Macy's Inc

Greetings and welcome to the Macy's Inc. second quarter 2023 earnings call. At this time, all participants are in 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 call 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.

Thank you, operator. Good morning, everyone, and thanks for joining us. With me on the call today are Jessica Nett, our chairman and CEO, Tony Spring, president, Macy's Inc., and CEO-elect, and Adrienne Mitchell, our COO and CFO. Along with our second quarter 2023 press release, a presentation has been posted on the investor section of our website at Macy'sInc.com. Unless otherwise noted, the comparisons discussed today are versus 2022. Comparisons to 2019 are provided, where appropriate, to best benchmark performance. All references to our prior expectations, outlook, or guidance refer to information provided on our June 1st earnings call, unless otherwise noted. 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 files with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAF financial measures. You can find additional information regarding these non-GAF financial measures, as well as others used on the investor 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 am going to hand it over to Jeff.

Good morning, everyone, and thank you for joining us. I'm going to begin today's call with a review of our second quarter results, followed by a discussion on the macro environment and how that is informing our approach to the remainder of the year. Tony will then give an update on our five growth factors and the merchandising strategy. From there, Adrian will provide additional detail on the second quarter and our third quarter and full year outlooks. He will also discuss opportunities under his expanded role as COO. Before we dig into the results, I want to acknowledge the devastating wildfires on Maui. We have accounted for all our colleagues on the island, but a few have been directly impacted by the destruction and loss caused by the wildfires. We're supporting those colleagues via our North Star Relief Fund, and are engaged with the American Red Cross through our annual financial commitment and customer roundup campaigns across our Hawaii and Guam stores to support Maui residents. Turning to second quarter results, we achieved net sales of $5.13 billion, a gross margin rate of 38.1%, and an SG&A rate of 37.5%. Adjusted diluted EPS of 26 cents primarily benefited from better than expected sales, gross margin, and SG&A. These factors more than offset lower than anticipated credit card revenues and a timing shift in the recognition of shortage. Taking a step back, we exited the first quarter with excess spring seasonal receipts at Macy's due to lower than anticipated demand trends in the back half of the quarter. On our earnings call, we committed to entering fall in a clean inventory position. Ultimately, we ended the second quarter with inventories down 10% to last year and down 18% to 2019. We were disciplined with our approach to inventory commitments and flexed the cadence and depth of promotions and markdowns, utilizing our data-driven tools to reduce the length of seasonal clearance activity by several weeks. Promotional sell-throughs were better than expected, and clearance markdowns were not as deep. Thanks to our cross-functional teams for being nimble, flexible, and embracing new ways of working. Entering the third quarter, store floors and online are less cluttered and easier to navigate. Content is fresh and seasonally appropriate, with open-to-buy and the ability to chase into areas of strength, all of which improves the omnichannel shopping experience. At Macy's, net sales declined 9.3% and comparable sales declined 8.2% on an owned plus licensed basis. Aged inventories were roughly 20% below last year's levels, and warm weather inventories were about 40% lower. Top performing categories include beauty, particularly fragrances and prestige cosmetics, women's career sportswear, and men's tailored clothing. We also continue to realize improvements in the soft home categories, including textiles and housewares. Active, casual, and sleepwear remain challenged. We are working on solutions to improve trends in these categories. In the near term, active should benefit from the reintroduction of Nike men's, women's, and kids online and in 75 doors in October, and the rollout to more than 200 doors this spring. This morning, we are also pleased to announce that select Under Armour men's product will be available in 150 stores and online beginning in February. The return of Nike and Under Armour speaks to the strength and reach of Macy's in our ability to attract sought-after wholesale partners. Looking ahead, we're working with both brands as well as potential new partners on how to expand further. Comparable owned sales for store within stores that are Macy's off-price concept backstage outperform Macy's full-line stores in which they operate by roughly 260 basis points. At Bloomingdale's, net sales declined 3.6% and comparable sales were down 2.6% on an owned plus license basis. Beauty, women's contemporary and designer apparel and shoes were our best performing categories while handbags, men's and dresses were challenged. Bloomingdale's focus remains on being the winning option for multi-branded, upscale retail. During the quarter, we introduced Hoka, a leading active shoe brand that is highly relevant to our consumer, and it has been selling out. Bloomingdale's outlet outperformed full-line Bloomingdale's locations by about 800 basis points. Later this month, we will be opening our 21st outlet, which will be located in Christiana, Delaware. At Blue Mercury, net sales rose 5.6% and comparable sales increased 5.8%. Customers continued to respond well to our skincare and color cosmetic brands. While second quarter results largely exceeded our expectations, they were promotional and markdown driven, which makes it difficult to decipher any potential shifts in consumer health. As we plan the remainder of the year and we think about 2024, we remain cautious on the pressures impacting our customer, especially at Macy's, where roughly 50% of the identified customers have an average household income of $75,000 or under. Over the last several quarters, we have seen the Macy's customer more aggressively pull back on spend in our discretionary categories. They are not converting as easily and becoming more intentional on the allocation of their disposable income, with an ongoing shift to services and experiences. We cannot predict when macro pressures will ease in our focus on controlling what we can control. However, we believe our strong balance sheet, continued discipline approach to inventories, and fortification of fundamentals position us well. Today we are reading and reacting to shifting consumer preferences in real time. We have remixed category and brand level receipts, pulled back on what's not working, and chased into areas of strength. As we look to the remainder of the year, we are confident in the thoughtful and strategic promotional calendar and offerings we have planned, and our ability to pivot to the right inventory at the right time and right value. We will continue to leverage our data science tools to refine inventory composition, breadth, and depth on a weekly basis, and a further streamlined decision-making to efficiently find and execute compelling opportunities that have a positive impact both near and longer term. At Macy's, for back to school, we have a compelling mix of relevant national brands, including Jordan Kids, Levi's, and Ralph Lauren. and are also offering a better selection of everyday basics, including uniforms. For holiday, we are further amplifying our strength as a gift-giving destination. We have elevated the quality of our products. We have built strong value across our categories from top market to private brands. And beauty and gifting are a more significant piece of our fourth quarter strategy, accounting for over 40% of Macy's brand sales versus mid-30s during the rest of the year. We anticipate a strong holiday for toys, and we will be offering a Disney 100th anniversary collaboration in-store and online. This is the start of a longer-term strategic partnership with Disney and Toys R Us that will have elevated, differentiated products across categories brought to life through engaging retail experiences. At Bloomingdale's, this holiday season, we are partnering with many of our luxury brands to introduce high-touch, unique experiences, events, and pop-ups curated around the interests and shopping patterns of our best customers. These activations have been designed to create animation and inspiration in our stores and strengthen our client relationships. And at Blue Mercury, we have an expanded fragrance offering for holiday, and we will launch our newest proprietary brand, which is focused on body and bath products. We are excited for the back half and all the ways we will serve our customers. Adrian will discuss our full-year guidance in detail shortly, but it is important to note that despite elevated headwinds for credit card revenue and asset sales relative to prior outlook, we are reiterating our full-year adjusted diluted EPS guidance. Before turning it over to Tony, I want to congratulate our teams on several milestones. At Macy's, we recently introduced our newest private brand on 34th. Its target demographic is the 30- to 50-year-old woman on the go. Commentary has been very positive, with approximately 80% of product reviews receiving four stars or above. At Bloomingdale's, we soft-launched Marketplace in July. Customers have been discovering and responding well to the new categories and brands offered. And at Blue Mercury, we moved our headquarters from Washington, D.C. to New York City. The team is energized by this important step in its growth trajectory, which places them in one of the major beauty centers of the world, brings cost efficiencies, and allows them to further benefit from the existing infrastructure of Macy's Inc. Looking ahead, we believe that our improving underlying fundamentals, five growth factors, and elevated customer experience are key components to relevancy and success as a modern department store. With that, Tony is going to discuss our five growth vectors and his approach to merchandising.