Macy's Inc

Greetings and welcome to the Macy's Inc. first quarter 2023 earnings call. 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 will now turn the call over to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.

Thank you, Operator. Good morning, everyone, and thanks for joining us. With me on the call today are Jeff Gannett, our Chairman and CEO, Tony Spring, President, Macy's Inc., and CEO-elect, and Adrienne Mitchell, our COO and CFO. Along with our first quarter 2023 press release, a presentation has been posted on the investor section of our website, macysinc.com. Unless otherwise noted, the comparisons we provide will be versus 2022. Comparisons to 2019 are provided where appropriate to best benchmark performance. 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 on the Investors section of our website. Today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call. With that, I'll turn it over to Jeff.

Thanks, Pam. So good morning, everyone, and thank you for joining us. Before getting started, I want to take a moment to acknowledge our team and how they have continued to navigate an extremely dynamic macro environment. On that note, let's discuss the current macro landscape. On our fourth quarter earnings call, we said that we expected pressure to be more intense in 2023 compared to 2022. Subsequently, demand trends began to worsen in mid-March and further decelerated in April. We believe cooler temperatures and headlines surrounding layoffs and the banking crisis were factors. But so were the compounding effect of some previously identified macro headwinds. The US consumer, particularly at Macy's, pulled back more than we anticipated as they reallocated spend to food, essentials, and services. We have planned our business for the remainder of the year, assuming mid-March through April macro headwinds continue and potentially worsen, and we have taken decisive actions in the second quarter and the back half of the year to ensure we are well positioned to compete. We will go into more detail on these shortly, but first, let's discuss first quarter results. We achieved adjusted diluted EPS of 56 cents. Versus our expectations, net sales were below Gross margin rate was above, and inventories were in line at down 7% year over year. February and early March performed largely in line with expectations. As previously mentioned, trends worsened in late March. We entered April confident in our product and had several important events, including friends and family at Macy's, the spring break season, and Easter. As April progressed, demand worsened across nameplates. The decline was most pronounced at Macy's, which has the largest exposure to the lower and middle income consumer, with roughly 50% of its identified customers at an average household income of $75,000 or under, and about 85% at $150,000 or under. By nameplate, Macy's net sales declined 7.7%, and comparable sales declined 7.9% on an own plus license basis. versus a 10.1% increase last year. We began the quarter with limited inventory carryover. Consistent with our inventory discipline, we had sold through the majority of fall and holiday product in the fourth quarter. In hindsight, we converted too early, with spring fashion well set by early March, but without enough balance in weather-appropriate apparel and footwear. Store traffic was healthy, but conversion was challenged. Most of the country experienced below average temperatures for an extended period of time, while we were over-indexed in spring and early summer fashion, including special occasion, and did not have enough colder weather and seasonless product. Ultimately, sell-throughs were below expectations as our customer became increasingly more deliberate in how they are allocating discretionary spend and buying closer to need. On the flip side, categories we are known for that are less discretionary and weather-dependent including beauty, particularly fragrances, women's career sportswear, and men's tailored, all outperformed. We also began to experience a comeback in certain pandemic categories, including textiles, housewares, and top of table, which is encouraging. At Macy's Backstage, which curates lower price point merchandise and flows in freshness more often, store within stores outperformed the full line locations in which they operate by approximately 150 basis points on a comp-owned plus licensed sales basis. These locations benefited from a greater emphasis on seasonless product and a strong value proposition. We currently operate at 310 backstages, including 301 store-within-stores, and plan to open nine more this year. Our luxury nameplates, Bloomingdale's and Blue Mercury, were also impacted by macro pressures, although not at the same rate or intensity as Macy's. Bloomingdale's results were roughly in line with our expectations. Net sales declined 2.3% and comparable sales were down 4.3% on an own plus license basis versus a 26.9% gain last year. Bloomingdale's registered strength and beauty, particularly fragrances, men's and women's contemporary apparel, and housewares. Bloomingdale's outlet, a relatively undeveloped part of the nameplate that appeals to the more value conscious luxury customer, also continued to outperform. At Blue Mercury, results once again exceeded expectations, benefiting from our differentiated product mix and unique competitive positioning as a luxury beauty retailer. Net sales rose 4.4% and comparable sales increased 4.3% versus a 25.2% gain last year, benefiting from strength in clinical and medical skin care as well as color. Quarter to date, demand trends have accelerated from April across nameplates. As the weather has turned more seasonal, our customer has been responding well to our compelling offerings and price points. We are likely also benefiting from pent-up demand. Although encouraging, we do not have clarity on whether or not these improvements indicate a trend change reflective of a healthier consumer. These improvements have been strongest at Bloomingdale's and Blue Mercury, potentially indicating a further bifurcation of customer behavior by income tier, which we are closely monitoring. While first quarter adjusted EPS at Macy's Inc. was ultimately better than our expectations, we did not end as strong as we would have liked. We will not carry problems from one quarter to the next. We have moved quickly to improve the composition of our assortments for the back half. At the same time, we are also taking a more cautious view of our customer. The high end of our second quarter and full year guidance ranges assume heightened macro pressures experienced in mid-March through April that they persist. while the low end of both contemplates potential deterioration as the year progresses. If demand improves, we will use our ample inventory receipt reserve, which is above last year's levels, to chase into areas of strength as they materialize. Availability of goods remains robust, and we are confident that, with our strong liquidity position, we will be able to secure the right product to support demand curves if justified. Now let's turn to the specific actions we have taken to ensure we are well positioned to compete in the back half and longer term. For the second quarter, we have accelerated the timing and depth of promotional events, markdowns, and clearance at Macy's to liquidate seasonal merchandise. This includes slower moving first quarter spring transitional receipts, as well as May flows that we were unable to impact following the rapid deterioration in demand. We are utilizing our pricing science tools to approach markdowns and promotions with precision to maximize merchandise margin. We have also adjusted the timing, composition, amount, and value proposition of receipts. For the third and fourth quarters, we are leaning into categories that are working, like beauty, career sportswear, and gifting, and are further reducing our emphasis on downtrending categories. Looking specifically at the fourth quarter and our leading position as a gifting destination, This year, we will have more newness compared to last year, including exclusives that leverage our strong vendor relationships in beauty, where we had great Mother's Day and Valentine's Day performance, and in toys. We also recognize the need for a better balance of cold and warm weather goods at Macy's. Adjustments have been made to flow product closer to need. In addition, we are working with our partners to offer more seasonless year-round fashion content. Other actions taken. improved receipt flow and in-stock position within our core assortment, enhanced pricing algorithms to maximize sales, margin, and competitive positioning, and updated marketing messaging to speak to our even stronger value proposition. It is imperative that we have the right assortment, including the appropriate mix of private and national brands that our customers care about, with compelling value and price points that appeal to our diverse, fashion-conscious base. Value does not mean the lowest price. It means offering the right brands, fashion content, and elevated omnichannel shopping experiences. This morning, we are excited to share that we are bringing Nike back to the Macy's nameplate this fall. This mutually beneficial relationship reflects our strategy to provide customers with an enhanced and elevated offering. Starting in October, an expanded Nike selection, including apparel, plus-size women's, big and tall men's, kids' bags and gear, will be available online and in key locations nationwide. Footwear will continue to be sold in our finish line licensed locations. We look forward to scaling our Nike partnership with additional locations in spring of 2024. We remain focused on the long term. Balance sheet health and cash preservation are critical to achieving our goals. About six months ago, we embarked on a cost savings project to reimagine our ways of working, drive clear prioritization across key enterprise capabilities, and reduce complexity. Given late first quarter trends, that work was accelerated, and we have identified an additional $200 million of cost savings for this year and roughly $300 to $350 million of savings in 2024. We have also reduced this year's planned CapEx spend by roughly $50 million. Adrian will discuss the specifics, but investments in our five growth vectors remain protected. Our ambitions are greater than our recent results. As a seasoned retailer, we understand the challenges that we are facing and will continue to pull the levers needed to achieve our aspiration of low single-digit sales growth and a sustainable low double-digit adjusted EBITDA margin beginning in 2024. The biggest risk to achieving that goal is if pressures on the consumer further intensify at an accelerated rate next year. I am confident that we have the right strategy and team to lead us into the future. I have a tremendous amount of personal and professional respect for incoming CEO Tony Spring. He is an excellent merchant and marketer and has a well-deserved reputation as an innovator, brand builder, and talent developer. And this marks Adrian's first call as Chief Operating Officer and Chief Financial Officer, a promotion that is well-deserved. Adrian's strategic thinking and financial acumen have enabled us to achieve our current position of financial strength and has set us up to continue to make crucial investments for future success. Congratulations to you both. I look forward to what you will achieve together. And I know you're all excited to hear from Tony, so I'm going to turn it over to him for some brief comments.