Macy's Inc

Good day and welcome to Macy's in Q3 2022 earning call. Today's call has been recorded. At this time, I will now turn the call over to Penn Quintilia. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thanks for joining us to discuss our third quarter 2022 results. 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 single part question. Along with our press release from earlier this morning, a slide presentation has been posted on the investor section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes supplementary data 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 a performance given impacts from the pandemic. 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 of our website. 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 will turn the call over to Jeff.

Thanks, Pam. Good morning, everyone, and thank you for joining us today. It's an exciting time at Macy's, Inc. Our teams are geared up for the peak holiday season, and earlier this morning, we shared our third quarter results, where compelling product, disciplined inventory controls, and solid execution drove strong top and bottom line results. Results are further proof that our Polaris strategy, first introduced in February of 2020, is working. Before getting started, I would like to thank our entire organization. Every single one of our colleagues has contributed to our success. Thanks to them, I am confident that we are serving our customer base and their unique needs better than ever across channels, categories, occasions, and value bands. Our products, colleagues, and customers mirror the diversity we see across the country. We are an anchor and a trusted resource for all of the communities that we serve. And while we are honored to uphold many of the traditions of the past, like the Macy's Thanksgiving Day Parade and Santa Land, We are also there for our current and potential customers as they celebrate the moments and holidays that are most meaningful to them. Being a modern department store is key to that relevancy. The concept of a trusted one-stop shop is timeless. It works, but only if it reflects the preferences and needs of our customer, and we have transformed our entire organization to do just that. With our breadth and diversity of product across multiple nameplates, that are not tied to just one value band, category, end use, or life stage. Our position is a strength, especially in the current environment where the styles our customers are looking for, the categories they are seeking, and how much they are spending can differ dramatically from one season to the next. It also is what attracts new customers to us. We are committed to providing quality, fashion newness, timely flows, and relevancy through first- a curation of premium-owned and market brands, which we bring to life at Macy's through our Own Your Style platform. Second, a disciplined approach to inventory, reflecting conservative bind and a healthy receipt reserve that ensures flexibility when our customer pivots and signals new interests. And third, a modernized supply chain and pricing science tools, which yield higher turnover, gross margin return on investment, and higher cash flow. These attributes have been critical unlocks to our success. Third quarter net sales of $5.2 billion were at the high end of our guidance provided on our second quarter call, declining 3.9% to last year and rising 0.1% to 2019. Customers continued to return to in-person post-pandemic shopping experiences and were searching for occasion-based product, including career and tailored sportswear, dresses and luggage, rather than popular pandemic categories such as active, casual sportswear, sleepwear, and soft home that skew more heavily towards digital purchases. These factors contributed to the relative outperformance of brick-and-mortar sales, which declined 1% to last year. Digital sales declined 9% to last year. Relative to 2019, brick-and-mortar sales declined 9% and digital sales rose 35%. During the quarter, Macy's digital traffic remained relatively consistent, but conversions softened, suggesting that while discovery is still occurring online, there has been a shift to in-person transactions. Regardless of where our customer ultimately makes a purchase, we strive to provide the best omnichannel experience throughout their journey. We are making digital investments to authentically communicate and serve their lifestyle needs whenever and however they choose to shop with us. That includes the introduction of personalization and live shopping, as well as the ongoing refinement of existing online platforms, including our mobile app, where we registered an 11% rise in active customers on a trailing 12-month basis. Compared to our average Macy's customer, active app users spend more per transaction and per year. Turning to COPS, our own plus license comparable sales declined 2.7%. Luxury nameplates Bloomingdale's and Blue Mercury continued to outperform. Bloomingdale's posted 4.1% comp sales growth and expanded its active customer file by 9% on a trailing 12-month basis, while Blue Mercury saw comp sales growth of 14% and grew its active customer file by 15%. Although in different stages of the revolution, we see a significant long-term growth opportunity for both nameplates. Macy's own plus license comp sales declined 4%. On a trailing 12-month basis, active customer count grew by 2%, and our Star Rewards active customer base, which is our most valuable customer, represented 70% of Macy's own plus license comparable sales, five points higher than last year. Throughout the quarter, our customer responded well to our mix of full price, promotions, and markdown items. When combined with selectively higher tickets, we realized our eight consecutive quarter of AUR gains. End of quarter inventories were better than expected, rising 4% to 2021 and down 12% to 2019. And we achieved adjusted EPS of 52 cents, well above our guidance. While we are pleased with our progress, we are committed to doing more. Our customers are savvy and they have a lot of options. Our team is aligned on what it takes to be successful and relevant today and into the future. This includes, one, an improved shopping experience for all customers through reducing friction across Omni touch points. Two, more personalized offers and loyalty communications. Three, a compelling mix of private label and branded product. And four, speedier checkout and delivery with the right service when our customer needs it. In addition to these ongoing initiatives, we are also enhancing other go-to-market strategies to inspire new and existing customers. Last month, we introduced permanent Toys R Us Shop and Chops within all Macy's locations, providing an experience that does not exist on a national basis elsewhere. These shops are adjacent to the kids' department, making it easier to discover, with room for kids to explore and a space designed for them. We are encouraged by the initial response. Overall, the Toys R Us customer is younger and more diverse than our Macy's customer, and we have discovered that 85% of Toys R Us customers are cross-shopping. Toys R Us is a great example of finding a hole in the market and strategically filling it, gaining share and loyalty and creating lasting memories for children and adults alike. Another example is the late September launch of Macy's Digital Marketplace. Marketplace features a collection of new brands, products, and categories from third-party sellers, representing a low-risk way to introduce customers to new options without shouldering inventory liability. While not the first to do this, we believe our curated offerings will keep existing customers on our platform while bringing in new ones. Units per order are above the Macy's average, and we are seeing customers cross-shop with mixed bags, including owned, vendor-direct, and marketplace items, which is encouraging and similar to Toys R Us it further cements our status as a one-stop shop. Another way we are staying close to our Macy's customer is by refining our in-person shopping experience. Market by Macy's, which we introduced in February of 2020, plays a unique role in our omnichannel market ecosystem. These off-mall stores are 25,000 to 50,000 square feet compared to our full-line average of roughly 185,000 square feet and offer a highly curated immersive shopping experience that celebrates discovery and convenience. Market by Macy's conversion rates are generally higher than that of our full-line stores, and these locations continue to outpace their respective trade areas in acquisition of new customers. Today, we operate eight Market by Macy's. As we evaluate potential new locations, we are looking at areas where we have a strong digital presence but no physical footprint, where it no longer makes sense for us to keep a full-line store and Market by Macy's can act as a replacement. A good example is the Market by Macy's in St. Louis, Missouri, which opened last week and is a mile away and less than a fifth of the size of its mall-based predecessor. All these initiatives taken together, plus others like the ongoing reimagination of our private brands, our Own Your Style brand platform, and our Macy's Media Network, are a testament to our focus of reclaiming Macy's voice, as a multi-generational influencer and arbiter of American fashion, and helping customers connect with the product that empowers, inspires, and speaks to their unique individual preferences. We are focused on remaining relevant by doing so in an authentic way that honors our rich and unparalleled heritage. That emphasis on bridging the past with our future at Macy's also applies to Bloomingdale's, where we are celebrating our 150th anniversary with a series of events and exclusive collaborations with top designers. The collections, along with pop-up shops and events with brands such as Ralph Lauren, Jimmy Choo, and Dior, speak to our relationships with both established players as well as the next generation of luxury designers our customers are craving. Following seven quarters of comp-owned plus licensed sales growth, we are excited about the opportunity at Bloomingdale's and the expansion of our off-mall smaller format, Bloomy's, nameplate. Today, in the Chicagoland area, we are opening our second Bloomy's. At 50,000 square feet, it serves as a replacement of the 206,000 square foot full-line Old Orchard location. Momentum has also continued to build at our other luxury nameplate, Blue Mercury, where we registered our fourth consecutive quarter of comparable sales growth. Another way we're maintaining a close relationship with our customers, colleagues, and communities, and one which we are all proud of, is the launch of Spur Pathways in early November with our momentous capital. Spur Pathways is a multi-year, multi-faceted program that ultimately will provide up to $200 million of funding to diverse owned and underrepresented businesses. The program is designed to advance entrepreneurial growth, close wealth gaps, and address systemic barriers among minority-owned businesses. Spur Pathways also represents an ongoing evolution of our Mission Everyone social purpose commitment to people, communities, and planet. Before turning it over to Adrian, I would like to provide insight into the recent trends and our current thinking around the fourth quarter. In the middle of October, there was an unexpected slowdown in sales, which continued into November. Markets that were unseasonably warm were the most affected. Over the past week, our sales performance has improved. We are evaluating the sustainability of recent trends and the drivers that we believe will impact holiday consumption. When we think about last year, the consumer was flush with cash and there was a pull forward of demand on well-documented inventory constraints. This year, the consumer is hearing about a glut of inventory. They are under a tighter budget, feeling the impact of inflation on non-discretionary items and beginning to deplete their savings. With that in mind, We believe they are waiting until closer to holiday to make purchases, especially as there is an extra day, which is a Saturday between Thanksgiving and Christmas. We now expect holiday shopping patterns to be similar to 2019 and are taking the appropriate actions to support anticipated higher peaks around Black Friday, Cyber Week, and the two weeks before Christmas. Holidays are happening. Trips are booked. Parties and family gatherings are planned. Consumers will be spending, but it is too early to tell how much they will allocate to our generic categories. We are confident in the amount and composition of our inventory, timing of flows, and marketing, but cognizant that we do not operate in a vacuum. The low end of our outlook assumes late October and early November sales trends continue. Pressure on the consumer persists, and the promotional competitive landscape intensifies throughout the holiday and into January. The high end assumes that sales patterns will be consistent with our 2019 trends and reflects recent adjustments to our operating plan for holiday. As we navigate this period of uncertainty, our financial health and operational disciplines, along with our experienced leadership team, are key advantages. We are flexible, agile, and well-positioned for the fourth quarter and 2023. Here's why. Our inventory is in great shape. We have roughly 55% newness for holiday, 30 percentage points higher than 2019, and we are not saddled with older receipts and pandemic category overstocks. Across nameplates, we have products and brands that cater to our customers' lifestyle needs with a variety of price points that will allow everyone, including last-minute shoppers, to participate in the magic of holiday at Macy's Inc. This includes exclusive cosmetics and fragrances from Dior and Armani, Established brands such as UGG, Ralph Lauren, The North Face, and Jordan, as well as newer additions, Kylie Cosmetics, Nest Candle, Vee Friends, and Pandora. With our strong vendor relationships and mix of private brand and licensed brands, we can chase into areas of strength that warranted and have a flexible pricing model to quickly adjust promotions and markdowns if demand does not materialize. We believe we are taking an appropriate cautious stance on our outlook, giving the myriad of unknowns. However, that does not temper our enthusiasm for holiday. We know our customer relies on us for an exceptional holiday experience, and as we have for the past several years, we'll deliver. With that, I'll pass it over to Adrian for a deeper look into the third quarter and details on the remainder of the year.