Macy's Inc

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 would now like to turn the call over to Pamela Quintiliano, Vice President of Investor Relations. Ms. Quintiliano, you may now begin.

Thank you, Operator. Good morning, everyone, and thanks for joining us. With me on the call today are Tony Spring, our CEO, and Adrian Mitchell, our COO and CFO. Along with our fourth quarter 2023 press release, a presentation has been posted on the Investors section of our website, Macy'sInc.com, and is being displayed live during today's webcast. Unless otherwise noted, the comparisons we provide will be 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 the November 16th 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 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 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'll turn it over to Tony.

Thanks, Pam. It's great to be here on my first call as CEO. We have a lot to cover this morning, including our fourth quarter results, our outlook for fiscal 2024, and our strategy, a bold new chapter, which is designed to accelerate financial improvement and deliver sustainable, profitable growth. Taking a step back, this holiday season we offered an improved omnichannel experience with effective merchandising and a clear demonstration of value. Fourth quarter and full year adjusted EPS were above our most recent guidance, reflecting better than expected gross margin, SJNA and other revenues, and higher asset sale gains. We are a company defined by the quality of our people. And we could not have accomplished these results without the enthusiasm and dedication of our teams across stores, distribution centers, and our corporate offices. Throughout the year, our consumer proved to be more resilient than expected. While there was pressure from ongoing reallocation of spent and non-discretionary items, our focus on new and relevant private and national brands enabled us to effectively compete. The likelihood of a recession is now lower than it was a year ago. Inflation has slowed. but so has labor and wage growth. As such, we expect our consumer to remain under pressure. It is against this backdrop that we share our vision for a modern Macy's Inc. that takes a holistic view of our portfolio of brands. It is the thoughtful culmination of comprehensive research and reflection that began in earnest early last year. A bold new chapter is designed to return Macy's Inc. to enterprise growth, unlock shareholder value, and better serve our customers. It builds on our five growth factors, adds newly identified and stress-tested areas of opportunity, and is supported by our financial disciplines. Over the next three years, we intend to, one, strengthen the Macy's nameplate and return it to top-line growth, two, accelerate luxury growth, and three, simplify and modernize end-to-end operations. We view fiscal 2024 as a transition and investment year. as we begin to implement real change for our customers. Beginning in 2025, we expect Macy's Inc. to deliver low single-digit comp growth, mid single-digit EBITDA dollar growth, and a return to pre-pandemic levels of free cash flow. As we look across our omnichannel enterprise, we are taking a balanced portfolio approach to establish the right mix of on and off mall Macy's, Bloomingdale's, and Blue Mercury stores in the best locations and markets. By the end of 2026, we plan to close approximately 150 underproductive Macy's locations and reprioritize investments in our roughly 350 remaining locations, inclusive of full-line furniture and current off-mall doors. Grow our Bloomingdale's and Blue Mercury store bases by a combined roughly 20% and monetize $600 to $750 million of assets primarily related to stores and distribution center closures. In setting our bold new chapter strategy, we've been our own toughest critics. We have challenged the status quo, identified what we've gotten right and where we could have done better. We also conducted external focus groups and surveys with current, lapsed, and potential customers. We're driving a higher level of accountability amongst our teams to ensure we keep up with customers' evolving tastes, needs, and preferences. As I now turn to discussing each element of a bold new chapter in more detail, I'd like to stress that this work is already underway. We are moving swiftly and methodically. While some aspects should take time to bear fruit, others are intended to have a more immediate impact. The first component is strengthening the Macy's nameplate. Coming from Bloomingdale's, I have approached Macy's with an outsider's point of view. There are few brands that have the deep heritage and a strong emotional connection with its customer. But as we conducted surveys and focus groups with some of our 41 million active multi-generational customers, it became increasingly clear that the needs are not being fully met. They want an omnichannel shopping environment that's neat, easy, and convenient, an edited and updated selection of relevant trending products, clarity on value and pricing, and greater availability of colleagues to find product and complete a purchase. This list is similar to what I first encountered at Bloomingdale's. While there are certainly differences, the core formula for success is the same. It's going back to basics and balancing the art and science of retail. By putting the customer first, which has always been my priority, we improve Bloomingdale's sales, profit, and net promoter scores. We will do the same for Macy's. First, by focusing our resources and optimizing our store footprint to meet the customer where they are. Second, revitalizing the assortment to improve the relevance and value. And third, modernizing the shopping environment to ensure a convenient, easy, and frictionless customer experience across channels. Strengthening the Macy's nameplate should result in healthier sell-throughs and more productive stores, benefiting Macy's sales and margin profile, and returning the nameplate to growth. The first step is to close and monetize under productive locations so that we can prioritize the investments in stores that will lead us to a healthier future. Over the past 10 months, we have refined our approach to closures and have developed an even more sophisticated framework to evaluate our assets. Our thresholds to keep a store open have become more stringent. In the past, we may have continued operating an underproductive store that was four-wall cash flow positive. The bar has now been raised. We have conducted extensive internal and external analysis of our Macy's fleet center by center and market by market. We have compared value to operate versus value to closed and looked at demand in each market to determine the right construct of stores and digital with a focus on being in the strongest centers. This is not a one-time exercise. Given rapidly shifting market dynamics and consumer preferences, it will be an always-on practice. Through our work, we have identified approximately 150 Macy's stores for closure over the next three years. We call these our non-go-forward locations. In fiscal 2023, they represented about 25% of Macy's Inc's gross square footage, but less than 10% of its sales. The roughly 350 remaining Macy's, inclusive of full-line, furniture, and our current small formats, are referred to as go-forward locations. In fiscal 2023, comp sales of Macy's go-forward locations outperformed non-go-forward locations by approximately 500 basis points. and the four-wall adjusted EBITDA rate outperformed by about 950 basis points. Simply put, the value to monetize non-go-forward locations is higher than the value to operate. We expect to close about 50 non-go-forward stores by the end of this fiscal year and prioritize our focus where we have the most opportunity to improve square footage productivity and better serve our customer. Over the next three years, we estimate non-go-forward store monetization proceeds of roughly $500 to $650 million and asset sale gains of about $250 to $350 million. We will make sure the economics of each closure and monetization transaction make sense. Working together with our real estate advisors, our team has generated over $2.4 billion of real estate monetization proceeds from 2015 to 2023, and we will leverage that expertise and those relationships as we continue to refine and assess our base. Importantly, our healthy balance sheet allows us to be opportunistic on timing of the closures to deliver the highest value for our shareholders. We have recently stopped all but required maintenance investments in our non-GoForward locations. We plan to reallocate some of the capital to our GoForward fleet and we'll work closely with our vendor partners on joint business plans. We will also work with non-GoForward location colleagues to support and place them into open roles in nearby locations whenever possible. In addition, we'll educate our customers on the proximity of our GoForward stores and access to our digital platforms. Exiting stores allows us to prioritize our highest return on-mall opportunities and open more small format off-mall Macy's. At the end of the year, we operated 12 small formats. As previously disclosed, we plan to open up 30 more in the next two years, including 12 this year, informed by the real estate analysis discussed earlier. With these additional stores, we will have a better understanding of our competitive positioning and long-term potential. Having the right footprint and location is important, but we must also have the right product at a value that we know appeals to our customer. That is why we are revitalizing the Macy's assortment. Recently, we shifted our merchant responsibilities to a full category approach, rather than the separate teams for owned and licensed. Consolidating roles creates more accountability. There is increased focus on the nuances that make each category thrive, With increased visibility and awareness across the entire categories, merchants should be able to provide more consistency in product and experience and reduce duplication. Bloomingdale successfully adopted this model several years ago. It resulted in stronger relationships with our partners, diversified product and choice across price points, and helped us grow market share. We also continue to rebuild our private brand portfolio. which capitalizes on white space opportunities that compliment market brands and give customers more reasons to shop with us. Private brands have higher merchandise margins and profit contributions relative to market brands. In fiscal 2023, private brands represented about 15% of Macy's sales versus 16% in 2022, reflecting the exit of several heritage women's brands, including Alfani and Karen Scott. We expect to complete all private brand exits this year. Longer term, we expect private brand volumes to grow as we reimagine existing brands and introduce others, including our latest, State of Day. With a rationalized and focused existing store fleet and better product, we also want to improve the omnichannel experience. Reflecting learnings from our research, we know we can better serve our customer. We plan to increase resources and investments to improve the experience in our roughly 350 remaining Go Forward Macy's locations. We will test and learn and not bite off more than we can chew. We'll be thoughtful, methodical, and unemotional in our approach. In fiscal 2023, we had a small number of incubator stores which tested new ideas that were based on customer feedback and prioritized conversion. Comps outperformed the broader Macy's fleet by over 350 basis points. That's given us confidence to expand the pilot to 50 doors, which we refer to as our first 50 program. The FIRST50 program is purposely different from past pilots. It centers on the customer and is representative of our go-forward geographic footprint, balanced across volume tiers, in stores with strong vendor engagement, supported by more associates on the floor to serve customers, and focused on merchandising and visual presentation. We are conducting additional tests in the FIRST50 doors this year and plan to apply pertinent learnings to a broader set of go-forward locations beginning in fiscal 2025. Now let's turn to digital, which is also an important part of the Macy's current and future customer experience. We view digital as the gateway for customers to research, discover, connect, and transact with Macy's. It's imperative that we show up with inspiring content at the right place, time, and value. Our digital team is relentlessly seeking to better understand our customers' pain points across mobile, app, and desktop platforms. We have reevaluated our foundation to improve search and navigation tools. Customers will be offered personalized communications and recommendations that have a definitive Macy's point of view, culminating in efficient and speedy checkout. Rewriting this digital journey should generate greater loyalty and increased conversion. We also expect growth of Marketplace and Macy's Media Network, both of which were designed to improve profitability and increase customer engagement. To conclude on the Macy's nameplate, our focused omnichannel portfolio will empower us to provide a better customer experience. We intend to fuel go-forward locations and our digital channels with curated and compelling assortments, have a better in-stock position, and appropriate investments to create a more welcoming environment and enhanced service. Our new Chief Marketing Officer, who joined us in December, is working closely across teams to align Omni Touchpoints to customer expectations and create a modern brand platform for all of our communications. More to come as the year progresses. As I shared earlier, we view fiscal 2024 as a transition and investment year, and we expect to return Macy's Inc. to consistent comp sales and EBITDA dollar growth beginning in 2025. Longer term, we aspire to have a compelling physical and digital portfolio in the strongest markets. We are one Macy's Inc., and our future relies on our ability to offer customers the optionality to shop how, where, when, and for what they desire. As Macy's rebuilds, our luxury nameplates, Bloomingdale's and Blue Mercury, are poised for acceleration, which brings us to the second component of our bold new chapter, luxury growth. During my tenure leading Bloomingdale's and Blue Mercury, we strengthen relationships with our customers and vendor partners. Both nameplates have been outperformers within our portfolio and are viewed as leaders in identifying up-and-coming trends and brands. They provide a mix of accessible and aspirational product, top-notch customer service, and an elevated omnichannel shopping experience that's warm and inviting but doesn't take itself too seriously. Over the next three years, we plan to take advantage of our leadership position to more aggressively grow our luxury nameplates. While cognizant of luxury brand headwinds, with the aspirational customer stepping back, we believe Bloomingdale's and Blue Mercury are uniquely positioned within the broader retail landscape. Today, Bloomingdale's current foothold is predominantly coastal. The adage that fashion trends begin in LA, New York, or Miami and then migrate no longer holds true. With the rapid growth of social media and recent population shifts, the fashion playing field has leveled and psychographics have moved. Of the top 50 designated market areas in the US, the Bloomingdale's name plate is physically only in 14. This morning, we're announcing the accelerated rollout of our small format Bloomingdales, which we call Bloomies, and our outlets. At the end of fiscal 2023, we operated just 33 Bloomingdales, 3 Bloomies, and 21 outlets. which we refer to collectively as the Bloomingdale's nameplate. Over the next three years, we plan to open a combined 15 Bloomingdale's and outlets across new and existing markets. Bloomingdale's also has a strong digital presence, offering compelling content updated regularly and a highly curated marketplace. Currently, about 80% of Bloomingdale's digital sales are in markets where we have physical stores. We believe that entering new markets should only benefit the digital business further. We have taken the time to prove out the Blumey's and Bloomingdale's outlet concepts before committing capital to this accelerated rollout. We are doing the same at Blue Mercury, where we have the opportunity to be the fastest growing luxury beauty retailer and own a greater piece of the approximately $90 billion North American beauty market. Customers love Blue Mercury's elevated skincare, beauty, spa offerings, and high touch customer service. We operate at 159 locations at the end of the fiscal year. Our latest remodels, located in Bronxville, New York, and New Canaan, Connecticut, have been well received and will serve as the foundation for the New Blue, which encompasses our total Omni evolution, inclusive of outdated branding. They'll have an expanded assortment, elevated aesthetics, centralized customer service hubs, integrated spa facilities, and technology to support relationship selling. Over the next three years, we anticipate at least 30 Blue Mercury store openings, and remodeling roughly 30 others. Learnings from these doors will guide long-term expansion plans. Similar to other nameplates, digital remains a meaningful opportunity for Blue Mercury. To close out the discussion on luxury, we have a high degree of confidence in the Bloomingdale's and Blue Mercury nameplates, which are healthy, accretive, and have strong investment profiles. Now is the time to capitalize on this momentum and we expect these investments that we are making will fuel sales growth and margin expansion. Turning to the third and final component of our bold new chapter strategy, simplifying and modernizing end-to-end operations. We are committed to delivering a more efficient operating model that better serves our customers. Over the next three years, we have plans to rationalize and monetize our supply chain asset portfolio, streamline fulfillment, improve inventory planning and allocation, and deliver a more scalable technology platform. A modern operation is our objective throughout the company. Aligning to the anticipated future omnidemand provides synergistic cost savings and allows us to improve our ways of working. To support that, in January, we reduced our corporate workforce by 13%. We took out layers of management, consolidated positions, and offshore selected roles. At the same time, we remain focused on hiring the best talent to support our view of the future. Adrian is leading the end-to-end operations work. He will now provide more detail before discussing our fourth quarter results and forward outlook. Adrian?