of our updated Private Brand Strategy, last year we successfully refreshed women's INC. In the second quarter, momentum for this popular brand continued as sales once again outperformed its broader apparel segment. In September , we'll be introducing the next phase of INC's refresh.

Speaker 4: Our second growth factor is small store format. We are pleased with the performance of our ten small format locations, which include eight Macy's and two Bloomies. Macy's and Bloomies doors that have been opened over a year had a positive comparable own plus life and sales growth.

Last weekend we opened our ninth Small Format Macy's just outside Chicagoland area in Indiana. In September we will open two more.

One will be in Las Vegas and the other will be in Boston, which is our first smaller format in the Northeast. In November , we will open a location in San Diego.

Bloomingdale's is also adding to its small format portfolio with plans to open a third location in November . The store will be located in Seattle, which is the new brick and mortar market for the brand.

Our third growth vector is digital marketplace which offers curated categories and brands that seamlessly integrate with the customer experience and have no inventory risk. At Macy's we're approaching the one year anniversary of our marketplace launch. We now offer approximately 1350 brands on the platform, up from 500 last fiscal year end and we gross merchandise value by over 116% from the first quarter.

At Macy's Marketplace, we continue to see significant cross shopping, higher average order value, and higher units per order. As Jeff mentioned earlier, we recently introduced Bloomingdale's Marketplace and are pleased with the early results.

Our fourth growth factor is luxury, which spans Bloomingdale's, Blue Mercury and Macy's Beauty. At Bloomingdale's, we continue to optimize our relationship with our customers and elevate our luxury shopping experience. On the trailing 12 month basis, our top of the list loyalty customer base grew in both count and spend.

We know this customer loves the Bloomingdale shopping experience and we have remodeled the Bloomingdale's doors with larger concentrations of luxury brands and products. Improvements have focused on areas with higher luxury goods penetration including beauty fragrances, shoes, handbags and fine jewelry. Thus far we have remodeled five locations and believe there is opportunity for more.

maximizing sales and market share opportunity in underpenetrated categories where customers have signaled demand. In addition, we're exploring how we can further establish ourselves as a compelling wholesale partner for current and potential top market brands. The upcoming editions of Nike and Under Armour are two great examples.

We are a business committed to transforming, even in an environment that is unpredictable. Despite the macro conditions and challenges, we remain focused on satisfying our customers' desire to shop, off-price to luxury, digitally, on-mall or off-mall, and from private brands to up-and-coming and established national brands.

Within that framework, our multichannel, multigenerational, and multi-category platform is an advantage to address changing demand. I have confidence in our strategy and the team's ability to execute, which sets us up for success even in this uncertain environment. With that, let me turn it over to Adrian.

Thanks, Tony, and good morning, everyone. I want to start this morning by thanking my finance and real estate teams for their ongoing dedication and hard work. And to my colleagues in stores, technology, and supply chain, I am grateful to partner with you more closely.

In our last call, I shared the three fundamental areas of opportunity that we identified to build a faster, more flexible, and more efficient operating model.

First, improving the end-to-end omnichannel shopping experience.

Second, optimizing our physical store footprint while enhancing inventory flow, merchandise planning, and localized assortment capabilities.

And third, further modernizing our supply chain and technology infrastructure.

Over the last few months, I have continued to align with our teams on how to simplify our processes while providing more consistent shopping experiences that engage and inspire our customers.

I look forward to sharing more on this effort in the future. Now let's talk through the second quarter performance for our five value creation letters.

to sharing more on this effort in the future. Now let's talk through the second quarter performance for our five value creation levers. First, omni-channel sales.

Net sales of $5.13 billion declined 8.4% versus the prior year, slightly above the high end of our outlook.

Comparable sales on an own plus license basis decreased 7.3%.

Owned AUR rose 4.7% driven by ticket increases and category mix.

For the remainder of the year, we expect continued AUR improvement on ticket increases, lower markdowns, and category mix.

All the revenue of $150 million were 2.9% of net sales.

Macy's media network revenue was flat to last year at $30 million.

Our long-term competence in Macy's Media Network is tempered by near-term caution in light of broader industry trends.

During the quarter, credit card revenues declined 130 basis points, or $84 million year-over-year to $120 million and represented 2.3% of net sales.

We experienced an increased rate of delinquencies within the credit card portfolio across all stages of age balances.

While we had expected delinquencies to rise as part of our normalizing credit environment, the speed at which the increase occurred for us and the broader credit card industry since our first quarter earnings call was faster than planned.

This negatively impacted second quarter results and led to an increase in the portfolio's bad debt outlook.

As a reminder, credit card revenues for the quarter include the pro rata recognition of the updated annual bad debt assumption.

We will discuss our annual outlook inclusive of the updated back-debt assumptions within the credit card portfolio in just a few moments.

The second value creation lever is gross margin. Our gross margin rate was 38.1%, 80 basis points below prior year, but above our outlook.

Merchandise margin was 130 basis points lower than last year.

During the quarter, we leverage our data-driven processes and tools to maximize margins and sell-throughs of excess spring seasonal receipts.

We surgically implemented clearance markdowns and promotions which, while above last year's levels, were lower than forecasted in our prior outlook.

Merchandise margin also impacted by unfavorable category mix shifts and a shift in the timing of shortage recognition partially offset by better inbound freight charges from our cost savings efforts.iting for as a resiliency for market

In relation to shortage, we added a June physical inventory count in certain categories with low RFID penetration.

This helped us better understand shortage trends and informed our outlook and approach to receipt planning for the remainder of the year.

The count did not materially change our annual assumption, but it did provide actuals for the categories counted in the second quarter.

As a result, we adjusted our shortage accrual, shifting a portion of the recognition out of the fourth quarter and into the second and third quarters.

Lastly, delivery expense decreased 50 basis points from the prior year primarily due to improved carrier rates from contract renegotiations as well as lower fuel costs and lower vendor direct volume.

Now, let's turn to our third value creation lever, inventory productivity.

End-of-quarter inventory was down 10% year-over-year and down 18% to 2019, which should represent a low point for the fiscal year.

Trailing 12-month inventory turnover was roughly flat for last year.

Inventory management is a key tenant to further improve the omnichannel customer experience.

we're committed to having current and compelling product at the appropriate receipt levels based on expected sales demand.

Expense discipline is the fourth value creation lever. SG&A expenses of $1.98 billion were better than our expectations, declining $31 million or 1.5% from prior year.

SG&A as a percent of total revenue was 37.5%, 300 basis points higher than last year, reflecting the decline in year-over-year sales.

Second quarter adjusted diluted EPS was $0.26 versus $1.00 in 2022.

Better than expected sales, gross margin, and SG&A were offset by credit card revenues and shortage, which negatively impacted EPS by $0.11 and $0.04 respectively, relative to the midpoint of our prior outlook.

Combined, this was roughly a 15-cent impact to EPS.

Lastly, the fifth value creation lever, capital allocation.

During the first half, we generated $271 million of operating cash flow versus $303 million last year. One triple- leftists army ripped out and

The change was primarily due to lower earnings, partially offset by lower merchandise inventories, and merchandise accounts payable.

We had $564 million of capital expenditures.

free cash flow, inclusive of proceeds from real estate, with an outflow of $261 million.

year to date we paid 90 million dollars in dividends.

Regarding capital deployment, in times of uncertainty, liquidity and a healthy balance sheet remain top priorities.

They provide us the flexibility to respond to changing consumer and competitive trends, while continuing to invest in our core business and growth factors.

Now, let's discuss the full year and third quarter outlook. To level set, we continue to have a cautious view on the consumer.

In addition to the headwinds discussed on prior earnings calls, the expiration of student loan forgiveness beginning in October , higher interest rate levels, and lower new job creation are all new pressures on the consumer.

While we had contemplated these factors when providing an annual outlook on our last earnings call, it is still unknown how consumers will respond to them, especially after so many months of increased pressures.

As such, we believe it is prudent to maintain our cautious view on the consumer and their capacity to spend on the discretionary categories we sell.

Even with this backdrop, there is much that remains in our control.

Entering the third quarter, inventory is for clean, current, and fresh, with an improved fashion and seasonless composition at compelling values that we believe appropriately reflects demand. The third quarter, inventory is for clean, current, and fresh, with an improved fashion and seasonless composition at compelling values.

Court of State sales results are in line with our expectations on reduced year over year promotions and clearance activity.

Now that I've provided the framework on how we are thinking about the back half, let's walk through our updated full-year expectations. Our full-year outlook now contemplates reduced credit card revenues and asset sale gains, both of which are fully offset by better than expected second quarter results, and favorable changes in interest expense and share count.

Our outlook continues to include approximately $200 million of cost savings discussed on our last earnings call.

For fiscal 2023, we now assume that fails of $22.8 billion to $23.2 billion.

Comparable sales on a 52 week OEM plus license basis to be down about 7.5% to down 6% to last year.

As a reminder, compares ease in the third and fourth quarters.

Are the revenues to be about 3.2% of net sales with credit card revenues accounting for roughly 80% to 81% of that?

The increased bad debt expectation for the credit card portfolio has resulted in a reduction in our annual forecast of roughly $80 million relative to our prior expectation. Given the magnitude of the credit card revenue impact, I want to take a moment to provide additional color.

Credit card revenues are predominantly driven by the level and health of sales and receivables generated from our proprietary and co-brand credit cards.

While we have seen an increase in revenues as interest rates of risen, that has been more than offset by higher bad debt assumptions and write offs.

These bad debt assumptions and write-offs are the result of rising delinquencies, which leads to higher net credit losses over time and contributes to increased bad debt within the portfolio. We are working closely with our bank partner City Bank to mitigate the rising bad debt by adjusting underwriting strategies. We also remain focused on acquiring new customers and retaining our active customer base as we communicate future personalized value.

Returning to the remaining line items, we are anticipating a gross margin rate of 38.3% to 38.6%, which is slightly better than our prior expectations of 38% to 38.5%. Our assumption for shortage, which impacts gross margin, remains materially unchanged. The challenge continues to be a headwind.

And we're focused on a variety of mitigation strategies, including testing the use of advanced technology, reporting, and tools, moving high-fat the product away from entrances in our stores, optimizing asset protection staffing to target high-risk areas, and collaborating with external parties to advocate.

for legislative change. Now let's turn to SG&A. SG&A as a percent of total revenue is expected to be 35.6% to 35.2% or 36.7% to 36.4% as a percent of net sales, reflecting ongoing expense discipline efforts.

with additional risk on the low end, given the importance of protecting the customer experience. Asset sale gains are now expected to be approximately $50 million, with nearly all the remaining gains anticipated in the fourth quarter.

While the real estate market has become more challenging in light of higher interest rates, there is no change to our asset monetization strategies.

We are confident in the value of our assets, have seen these cycles before, and will be patient to ensure we receive the appropriate valuations for our properties.

Fortunately, we have the balance sheet to do so.

We expect to achieve adjusted EBITDA as a percent of total revenue of roughly 8.7% to 9.4%, or 9% to 9.7% as a percent of net sales.

Interest expense is now expected to be approximately $160 million. After interest in taxes, we are maintaining our annual adjusted diluted EPS of $2.70 to $3.20, which reflects an updated annual diluted shares expectation of roughly $207.9 million shares.

There are lots of moving parts to our annual EPS outlook. To summarize, relative to our prior expectation, gross margin, SG&A, and shares are the primary benefits. When looking at the low and high end of our current outlook compared to what we discussed on our first quarter call, gross margin, SG&A, and shares are the primary benefits.

inclusive of volume and mix, is positively contributing an incremental 14 cents to the low end and 6 cents to the high end of our prior outlook.

SG&A is contributing an incremental 6 cents to 19 cents. And together, lower share count and interest expense are contributing an incremental 4 cents.

These factors reflect solid execution in our core business and represent a $0.24 to $0.29 benefit relative to our prior outlook.

On the flip side, reduced credit card revenues are a 21-cent to 22-cent drag on the low end and high end of our prior outlook, while lower asset sale gains are a 3-cent to 7-cent negative impact. Combined, this also represents 24-cents to 29-cents, essentially canceling each other out.

Our adjusted diluted EPS guidance does not assume potential share repurchases. For the third quarter, we expect net sales of $4.75 billion to $4.85 billion.

gross margin rate to be at least 140 basis points better than the third quarter of 2022.

As a reminder, last year, Macy's had elevated promotions and markdowns to clear excess receipts in warm weather seasonal goods and slow-removing pandemic-related categories including casual apparel and soft home.

adjusted diluted EPS down three cents to up two cents inclusive of our updated credit card revenues outlook and the timing shift in the recognition of shortage. End-of-quarter inventories to be down low to mid single digits to last year on a percentage basis.

as we begin to introduce Nike and further support on 34th and INC private brands. Looking ahead, we remain committed to achieving low single-digit sales growth beginning next year and believe that improved underlying fundamentals and the early contributions of our five growth vectors will provide an offset for the growth of our five growth vectors.

to ongoing macro pressures impacting our consumer. However, we do have additional external factors that are more difficult to combat.

If recent trends in credit card revenues, shortage and asset sale gains continue, and late fee regulatory changes are passed, the ability to achieve low double-digit EBITDA margin in 24 becomes more challenging.

Now, to be clear, there have been no changes to the underlying assumptions and opportunities regarding the rest of our business. We're actively working to offset headwinds, prioritize growth, and we'll share more as the year progresses. But until next week, after all, TIM J pointing sal to turned responses. Thank you.

I'll now turn the call back over to Jeff for some closing remarks.

Thank you Adrian and Tony. It has been exciting to watch you two collaborate and find innovative ways of opportunity that reflect your unique lenses and backgrounds.

And I am confident that you will lead Macy's Inc. to sustainable long-term profitable growth.

Now, operator, we will now 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 1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

from Oliver Chen of TD Cowan please go ahead.

Hi Jeff, Tony, Adrian. Good morning. Two Q revenue and margins were encouragingly better. What was the driver behind that? And as we look at three Q guidance being below street, I assume it's primarily the credit card delinquency bad debt expense.

AURs were also encouragingly up. What was the offset to that? We assume it could have been traffic. A follow-up, as you think about longer term, the small format opportunity, how are you dimensionalizing the addressable market there? Thank you.

Now while the second quarter was more promotional than last year, as we worked to clear a lot of the seasonals product that we talked about, it was less promotional than we had anticipated. We leaned into a lot of our strategic and personalized promotions. We leaned into our pricing science as we've talked about prior. But look, leveraging the data-driven processes that we've had in place and been using for the last couple of years, we've been able to get a lot of the data that we've been able to get into.

able to clear through a lot of the seasonal product that we've spoken about several weeks ahead of schedule. So we're continuing to take these behaviors into the back half of the year.

The other thing I'd add on that Oliver would be just our inventory is in a great position. So exiting the third quarter down 10%. We have been able to retain a lot of liquidity that will respond to customer interest. But our stock to sales ratios are good by category. The third quarter has started at expectation. We're looking at the back to school, you know, reads as well as really all new fall fashion and how that's performing.

stores. As you know, we remain in the early stages of continuing to scale this opportunity, but we did announce that we're opening up a number of stores this fall. Chicagoland, Boston, Las Vegas, San Diego are several locations where we'll be opening up our small-format Macy stores.

And in the Seattle market, we'll be opening up a small form at Bloomingdale's. Last week, we did open up a store in Chicagoland. But as we think about the quality of experience for our customers, we continue to see positive signals in terms of the financial performance and the customer experience within these stores. So we're actively evaluating potential locations across the country that will enable us to accelerate growth at the appropriate time. So more to come on this topic.

Thank you. Thank you. The next question is coming from Matthew Boss of JP Morgan. Please go ahead. Thank you,

Great, thanks. So, Tony, could you just elaborate on the key strategic initiatives that you believe best positions may seize for a return to revenue growth next year? And then Adrian, any notable differences in top line by income cohort that you're seeing today, maybe relative to three years?

range of EBITDA margin outcomes for next year relative to the low double digit target that you've laid out.

Thanks for the question, Matt. Let me begin with the opportunities for growth. Just as a reminder, I've been a part of the Macy's executive leadership team for the last few years and working closely with Adrian and Jeff and other senior leaders the last few months. And I remain bullish on the opportunities for the entire portfolio.

These five growth vectors are designed to help us to amplify our business. They're designed around merchandise, which includes private brand and making sure that we're bringing the most important market brands to all of our portfolio. The reintroduction of Nike and the announcement of Under Armour is a good example of that.

It's strengthening our marketing, but on a more personalized basis with specific offers that are right for that customer.

our marketing but on a more personalized basis with specific offers that are right for that customer at the level of modernization in our marketing.

It's also making sure that our portfolio has the right number of stores in the right locations that includes the quality mall that we're in today as well as, as Adrian described, the right small format locations that identify, replace existing stores that may not be as productive or allow us to enter a new...

that's grown across every single nameplate. So we feel strongly about all of our growth vectors.

But in answering fully your question, I think the growth opportunity for the Macy's brand requires us to dig deeper into the assortments and making sure that we eliminate redundancy and we improve variety. Making sure that people find the brands they're looking for as well as the level of exclusivity that comes from our private brand assortment.

And the final piece I would say is the team is highly focused on improving the customer experience, physically and digitally, doing those things that are necessary to create a more seamless and easier omnichannel experience. Matt, good morning. Just going through a few points that you raised. The first is we have a discerning customer across all income tiers.

They're being quite choiceful about how they think about experiences versus discretionary goods. And so we continue to be thoughtful about focusing on the things that we can control to deliver a positive experience for our customers.

The reality is in the macro environment we continue to remain cautious as we spoke about earlier in our opening remarks. We do believe that there continues to be pressure within the macro environment, so we will continue to remain cautious. To your third dimension around EBITDA margins as we think about next year, the first thing that we would emphasize is what Tony spoke to, which is our top priority is profitable growth.

And that profitable growth is about low single digit growth beginning next year, and we remain confident in that. The kinds of things that we're controlling is our balance sheet.

The operating disciplines that you've seen from us around inventory management and expense management, the quality of execution and our fundamentals within our core business, and we continue to see that our five growth factors remain on track. Now, as it relates to low double digit EBITDA, it remains our aspiration longer term.

Now as we look on the horizon in the near term, we see several factors worsening and difficult to offset again in the near term. And as we spoke about earlier in the call, credit card revenues, shortage, and asset gains are all the type of things that are at the top of our list.

So look, as we think about credit card revenues, we've experienced higher age balances across all delinquency levels, which has led to increased bad debt impact in our credit card. And as you know, there's still an open question about the legislative ruling on limiting late fees, which is something that we'll have to quantify the pension's potential impacts of if that ruling comes to fruition.

Shortage, as you know, has been an industry-wide opportunity. It has been at elevated levels for multiple years. Shortage for us for the second year in a row will be at record levels. Now, we continue to put mitigation strategies in place to address it, but these mitigation strategies will likely take time to effectuate. And then obviously with regards to real estate, the industry is really challenged right now with higher interest rates.

higher cap rates, and higher hurdle rates. We do have confidence in our real estate, but we will be patient on our ability to monetize those assets. So when you look at the confluence of all these different factors, our ability to achieve low double digit EBITDA in the near term may be more challenging. But as we progress through the year and we focus on our expense management initiatives and the growth initiatives that.

I'm hoping you could help us understand the potential levers that you have for additional improvement in margin rate should the consumer dynamic backdrop worsen into the back half of the year. How are you thinking about merchandise margins and promotional backdrops and what are the incremental opportunities in SG&A expense beyond what you've identified?

that you've seen from us are pre-key. And that's really around strong execution on the customer experience and healthy inventory management. Now we've talked a lot about inventory management from the perspective of the volume of inventory which allows us to limit our markdowns, the composition of inventory that allows us to support full-price sell-through.

as well as the freshness of inventory to have the relevant content for our customers to shop from us versus the competition. We'll continue to be very thoughtful about executing on those, but you've seen us pretty consistently execute on the gross margin side over time. The one thing I would call out as we think about gross margin for the balance of the year is we've done something a little bit different this year with shortage.

We will recognize some shortage in Q2. We will recognize some shortage in Q3 and Q4, which is different from what we've done in prior years, which is to recognize it all in the fourth quarter. So we are very thoughtful about how we're thinking about the margin rate going through the balance of the year. We're excited about the composition of inventory. We're excited about all the initiatives that Jeff and Tony spoke to. But we also are cautious in terms of making sure that we have the capacity to respond to growth opportunities.

and to absorb any potential promotions that we may need to do to move through the business in the fall season. As it relates to SG&A, we continue to feel good about the $200 million that we spoke about in cost savings earlier in the year. We spoke about it in our June 1 call. We've been working on it for a number of months. We're seeing those come through and a larger portion of those benefits.

And that's something that you'll continue to see us focus on for quite some time.

that you'll continue to see us focus on for quite some time. Great, thank you so much.

for quite some time. Great, thank you so much. Thank you, bro.

Thank you. The next question is coming from Chuck Grom of Gordon Haskett. Please go ahead. Hi. This is Greg Summer on for Chuck. I just want to dig into the health of the consumer a little more, looking at the outperformance of BlueMee's outlet and then also backstage and then also higher credit card delinquencies.

It would suggest that the health of the consumer is deteriorated and even at the high end. I was just curious, is this accurate? I wanted to get more color on the health of the consumer, either by what you're seeing in terms of performance by store banner or what you're seeing when you dig into the credit card data. Thank you. So, why don't I start with the credit card data, and then we'll talk a little bit about the consumer a bit more broadly.

So, with regards to the credit card data, the one thing I would say is that we're managing our credit card revenues to the best extent we can. And I think that credit card revenues is an indication of some of the pressures that we're actually seeing on the consumer. So as you know, we have actually planned out higher delinquencies based on the expectation of a normalizing credit environment. But what we did see is that the speed of those delinquencies across all age balances or age ranges.

balances actually accelerated after Q1, and that occurred primarily in June and July . So we've made a number of adjustments there. Now what's interesting about this is that there are things that we can control and things that we cannot control. The things that we're controlling is that we're working actively to mitigate a lot of the headwinds that we see. So for example, we're working with our credit card partner.

Citibank to target higher risk segments to surgically reduce exposure. We're also maintaining spend in places where we can for customers that have the capacity, requiring new customers, we're retaining active customers, and we're focusing on the spend at Macy's on their PopCard. But there are things that we cannot control, which I think gets very much into what you're describing around the health of the community.

and supporting our cautious approach. The one metric we find quite interesting is the debt-service ratio, which we leverage as a proxy for the consumer's ability to pay debt using their disposable income, personal income. This is about credit card balances.

This is about student loans, which we know is going to come into focus in the next month or two, auto loans, mortgage. So we just believe that the customer is coming under pressure because these are new realities that they have to continue to deal with as we get through the back half of this year and move into next year.

Chuck, what I'd add is your question about off-price. So just know that when we've always been quoting what's going on with our off-price business between Bloomingdale's and Macy's, you heard that off-price at Macy's outperformed the balance by almost 300 basis points at.

at outlet Bloomingdale's versus the Bloomingdale's brand. It was about an 800 point difference. That really is just when you think about being, in most cases, small-based to have an off-price option, has been a potent part of our discovery with off-price. What we have seen over time is that there is no cannibalization that's going on between the full price and the off-price side.

It's just building stickier relationships with customers. They're building up their spend with us, they're shopping more frequently. We certainly saw that in the second quarter. Then your question about how different income levels is being affected. We'll talk about the Macy's brand. Certainly, the Macy's brand is more under pressure and it really is the stat of the 50 percent of the Macy's customers are making 75.

And and what we're really looking to do is controlling what we can control and Ensuring that we've got the right stock to sales ratio in all of our categories and that we've got receipt reserve to chase into demand So we feel good about our fourth quarter strategy and we feel good about where our inventories are right now with this consumer Great, thank you Thank you, the next question is coming from Blake Anderson of Jefferies, please go ahead

Hi, good morning. I was wondering if you could talk a little bit more color on the monthly trends you're seeing and maybe back to school and then just higher level talk about your confidence in the comp guide and kind of reiterating the comp guide for the rest of the year. I know you've talked about some pressures on the consumer but you're being conservative. Just give a little bit more commentary on your decision to reiterate the previous comp guide for the year.

And then second question was on the promotional environment, wondering if you can talk about your expectations for the holiday in terms of promotions and then how expectation really a mix between our back to school performance as well as new fall fashion. And just to kind of reiterate, having those fundamentals in place of the stock to sales ratio, being in stock on all the most important items, having discipline with our pricing signs and getting great traction.

expectation for the fourth quarter. So we're gonna be sharp on our values, we're gonna be competitive. You know, as we've seen over the past couple of years, the customer is shopping earlier and they're shopping all the way through Black Friday, Cyber Monday, taking the lol, last 10 days. We're ready for all that. We built the promotional calendar so that we thought through all of where the customer, where we expect them to shop, you know, each of our brands. I think specifically when you look at the fourth quarter, in addition to the gifting strategies and the penetration of trending businesses, it's also the ad of Nike, it's the Toys R Us and the Disney collaboration. Very importantly, just the liquidity to be able to respond to inventory that's always in the system, and this agile team that is responding in real time faster than us.

current second quarter, what was the cadence of the quarter? How did you exit? I know, Jeff, you mentioned just about third quarter and back to school. Anything on tourism that we should note? And then, Tony, just on other brands, it's nice to see Nike and Under Armour. Are there other categories that you want to enhance the brand assortments that we should be looking to? Thank you.

So we have a good understanding of the puts and takes. We recognize that there have been evolutions in terms of our agreement with Citibank. But from our perspective, it's continuing to control the controllables and continuing to navigate beyond controllables, as I mentioned a little bit earlier. Again, as I shared, so much of this is really around the health of the consumer, and so much is also around what we consider to be the debt service ratio. As you think about the average household income in the US, you think about the average household income of our customers, particularly in the Macy's brand, that consumer is experiencing a number of headwinds as they think about servicing their responsibilities and their liabilities. I referenced it a little bit earlier. Your credit cards are referenced, student loans, auto loans, mortgage.

all built in a higher interest rate environment creates real challenges. Now coming into the year we did project bad debt levels to normalize, but they just normalized a little bit faster than expected. But you know as we continue to look at ways to mitigate by giving more personalized offers to customers, as well as increased usage on our proprietary credit card, acquiring new customers, and really leaning into the loyalty aspects, we're working very diligently to find the best offsets we can. Dana, I'll take on the cadence by month and the tourism, and I'll hand it over to Tony on new brands and new categories.

As I mentioned in my conversation earlier to the question from Blake, we're not disclosing our monthly performance in that it was heavily marked down and promotional driven. So that is on the second quarter. As it relates to tourism, this is one that we still have not seen the return of —

the depth of the international tourists that we typically have, you know, at Macy's and Bloomingdale's. So just to remind you our international tourism is generally three to four percent. That's what it was in pre-pandemic sales. It's now south of two percent of our overall business. So that tailwind is coming in the future. We're not predicting yet when that's going to be. But know that when you look at the

Thank you. The next question is coming from Lorraine Hutchinson of Bank of America. Please go ahead.

Thank you good morning.

I wanted to focus for a minute on your cost saving programs you have spoken about $300 million to $350 million run rate of savings in fiscal 'twenty four but it seems that you're outperforming that early how much of these savings are included in the 2023 guidance versus how much will be incremental in 2024.

Thank you for your question. It's a good question Lorraine So as we referenced the $200 million. This year is a combination of both gross margin and SG&A expense, what we spoke to on the last call was that there is an annualized benefit of about $300 million to $350 million now the reality is that we're continue.

To benefit from those opportunities and those initiatives. This year. So we're pretty excited about what we're seeing here. The key thing I would say that the initiatives are real and as an organization. We're continuing to lean into these expense opportunities we have not given specifics on how this will materialize as we get into next year, we're still working through.

Kind of how we think about our growth profile and margin profile for next year, but we'll definitely keep you posted and give you much greater clarity on those puts and takes as we get into 2024.

And then I just wanted to follow up on credit.

Sounds like the second quarter numbers include a pro rata recognition for the updated annual bad debt outlook, but it looks like you're guiding the second half down to a similar decline can you talk about the dynamics of this revenue stream going forward.

Yeah, absolutely so the leading indicator on bad debt write offs or the delinquency rates. So we're looking at 30 days 60 days 90 days and 30 day increments all the way up to 180 days, which is when the write off actually happens so from our perspective, as we think about past purchases and we see the level of delinquencies that had been increasing across all <unk>.

H band balances were actually projecting what we believed to be the bad debt levels, given the trends that we see so given those leading indicators and what we see with other factors in and around the consumer that gives us a perspective and a greater level of confidence around what we believe our credit card revenues will.

Based on our bad debt levels.

Thank you.

Brian .

Thank you our last question for today will be coming from Jay sole of UBS. Please go ahead.

Great. Thank you so much just two questions from me one on the delinquency rate that you cited for June and July was the delinquency rates higher in July than what you saw in June was June the peak and then it slowed in July and then secondly, just on the small stores can you just elaborate a little bit on the proof points that youre seeing to give you confidence to open up more small stores and how many.

All stores you see the company opening up over the next let's say six to 12 to 18 months. Thank you.

Thanks, So much for your question so on delinquencies between that keep in mind is that we did plan for higher delinquencies this year.

We had spoken.

<unk> times over the last 18 months about the credit environment really normalizing, but this was the first time in the second quarter, where we actually saw that our projections were more conservative than the actuals.

So what we've done with the acceleration, particularly that we saw in June and July that we've adjusted our trajectory per the <unk> question that I spoke to a few moments ago, but effectively what we've been doing is looking at that on a regular basis and making the appropriate adjustments for the trajectory of the return to a more normalized environment as we think about small form.

Matt stores, they're kind of three key things that we think about that.

The first is the quality of the customer experience and as we look at a number of factors, including the availability of product the quality of the experience. This quality of service. All these different factors what were seeing are very healthy numbers as we think about the performance of these stores and the quality of the experience for the customer the second thing that we look at is the.

<unk> financial trends of the business and so for stores that are comps, we're seeing healthy year over year growth in this portfolio and we're getting better we see lots of opportunity around product around how we engage customers in the local market, but even in spite of our learning experience. We continue to see growth in stores that are actually comping the third thing.

We're excited about is the potential that's ahead and so when we think about where customers are where we can invest we see a portfolio of healthy big box stores. We will continue to invest complemented by a large number of small format stores. We do believe that there is an opportunity to accelerate over the next several months and the timeframe that you.

Described but we will be able to share more specifics on that hopefully in the coming months and quarters.

Yes, Jay I would add that we're excited in the Macy's mall format that we now have polo and Levi's and finish line and Sunglass hut and now Nike.

Added to those stores and as Adrian mentioned looking very carefully at the traffic conversion and a whole host of other metrics to make sure that we are seeing the proof points necessary to expand the portfolio of small doors.

Got it thank you so much.

Thank you thank.

Thank you at this time I would like to turn the floor back over to Mr. <unk> for closing comments.

So thanks, operator and for all of you still on the call hope that you enjoy the last days of summer and we look forward to updating you on our results on the third quarter on our November call.

Thanks, everybody.

Ladies and gentlemen, thank you for your participation and interest in Macy's you may disconnect. Your lines of log off the webcast at this time and enjoy the rest of your day.

Okay.

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Yes.