Macy's Inc

Greetings and welcome to the Macy's Inc. 3rd quarter 2024 earnings conference 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 call is being recorded. I would now like to turn the call over to Pamela Quintiliano, VP 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 Tony Spring, our chairman and CEO, and Adrienne Mitchell, our COO and CFO. Along with our 3rd quarter 2024 press release, a Form 8K has been filed with the SEC, and a presentation has been posted on the Investor section of our website, Macy's Inc. .com, and it's being displayed live during today's webcast. The Form 8K includes revisions made to its historical consolidated financial statements that were impacted by the immaterial misstatements that the company has previously disclosed. Unless otherwise noted, the comparisons we provide will be versus 2023. All references to our prior expectations, outlook, or guidance refer to information provided on our August 21 earnings call unless otherwise noted. In addition, all references to comp sales throughout today's prepared remarks represent comparable owned plus licensed plus marketplace sales, and owned plus licensed sales for our store locations 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, 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.

Thank you, Pam, and good morning, everyone. As previously reported, Macy's first 50 locations, Bloomingdale's, and Blue Mercury all comp positive in the third quarter. We maintained effective expense controls, generated above planned asset sale gains, and are encouraged by our -to-date comparable sales trends, which remain above our third quarter levels. Year to date, we have made progress in our bold new chapter strategy and remain on track to achieve our long-term goal of sustainable profitable growth. Before we get into our third quarter financial performance, I want to discuss the independent investigation into the issue related to small package delivery expenses in one of our accrual accounts. Our investigation is now complete. We've determined that the individual responsible for the issue intentionally made erroneous accounting accrual entries beginning in Q4 2021 and in subsequent periods, acted alone, and did not pursue these acts for personal gain. As noted in our press release this morning, we've concluded that these erroneous entries had an immaterial impact on our cumulative financial results and no impact on our cash position as all vendors were fully paid. As a reminder, our delivery expenses recorded in cost of goods sold, which falls within gross margin. To provide transparency, adjusted numbers for fiscal 2021, 2022, and 2023, and quarterly periods for fiscal 2023 are in today's form 8K filed earlier this morning. Adrian will also provide detail on the impact to our financial statement metrics in his prepared remarks. But I want to be clear, integrity is paramount at Macy's Inc. and we promote a culture of ethical conduct. When discovered, we move quickly to investigate and address the issue. The responsible individual is no longer with the company following the discovery of their actions. We've also identified and begun to implement additional controls to be a stronger and more disciplined organization so that an action like this could not happen again. Now let's turn to the third quarter results. Net sales of 4.7 billion were in line with our outlook provided in August. Momentum in first 50 locations at Macy's and Bloomingdale's and Blue Mercury were offset by weakness in Macy's non-first 50 locations, its digital channel, and its cold weather categories, all of which have registered sequential quarter to date comparable sales improvements from their third quarter levels. Inclusive of delivery expense impact, adjusted third quarter EPS of 4 cents benefit from a pull forward of non-go forward asset sale gains into the third quarter from the fourth quarter. We are pleased with our third quarter results. Our teams did a great job. They thoughtfully responded to the extended warm weather conditions and an active hurricane season. We took proactive steps to address the dynamic environment and best serve our customers through reprioritizing categories, marketing, in-store presentations, and adjusting go forward orders to provide more newness. At the same time, we continued to invest in and execute our bold new chapter strategy. Three quarters into the strategy, initiatives continued to gain traction across all three pillars. We're using data to test, iterate, and refine our initiatives. Our healthy balance sheet and ample liquidity allow us to deploy capital that supports our long-term aspirations without compromising our financial health. Turning to the first pillar of our strategy, strengthening the Macy's nameplate. First 50 locations delivered a positive .9% comp, representing their third consecutive quarter of comp sales growth, and 410 basis points of outperformance relative to the total Macy's nameplate. These results reflect positive customer response to investments in staffing, merchandising, visual presentation, and eventing, which led to a 400 basis point improvement in net promoter scores compared to last year, representing our third consecutive quarter of improvement. We've also been testing women's shoes and handbag staffing at about 100 other go forward locations. Having dedicated runners to get shoes from the stock room, and salespeople available to assist in handbags allows our colleagues to spend more time with the customer. Compared to non-first 50 Macy's locations, and those that did not receive additional staffing, women's shoes and handbag sales outperformed by roughly 600 and 700 basis points respectively year over year. This illustrates the importance of dedicated customer assistance in high touch point categories. These learnings, along with those from the first 50, are being used to inform our plans for expanding initiatives to additional go forward locations in 2025, which will be discussed in more detail on the fourth quarter earnings call. Improvements have not been limited to our first 50 and 100 test door locations. Across the Macy's nameplate, we continue to take active steps to improve the customer experience. We are training colleagues to be more helpful by leveraging digital tools and in person coaching. And our merchandise revitalization is gaining traction. We've reduced exposure to less relevant brands and expanded our offering in ones that customers are responding to, including Anne Sasong, Donna Karen, Steve Madden, Avette Lafitte, Dolce Vita, just to name a few. We're providing compelling fashion and value in our women's private label brands. Such as Charter Club and Style & Co. Beyond women's apparel, fragrance has continued to be a standout. While men's non-active apparel, handbags and home sales, although still weak, sequentially improved in the third quarter. Customers have taken notice of the better product and experience with total nameplate net promoter scores up roughly 230 basis points year over year and representing our highest score ever. Rounding out the discussion on Macy's, we're encouraged by the pace and economics of our -go-forward store deals. We now expect to close roughly 65 locations this year. In line with our typical cadence, closures will occur post-holiday. The second pillar of our bold new chapter strategy is accelerating luxury growth. Both Bloomingdale's and Blue Mercury posted positive third quarter comps. Customers continue to respond well to their breadth of product, price points, market and private brands, and we remain confident in our ability to grow sales at each of these nameplates. At Bloomingdale's, our aspirational to luxury positioning and associated price points are key differentiators. Comp sales rose 3.2%, driven by women's advanced contemporary apparel, which continued to be a standout, as well as beauty and digital. Customers responded well to new brands, including Skims and Jenny Kane, and handbags have begun to show signs of improvement with strength in Tory Burch, Coach, Longchamp, and Rebag, which is our recent pre-owned luxury accessories launch. These improvements were partially offset by the softness in certain areas of the home store. During the third quarter, Bloomingdale's had its From Italy with Love campaign, which was a strong driver of traffic and a brand amplifier. It brought the best of Italy to the US, embracing its fashion, design, cuisine, and culture through 300 exclusive products from 150 plus renowned partners and 30 new brands, and garnered roughly 2 billion media impressions. From Italy with Love is a tangible example of how Bloomingdale's remains close to and connects with its customers through unique product and experiences, empowering it to be the local leader in the markets it serves. We recently opened our fourth Bloomies location, located in Shrewsbury, New Jersey. This store was informed by extensive customer and market research. It's our first women's only store, and offers a highly curated assortment that's been well received. Blue Mercury achieved its 15th consecutive quarter of positive comps, posting a .3% gain. During the quarter, we expanded popular lines such as Sicily Paris, Schenmedica, Augustina's Bader, and introduced Victoria Beckham Beauty. The quarter also benefited from Blue Mercury's 25th anniversary celebration, which kicked off in September with the unveiling of an elevated website aesthetic that offers improved navigation, an educational blog, and new logo. Blue Mercury's 25th anniversary celebration is not limited to its website. We've also introduced a more modern aesthetic to our new and remodeled stores. During the quarter, Blue Mercury remodeled four locations and opened eight, for a total of five remodels and nine new stores this year. New and remodeled locations can continue to outperform the total fleet. We plan to open an additional nine and remodel two more stores in the fourth quarter. Moving to our final pillar, simplifying and modernizing -to-end operations. We are pleased with the work our teams are doing to phase out legacy technology across the organization, improve our search platforms, and deliver an improved customer experience. In our supply chain, we remain focused on creating a more efficient and effective network. Through the third quarter, speed of delivery and fulfillment have each improved by roughly 800 basis points compared to the prior -to-date period. As a result of our multi-year investments, we're realizing lower fulfillment costs, optimized cash flow generation, and seeing improved net promoter scores for product availability, in-stock rates, and fulfillment of packages. Before I turn over to Adrienne, I wanted to share more on -to-day trends and how we're approaching the remainder of the year. Consistent with our press release commentary, -to-day comparable sales trends remain above third quarter levels. We're listening to our customers and believe our compelling product, marketing, value, and experiences, and of course, front-line colleagues, are giving them a reason to shop our nameplates. Our marketing teams, in conjunction with Merchandise and Digital, have developed exciting holiday strategies with multiple touch points and events. We're leveraging our Macy's Thanksgiving Day Parade and gift-giving destination status. Heading into Thanksgiving, our Parade of Deals event filled excitement with 24-hour specials that culminated in our 98th annual parade, which had about 32 million viewers, a new record. And this year, we've brought our gift guide to life in human form with actress Alison Brie, who stars in our holiday campaign, which is supported by a team of high-profile social content creators with over 24 million followers, and we call them the Macy's Giftfluencers. And the excitement is not limited to Macy's. Bloomingdale's holiday campaign and iconic windows are inspired by its collaboration with Universal Pictures Wicked. The Wicked Good Holiday Campaign includes 100 exclusive products, 150 brand participants, and our biggest aqua collection to date. And at Blue Mercury, we're emphasizing the gift of self-care and unique skin and beauty products, including new perfume offerings and gift sets from Perfume to Marley, Creed, The Manicurist, and Flamingo Estate. As we look to the remainder of the year and beyond, we are well positioned across nameplates to capture mindshare through curated assortments, relevant messaging, enhanced customer service, compelling value and promotions, all supported by improved -to-end operations. With that, let me turn it over to Adrian.

Thank you, Tony, and good morning, everyone. Our third quarter performance reflects our team's ongoing focus and agility in navigating a dynamic environment, positive reception to investments in our customer experience, and the benefits of continued operational productivity efforts. These efforts continue as our teams work to deliver on holiday and the execution of our bold new chapter strategy. Before discussing the quarter, I'll first provide detail on the revisions to our financial statements. We have concluded from our independent investigation that the erroneous entries had an immaterial impact on our financial results over the cumulative period the actions took place. The erroneous entries from the fourth quarter of 2021 through the fiscal quarter ended November 2nd of this year, totaled a combined $151 million. During the same period, the company recognized approximately $4.36 billion of delivery expenses. The largest quarter delivery expense impact tended to occur in the fourth quarter due to elevated holiday volumes. This was not theft. There was no impact to revenues, and there was no impact to cash or inventories as all vendors were fully paid. This matter did not require reissuing prior financial statements as the impacts were deemed immaterial. We have provided revised historical financial information in this morning's press release and 8K for your reference. For purposes of today's call, third quarter -over-year comparisons as well as our fourth quarter and full year outlooks reflect our revised results. Management performed additional analysis and other procedures to ensure that our consolidated financial statements were prepared in accordance with the U.S. generally accepted accounting principles. Now diving into third quarter results, total Macy's Inc. net sales were $4.7 billion, down .4% to last year, unchanged from what we reported on November 25th. Owned AUR rose 3.7%, driven primarily by category and product mix. Total enterprise comps were down 1.3%. Go Forward Business Macy's Inc. comps, which includes Macy's Bloomingdale's and Blue Mercury Go Forward locations, plus digital, declined 0.9%. By nameplate, Macy's net sales, which includes all Macy's locations in digital, were down .1% and comps were down 2.2%. We estimate that unseasonably mild temperatures and the associated negative impact on fall transitional and colder weather product sell-throughs accounted for roughly one point of comp sales. Macy's nameplate Go Forward Business comps, which include approximately 350 Go Forward locations and digital, were down 1.8%. First 50, which we view as the leading indicator of Go Forward Macy's ability to achieve comp sales growth, posted a positive .9% comp. Both Bloomingdale's and Blue Mercury had a strong third quarter. Bloomingdale's net sales were up .4% and comps rose 3.2%, while Blue Mercury net sales were up .2% and comps rose 3.3%. Other revenues of $161 million declined 9.6%. Net credit card revenues were $120 million. Profit share was better than our expectations while net credit losses were in line. Macy's media network revenues were $41 million and continue to be supported by higher advertiser and campaign counts. Before discussing gross margin rate and inventory, a reminder that for this year, neither are directly comparable to the prior periods due to our conversion to cost accounting at the beginning of this fiscal year. And gross margin rate for the current and prior year quarters have been adjusted for delivery expense by 30 basis points and 10 basis points respectively. Gross margin rate was .6% down 60 basis points year over year. Within that, merchandise margin declined 70 basis points. Relative to last year, slightly less than half of the decline was due to our shift to cost accounting. The remainder reflected product mix. Relative to our expectations, we took proactive discounting on seasonal fall transitional product and had higher penetration of clearance sell-throughs in response to warmer weather conditions and a more value conscious customer. This was partially offset both year over year and relative to expectations by efficiencies in the company's fulfillment network and lower shift sales volume. End of quarter inventories were up .9% year over year, approximately half of which was due to the conversion to cost accounting. We made sequential progress on the quantity and quality of our merchandise and believe Q3 ending inventories reflected an appropriate amount of newness for this holiday season. SG&A expense dollars were $2.1 billion or .1% of total revenue. We continued to take a disciplined approach to cost controls while making strategic customer facing investments. These investments contributed to the $24 million increase in SG&A compared to last year while lower total revenue led to the 160 basis point increase in rate. Turning to real estate, during the quarter, we recognized $66 million of asset sale gains, reflecting the pull forward of select deals into the third quarter from the fourth quarter. The deal making environment remains favorable and as Tony mentioned, we now expect to close about 65 locations this year up from our prior expectation of 55 and 50 at the beginning of the year. Concluding the conversation on earnings, we delivered adjusted third quarter EPS of 4 cents. Results primarily reflect higher asset sale gains which contributed roughly 10 cents of EPS. This was offset by this year's delivery expense adjustment related to our recent concluded investigation which negatively impacted EPS by approximately 4 cents. On a year to date basis, cash used by operating activities was $30 million, largely driven by lower earnings. Capital expenditures totaled $649 million. Free cash flow was an outflow of $492 million and we have paid $144 million in cash dividends. We also completed a $220 million tender offer to further remove liabilities from the enterprise while keeping the flexibility to fund our own growth and invest in consumer facing initiatives. We, along with our board, are constantly evaluating our capital deployment to ensure it aligns with our priorities which are maintaining a healthy balance sheet, investing in profitable growth initiatives and returning capital to shareholders. Before discussing our fourth quarter and full year outlooks, a few reminders. First, the outlooks incorporate the revised historical delivery expense and updated delivery expense expectations for the fourth quarter and fiscal year as small package delivery expense had not been forecasted properly by the individual responsible for the erroneous accounting entries. Second, we assume current pressure on the consumer persists and that they will remain choiceful in their discretionary spend. And third, the fourth quarter of 2024 is a 13 week period while fourth quarter 2023 was a 14 week period. The 53rd week in fiscal 2023 contributed $252 million to net sales. For the fourth quarter, net sales are expected to be $7.8 to $8 billion. On a 13 week basis, net sales are expected to be down approximately 1% to up approximately 1.5%. Although quarter to date comparable sales trends have improved sequentially from the third quarter, there are several large volume weeks still ahead. We are pleased with recent trends but do not believe there will be a full recapture of the lost cold weather product sales, especially given this year's shortened holiday season. Other revenues are projected to be roughly $206 to $216 million, including credit card revenues of approximately $138 to $148 million. Gross margin rate to be approximately .3% to 35.7%, which includes a roughly 85 basis point accounting adjustment for delivery expense that was not included in our previously issued guidance. On an adjusted basis, year over year, the majority of the anticipated gross margin rate decline is due to the shift to cost accounting at the beginning of this fiscal year. The gross margin outlook range also incorporates our expectation for a heightened promotional environment relative to our prior view and commitment to taking actions to limit inventory liabilities, particularly in seasonal goods as we enter fiscal 2025. End of quarter inventories to be roughly flat on a reported basis relative to last year. Adjusting for the shift to cost accounting, inventories would be projected down low single digits. We are proud of the work the team has done to improve our sales to stock ratio. Asset sale gains are expected to be roughly $32 million, primarily reflecting the pull forward of certain asset monetizations into the fourth quarter from fiscal 2025. Finally, we expect adjusted diluted EPS of $1.40 to $1.65, including an approximately $0.17 adjustment for delivery expense. To take into account third quarter results and our fourth quarter outlook, we now expect the following for the full year 2024. Net sales of approximately $22.3 to $22.5 billion. For the full year, we now assume Macy's Inc. comps, inclusive of non-go forward locations in digital, to be down 1% to roughly flat, representing a sequential improvement from the third quarter levels. Macy's nameplate go forward locations and digital are expected to be down 1% to roughly flat, and our luxury nameplates are expected to collectively be up 2% to up 2.5%. Other revenue of $680 to $690 million, including credit card revenues of $500 to $510 million. Gross margin as a percent of net sales of .2% to 38.3%. This compares to an adjusted prior outlook of .6% to 38.8%, which includes an approximate 40 basis point adjustment for delivery expense. The adjusted full year gross margin outlook is relatively in line with last year's adjusted rate. SG&A as a percent of total revenue of .5% to 36.3%. Asset sale gains of approximately $135 million, and asset sale monetization proceeds of approximately $275 million, compared to our prior outlook of $115 million and $150 million, respectively. Adjusted EBITDA as a percent of total revenue of 8% to 8.4%. This compares to an adjusted prior outlook of .2% to 8.7%, which includes an approximately 35 basis point adjustment for delivery expense. Annual adjusted diluted EPS outlook of $2.25 to $2.50, which compares to an adjusted prior outlook of $2.34 to $2.69, which includes 21 cents related to the adjustment of delivery expense. Capital spend of approximately $895 million, which compares to roughly $993 million last year. This represents our second consecutive year of reduced capital expenditures and reflects our commitment to efficient capital allocation. To conclude, as we close out this year and look to fiscal 2025, we're thoughtfully balancing the consumer's desire for value with our pursuit of profitable top line growth. We're taking learnings, making adjustments, building on successes, and finding additional areas of opportunity. We are encouraged by recent results and fourth quarter to date comparable sales trends across nameplates, and remain focused on navigating the near term while executing our longer term goals supported by our strong and experienced team and our healthy balance sheet. With that, I'd like to pass it back to Tony.

Thank you, Adrian. We now have three quarters of our three year Bold New Chapter strategy in the books and three consecutive quarters of sales growth and improved net promoter scores, leading to our third consecutive quarter of positive comps in Macy's first 50 locations and Bloomingdale's and Blue Mercury also comping positive in the third quarter. All of our nameplates are well positioned for growth, supported by -to-end operations, which are yielding customer facing benefits and cost savings, as well as improving enterprise wide inventory management. Although we still have work to do, we believe our Bold New Chapter initiatives, including the closure of roughly 65 -go-forward locations this year, gets us even closer to our go-forward end state of becoming a more profitable Macy's Inc.

Thank you, Tony. With that, operator, we are ready for questions on our third quarter results and fourth quarter and fiscal year outlook.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please limit yourself to one question and one follow-up. Our first question today is coming from Matthew Voss of JP Morgan. Please go ahead.

Great, thanks. Tony, could you elaborate on drivers of the comp improvement in the back half of the year? With the fourth quarter comp guidance pointing to your first positive comp in three years, what drivers do you see as sustainable? What initiatives specifically build or accelerate into 2025? Then, Adrian, just on the target for long-term sustainable positive growth, do you see high 30s gross margin as sustainable or any areas of give back that we would need to consider?

Thanks, Matt. Appreciate the question. Yes, we feel strongly about the progress we're seeing on the top line. Obviously, the first 50 locations at .9% for the quarter are the best leading indicator of the growth potential of the Macy's brand. We look forward to expanding our first 50 program in 2025 and we'll talk about that more on the fourth quarter earnings call. We're seeing progress across a number of categories. Whether it Macy's, we're talking about tailored clothing or dresses, continuous strength and fragrances, mattresses. It's across a broad array of categories. I think those are all sustainable as we go into the next fiscal year. Obviously, we're continuing to see strength at Bloomingdale's and Blue Mercury. I think the Bloomingdale's team has done an outstanding job at building on their recent success and positioning that brand for further expansion and growth. The private brand reinvent is almost complete. We have the home store to do next year, but that instead of being a headwind becomes a tailwind as we go forward. Looking at it from a merchandise assortment, category assortment, brand matrix, price strategy, I think if we could set aside some of the issues that have impacted us this quarter, we are positioned, I think, for improvement as we go forward.

Matt, good morning and thank you for your question. As you think about the path ahead, we remain enthusiastic or we remain committed to the results that we believe the bold new chapter will deliver for us. We're laser-focused on really the fundamentals of the business. As Tony pointed out, we're very encouraged with the top-line momentum that we're seeing. We're seeing it in the F50 stores. We're seeing it in the 100 pilot stores for women and handbags. We're seeing it in our luxury segment. We're just really encouraged by what that looks like. On the gross margin side, what I would say here is that we do expect to continue to lean into improvements in our gross margin through a combination of factors. But in this holiday season, we're navigating a competitive discretionary environment. But what we're seeing gives us encouragement that we can continue to achieve -over-year sales growth that's profitable over time. If you just think about what we're dealing with in this environment, we do see a customer that's very value-oriented. We see it in the higher sales penetration of our clearance. We're seeing it in how the customer has responded to our offers. One of the biggest challenges we had with the unseasonably warmer weather later into the year is that a lot of our higher margin categories, cold weather, is really coming online sequentially a bit later than what we had expected. But we have to manage a number of variables, Matt. We have to manage their inventory control. We have to manage what the customer is looking for in terms of value, which is around experience, great product, etc. We have to execute well. And so we continue to invest in the fundamentals of the business and driving profitable sales growth. And the thing that I would leave you with as well is we're really encouraged by the quality of execution. In our opening remarks, we talked about better end-stops, faster delivery, highest MPS scores for Bloomingdale's and Macy's in history. And so we're seeing progress coming out of this transition and investment year and we're very encouraged by the results as we look ahead.

Great. Best of luck. Thank you, Matt. Thank you.

Thank you. The next question is coming from Brooke Roach of Goldman Sachs.

Please go ahead.

Good morning and thank you for taking our question. Tony, as you invest in customer experience and staffing in First 50 and select shoe and handbag initiatives, what gives you confidence that these test locations are transferable to a broader swath of the fleet? And do you expect these to be accretive to profitability as we move into 2025 given the additional SG&A investments? And then for Adrian, could you just elaborate a little bit more on your updated outlook for gross margins for the fourth quarter and what you're seeing in the promotional environment? What changes have you made to your promotional calendar versus 90 days ago and how should we be thinking about the opportunity to recapture that pressure into 2025?

Good morning, Brooke, and thanks for the question. I think that the investments that we've made in our First 50 locations and frankly in the 100 other pilot shoe and handbag doors gives us confidence that the customer is responding to the changes that we're making in those stores. That's three consecutive quarters of comp store sales growth and acceleration of comp growth in the First 50 from the second quarter, 600, 700 basis points of improvement in those additional 100 test locations. So I think the net promoter score being up over 400 basis points for a third consecutive quarter, highest net promoter scores that we've seen on record at the Macy's brand. So all those to me are strong indicators that the changes that we're making are the right changes that we underserved the customer in the Macy's brand in our store experience and we had to make the necessary changes to create a better shopping experience. On the question of affordability of investment, that's our responsibility. We have to make choices and we have to make sure that we can provide the customer with a compelling reason to shop at Macy's. They are going to be accretive to the overall profitability of the company, but that will be through our adjustments to the other ways in which we invest in our business. This to us is a priority. We set out this year to change the Macy's experience. We pick 50 stores to do it. We will expand First 50 next year and that expansion strategy will be communicated on our fourth quarter call.

Good morning, Brooke. Let me speak briefly to the gross margin outlook. I'd start here by saying that the teams are executing well. There are a number of different factors that we're navigating. As it relates to the gross margin, just a quick reminder that the fourth quarter includes roughly 85 basis point adjustment for the delivery expense and we've reflected the adjusted numbers comparable year over year in the press release this morning and the form 8K. Now, relative to what we talked about with regards to our outlook, we're updating our outlook for just the competitive and promotional landscape that we're dealing with. We see that the consumer remains under pressure. The consumer remains quite choiceful in discretionary spending. Where we're adjusting is that we're focused on offering real value and making sure that we're doing so as profitably as possible in order to win share within the market. But we're navigating a number of things. We're navigating weather, we're navigating a competitive environment, we're navigating a variety of promotions that's happening in the marketplace. But overall, we feel good about our marketing calendar across all of our nameplates, the newness of content for the holiday season, the quality of the merchandise and the quality of execution across the operation, across our markets and across our channels. So we'll continue to be very thoughtful. We're very pleased with the sequential improvement in sales throughout the course of quarter to date relative to the prior quarter. But we're balancing profitability, inventory management, the quality of self-brews as we navigate the balance of the season.

Great. Thanks so much. I'll pass it

on.

Thank you,

Brooke. Thank you. The next question is coming from Ashley Hogan of Jeffreys. Please go ahead.

Hi, guys. It's Blake on for Ashley. Thanks for taking our question. I wanted to ask on the first 50 stores, I'm wondering if you could touch on AUR versus traffic and then conversion for those. And then just second question on that topic on the first 50. Are you seeing new customers show up to the first 50 stores that you might have not seen before? How does that customer compare to the traditional Macy's shopper?

Thanks, Blake. I'll take the first part of it. And Adrian can add anything he'd like. We're seeing consistent performance in the first 50 as it relates to the metrics that we measure. So we're obviously looking at all elements of that equation, whether it be AUR, IPT, average order value, numbers of customers, conversion. The biggest driver of performance has been AUR growth and average order value growth. We're certainly seeing the customers who are familiar with those stores spend more and increase their visits. And we're beginning to see some new customers. The reality is more of our new customers today come through our digital channel. So it's our opportunity because those customers, by the way, live in a geography, is to bring them into a location to make them an omni consumer. The work, again, from the types of stores, we have stores that are less than $40 million. We have stores that are over $150 million. So we're learning a lot with stores that exist across the entire country, stores of different volume levels. And as we did the expansion of the shoe and handbag test, we went to lots of different types of stores to, again, increase our learnings in 2024 in this transition and investment year to set us up for expansion of first 50 in 2025. Adrian?

I think, Blake, good morning. Tony covered it quite well. Just a few things around the proof points, which I think is quite important here. When you think about some of the opening comments around MPS, it's improved for our Macy's business, but it's improved even more sequentially for our F50 stores. When you think about the categories that we've touched, like -to-wear, woman's shoes, handbags, the places where we've made capital-wide investments in these categories, you see a pretty significant acceleration. When you think about all the volatility and what we've dealt with throughout this year of 2024, year to date, three consecutive quarters of -over-year growth and growth that's more than 400 basis points ahead of those stores that did not have to change. To Tony's earlier point, the 100-store test was really important for us because we wanted to demonstrate that putting in these key capital-wide changes into these stores, can they make a difference and can they be replicated at scale? And the simple answer is, yes, they can. So we're quite encouraged, we've learned a ton. We see additional opportunities that we'll bring online in 2025, but we feel very good about what we've learned. We

feel good about the progress, but our work is not done.

That's great to hear. Thanks so much and best of luck for the holidays.

Thank you, Blake. Thank you, Blake.

Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Good morning, everyone. Nice to see the progress on the Bloomingdale's and Mercury and how you're progressing. When you think about the store closure rate taken up to 66 from what had been 55, what's the difference and does this change at all the 150 in total over the next three years that you were talking to? Second thing is on the smaller format stores, how are those doing? And the merch margin down 70 basis points, I think it was up 210 last quarter. Delivery expense and how do you unpack it and how are you thinking about it going forward? Thank you.

Let me take the first and then I'm going to turn over to Adrian for a good part of your question, Dana. Good morning. We, at the start of the closure strategy, said we had locations that were less profitable and less productive and we wanted to monetize them as soon as possible. So the fact that we are closing more stores this year is a reflection of the fact that our assets have value and that even in this less stable market, we're transacting. And the number remains approximately 150. We'll provide an update on that as we get into 2025, but the core is to get to a fleet that we think can provide sustainable profitable growth for the enterprise. We've continued to open Macy's small formats. We're up to 24 locations. And like First 50, we're learning as we go. Bloomingdale's opened its fourth small format in Trusbury, New Jersey and we're very pleased with the initial response to that smallest location that we have. Adrian, you want to talk a little bit about margin?

Yes, absolutely. Let me just add one thing with regards to the closures, just to amplify Tony's point. With regards to the closures of approximately 65 relative to the 50 we started the year with, we're just seeing really good deal making. And we are eager to get to the go-forward enterprise. So when we're able to have favorable deals that are at or above our expectations, we're certainly taking advantage of that opportunity. And as we said earlier, we do have a long history in terms of managing these opportunities and walking value. The great thing about that is that with the monetization, which we highlighted in terms of sales proceeds, being approximately 275 million forecasted for this year, that's almost 2X what we planned coming into the year. That gives us capital to invest in the go-forward enterprise and capital to return to our shareholders. Now, as it relates to margin, on the adjusted financials that we provided, what you see is some deterioration in the merchandise margin. That's about the product mix given the weather impact, that's about the competitive environment that we're in, that we spoke to a little bit earlier. And in terms of the delivery expense from an operating standpoint, we do see improvement in how we're managing the expense profile and the quality of execution on the delivery side. But keep in mind, Tony, myself, the team are very much focused on the fundamentals, focused on managing our profitability. And we do have a lot of sites to our goal of achieving profitable growth as we look ahead.

And, Jay, I would just add that the comparability, because of the conversion to cost accounting, the reference you made to the second quarter beat the gross margin, was benefited from cost accounting conversion, and the third quarter miss was impacted by the conversion to cost accounting. We couldn't be more excited to get to 2025 so that we have these conversions and changes behind us, so you have a better view into the natural margin of the company.

Thank you. Thank you. The next question is coming from Oliver Chen

of TD Cowan. Please go ahead.

Hi, happy holidays. What's assumed in terms of the guidance at the higher end of your comp range relative to the lower? And on your comments related to value and the customer throughout the call, how does that intersect with your private brand developments, as well as we think about merchandise margin and promotions on a longer-term basis? Thank you.

So, Oliver, it's great to be with you this morning. Look, the guidance range on the top end shows you over your growth. And as you look at our performance in the fourth quarter of last year, we reflect on a good quarter last year. So, you know, on the high end, having growth year over year, we're quite encouraged by. On the low end of the range, it's about 1% decline year over year, and we're talking about this on a 13-week comparable basis. And so, we're quite encouraged. I think the most important thing that we've seen as we've progressed through this investment year is sequential improvement in performance. As Tony spoke about in the opening remarks, our -to-date trends are better than what we saw in the third quarter. And so, we're encouraged by how all this is really coming together within the business. Private Brands?

And I would add, Oliver, we're using 2019 as the analog year because of the five fewer days between Thanksgiving and Christmas and the fact that you had a later Hanukkah that year. That's another reinforcement for the -to-date trends versus the third quarter, and why we're cautiously optimistic on our opportunities to improve our revenue performance. Yes, Private Brands is absolutely a part of being able to respond to the value equation and the desire of the consumer to have choice and to be able to invest where they see fit and to be able to have more value where they're looking for it. And we see that in our cashmere program in Charter Club this year as having a very strong response, even with the inconsistency in weather. We're seeing that with the growth in Style & Co. We're continuing to see that with the strength within parts of our private brand business within the men's pyramid. So, it's area by area and 85% of our business is market brands. So, it's obviously equally important or more important that we get that right too for both a breadth of assortment and a breadth of price availability. So, the customer finds their definition of value across our suite of brands.

Okay, and you made really nice progress with First 50. Which aspects of First 50 will be easier and faster to implement versus aspects that will take a little bit longer? Thanks a lot.

Well, I think if you break down, Oliver, the First 50 into the things that we did differently, I just want to remind the community that it's an asset light strategy. So, we really did not put a lot of capital into these stores. The focus was on operating expense and merchandising strategy. So, certainly less density on the floor is very easy to replicate. The visual enhancements are easy to replicate based on the dedicated visual team that we have in the stores. The ability to have a common set of relevant brands is easier to execute. Once we have a go-forward fleet that is compelling to the vendor community. I think the additional staffing is the one that we will have a variable strategy for because if we're talking about a $20 million box versus a $150 million box, that incremental staffing will obviously be different based on the rate of sale. Interestingly, what we're also learning is some of our lower volume stores are having our largest increases, which gives us confidence in the next wave of First 50 that we will have as much or more opportunity for improvement in the Macy's fleet.

Thank you. Best regards. Thank you. Thank you, Oliver.

Thank you. The next question is coming from Michael Benetti of Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking our questions here. So, just a couple for me. To get to the high end of the guidance in the fourth quarter, comp stuff about 3%. When we think about the multitude of different same-store sales lines you report to us today, beyond the First 50, which speak for themselves, which one of those comps in the presentation will see the biggest change in fourth quarter to get to the higher end of the 3% guidance relative to the third quarter? And then I guess using the First 50 as a leading indicator, as you've spoken to, Tony, what do you think about the timeline to close the gap between the First 50 and consistently the positive low single digits and the .5% decline for the non-First 50 go forward? And then as we think about 2025, you think about closing the 65 doors, assuming those are unprofitable and lower four-wall margin like you've pointed to a few times. All else equal when we consider some of the other forward-looking comments you gave today, do margins go up next year?

So, why don't I start, and Tony, I encourage you to add anything that I may miss. Mike, it's great to be with you this morning, and thanks for your questions. Let me talk about the high end, first of all, in terms of the sales guide. When we think about what we've seen quarter to date, we're seeing sequential improvement across many dimensions of our business. We're seeing sequential improvement in digital, we're seeing sequential improvement in stores, we're seeing sequential improvement in Macy's nameplate, we're seeing sequential improvement in luxury, both Bloomingdale's and Blue Mercury. We're seeing sequential improvement in that 50. We're seeing sequential improvement in the other go-forward stores that have not received the investments yet. So, the way that we approach this is we want all boats to rise as part of a bold new chapter. We've distorted investments in things like First 50 and digital, and we definitely are seeing a lot of those investments now begin to harvest. So, when we think about the high end of the range, what we're encouraged by with the sequential improvement is really the momentum that we're seeing building. And as you know, these things work together and create more than the sum of the parts, so we're actually quite encouraged by that. When we think about the First 50 to all stores, as Tony mentioned, these are capital-wide investments. And we're encouraged by what we're able to very quickly replicate a portion of these changes from the F50 to 100 stores. We wanted to understand how replicable, how quickly the impact would show up, and how do we do this at a level of scale as we think about our go-forward business into next year. Now, as we think about 2025, we're going to continue to manage a healthy balance sheet. We want to make sure that we have the appropriate deal-making. We're monetizing underperforming stores as well as right-sizing our supply chain network. So, we see opportunities for further monetization, but we'll share more about what that looks like on our fourth quarter earnings call. As we talked about earlier, we're focused on the fundamentals. That's the top line, that's the bottom line, that's the margin profile. But we recognize that in the discretionary environment, we have to be thoughtful about how we're competing for share of wallet relative to our competition and navigating that as we progress. But look, we're encouraged. You know, we still have a road ahead, but as we think about when we entered the year, we talked about investment, we talked about learning, we talked about experimentation. As we exit the year, we've gotten a lot done, we've learned a ton, there's more opportunities we're going to lean into, but the proof points are much clearer to us now than it was nine or ten months ago.

I'd only add that the penetration, Mike, of the categories that are performing best goes up in the fourth quarter. So, some of the guidance in the fourth quarter is also related to the penetration of those businesses. Some is improvement, some is related to the penetration. And that also has an impact on the margin forecast as well.

Okay, thanks a lot, guys.

Thanks, Mike.

Thank you. The next question is coming from Bob Drupal of Guggenheim. Please go ahead.

Hi, good morning. Two questions for me. The first one just in the shoe and handbag locations, do you have the brands you need? Are you getting new brands? Is it a labor support? Can you just expand a bit more in terms of the initiative and some of those trends? Then the second question is on inventory levels. I think you said you're going to end the year flattish and you made some adjustments on the sort of order books going forward. How far out are you making adjustments to your order book? And as you think about 2025, where there might be needs to make adjustments? Thanks.

Let me take the couple of questions and then Adrian can add anything I miss. The changes in the 100 stores between the shoe and handbags are predominantly about people. So we're certainly making changes to assortments. We are reducing the duplication within those stores to try to make shopping easier for the consumer. But the lion's share of the impact that we're seeing is by having somebody to run to get the bag and get shoes to the floor and to unlock the handbags that are not easily accessible by the customer. And so I think that's given us some cautious optimism that there is more that we can do as we are able to actually impact more of the menu, inclusive of the assortment in those stores. As it relates to inventory levels, we are already, without making significant adjustments to our order books for 2025, at the forecast of a flat to slightly down on a restated basis. So I don't think that inventory will be our issue going into 2025. I think we want to continue to see the green shoots we're seeing in our revenue performance continue so that we have the opportunity to, as we said, expand First 50, get past the kind of private brand reinvention, expand on some of the brands that we've added this year to more locations, and get greater consistency between the performance we're seeing in the other go-forward stores.

Thank you. Thanks, Bob.

Thank you. The next question is coming from Paul Leshway

of Citi. Please go ahead.

Hey, thanks, guys. I'm curious if promotions have been running higher in the -to-date period, and if so, how much of the higher sales do you attribute to the higher promotions -over-year? And then, second, just thinking about the 65 closing, by the end of the year, what do you typically see in your e-comm business, in markets where you close stores? Is that a comp drag as you look out to next year, or is that a comp driver because you see some sales transfer? Thanks.

Hey, Paul, thanks for the question. I'll take the first part, I'll let Adrian take the last part. -to-date, the promotions are approximately comparable to last year. So, you know, an interesting factor is that our discount rate is -over-year about the same as it was. The difference when you get into the impact to margin is the mix of business, and then the liquidations that may be necessary on aged inventory. So, we have a small proportion that is aged inventory, more so within the mix of business that we're selling, and again, the impact of not selling as much cold weather product, and hopefully, again, we see even colder weather come in the latter part of the quarter, and that'll only help us get a stronger margin of performance. But I actually feel pretty good about the regular price delta we're seeing and the overall discount rate given the promotional environment we're operating in. But as you know, Macy's is a promotional department store to start with. There isn't a lot of room on the calendar to be able to add a lot of value. We think it's one of the reasons why in an environment like this, when people give gifts, they come to brands and stores like Macy's. And so, I think we have opportunity to be able to deliver our guidance for the quarter and position ourselves for improvement in 2025.

Good morning, Paul. Let me talk a bit about the closures. The thing to keep in mind with the closures is that these are underperforming stores. And so, these are places where the economics are not as favorable. These are places where customers are shifted away from those centers to shop. And these are stores that are just incredibly difficult to run. So, just start with that fundamental premise. Very few of the stores are actually in single-store markets. And the reason that's important is because in an omnibusiness, we continue to see that when we have a physical presence and a digital presence, by far we have the best economics and the best sales per customer, sales per capita, however way you look at it, sales per customer, we actually see the best economics there. Given that the vast, vast, vast majority of the closures are in markets that have other buildings, other Macy's buildings within that market, we think that the impact on common is going to be limited. And we look back 10 years at closures to really try to understand it. But most importantly, we're taking a different approach to retaining any customer in the market. So, whether it's a digital-only customer, an omnicustomer, a store-only customer, we have a very specific strategy that we've already been working on developing to retain as many of the customers by introducing them to other stores with unique communication, etc., etc. So, we're encouraged, we recognize that it's important to get to a healthy fleet. And so, that's our focus because that healthy platform, omnichannel platform, is what's going to be able to drive profitable growth

going forward.

Thank you. Good luck. Thanks, Paul. Thank you.

Thank you. The next question is coming from Alex Straiton of Morgan Stanley. Please

go ahead.

Thanks a lot. Maybe first for Adrienne, can you just elaborate on why digital was a pressure point in the third quarter relative to stores and maybe how that should change into the fourth quarter and beyond? And then for Tony, just big picture, understanding you're not giving any formal guidance for next year. But as you think about 2025, just curious what's strategically top of mind for you that's perhaps different from this year. Thanks a lot.

Good morning, Alex, and thanks for your question. You know, look, we've really been challenging our digital business for a number of years. And as we had new talent come into the organization, we really focused on how do we fundamentally improve the digital experience and the omniexperience that's contributed by digital. What we're very encouraged by are the material initiatives that were introduced, particularly in late summer, kind of August time framing to October, whether it's SEO enhancements, new category pages, better layout, greater stability, greater upload speed. We look at a variety of operating and customer-facing metrics. We're seeing a number of things that are better. Conversion is better. Traffic is better. Experience is better. CSAT scores are better. MPS scores are better. And so, you know, from our perspective, and we've spoken about this in earlier conversations, we needed to invest in a better shopping experience for our customers. From the research that Tony and myself and the team navigated a year, year and a half ago as we were building the strategy, something as simple as quality search results we really underperformed on. Something as simple as in-stock speed of delivery. And all those different dimensions we've improved on this year and the sequential improvement we're seeing in digital gives us a lot of encouragement that the changes that we're making both operationally and on the customer-facing side is really getting traction because the customer is noticing and actually spending.

Yeah, I'd only add, Alex, that digital also includes our merchant organization and our marketing organization. And I think the work together across the three pyramids is as strong as I've seen it in my time with the company. So I think that also is a good segue into what I feel good about in 2025, again, without getting into our guidance and the particular specifics of how many of what. But think about it this way. The delivery expense that we just went through, that's behind us. Cost accounting conversion, that's behind us. The private brand reinvention without home, that's behind us. We're not in a year of testing, we're in a year of scaling. You have the opportunity to have more new brands as people begin to visit and see the changed experience, as they begin to see the site experience be more about product than just about price, we have more opportunity for growth. We know we'll have more first 50 locations, how many we'll talk about on the fourth quarter call. And we're also excited about continuing to expand Bloomingdale's and Blue Mercury. Both are contributing to the corporate results and both have opportunity for significant growth.

If I could just add one additional thing, Alex. From a capital allocation standpoint, we've really been pivoting into this notion of harvesting our investments. And so to Tony's point, a lot of these investments are beginning now to really yield fruit. So if you kind of look at the history, back in 2022, we invested about $1.3 billion of capital to really improve the fundamentals of this business. Last year, we invested $993 million. This year, we're projected to invest $895 million. So we talked very clearly when we implemented our capital allocation strategy that this business needed investment. Some of it was CapEx investment. And this past year, the investment has been capital ride investments. So as all this is coming together, harvesting and really focusing on scaling next year, as Tony described, is what excites us as we think about 2025.

Thanks a lot. Good luck.

Thank you, Alex.

Thank you. The next question is coming from J. Sol of UBS. Please go

ahead.

Great. Thank you so much. Maybe Tony, could you just talk about the furniture business a little bit and how much of a drag that is on overall comps? And then at the same time, maybe a little bit more color on handbags. You mentioned you're seeing some improvement there. And then lastly, just a little update what you've seen since Cyber Monday in the trends in the business and what you expect for the post, in January, sort of post the holiday season. How do you expect comp trends to develop once you get through the peak season? Thank you.

Thanks, Jay. The furniture business is softer than the mattress business. Overall, the Big Ticket business is stable, but certainly a better trend in mattresses than we're seeing in furniture. I think as others in the Big Ticket business have reported, until we get to a slightly lower interest rate environment, that business is probably going to still be under pressure. We have a new team in Big Ticket who's working feverishly on our assortment. I'm pleased with some of the progress, but longer lead times on the Big Ticket business in terms of furniture. So that will be an opportunity for us as we get into the latter part of 2025. As it relates to handbags, we mentioned on the call Bloomingdale's business really seeing some nice strength now in handbags, being driven by newness as well as some historic traditional brands, people like Coach and Tory Burch and Longchamp, really seeing some nice business. And beginning to see that also on the Macy's side as well. The crystal ball of what happens after the holidays and the nature of the consumer in an environment where is inflation a little higher or a little lower. We saw the reports a little higher now this morning. But I think the consumer has shown, post the election, a real interest in shopping. And so we are only quantifying it. We're not talking about post cyber, talking about on a -to-date basis. But I see a consumer that although remaining choiceful and looking for value, who is interested in shopping. Chris, Masonic, Akwans, everything is still going to come. And I see people interested in a variety of categories, which bodes well, I think, for all three of our nameplates.

Got it. Okay. Thank you so much. Thanks, Jay. Thank you.

There are no further

questions at this time. I'd like to turn it back over to Mr. Tony Spring for closing comments.

Just want to thank everybody for your questions and your time this morning. We have a good, solid trend coming out of the third quarter with the start of the fourth quarter. And we will work hard as a total team to deliver on the remainder of 2024 as we look at the opportunities in 2025. I want to wish you and your families a very happy holiday season. All the best and talk to you in the new year.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or lock off the webcast at this time and enjoy the rest of your day.