Q3 2023 Macy's Inc Earnings Call
Greetings and welcome to the Macy's, Inc. Third 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.
As a reminder, this call is being recorded I would now like to turn the call over to Pamela Quintile Yano V. P 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 <unk>, our chairman and CEO, Tony Spring, President Macy's, Inc, and CEO elect and.
And Adrian Mitchell, our CLO and CFO, along with our third quarter 2023 press release, a presentation has been posted on the investors section of our website Macy's Inc. Dot com.
Otherwise noted comparisons we provide will be versus 2022.
Comparisons to 2019, our provided where appropriate it's the best benchmark performance all references to our prior expectation outlook or guidance refer to information provided on the August 22nd earnings call unless otherwise noted.
All forward looking statements are subject to the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today a.
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'll turn it over to Jeff. Thank.
Thank you Pam and good morning, everyone as you're all aware in March we announced my pending retirement as CEO at that time, Tony Spring became president and CEO elect of Macy's, Inc, and Adrian Mitchell was promoted to the dual role of COO and CFO.
I remain the CEO through the end of this fiscal year today marks my last earnings call between now and then I will work to ensure a smooth and successful holiday season, which for many starts with our iconic Macy's Thanksgiving day parade. This year, we had the incomparable share as our headliner.
Following Thanksgiving, we enter our most important sales period across nameplates, we have refined our gift assortments and improved our shopping experience. We know our customer is looking for value. So we have simplified our promotions. We are confident the strategic changes we have made will be well received by our customers.
I'm now going to turn the call over to Tony to discuss our third quarter results holiday plans by nameplate and how he's thinking about the future from their Adrian will go over our five value creation levers and outlook for the remainder of the year and then I'll close with reflections on my time as CEO with that Tony I'm going to hand, it over to you.
Good morning, I'd like to begin by thanking Geoff for his support Jeff.
Yes, as we sit here today on your last earnings call. It has been a privilege working with you throughout the years, you've illustrated what it takes to be successful and empathetic CEO from everyone across the Macy's Inc. Family. Thank you for your service.
And on your last call I am pleased to report the third quarter adjusted diluted EPS of <unk> 21 was above our expectations, our sales gross margin and SG&A rates were all better than expected.
We also benefited from lower interest expense and a lower than anticipated tax rate.
We ended the quarter in a clean inventory position down 6% in the last year and down 17% for 2019, with macys and blending of aged inventory down a combined 26% by.
By nameplate Macy's net sales declined seven 9% and comparable sales declined six 7% on an owned plus licensed basis sale.
Sales results exceeded expectations with strength in beauty, particularly fragrances in prestige cosmetics womens sportswear and men's tailored clothing.
Women's casual sportswear big ticket and handbags were challenged.
In late October Nike arrived in 75 stores and online and we introduced <unk> home in 200 stores at Homeaway, both are off to a strong start and our off price division backstage comparable owned sales outperformed the Macy's full line stores in which they operate by about 720 basis points.
At Bloomingdale's results were roughly in line with our expectations as we lapped last year's 150th anniversary celebration, which included over $8 6 billion organic media impressions net.
Net sales declined two 6% and comparable sales were down four 4% on an owned plus licensed basis beauty women's contemporary apparel and shoes were top performing categories, while men's home and designer handbags were more challenged during the quarter. We added several exciting new brands such as Veronica beard.
<unk> hatched and Alex Mill, We also launched the Aqua collaboration with carrier Rosenthal in honor of breast cancer awareness month.
<unk> outlet comparable sales outperformed blind bloomingdale's stores by about 860 basis points.
Blue Mercury had its 11th consecutive quarter of growth with both net and comparable sales up two 5% customers responded well to skincare and color cosmetics, which are our largest categories and feedback on it's really in six its recently launched proprietary Bath <unk> body brand has been positive during.
Quarter Blue Mercury also unveiled a redesigned luxury store in spa experience in new Canaan, Connecticut. This will serve as the prototype for future locations.
Looking to holiday, our outlook, which Adrian will discuss shortly assumes that our customer across name place continues to be under pressure and discerning and how they spend and discretionary categories. We offer we.
We have the flexibility to react to customer demand with increased open to buy reserves versus last year, we will be nimble and competitive with promotions as needed while sustaining healthy gross margins and plan to end the fourth quarter and at appropriate inventory position.
Each nameplate and our portfolio is focused on providing the best experience for their respective customer this holiday season, with new and exciting gifts across the value spectrum.
And we're ready to fulfill our customers' needs online in store and through our gift guidance.
Yeah.
At Macy's the messaging around give love gifts style holiday campaign first introduced last year has evolved we have clear customer facing language that drives authority discovery and conversion in the fourth quarter, we over index in beauty with sales penetration in this top performing category typically rising by approximately 300 basis point.
Compared to the balance of the year.
This year, we have new partners like J Lo beauty and are offering make your own gift station and exclusive sets for many of the biggest brands in the industry, including Chanel, New York and La Mer.
Outside of beauty, we have updated our private brand cashmere refined are fine and fashion jewelry selection, including offering Pandora and more stores and online and added exclusive Disney 100th anniversary product and experiences to our gifting selections.
At Bloomingdale's were embracing retailers theater through our best holiday of our campaign, which featured in store and digital activations throughout the season customers can look forward to exciting curated gift assortments from our top brands, including Mfk, Montclair and background as well as immersive shopping experiences and celebrations, including our work inspired.
Collection, featuring exclusive products from David Yurman, Kurt Geiger Reese and more.
At Blue Mercury, we're featuring new brands, and critical skincare and body and fragrance, including skin Medica, Asos and DSM Durbin.
Our customers have the opportunity to experience new in person spot treatments complimentary gift consultations and exclusive loyalty member Activations.
Looking beyond holiday I am confident we can evolve Macy's Inc into a more relevant destination of choice for our customers and partners. The fundamentals are there we have a balanced portfolio of nameplate each with its own identity and this is a distinct advantage. We can learn from each other without becoming one another as we remove silos to optimize our.
Active customer insights.
We are also balancing our insights I'd like to say this is Steve notch down we are embracing data science tools, including AI and machine learning to drive more accurate and agile decision, making based on changes in demand. This married with the art of human judgment helps us become more proactive and customer influenced.
We are emphasizing variety versus redundancy the customer today does not want an endless aisle. They want the best site, which provides an improved assortment and leveraging the use of data driven tools working closely with our vendor partners.
Our balanced approach rooted in customer insights will help us strengthen our core business and scale, our five growth vectors, which ill delve into now starting with macys private brand re imagination.
We launched our new private brand on 34th in August than at September we rolled out the next phase of the IAC re imagination further elevating our design strategy and fashion offering.
We've been pleased with the performance of both our taking learnings to fuel our comprehensive private brand strategy.
And our second growth vector small format stores, we continue to open new Macy's and Bloomingdale's occasions. As a reminder, these average roughly one fifth the size of our full line stores our portfolio of small format stores continue to generate year over year comparable owned plus licensed sales growth customers appreciate the store environment service.
And ease of checkout, while feedback on shopping inspiration and styling ideas has been steadily improving.
Today, we operate 15 small format locations, including 12, Macy's and St. Louis.
In the third quarter, we opened a small format Macy's in Las Vegas, Chicago land and Boston and this month, we opened another in San Diego and our new Blue Moon and Seattle. This is our first physical brick and mortar bloomingdale's with representation in the market and it's off to a great start.
As announced in October we plan to open up to 30 additional small format Macy's locations through fall 2025, and are committed to expanding <unk> as well.
So touching on the remaining growth vectors macys digital marketplace continues to scale. It had over 500 brands on the platform at the end of the third quarter and grew gross merchandise value by approximately 22% on a consecutive quarterly basis.
<unk> introduced its marketplace in July and had 55 curated brands available at the end of the quarter across both marketplaces, we're experiencing healthy cross shopping resulting in higher average order value and increased units per order.
Turning to our fourth growth vector luxury we view bloomingdale's is a winning option for multi branded upscale retail our mix of aspirational products across categories and price points combined with a modern personalized shopping experience resonates with our customers.
So the Mercury is establishing itself as a skincare authority with a leading assortment of cutting edge derma products and services and.
And Macy's beauty is an accessible luxury beauty destination with the power to scale elevated brands, we view, our positioning and offerings across all three nameplates as a competitive advantage as the luxury business continues to normalize we remain confident in luxury as long term growth potential.
Our best growth factor as personalized offers and communications.
Our team has been testing and learning throughout the year, including the recent launch of several new multi touch journeys, we're seeing positive signals and are excited to move from testing to scaling in 2024.
Before handing it over to Adrian I want to thank our teams for their hard work and dedication to our customers.
And I'd like to extend a warm welcome to our new Bloomingdale's CEO Olivier bra.
With 20, plus years of international retail and consulting experience Olivia brings a differentiated global view that will further elevate limit goes.
I am confident in our leadership team and their ability to navigate an uncertain environment macroeconomic challenges and industry headwinds, we are committed to making the appropriate strategic investments to fuel our ongoing evolution and achieved low single digit sales growth beginning in 2024 with that let me turn it over to Adrian.
Thank you Tony and good morning, everyone before discussing our five value creation levers I would like to thank Jeff for his partnership guidance and support when I joined the company three years ago. It was because of the quality of the team led by Jeff and his commitment to transforming Macy's Inc into a.
Modern omnichannel retailer.
Under Jeff's leadership, we have returned the company to financial health and operational stability and have established the foundation for growth.
Now, let's discuss third quarter results and our five value creation levers.
First omnichannel sales net sales of $4 $86 billion declined seven 1% versus the prior year.
Comparable sales on an owned plus licensed basis decreased six 3%.
On AUR rose five 2% driven primarily by changes in product and category mix.
Other revenues of $178 million were three 7% of net sales Macy's.
Macy's Media network revenue grew $5 million or 16% from the prior year and was better than our expectations.
Credit card revenues of $142 million or two 9% of net sales declined $64 million or 100 basis points versus last year, but.
The decline was primarily due to higher bad debt assumptions within the portfolio as expected.
Credit card revenues as well as delinquency rates and bad debt levels within the portfolio were in line with our expectations.
Our cardholders have the capacity to spend on their proprietary and co brand cards.
FICO scores for new accounts have risen over the last three years and are higher than the overall receivable portfolio, which is largely prime.
Looking to the remainder of the year. There is no change to our annual credit card revenue assumption as a percent of net sales or expected delinquency rates and bad debt levels.
The second value creation lever is gross margin our gross margin rate was 43% 160 basis points higher than last year merchandise margin improved 110 basis points, largely due to lower permanent markdowns within the Macy's nameplate.
<unk> freight expense also benefited merchandise margin during the quarter.
Partially offsetting these benefits were anticipated changes in category mix inclusive of the transitional impacts of our private brand re imagination as we exit brands and as discussed on our second quarter call a shift in the timing of shortage recognition informed by June physical inventory counts the third quarter.
Shortage impact and our annual shortage assumption remain materially unchanged from our prior expectations.
Compared to last year delivery expense as a percent of net sales improved 50 basis points, primarily reflecting improvements in merchandise allocation, resulting in reductions in packages per order and distance traveled.
This work is closely tied to the third value creation lever inventory productivity.
Our supply chain is flowing smoothly end of quarter inventory was down 6% year over year and down 17% versus 2019 inclusive of the typical seasonal build for holiday.
Trailing 12 month inventory turn was up 1% to last year.
Expense discipline is the fourth value creation lever SG&A of $2 billion declined $48 million or 2% from prior year.
SG&A dollars benefited from our commitment to ongoing expense discipline.
Versus our prior expectation SG&A dollars were favorable due to a roughly $10 million timing shift of certain previously forecasted expenses from the third quarter to the fourth quarter S.
SG&A as a percent of total revenue was 45% 230 basis points higher than last year reflective of the year over year decline in sales.
Third quarter adjusted diluted EPS was <unk> 21 versus <unk> 52 last year benefiting from better than expected sales gross margin and SG&A rates improved interest expense and a lower tax rate.
The shift in timing of $10 million of SG&A expenses combined with the lower interest expense and tax rate contributed roughly 10 cents to EPS versus our prior expectations.
Lastly, the fifth value creation lever capital allocation here.
Year to date through the third quarter, we generated $158 million of operating cash flow versus $488 million last year at $749 billion of capital expenditures free cash flow inclusive of proceeds from real estate with an outflow of $555 million.
And we have paid $135 million in dividends.
Liquidity and a healthy balance sheet remain top priorities, we continue to deploy capital prudently to ensure financial flexibility and to invest in long term growth.
Now, let's discuss our fourth quarter and full year outlooks for.
For the fourth quarter, we expect net sales of $7 95 billion to $8 <unk> 5 billion <unk>.
Including the 50 <unk> week.
Our sales outlook reflects our confidence in Macy's, Inc. As a gift, giving destination, including the expected increase in beauty sales penetration, particularly fragrances.
Gross margin rate to be at least 220 basis points better than the fourth quarter of 2022.
As a reminder, in the fourth quarter of 2022, we experienced higher markdowns and promotions as we took actions to respond to the heightened competitive environment.
Our gross margin outlook gives us the latitude to respond to changes in the promotional landscape.
Adjusted diluted EPS of $1 85 to $2 10, which takes into account. The previously discussed $10 million shift in timing of certain SG&A expenses into the fourth quarter as well as an incremental $15 million of combined investments in marketing and our growth vectors.
Together these items are anticipated to impact fourth quarter EPS by <unk> <unk>.
End of quarter inventory is roughly flat to last year and down approximately 18% to 2019 inventories reflect a higher penetration of transitional and seasonal merchandise relative to last year and a build in our re imagined private brand portfolio.
And the anticipated closure of less than 10 locations in early 2024.
Taking into account third quarter results and our fourth quarter outlook. This brings our full year expectations to net sales of $22 9 billion to $23 2 billion.
A comparable sales decline on a 52 week owned plus licensed basis of 6% to 7%.
Other revenue to be about three 2% of net sales with credit card revenues accounting for roughly 81%.
A gross margin rate of 38, 4% to 38, 5%.
SG&A as a percent of total revenue to be about 35, 2% to 35, 5% or 36, 4% to 36, 6% as a percent of net sales.
Asset sale gains of approximately $45 million.
Adjusted EBITDA as a percent of total revenue of roughly eight 9% to nine 1% or nine 1% to nine 4% as a percent of net sales and interest expense of approximately $140 million.
After interest and taxes, we are narrowing our annual adjusted diluted EPS outlook to $2 88.
To $3 13.
Which includes an updated annual diluted share expectation of 278 million shares.
As we position for sales growth next year and beyond our decisions are centered on our customer we must deliver relevant products strong value and a more enjoyable shopping experience from optimizing our physical footprint to providing compelling experiences across channels to modernizing.
G to driving efficiencies to automating personalized offers and communications, we are committed to bringing more inspiration on a daily basis to our customers.
We look forward to sharing more and how that ladders to long term profitable growth on our fourth quarter call.
And with that I'll hand, the call back over to Jeff One last time.
Thank you Adrian.
Before turning to Q&A I would like to comment on my seven years as CEO.
I did not achieve everything I had set out to accomplish I am proud of my contributions we exited the pandemic a healthier and more agile company leaning into data driven tools and processes to guide a renewed focus on expense and inventory disciplines. In addition, we significantly improve the health of our balance sheet pay down.
That pushed out material debt maturities to 2027 and.
And extended the term of our asset based credit facility.
We invested in our colleagues across the company and strengthen our culture of inclusivity, we introduced our social purpose platform mission, everyone directing $5 billion through 2025, two partners products people and programs that help create a more equitable and sustainable future. We also reached <unk> 99.
Percent pay equity across gender and race and launched spur pathways, which provides funding to diverse owned and underrepresented businesses.
And we have a very committed leadership team with strong continuity shifting to Tony who is ready to lead Macy's, Inc to profitable sales growth.
I would like to thank the board of directors for their guidance and support our senior management team for their leadership and dedication and our colleagues across stores distribution centers and corporate offices. It has been an honor to work with such a talented team.
I am confident the foundation is in place to build on Macy's legacy as a cornerstone of American culture and style.
And with that I'll turn it over to the operator for questions.
Thank you we will now be conducting a question and answer session. If you would.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Ask that you please limit yourself to one question and one follow up.
Again Thats Star one to register a question. Today's first question is coming from Matthew Boss of Jpmorgan. Please go ahead.
Great. Thanks.
Sorry to see you go Jeff and.
Congrats Tony.
So maybe.
Tony can you elaborate on the scale opportunity that you've cited from the portfolio approach, maybe how you see your three nameplates positioned into holiday and also the ability for them to drive a low single digit growth next year and then Adrian could you outlined fourth quarter gross margin drivers and just how best to think about gross.
Margin opportunity multiyear.
Thanks, Matt for the question.
We remain excited about the power of the Macy's, Inc portfolio, Macy's Bloomingdale's and Blue Mercury are three of the most important names in retail we speak to 40 million customers at Macy's 4 million customers at Bloomingdale's.
And upwards of 1 million customers at Blue Mercury between the three nameplates, we offer a range of price points from off price to luxury this year. We're excited about the gift assortments at all three nameplates.
The improvement in our gift, giving assortments in the beauty and fragrance area of Macy's the expansion of cosmetics and cashmere the expansion of toys with our celebration of Disney's 100th anniversary and the opportunity that we see in fine and fashion jewelry with the expansion of Pandora at Bloomingdale's.
We've partnered with Wonka to do an incredible carousel, and 59th Street and online as well as expand our gift assortment across the entire chain and finally blue Mercury, our new prototype store in Buchanan, Connecticut, I think sets the standard for what upscale beauty retailing can be in the future with regard to 2024, we'll talk.
More about that on the fourth quarter call, but I would only remind the group that we are in the early innings on our five growth vectors and we see plenty of opportunity across each and every one of them.
And good morning, Matt.
First thing we would say on gross margin is that as we think about the risks and opportunities in the fourth quarter. That's reflected in our outlook and as you know we've done a lot of work the last several years around this topic of gross margin whether it be the composition of our assortments to focus on delivering value or even improving our shopping experience, what's most encouraging going into the fourth quarter.
<unk> is how we think about our inventory. So we start the fourth quarter in a solid inventory position inventory down 6% year over year down 17% to 2019 now as we think about kind of where we are with regards to gross margin. We are controlling what we can control we recognize that the.
The consumers under pressure, we recognize that there is uncertainty in the environment that we're operating in we recognize that there is pressure on discretionary but from our perspective, we have a lot of optionality, we have the ability to adjust we have flexibility as we think about the transition from the fourth quarter to next year. The thing that we feel good about is that we have a seasonally appropriate.
Hopefully a target ending in the fourth quarter, we expect to be about flat to last year, but down approximately 18% to 2019. So we're very focused on gross margin, we're very focused on profitability and looking forward to the holiday season.
Great color best of luck.
Thank you.
Yes.
Okay.
Thank you. The next question is coming from Oliver Chen of TD Cowen. Please go ahead.
Hi, Jeff and team Congrats Jeff it's been great working with you congratulations on what's next Oliver.
Okay.
So would love your thoughts jets and Adrian on what's happening with the consumer and also traffic has been pretty bumpy as we look across the sector and many positives and negatives what the health of the consumer.
Would love your thoughts there and then Tony as we look ahead, which areas of the product assortment do you think have the greatest opportunity are you most excited about and Adrian.
Regarding the the credit card trends that youre seeing higher bad debt assumptions and delinquency rates were as you expected half.
I'll hop trends stabilized here, what should we know about your expectation ahead.
With those assumptions as well thank you.
Hey, Oliver.
I think it's really as we've talked about with the consumer so very uncertain times, the consumer side under pressure.
Nothing new on that we're reading and monitoring the same signals signals that you are the consumers are dealing with many of the same headwinds we've been talking about and Theres. Some theres some additional ones a.
Student loan repayments, obviously is that with one rising interest rate environment.
Some geopolitical issues, but all of that's baked into our guidance and we've been clear on that really for the last number of quarters. So we do expect that the consumers under pressure there in some cases continuing to shift into experiences.
And away from our discretionary categories, but because of the broad bandwidth the customers we serve to what Tony talked about earlier.
When you look at for kind of off price to luxury we have lots of categories and we're getting more categories. When you think about what we're building in our prowess of marketplace. So.
The big thing that is going to enable all of that is our liquidity and that's really where that where inventory is right. Now, we're obviously controlling that well where controls gross margin well, we really have the opportunity of a liquidity could jump on trends and expect us to continue to do that.
Okay.
Oliver in answer to your question about the categories.
The piece that I Love about Department store retailing is that we can shift to where the customer is going and while I certainly love the beauty and fragrance business. This time of year, because it adds 300 points of penetration to the macys business or essentially the power of blue Mercury or the luxury fragrance business at Bloomingdale's I embraced <unk>.
All of the categories and the reality is if we do a good job as a leadership team we have the agility to move inventory move marketing move web exposure move presentation in stores to the businesses that are trending best you've certainly heard us talk with confidence about our opportunities in private brands. We're in the early stages of <unk>.
Imagination pleased with the growth of on 34th Street and its first few months the re imagination of IMC and more to come but we also love market brands, we want to be the best partner out there to the.
Retail community and so we're going to be flexible in our financial models, we're going to keep pursuing our go gurt list of brands that we want to be a part of Macy's bloomingdale's or blue Mercury and expect that we will have the brands and the products that customers expect from each of these three nameplates.
And Oliver just to close out on credit card no changes with regards to credit card. We spoke on our last earnings call about our outlook for the balance of the year in.
In Q3 was very much in line with our expectations and as we think about Q4 very much in line with our expectations as we think about what this means into next year. There is just a number of unknowns that are that remain out there and as we get a better sense as to what's happening with the bureau's decision on late fees and a number of those other factors we'll share more of a.
Perspective on 2024 and beyond.
Great happy holidays have people like Friday best regards.
Thanks.
Thank you. The next question is coming from Brooke Roach of Goldman Sachs. Please go ahead.
Good morning, and thank you for taking our question I wanted to follow up on <unk> question about the consumer.
Thoughts on what Youre seeing from consumer discretionary demand across income cohorts relative to what we thought a few months ago has there been any changes in conversion or traffic across each of these cohorts and how is that driving your strategy for the holiday season.
And then as a follow up Adrian can you provide your updated thoughts on the levers that you can pull to protect profitability and EBITDA dollar generation next year, if the macro.
Crow backdrop or credit outlook weakens further thank you.
Thank you Brook for the question.
I think the consumer remains under pressure, we know those discretionary categories.
Main challenging and yet as a modern department store, we have the ability to be in multi brand and multi category multichannel and cater in off price all the way to luxury with content. The customer is interested in and certainly the gift giving period.
Even in a year, where discretionary categories are more challenged this is the time of year, where they come to life gift, giving Christmas Kwanza Hanukkah, they still come and our stores and our site and our teams are prepared for the holiday with 26% less aged inventory this year and I think our refreshed assortment.
Content across all three nameplates.
There's no doubt that there is a normalization happening in the luxury sector in answer to your points about the different income brackets. However, we believe in luxury long term and I think the opportunity is there even in a challenged environment for each of our brands to capture more points of distribution.
<unk>.
Thanks, Tony.
Really good question as it relates to 2024, we remain committed to low single digit growth beginning next year and also low double digit EBITDA margin over time right now we're controlling what we can control we're working to maintain a healthy balance sheet, we're putting in place more and more operating disciplines around inventory.
Management expense management, we're investing in our growth vectors and investing in the fourth quarter in our growth vectors as we move from testing to scaling in 2024 as we stand here today on this call the primary headwinds to achieving low double digit EBITDA in 2024 is really around credit card revenues inclusive of the <unk>.
Pending credit card late ruling that still has not been released but our fundamentals remain intact. We are excited about what we're seeing with our growth levers the development and scaling of that is on track and that's why we're leaning into some additional investments in the fourth quarter. We're encouraged.
Yes.
Great. Thanks, so much.
Thank you.
Thank you. The next question is coming from Ashley Hogan of Jefferies. Please go ahead.
Hey, good morning, Thanks for taking our question to start with just curious what kind of promotional level, if you're embedding in the fourth quarter Guide I know you've mentioned that God gave me some flexibility to respond to the promotional environment and then also we wanted to ask about your expectations for holiday shopping cadence this year with more pressure on the consumer and higher rates do you expect people to shop, a little closer to her.
Today than they have in the past couple of years. Thanks.
Ashwin, let me take the second part of your question and I'll throw the first parts of Tony So when you look at the pace of our.
Holiday Shopper clearly next week and the following week are really critical so when you think about black Friday.
The competitive landscape has really shifted to black Friday deals prior to Black Friday, we're in the midst of that along with our competitors' customers, who are taking advantage of that.
But there is a pilgrimage that goes to brick and mortar in our sites for black Friday, and that full weekend, where well ready for that and then cyber week, obviously, starting with cyber Sunday Cyber Monday really important then we go into a 10 day or so which is very typical and we're ready for that in terms of where customers are resetting.
We are resetting for the last 10 days Thats, a really important timeframe for us.
And one thing Thats been sets up well for all retailers is that full weekend before Christmas with Christmas dropping to a Monday. So all of that is anticipated I think the big thing that youre going to see is really powerful assortments across all three of our brands as well as to really focus on simplified values and how we are communicating that so we are well ready.
And I would add to Jeff's comments that the benefit of being a department store again is that we can handle the range of these cycles.
36 years into this and I haven't no in the fourth quarter that is a competitive and isn't promotion that being said our guidance and margin gives us the opportunity to offer compelling value to have a strong black Friday and take advantage of as Jeff described the extra days in front of the Christmas holiday season.
Our website is prepared to deliver on time or gift guides have got a nice range of products and price points that I I think show compelling value as well as the degree of newness that we just didnt have last year.
Great. Thanks, so much.
Thank you. Thank you. The next question is coming from Michael Binetti of Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question, Jeff Congrats on your retirement, it's been a pleasure and Tony we very much look forward to working with you ahead.
I guess Adrian just to clarify one thing in the low single digit sales growth. That's referencing net sales for next year I'm, assuming you're excluding the other revenue line because of credit, but if that's true could you would you mind, just helping us think even if at a high level through the contributors that you see between.
Yes between comps and new store contribution of new store productivity I know, we have small format stores coming on smaller but more productive you mentioned some store closures. So maybe just a little even if qualitatively.
What some of the contributions we should think about or and then I'm curious about the SG&A leverage point as you think ahead to next year based on some of the qualitative comments you gave to Brook. There you guys are really hustled and taken out a lot of cost without a lot of efficiencies obviously the magnitude of the sales declines. This year has made SG&A deleverage point, but maybe help us through this thing through.
Leo this is.
If comps are slightly negative next year versus slightly positive next year is there is there a point that you feel comfortable saying SG&A can leverage.
And a couple of scenarios next year.
Thanks for your questions, Mike as it relates to growth.
We've been pretty consistent with our investments in our core business and our growth levers and what Tony talked about a little bit earlier is really the scaling and maturation of a lot of those growth factors. So when you think about small format stores do you think about growing our core business do you think about the health of our different channels. It's all focused on better shopping experience.
<unk> value for the consumer and continuing to strengthen our assortment and those are the things that give us confidence about growth for next year, and we'll certainly share the composition of that as we get into 2024, and the Q4 earnings call expense discipline as always a top focus for US we spoke earlier this year to the $200 million of capture ability in 2020.
Three that's about $300 million to $350 million in 2020 for SG&A leverage is just good retail business. So expense discipline is really important for us we're continuing to lean into opportunities to drive greater productivity within the business and that's what will lead for us.
US to a double digit EBITDA profile over time.
Okay. Thank you very much guys I appreciate it thank.
Thank you.
Thank you. The next question is coming from Bob Treble of Guggenheim Securities. Please go ahead.
This is Bob.
Bob durable, Jeff what a pleasure working with you.
Adrianne can you. Please speak to units we've been hearing that the industry units have been trending down low single digits do you see any reduction in average basket just wanted to hear your thoughts.
And if I may on the broader consumer health.
What are the expectations for tourist traffic.
For the holidays are there any sequential improvement embedded in the guidance. Thank you.
Yes, we think about.
Units will be solved was in the fourth and the third quarter AUR was up mid single digit sales now. So obviously, we would expect our unit volume to actually be down.
As you think about the consumer we think the consumer is remains under pressure and I think most importantly, the consumer is discerning no change in what we've spoken to about the consumer we expect that to extend into next year, but we do expect the consumer to continue to be challenged.
Let me take your tourism question. So when you look at kind of if we look at towards the domestically and international but let's start on international. It just continues to be below 2019 levels Q3, we did see an uptick which was encouraging.
Particularly in Latin and Central America. Some countries in Europe that has benefited our downtown stores. When you think about the kind of tourist destination. Some of these downtown Metro cities.
Because our flagship it outperformed the fleet in Q3, but we're not anticipating a meaningful benefit.
For the balance of this year and we are hopeful that we've always talked about the fact that with tourism being three plus percent of our overall business International tourism that we will that will be a tailwind. So we do expect an uptick in 'twenty four and beyond there.
Yeah.
Got it thank you.
You bet.
Thank you. The next question is coming from Chuck Grom with Gordon Haskett. Please go ahead.
Hi, This is Greg <unk> on for Chuck I was hoping you could just provide any color on if you saw any.
Variability in the quarter as we saw like warmer pockets of weather around the country or even as a student loans kicked off when the repayments restarted.
Yes.
Overall comp sales and profit in Q2 was better than our expectations.
So we were strategic with our promotions and that definitely helped us drive conversion.
We're not commenting on kind of the monthly performance, but the overall quarter performed better than expectations. I think the main point is that we are definitely ready for holiday and.
We're confident in our curated offering strong value that we're going to be providing the customer. So pleased with the quality of the assortment as Tony and Adrian and both spoke to our building flexibility to respond to how the customer signals and that inventory position that we have in our commitment to really staying liquid to respond to the changing customer behavior across.
All of our categories and price points is going to be critical.
And I would just add that's going to work. The team has done to have more transitional product and even in a quarter, where the weather was a little warmer than we would have liked we saw a great sweater selling so that's one of the things we've come to accept as we cannot control the weather, but we can diversify our assortments to take advantage of opportunities for our gift giving itself.
Purchase.
The only other thing I would add is to your question about student loan repayments, it's really difficult to determine the specific impacts due to due to student loan payments, but as we think about the 2023 outlook for the balance of the year in the fourth quarter, that's very much reflected in our outlook.
And also incorporates.
The variable of student loans this will be a pretty important consideration as we get into 2024 as well, but we're just continuing to monitor it pretty closely.
Great. Thank you.
Thank you.
Thank you. The next question is coming from Alex Straightened of Morgan Stanley. Please go ahead.
Perfect. Thanks, so much for taking the question and Jeff Congrats on a great career at Macy's, it's been great getting to work with you.
Really just a couple from me first I think you highlighted backstage and blue means outlet as outperforming the full line. This quarter I was just wondering has that been the case for some time or was there some sort of step change this quarter that you'd highlight as well just how youre thinking about those banners heading into holiday and then.
Secondly, many of wholesalers have trimmed their order book outlook from three months ago. When their latest earnings reports, citing weaker partner orders is there anything you can share even qualitative on how you're ordering or thinking about the front half inventory buys thanks a lot.
Thanks, Alex for the question, we feel good about the business at both backstage and bloomingdale's outlets.
There isn't a quarterly change because they've been performing all year long I think it speaks to the value conscious consumer and we're glad that we have both of these named place having an offering in the sector in the case of backstage is inside of our overall stores and we know that the backstage customer is all.
So a full line customer sell bringing them in for value. It gives us the opportunity certainly as you look at the fourth quarter to sell them other gifts in size and color and in breadth and variety that we wouldn't have necessarily in a freestanding store and Conversely at Bloomingdale's, you are providing access to our brand that I think is on the upswing and there is still a consumer I think.
But.
At times as price sensitive so how do we cater to that customer and ultimately bring them over to the full price brand at the appropriate point in time. So we feel good about both backstage and bloomingdale's off price.
Just I guess in follow up to the second part of your question.
Tend to be the <unk>.
Better wholesale partner out there and when I say wholesale partner that doesn't mean that we won't have the concession related relationship of consignment relationship or a hybrid relationship. Our objective is to have the best relationship. We don't view it as a zero sum game and while there are going to be times, where we're adding orders and canceling orders.
We tried to do it with great transparency and what I found is our partners appreciate our willingness to forecast with them and talk about our future objectives as Adrian said, our commitment is to get to the low single digit growth next year, which means we need brand partners in the wholesale market, who are betting on both Macy's and bloomingdale's.
Thanks, a lot good luck.
Thank you.
Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.
Good morning, and Jeff Beth Best of luck as you think about <unk>.
Tony and Adrian the opportunities on the real estate side, you've obviously had some.
Small.
A short time period of the small format stores, but as you think of the landscape opportunity for bloomingdales and for Macy's and what the assortment could look like how do you envision it what does it mean for margins and just in the near term as you think about the first half of 'twenty 'twenty four is the cadence of orders or how are you.
We're thinking about the ordering patterns do they change at all from the back half of 2023. Thank you.
Yes, let me take the first part of your question, which would be on the real estate side. So obviously Dana we we look at our portfolio very closely and what's the value to operator particular unit, what's the monetization opportunity with that the thing that you're going to that you are hearing from US is really taking a full market view and really looking at all of our app.
Assets that serve customers in the market and Thats, our digital assets, that's our mall based assets as well as this emerging opportunity that we see in smaller format. So when you look at the Macy's brand is in 49 of the top 50 Metro markets. So from that perspective, we're well placed there is always opportunity.
So look at individual units and expect that we'll continue to do that so when you think about when we announced the player strategy, we announced timely door closures, we have closed eight of those.
And you've also heard that what we're doing with the smaller format on the Macys side. We've opened 12 through the fourth quarter of this year. The intent is to open up to 30 by the end of 'twenty five very excited about what <unk> is doing so if you think about <unk> <unk> is in a substantially less number of the major metro markets in the country and we just hit a milestone.
You know in the last week by opening <unk> in Seattle, and Im pleased to say that that has gotten off to a great start. So there is opportunities and bring the order, but that coupled with our prowess in digital to be able to create two powerhouse national Omnichannel brands that really spans the level of price points on customer.
And categories that we that we continue to track again.
And let me add obviously I have a soft spot for bloomingdales. So I believe there is growth opportunity digitally physically and both small format stores and in our off price Division as Jeff mentioned, we cover a fraction of the country, but we're going to be surgical in how we expand we have done too good a job I think and having a highly productive.
Octave portfolio of stores to sacrifice that now expect also that we're going to continue to lean into the opportunity to expand margin that is both in the pricing science as well as in the mix of products that we sell.
Sometimes I think AUR gets mistaken for charging the customer more I just want to emphasize we will be competitive on price, but we will look for opportunities to expand our AUR and expand our margin through the mix of categories and the types of products that we sell remember we're in the early stages of new order at Macy's, we've seen the margin.
Spansion that we enjoyed at bloomingdale's through having greater visibility to our assortment through assortment visualization.
Got it thank you.
And then.
Ordering patterns as you think about it for the first half of the year.
So what data we're not commenting on the ordering patterns of next year, but what I wish I want to emphasize one thing that Tony brought up which was the level of transition that we're having the balance of our assortments and seasonal Wisconsin I think when we were looking back at the first quarter of 2004, we ran out of cold weather units.
Faster than we should have and so we put we comment on about that on our first quarter call. Obviously that comes with getting the right receipts in the fourth quarter carrying the right level of units and all cold weather categories traditional categories for the warmer parts of the country that the team has done a good job on that this year and that should be a nice that should be a nice tailwind.
For us going into the 2024 times.
In terms of the content of the rest of the orders stay tuned for the fourth quarter call, where we will review all that detail.
Thank you.
Thanks Dana.
Thank you. The next question is coming from Gabby Carbone of Deutsche Bank. Please go ahead.
Hi, Thanks for taking my questions and congratulations Jeff.
So you just touched on this a bit but was wondering if you can take into that potential levers that you have for additional improvement in the gross margin rate as you look to next year. If you could maybe walk us through the biggest buckets there that'd be helpful. Thank you.
So I'll comment on a few things, even though we haven't shared that gross margin outlook for next year as Tony pointed out it's a big focus for us. The one discipline that will not go away is our discipline on inventory management and that has been very helpful to us in terms of margin expansion with our pricing science, our disciplined on having less markdowns.
Then we'll be at pre pandemic, so that will continue to be a strength for us as Tony talked about there are other opportunities around mix or other opportunities around how we manage our delivery expense. There just a number of initiatives that we're going after to increase our retail margin reduce our delivery expense and ultimately increase our gross margin, but it starts with inventory.
<unk> working capital discipline on that balance sheet, and then making good choices about our assortments and managing the flow of those goods, while so that we have solid sell through in unit velocity in all of our channels.
Great. Thank you so much.
Keith.
Thank you. The next question is coming from Lorraine Hutchinson of Bank of America. Please go ahead.
Thank you good morning.
Great job of managing the expense structure, Adrian I was just hoping that.
You could elaborate a little bit on the $300 million to $350 million of 'twenty 'twenty four cost savings how much of that is slated for reinvestment in your growth sectors.
So very good question Lorraine, we know the reality is that they're going to be puts and takes but fundamentally what we've been focused on is the incremental value from expense management as we think about the composition of the expense reduction is about a third event is coming from gross margin expense and the balance of it is really showing up in <unk>.
G&A, but our fundamental focus for next year is around profitable growth and so we're making investments in our growth vectors in order to accelerate the top line and so that's a big part of where our investments have been I spoke a little bit earlier to some of those investments starting in the fourth quarter, but those investments that are going back is all about incremental <unk> on the top.
Right.
Okay.
Thank you and Jeff Best of luck.
Thanks, Mike.
Okay.
Thank you. The next question is coming from Joseph Joseph J J K Research. Please go ahead.
Good morning, everyone and congratulations to Jeff I'm wishing you all passed.
I was wondering if you guys could talk a little bit about the private label push.
I really like on 34th and excited about the evolution of an iron.
<unk> and <unk>.
I was just wondering what the margin impact of that could be huge.
In late fiscal 'twenty, three and as we look forward to fiscal 'twenty, four and and.
If it's too early to be asking that I understand but I'm. Just wondering if there is some positive influence coming.
On the.
On the.
On the gross margin side.
Outperformance in private label and Adrian on the cost efficiencies you've achieved this year.
Which have been better than I.
I know how you just answered.
<unk> question I'm, just wondering how they influence those savings how those influences fiscal 'twenty four in that once there is some pull forward of savings.
In 2003 that might impact the opportunity for <unk>.
Better than expected SG&A next year. Thank you. Thank you all so much.
Thank you Janet I. Appreciate the question first of all I'm, a huge believer and private brands private brands have a wonderful heritage and the Macy's brand Macy's brand has been known over the years for having some of the best private brands and we're excited certainly about the performance of on 34th and the refresh of IMC.
And what's to come over the next couple of years I think the commitment of the team to refresh the entirety of our private brand portfolio with exclusive design customer influence product and true focus on weight White space opportunities gives me confidence in our private brand strategy.
Private brands are important to bloomingdale's too with success in both Aqua and Hudson Park, and I think Youre right. There is margin opportunity. When we scale. This particular growth vector and again you you trade a little liquidity for margin opportunity and you can expect us to watch that carefully because we love.
The exclusivity and the natural margin that comes from private brands, but we want to make sure. We're always buying the best brands that are available and we want to leave ourselves that flexibility to make sure that we're adding the appropriate market brands as well that that's what makes Macy's and bloomingdale's more compelling as when we have the right balance of both private brands and market brands.
Janet Good morning, and thanks again for your question.
We think about the profitable growth over time that requires SG&A leverage and so when we think about the cost efficiencies they have to be sustainable and they have to be recurring over time. The thesis that we talk a lot about within our business is around simplification and automation. So we're looking at our processes.
All over the business to really take out complexity put in new ways of working placing an automation where it makes sense.
Our foundation is based on the simplification of our core and so we are continuing to lean into is simplify the business, which will remove the headwinds for growth. So that's how we're approaching our cost efficiencies over time with the ambition over time of achieving SG&A leverage.
Thank you so much happy Thanksgiving.
Same to you Janet thank you.
Thank you that brings us to the end of the question and answer session I would like to turn the floor back over to Mr. Tony Spring for closing comments.
Thanks, everybody for joining us on our third quarter call today, we want to take this opportunity to wish you and your families a very happy Thanksgiving and we hope you will join us all and watching work joining us in person at the Thanksgiving Day Parade next week happy holidays, everyone.
Yeah.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines have backups. The webcast at this time and enjoy the rest of your day.
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