Macy's Inc

Good morning and welcome to Macy's Incorporate fourth 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 fourth quarter and full year 2021 results. With me on the call are Jeff Gannett, our Chairman and CEO, and Adrian 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. As a reminder, today's call is scheduled for 90 minutes. Along with our press release, we have posted a slide presentation on the Investors section of our website, Macy'sInc.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 Wednesday, March 9th at 9 o'clock a.m. Eastern Time, Adrienne will be participating in a fireside chat at the UPS Global Consumer and Retail Conference. This event will be webcast on our investor relations website, so please mark the calendars. Keep in mind that all forward-looking statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used in our earnings release and on 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. Thank you for joining us. As we kick off 2022, I'm proud to say that Macy's Inc. today is a stronger, more agile, and financially healthier company than we were before the pandemic. We delivered strong results in the past quarter and year. We continue to make good progress on the transformation of our company and build momentum, and we are in a much better position for long-term success. Our business has changed dramatically since 2019 when we began to lay the groundwork for our Polaris strategy. We stayed focused on that plan, and we have delivered. We are now more digitally led and customer-centric in our planning and execution. We have also demonstrated the value of an integrated company, meeting customer expectations for a more seamless shopping experience across digital and store offerings. Digital has been a particular priority for us. This morning, I will walk through our 2021 performance highlights, And Adrian will share the details of our financial results, which exceeded our expectations every quarter. Then I'll discuss the outcome of the Board's recent review of our operating structure and how we are enhancing shareholder value. From there, I'll review the specific initiatives we are accelerating to enable sustainable sales growth and strong and stable margins in the future. Adrian will wrap up with details on our financial outlook for 2022 and beyond. Let me start with the performance highlights. Comparable Own Plus license sales for the fourth quarter increased 6.1% versus 2019. This performance reflects strong November and December holiday sales that exceeded our expectations, as well as softer sales in January. Total company AUR was up 11.5% for the fourth quarter, and for the full year was up over 11%. For the year, comparable Own Plus license sales increased 3% compared to 2019. For the year, we generated $984 million more in adjusted EBITDA than 2019, growth of 42%. Our full year adjusted EBITDA margin was 13.6%, a rate we have not achieved since 2014. As a result, we achieved adjusted diluted EPS of $5.31 for the full year, up 82% versus 2019. With reduced debt and ample cash, our balance sheet is healthy, and we are in a stronger financial position. This enables us to navigate challenges that lie ahead while meeting our capital allocation goals to deliver shareholder returns through modest yet predictable dividends, strong returns on invested capital, and meaningful share repurchases. We completed our current $500 million share repurchase program during the past quarter, and I am pleased to announce that our board has authorized a new $2 billion program. Additionally, we have announced a 5% increase in our dividend after reinstating it during 2021. These accomplishments are the result of our focus of our organization has placed on the Polaris strategy, efforts that I have spoken to you about frequently over the past two years. This transformation strategy has evolved as the external environment changed and new opportunities arose. And the actions we took have led to a stronger, digitally-led retail business. Here are just a few highlights of what we've accomplished. Number one, we have modernized our digital platform and now offer an engaging and convenient experience with the power to meet customers whenever and however they choose to shop. In 2019, our digital team worked as a siloed organization. Today, it is fully integrated. We have a scaled platform operating the number two website in our categories in the nation with 39% digital penetration, an increase of nine percentage points versus fourth quarter of 2019. Number two, in 2019, our store strategy was largely focused on the highest quality A and B malls while accelerating the closure of stores in C and D malls. Today, the consumer is increasingly more omnichannel, and we are focused on establishing a more appropriate footprint in markets to drive sustainable and profitable omnichannel growth. Given this, as we said on our last call, we have delayed most of the remaining closures we earmarked in 2019 in order to maintain a physical presence in many markets while we scale up our off-mall format stores. In addition to being a place for discovery and shopping, our stores are also fulfillment hubs, supporting our digital operations through buy online, pick up in store, curbside pickup, and same day delivery. Keeping these cash positive stores open also helps us to fund the investments we're making to reposition our fleet over the next several years. Number three, in 2019, we were over-indexed on occasion-based apparel, had less disciplined buying behavior, and our approach to promotions was overly complicated for customers, all of which was driving high levels of markdowns, and low inventory productivity. Today, our pricing is simpler and clearer, allowing our customers to better understand the value they are receiving. Today, we offer a more balanced, curated merchandise assortment that reflects our disciplined purchasing behavior with new categories, products, and brands that inspire our customers' style across the value spectrum, from off-price to luxury. And today, we remain best positioned based on the health of inventory and multi-category and multi-channel capabilities to pivot with greater agility in response to changing customer trends. Number four, in 2019, the spread between customer acquisition levels and customer attrition levels was narrow. In 2021, we flipped that dynamic. While also benefiting from recovery-driven demand, our initiatives have led to an accelerated rate of customer acquisition that far outweighed the rate of attrition. Number five, in 2019, we had just created a new integrated team to reimagine our supply chain that previously segregated store and digital inventories and relied on a distribution network that lacked efficiency. Today, as a result of our investments, we have a more modern supply chain network that is agile, data-driven, and increasingly automated. We've seen the results of this work pay off throughout 2021, from increased speed of delivery to operational efficiency and to better inventory utilization. And finally, we have invested in advanced technology and data science throughout our operations, enabling us to increase productivity and profitability of the entire business. To best realize our strategic goal of building profitable lifetime customer relationships, we successfully built a new enterprise data and analytics organization that is helping us to embed data and analytics into everything we do. We have already seen improvements in our efforts around personalization and pricing. In short, we are a different Macy's Inc. today than we were in 2019. More agile, more profitable, and more relevant to our customers. That said, As we enter 2022, we see both headwinds and tailwinds ahead that together encourages us to offer a more measured outlook for the year. Now, I'd like to take you one level deeper into the work we've done to achieve our performance this past year across customers, merchandising, digital initiatives, and stores. First, customers. Our customer focus is paying off. 44 million customers shopped with our Macy's brand in 2021, up 1% from two years ago. They bought more and combined with higher AURs, spent more on each visit. We are adding new customers with 7.2 million new customers in the fourth quarter, an 11% increase compared to Q4 2019, with 58% coming in through digital. Nearly 30% of these new customers were dormant over the past 12 months, who are now re-engaged. For the full year, new customers increased 26% over 2019 to 19.4 million. This trend reversal in customer acquisition is an important marker for us and a strong indication of the increasing relevance of the brand. We will continue pursuing our strategies to build on this momentum. Let's turn to merchandising. Through our data-driven merchandising approach and our team's agility and creativity, we successfully navigated supply chain challenges ensuring we had a strong assortment for the holiday season. We placed bets on categories like fragrances, fine jewelry, home decor, men's outerwear, toys, sleepwear, and watches, which all perform well in the quarter. Bloomingdale's, which helps us reach affluent consumers, continued to see strength in luxury throughout the quarter, with strong performance from handbags, fine jewelry, men's shoes and contemporary, fragrances, and home. In addition to enhancing the shopping experience of our core customers, We also focused on new offerings to further attract the under 40 shopper. In the fall season, we added a curated selection of brands, products, and categories to 160 Macy's stores that appeal specifically to this younger, more diverse customer. These brands include Cotton On, Steve Madden, Michael Kors, and Levi's, as well as our new private brands, and now this, and Oak. We are pleased that our customer response and the results we've seen to date This in-store strategy aligned well with the digital strategy to attract the under 40 customers that we rolled out in the spring through our contemporary sitelet. At Bloomingdale's, brands geared towards the under 40 customer had a record year. Our private brand Aqua and various luxury brands outperformed in both sales and margin in 2021. This brings me to our digital initiatives. Today, our profitable digital platform is more modern and engaging thanks to our redesigned app experience, personalized homepages, curated sitelets, and improved search function. Aided by the shift in consumer preferences, the growth of our digital business continued in 2021. Sales remained strong, and we saw healthy levels of conversion for Macy's.com at 4.2%, a 13% increase compared to 2019. During the fourth quarter, Macy's app had the largest quarterly gain in downloads across our peer set, with an 81% increase in downloads over the third quarter of 2021. Today, our Macy's and Bloomingdale's digital teams operate more efficiently within a single backend structure, while each nameplate retains separate dedicated site merchandising and customer-facing benefits. Compared to 2019, Bloomingdale's digital sales grew 51% during 2021, with traffic increasing 28%. Lastly, stores, a critical part of our integrated omnichannel ecosystem. The role of stores has evolved with customer shopping habits. The interplay between our digital and physical assets is critical, and we remain focused on sustainable omnichannel sales growth. During the quarter, 58% of our omnichannel markets, representing 80% of our sales, had growth above 2019 levels, and half of these grew by at least 10%. For the year, we grew sales in 52% of our omnichannel markets versus 2019. Now to the macroeconomic environment that we see in 2022. First, tailwinds. We believe the consumer demand will remain healthy as the job market improves and wages continue to rise. We expect demand to increase, particularly as people return to the office and to social events. International tourism remains a tailwind, particularly beyond 2022. This past year, international tourism was down 50% from 2019 levels, with the fourth quarter strengthening before Omicron weighed on consumer sentiment. With headwinds, We expect inflationary cost pressures both for us and consumers, uncertainty of industry promotional behavior, supply chain disruptions, competition for talent, lapping of stimulus packages, and potential COVID variants. But we are confident that our financial health and operational agility put us in a stronger position to navigate the dynamic environment and challenges we expect in 2022. Let me now pass it to Adrian for additional color on our Q4 results.