Macy's Inc

Greetings and welcome to the Macy's Inc. 4th Quarter 2022 Earnings Conference. At this time, all participants are on 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 conference is being recorded. I would now like to turn to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.

Thank you, operator. Good morning, everyone, and thanks for joining us to discuss our fourth 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 our performance given impact 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. The 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 Investors 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, and good morning, and thank you for joining us today. So I'd like to start by recognizing our colleagues. In 2022, as consumer behavior rapidly changed, we adjusted our receipts and operations accordingly. At the same time, we fortified our balance sheet and continued to execute our long-term goals. In the fourth quarter, we achieved net sales of $8.3 billion. Beauty, dresses, tailored clothing, luggage, and gift-giving outperformed while soft-home, active, and casual were challenged. We offered freshness in every category and brand, even downtrending ones that are still important to customers. Peak holiday selling periods mirrored pre-pandemic patterns, but lulls were longer and deeper. Post-holiday demand for remaining winter and early spring product was stronger than expected and markdowns were shallower than contemplated when we provided our updated guidance in early January. End of year inventories declined 3% to 2021, and we're down 18% to 2019. Looking back on 2022, we began to see signs of consumer weakness and a shift in category demand late in the first quarter. We adjusted the timing, amount, and composition of receipts by channel, category, and brand. As macro pressures mounted and industry-wide inventory built on easing supply chain constraints, we bought closer to need, held open to buy reserves, and bought into areas of strength. We were measured with promotions and markdowns and did not chase unprofitable sales. These actions benefited fourth quarter results. We had our ninth consecutive quarter of AUR improvement and a better than expected gross margin rate of 34.1%. Our adjusted EBITDA margin rate was 11%, and adjusted diluted EPS was $1.88, including a 17-cent discrete benefit related to the favorable resolution of a state income tax litigation. Our financial health instability enabled us to navigate uncertainties while continuing to invest in growth drivers. At the end of the year, we had $862 million of cash, $1.2 billion less debt than 2019, and no material debt maturities until 2027. Turning to 2023, there is conflicting data regarding the U.S. consumer. As a modern department store operating from off-price to luxury, we have a full view of income tiers aided by our high penetration of loyalty members and robust credit card portfolio. On the surface, the consumer is in better shape than 2019. Jobs and wages are strong and savings levels are elevated relative to historic levels. But prices for services and goods are higher. Inflation has surpassed wage growth and revolving credit is rising. Adrian will provide specifics on our 2023 outlook, but we believe discretionary spend will be under pressure across income tiers and expect the allocation of disposable income to continue shifting towards services and essential goods. Even as consumers reprioritize spend, there is opportunity. With the continued expansion of a hybrid work model, there are more in-person meetings and flexibility for personal travel. We believe the desire to be with loved ones, go on vacation, and attend events has not diminished and expect gift-giving and occasion-based demand to continue. Reflecting on the last three years, 2020 was a year of crisis management. 2021 was stabilization. And in 2022, we laid the foundation for a sustainable, low double-digit adjusted EBITDA margin and longer-term sales growth. So let's discuss our progress. At Macy's, we re-evaluated our approach to merchandising. Since the pandemic, we have materially reduced markdown allowances and made a strong pivot to an upfront cost negotiation model. Changed how we incentivize merchants, so bonuses are based on Macy's Inc. sales versus functional responsibilities, allowing us to shift receipts and markdown dollars. increased open-to-buy reserves, enabling us to read and react to customer signals intra-quarter, and begin to work more closely with strategic brand partners to mutually grow brands in a healthier way. Beyond merchandising in 2022, Macy's also launched Own Your Style, an omnichannel brand platform encouraging customers to celebrate their personal style. Introduced a marketplace on Macy's.com, ending the year with 20 new categories and 500 new brands that our customers have been signaling demand for. And introduced Toys R Us store within stores in every Macy's, more than doubling toy sales for the year and attracting over a half a million new customers. In 2022, we continued to embed data and analytics across the enterprise. We added and refined pricing science capabilities, such as competitive pricing, and enhanced channel and location-level markdowns. And there is opportunity to further maximize profitability and drive even more productive sell-throughs. We also introduced Mission Everyone, our social purpose platform designed to advance Macy's long-term brand relevancy for all stakeholders. We look forward to reporting on our year one progress in the coming weeks. And we invested in our number one resource, our colleagues. We completed a $15 per hour minimum wage increase nationwide and introduced our Guild Education Partnership with approximately 3,000 colleagues taking advantage of free education benefits. These actions have produced overall turnover by roughly 3% since 2019, excluding reductions in force and seasonal employees. We have entered 2023 in a position of financial and operational strength, with a proven track record of executing our strategic priorities, even in periods of uncertainty. This year we will be testing, investing, and scaling for sales and margin expansion. In addition to our existing initiatives, including pricing science and data and analytics, we will focus on our five primary growth factors. Number one, Macy's private brand reimagination. Two, market by Macy's and Bloomy's off-mall stores. Three, marketplace. Four, luxury. And five, personalized offers and communication, which we have broadly described as personalization in the past. These vectors were contemplated when we introduced our long-term low single-digit annual growth sales CAGR goal in the fourth quarter of 2021. Since then, we have steadily invested, even as macro pressures have intensified. We are currently targeting low single-digit annual net sales and comparable owned plus licensed sales growth beginning in 2024, often assumption for a low single-digit decline in both metrics this year. Our target is based on the timing and anticipated impact of several rollouts and does not assume a dramatic improvement in consumer health. We are making strategic investments to fuel future profitable growth, and these investments are reflected in our 2023 SG&A and CapEx assumptions, which Adrian will discuss shortly. This morning, we will provide an overview of the five vectors, including proof points that give us confidence in their viability. So let's start with Macy's Private Brands. When our chief merchandising officer was promoted to her role roughly two years ago, Private Brands became one of her top priorities. Since then, we have built the capabilities and infrastructure to reimagine, strengthen, and grow the portfolio. We've created a dedicated Private Brand team with new design, sourcing, and merchandising roles, and broad cross-functional support. The team is now executing our vision for a differentiated, defendable, and durable portfolio. Our approach is rooted in consumer insights. Our team has conducted over 80,000 online surveys, 35 days of digital community engagement, and hundreds of hours of in-store fit research and shop-alongs. This data has informed our go-forward strategy, which is focused on five key pillars. Brand identity, original design, strategic sourcing, relevant size and fit, and compelling value. The role of private brands is to drive customer loyalty, be a differentiator for our business, complement our matrix of national brands, and benefit our gross margin. We currently have 24 private label brands in the Macy's portfolio, which combined represented roughly 16% of Macy's 2022 sales. Over the next three years, we will rigorously evaluate all of them and will refresh, reimagine, and replace brands. As part of our commitment to inclusivity, our new portfolio will reflect customers across every life stage, style preference, and price point. We started with an initial update of IMC in mid-2022. Early results have been favorable, with fourth quarter sales up 28% to last year. So turning to our second growth vector, our off-mall smaller format stores. These stores play an integral role in supporting our omnichannel ecosystem. We currently have eight Market by Macy's and two Bloomy's. These average about 30,000 to 40,000 square feet, or roughly one-fifth the size of our on-mall locations. Looking at the five Market by Macy's and the one Blue Mace that have been open for over a year, four-quarter comparable Own Plus license sales increased by 8% and 12% respectively. Off-mall conversion is significantly above mall locations, and customer experience scores on layout and neatness of the store, ease of the checkout process, and availability of colleagues are 25 to 30 points higher. According to Placer AI data, off-mall centers have two and a half times more visits than on-mall. Thus far, we are most successful in centers that include high-traffic concepts like off-price or grocery, where our unique products and brands provide a differentiated option. When opening in existing markets, cannibalization is lower than anticipated, and new customer acquisition rates are higher than on-mall. In 2023, we plan on opening four Market by Macy's and one Bloomy's, and if new locations continue to outperform, we will look to incrementally accelerate off-mall openings beginning in 2024. With our strong liquidity position, we are prepared to take advantage of opportunities as they present themselves. We are currently evaluating the right number and mix of on and off mall locations. Our ecosystem and customer are dramatically different today than when we announced our 125 Macy's store closure plan in February of 2020. Since then, we have closed approximately 80 Macy's locations and plan to close another five this fiscal year. We have shuttered our most significant underperformers, exited dying centers, and improved the existing store experience, while delaying closures of others that are cash flow positive. Today, roughly 99% of our mall base is profitable on a four-wall basis. Our third growth vector is our online marketplace. Over the last year, we have built a team focused on identifying, recruiting, onboarding, and supporting sellers. Since its launch last September, we have found that over 90% of our total marketplace customer base are Macy's cross shoppers. Additionally, marketplace number one captures incremental sales opportunity in categories and brands where we have historically limited offers, such as video games and electronics. Two, drives a larger average order value and higher units per order. Three, allows us to quickly move into new and adjacent categories without inventory risk. Four, gives our customer more choice at scale. Five, enables us to shift channels for certain customer wanted brands that do not have a high velocity of sell-throughs. And six, attracts a new younger customer. We have plans to add 2,000 brands on Macy's Marketplace this year and to launch a Bloomingdale's Marketplace in the back half. Luxury is our fourth growth factor. In 2022, both Bloomingdale's and Blue Mercury achieved their highest annual sales volume in history. Congratulations to the teams. At Bloomingdale's, which just celebrated its 150th anniversary, loyalist members accounted for over 70% of owned plus license comparable sales and spent 7% more year over year. Our top of the list loyalty customer, defined as loyalists who spent at least $5,000 annually, spent 9% more year over year. Over the past several years, we have used data and analytics to allocate assortments on a store level, including an elevated mix of brands and categories at our top locations. And across our base, we have been refreshing and remodeling our center core areas. Response from customers and partners has been positive, and we plan on accelerating this program in 2023. Blue Mercury has been under new leadership since mid-2021. Over the past year, our active customer base grew by 12% and our loyalty customer, which represents over 80% of sales, spent roughly twice as much as non-loyalty. Outstanding service, exclusive events, and cutting-edge national and proprietary brands continue to be top priorities. At Macy's, our focus on luxury beauty continues to strengthen our presence with great brands. Over the past five years, we have been actively updating our beauty departments and plan to renovate roughly 8 to 10 per year over the next several years. These are full beauty floor remodels where we will add new brands, right-size some existing brands, and focus on adjacencies and services. A key piece has been upgrading our luxury omnichannel beauty experience with brands like Armani, Chanel, Creed, Dior, Jo Malone, La Mer, Tom Ford, and YSL Beauty. We are also working with our luxury brand partners to create memorable events, such as our Dior Made With Love experience at this year's upcoming flower show. The fifth growth factor is personalized offers and communication. By targeting at the customer level, we can build loyalty, grow customer lifetime value, and further protect margins. This year, we have run tests with tens of millions of Macy's customers, including our Star Rewards members, who represent roughly 70% of our Macy's owned plus license comparable sales. The tests have focused on individualized promotions and consistent cross-channel experiences. We're pleased with early learnings and we will continue to refine offers and communication to make the experience more tailored and intimate. It's an exciting time to be here at Macy's. We have exited 2022 more relevant, flexible, and disciplined with a firm understanding of what it means to be a successful, modern department store. We are committed to freshness across categories. Our model allows us to pivot product, promotions, and messaging. We will buy conservatively, preserve liquidity, and open to buy, and not chase unprofitable sales. We are confident in the amount, composition, and mix of inventories, and we will continue to evaluate macro indicators and customer data to respond to signals, positioning us to compete and win regardless of the environment. So with that, I'm going to turn it over to Adrian for more detail on our fourth quarter and forward outlook.