Macy's Inc

Good morning, and welcome to the Macy's Inc. Third Quarter 2021 Earnings Conference Call. Today's hour-long conference is being recorded. I would now like to turn the call over to Mike McGuire, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and thanks for joining us to discuss our Third Quarter 2021 results. With me on the call are Jeff Gannett, our Chairman and CEO, and Adrienne Mitchell, our CFO. Jeff and Adrian have prepared remarks that they'll share, after which we'll provide time for questions. Given the time constraints and the number of participants, we ask that you please limit your questions to one. Along with our press release, we've posted a slide presentation on the investor section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes additional facts and figures to assist your analysis of Macy's. Also note that given the pandemic's impact on 2020 results, unless otherwise noted, the comparisons that we'll speak to this morning will be versus 2019, as we feel that benchmarks our performance more appropriately. We noted in our press release this morning that on Thursday, December 2nd, at 8 o'clock a.m. Eastern Time, Adrian will be participating in a fireside chat at the Morgan Stanley Virtual Global Consumer and Retail Conference. This event will be webcast on our investor relations website, so please mark your calendars. Keep in mind that all forward-looking statements are subject to the state harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used in our earnings release and our presentation on the investor section of our website. And as a reminder, today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call, and it will be archived on our website for one year. With that, I'll turn the call over to Jeff.

Thanks, Mike, and good morning, everyone, and thank you for joining us. Our company delivered another strong quarter and exceeded our expectations on both top and bottom lines, outperforming 2020 and notably 2019. With strong cash generation year to date, we were able to execute on our capital allocation priorities, including returning capital to shareholders. Our business has demonstrated resilience, and we remain confident in our ability to deliver on the Polaris strategy, and as a result, we are raising and narrowing our full year 2021 guidance. Our 21 results demonstrate the progress we've made with our Polaris strategy, operating in a better economic environment, as well as the strength of our digitally-led omnichannel model. We are poised for sustainable and profitable growth, and will continue to build and invest in our retail ecosystem to both maximize and accelerate our opportunities. Today, I am pleased to announce that we are making a significant investment to launch a curated digital marketplace platform to enhance the existing Macy's Inc. business, fuel customer acquisition, and drive growth across all of our channels. We will partner with the enterprise marketplace technology company, Miracle, to build the platform. Through this new digital marketplace platform, which will launch in the second half of 2022, we will connect carefully selected third-party sellers with our customers in a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation. Our digital business is on track to generate $10 billion in sales by 2023. And that figure does not include the incremental revenue we expect this new marketplace platform to generate for Macy's Inc. Now I'll provide some highlights from the third quarter. Comparable owned plus licensed sales increased 8.7%, an improvement in trend from the 5.9% increase we saw in Q2, even after adjusting for changes in our marketing calendar. Adjusted diluted EPS was $1.23. up significantly from Q3 2019, and adjusted EBITDA was more than two times better than 2019. Gross margin for the quarter improved by approximately 100 basis points, driven by stronger regular price selling, fewer markdowns due to leaner inventories, and a number of pricing and promotion initiatives and offset by increased delivery expenses. Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions. When they first began in the fourth quarter of 2020, our teams activated plans to mitigate bottlenecks and since then stayed agile and flexible, leveraging our strong networks and relationships with international carriers and brands, and diversifying how we move product both up and downstream. Significantly, as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season. Total company AUR was up more than 12% across our three nameplates. SG&A dollars were significantly lower, driven by a combination of ongoing expense discipline and unfilled open positions. Looking at each of our nameplates, Comparable sales for Macy's brand were up 8.4% on an own plus license basis, which represents a nearly one-point improvement versus last quarter when you take into consideration the friends and family marketing shift. Macy's brand full-price sell-through improved 610 basis points, while full-price AURs increased by 6.9%, driven by high demand and our gross margin initiatives. Our Bloomingdale's business performed well with comp sales on an own plus license basis of 11.2%, which was in line with the second quarter. Results were driven by strong sales of luxury handbags, fine jewelry, home, men's shoes, and contemporary apparel. And both stores and Bloomingdale's.com outperformed 2019. Blue Mercury continues to recover, outperforming versus 2020, but was down 2.2% compared to the third quarter of 2019. We see strong sales performance in private brands, home fragrance, and treatment. Turning to the health of our customer base, we brought in 4.4 million new customers into the Macy's brand, a 28% increase compared to 2019. Approximately 30% of these new customers were dormant customers over the last 12 months, who have now re-engaged. In addition to growth in new customers, customer loyalty has also increased. Star Rewards program members now make up nearly 70% of the total Macy's brand comparable loan plus license sales, up approximately 10 percentage points compared to 2019. During the quarter, we saw platinum, gold, and silver customers re-engage with average customer spend in these tiers of 16% compared to the third quarter of 2019. Bronze members, who represent our youngest and most diverse loyalty tier, continue to grow with the addition of 2.3 million members during the quarter, and we're seeing average spend per customer increase 13%. Bronze is one of our best customer acquisition vehicles, with approximately 35% of members under the age of 40 and 57% ethnically diverse. Our Star Rewards loyalty customers have a more personalized and productive shopping experience, with the most relevant offer presented to them, right down to the particular homepage they see. This is leading to increased conversion, higher revenue per visit, and a decreased rate of customers leaving the site. And through targeted personalization and pricing science, we've been able to reduce the number of route-based promotional days and increase AURs. Having a strong integrated retail ecosystem, that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers. The growth of our omnichannel ecosystem is powered by our thriving online business, relevant full-line brick-and-mortar stores, and growing off-mall format stores, all soon to be further accelerated by the new digital marketplace platform. Our data validates that in markets where we have a physical presence, our online business is stronger. The interplay between our digital and physical assets is more important than ever, and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth. Turning to merchandising, which we think about in three buckets. First, our products and categories that were strong during the height of the pandemic, such as fragrance, watches, jewelry, sleepwear, and home, continued to perform well during the third quarter. Second, Occasion-based categories such as dresses and men's tailor and luggage are continuing to see renewed interest from our customers. We're able to meet their shifting demand thanks to our wide range of assortment. And third, our emerging categories and new brands are expected to drive sustainable and profitable growth in the future. These complement our core categories while satisfying the customer shopping journey, and we're seeing encouraging results. To give you an example, since bringing the Toys R Us business to Macy's.com in August, our toy sales have more than doubled in stores and online compared to 2019. And we continue to expand on our assortment in these emerging categories. During the quarter, we added another important new brand partner, Fanatics, which offers our customers the largest selection of licensed sports products and increases our fan apparel offering 20-fold. This expanded assortment drove a 22% AUR increase in sports apparel and headgear compared to 2019. Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships. One element of this is the B2B monetization of our advertising partnerships that we realized through our in-house media agency, Macy's Media Network, which continues to generate solid results and recently expanded its scope to include Bloomingdale's. We see a lot of potential to further strengthen our relationships with vendor partners and cultivate even greater customer engagement. Overall, through Polaris, we laid a solid foundation for digital growth, and we're seeing that growth come to fruition. We are now able to focus on additional strategic investments to refresh the digital experiences to create more experiential customer engagement. enhance our stores, and further empower our colleagues who drive the success of our business on every level. Our important digital initiatives during the quarter included a refresh of Macy's mobile app, the launch of live shopping at both Macy's and Bloomingdale's, and a fragrance finder. We also rolled out our 3D room planning expansion, added PayPal and Venmo to in-store and online payments, and launched a sustainability product cyclist. As a result of these and other investments, digital conversion for the quarter was 4.25%, up 14% compared to the third quarter of 2020, and up 27% compared to the third quarter of 2019. Turning from digital to stores, we also continue to invest in our brick-and-mortar business and are seeing ongoing trend improvement in store conversion. During the quarter, sales in our non-downtown locations continued to sequentially improve. But due to the slow return of international tourism and office workers, our downtown doors continue to significantly lag our other doors versus 2019. A good example of stores' recovery is our backstage store-within-store format, with sales up 24 percentage points compared to full-line stores. Backstage store customers are more diverse, with 56% of customers ethnically diverse and have a higher spend. Across our ecosystem, everything we do starts with and is driven by our colleagues. They are our most significant contributors to our success, and we are pleased that the strength of our performance this year has made it possible for us to double down on our investment in talent. Last week, we announced a plan to launch a best-in-class benefit program to give our colleagues access to debt-free education.