Macy's Inc

Good morning and welcome to Macy's Inc. Q1 2022 earnings conference call. This conference is being recorded. I would now like to turn the conference 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 first quarter 2022 results. As always, with me on the call today are Jeff Gannett, our Chairman and CEO, and Adrienne Mitchell, our CFO. Jeff and Adrienne have prepared remarks that they'll share, after which we'll provide time for your questions. Given the time constraints, we ask that participants in the Q&A please limit their questions to one, hopefully single-part question. Along with our press release from earlier this morning, the slide presentation has been posted on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes supplementary facts and figures to assist you in your analysis of Macy's. Also note that unless otherwise noted, the comparisons that we'll speak to this morning will be versus 2021. Comparisons to 2019 are provided where appropriate to best benchmark our performance given the impact of the pandemic in 2020. I do have one housekeeping item to share with you this morning. We noted in our earlier press release that on Tuesday, June 7th at 8 o'clock a.m. Eastern Daylight Time, Jeff and Adrian will be participating in a fireside chat at the Evercore ISI Consumer and Retail Conference. This event will be webcast live on our investor relations website, so please circle the date on your calendars and plan to tune in. Now for the good stuff. 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 our presentation on the investor section. Finally, 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. The first quarter presented a unique combination of challenges across a highly dynamic and uncertain operating environment, with mounting inflation, rising interest rates, a volatile stock market, COVID-19 lockdowns in Asia, and the war in Ukraine. Nevertheless, I'm pleased to say that Macy's Inc. delivered solid results, thanks in large part to the efficiencies we built into our business through the Polaris strategy. Throughout the quarter, our team stayed focused on the customer, and we executed on our plan for long-term growth. We leveraged our transformation muscle and quickly pivoted to satisfy customers with what and where they wanted to shop. As a result, quarterly net sales were in line with our expectations at $5.3 billion, a 13.6% increase compared to the prior year. Comparable owned plus license sales increased 12.4%, And average unit retail was up approximately 8%. We beat our earnings expectations. We generated $211 million more in adjusted EBITDA in the first quarter than in the same period in 2021. And our adjusted diluted EPS was $1.08 for the quarter, almost three times higher than the prior year's $0.39. Looking at each of our nameplates, comparable sales for the Macy's brand increased 10.1% on an own plus license basis. We saw a notable shift in consumer shopping behavior between channels, with better than expected sales in stores and lower than expected digital sales. This dynamic underscores the resilience of our omnichannel strategy, which I'll talk about in a couple of minutes. Macy's sales were also affected by an accelerated category shift. away from the popular pandemic categories, such as casual and active wear, as well as soft home, and into more occasion-based apparel, like dresses, women's shoes, men's clothing, and furnishings. This shift accelerated faster than we expected. It contributed to an increase in stored foot traffic, as consumers are more likely to shop in person for occasion-based apparel. We were pleased to see that our balanced assortment allowed us to meet this shift and capture sales. Our Macy's customer base remained healthy during the quarter. On a trailing 12-month basis, we now have 44.4 million active customers. That's a 14% increase over where we were in the first quarter of 2021 and the highest active customer level in four years. We are also encouraged to see strong engagement by our most loyal customers. On a trailing 12-month basis, our 29.1 million Star Rewards Program members made up 69% of Macy's brand owned plus license sales. That's up nearly six percentage points from the prior year. Our Bloomingdale's brand performed strongly, exceeding expectations both in stores and online as luxury consumer spending remained robust. Comp sales on an owned plus license basis was up 26.9%. This was driven by strong sales of dresses, men's tailors, men's and women's contemporary, and luggage. About 4 million people shopped the Bloomingdale's brand for the trailing 12 months ending Q1. That's a 21% increase compared to where we were as of the first quarter of 2021. Overall, this robust, broad-based performance is a testament to how the Bloomingdale's team has evolved the product assortment to be relevant for new, younger generations that is investing in both their wardrobes and their homes. At Blue Mercury, The team continued to build on its momentum and posted another improved quarter. Comparable sales on an own plus license basis were up 25.2%. This was driven by an increase in store traffic coupled with better than expected growth in private brands. During the quarter, as mask restrictions lifted, Bloomberg re-saw the return of color, particularly in lip, face, and eye categories. Now let me circle back to the importance of our omnichannel strategy. Across our nameplates, it's clear that our customers were changing how they shop during the quarter, and we were ready. As COVID-19 restrictions loosened in the U.S., people grew more comfortable returning to normal activities. They went back to the office at least a few days a week. They attended group events and celebrations and resumed in-store shopping. Our strong performance underscores the strength of our omnichannel ecosystem and our success in building a seamless shopping experience that accommodates changes in customer behavior. Notably, more than 88% of our omnichannel markets grew sales. Bricking this down further between channels, growth in our digital channels slowed from last quarter, but sales remained elevated over 21 and 19 levels. Digital sales were up 2% versus 2021 and up 34% versus 2019. For Macy's, which represents the lion's share of digital sales, traffic was up 1% from the quarter of 2021. As consumer shopping behavior shifted from digital to in-person, we took steps during the quarter to increase traffic, including paid search and personalization, which helped to attract more visitors. At the same time, Macy's saw conversion decline by 5%, driven by consumers online shifting back to in-store purchases, which was partially due to the return of occasion-based apparel. We know that the consumer shopping journey often begins online, even when the ultimate purchase happens in the store. We're continuing to drive traffic to our digital platforms with that in mind, and further underscoring the benefit of our omnichannel ecosystem. We're focused on personalization as an important growth engine, and we continue to ramp up our capabilities to increase engagement, particularly with our highly engaged omnichannel shoppers, our best segments. Today, we're starting to see the results of this personalization work, with revenue driven by personalized product recommendations of 13% during the quarter. While we're still in the early innings of these initiatives, we're pleased with these results, and we continue to test and iterate to find the best communication channels, frequency, messages, and offers. Our apps performance continued to be a standout, with active customers increasing 14% to 7.4 million in the quarter, and we continue to make progress in preparing for our new Macy's Marketplace, which will launch during the third quarter, and we expect to scale it over the course of the second half. We'll share more on this as we get closer to launch. As I mentioned, sales in stores grew as consumer comfort levels rose along with their desire to return to in-store shopping. But these gains were also a result of the investments we made to make our stores a style destination through our new brand platform, Own Your Style. There are also benefits of our focus on trend merchandising, which enables our customers to shop for full looks rather than just items. We're also investing in our customer service experience by enhancing at-your-service centers in every store. Additionally, we continue to make progress scaling our smaller off-mall store formats like Market by Macy's. These will be integral in supporting our digitally-led omnichannel ecosystem. During the quarter, we also benefited from international tourist traffic, particularly from Central and South America, as well as Europe, aiding stores like our flagships at Herald Square in New York and Union Square in San Francisco, along with many of our downtown locations. While our downtown locations continue to lack in performance versus 2019, we saw a year-over-year improvement in their sales trend, with these locations outperforming the balance of the stores. We're also continuing to see strong performance from our backstage store-within-store locations. These locations, open more than a year, posted a high single-digit comp increase versus last year, driven by continued strong performance in kids' apparel, men's, dresses, Missy sportswear and luggage, as well as higher AURs. We're also expanding this off-price presence in strategic spots that advance the Macy's value spectrum strategy. During the quarter, we announced that we will open 37 new backstage store-within-store locations nationwide. In the month of May, we opened our 300th backstage location, as well as our largest store-within-store location in our Herald Square flagship, both of which are significant achievements for our off-price portfolio. So in summary, we're pleased with our results this quarter, particularly our ability to navigate the difficult macro and economic environment. Now I'd like to provide more details on how we're dealing with the economic headwinds. First, I'd like to share some color on supply chain and inventory productivity. As I mentioned earlier, we saw a rise in consumer demand in occasion-based merchandise categories, while at the same time we experienced a deceleration in casual active and soft home categories, both at a faster pace than we anticipated. Simultaneously, supply chain constraints relaxed, resulting in a higher percentage of receipts than we expected. The combination of these factors created an imbalance in our overall inventory levels as well as by channel. The good news is that we were able to navigate these demand and supply trends thanks to our underlying work to improve pricing science and our disciplined purchasing behavior, coupled with leaner inventories entering the year. As a result, we delivered strong improvement in both inventory turn and gross margin compared to both 2021 and 2019 levels. At quarter end, our work resulted in inventories rising 17% from 2021 levels on a 13.6% increase in net sales. And this shift in consumer demand for more occasion-based categories like dresses and tailored clothing is a good thing for Macy's. It is where we shined. With our broad assortment base, we are pivoting to those categories and building replenishment stock in our best sellers. We are continuing to closely watch supply chain dynamics. While constraints loosened up in the first quarter, there is still a significant amount of uncertainty with the lockdowns in China and the ongoing labor negotiations in the LA port. Factors like these drive us to continue taking a prudent and disciplined approach with our lead times and forecasting. We're making adjustments as needed with ongoing communications with our partners to ensure that we can adapt to changing consumer demand and have the right inventory available at the right levels and at the right time. We're also closely monitoring evolving shopping behaviors relating to the ebbing of the COVID pandemic combined with mounting inflation and macroeconomic volatility. During the first quarter, all income tiers continue to engage with us, led by the higher-income and middle-income consumers. Luxury sales remain to stand out for our business, as shopping behavior among high-income consumers has so far remained less affected by inflation. These trends show the benefit of our balanced portfolio across nameplates. We operate across the value spectrum, from off-price to luxury. This, coupled with our wide assortment of categories, products, and brands, gives us the ability to flex with consumer demand. Now I'll pivot to our merchandising strategy for the Macy's brand. We're putting a lot of focus here as we look to engage more customers and grow market share. We are in the early stages of reimagining our private brand portfolio and realigning our private brand team under new leadership in partnership with our broader merchandising and sourcing teams. Our goal is to have a private brand portfolio that is differentiated, defendable, and durable. The team is developing original designs and distinctive brand identities, values, and principles that foster brand love with a modernized size and fit approach so that all our customers are empowered to own their personal style. This work is underscored by customer data and analytics to ensure that we have the right value equation and competitive pricing architecture. And while specifics of its composition are not yet ready to share, we're considering all avenues, including the launch of new brands, as well as a rethink and refresh of current brands, all centered around giving the customer what they want. I'm looking forward to sharing additional details on this work in the future. Before I pass it over to Adrian, I want to thank our colleagues for their continued hard work and dedication. They are demonstrating tenacity in executing our strategy and building a seamless shopping experience, all while keeping our customers at the heart of every decision. Their spirit and ingenuity drive us forward as we continue to navigate this dynamic environment, and I want to acknowledge and thank them for that. And with that, I'm going to turn it over to Adrian for additional color on our first quarter results and the outlook for the rest of the year.