Macy’s, Inc. (NYSE:M) Goldman Sachs 29th Annual Global Retailing Conference September 8, 2022 8:05 AM ET
Company Participants
Adrian Mitchell – Chief Financial Officer
Conference Call Participants
Brooke Roach – Goldman Sachs
Brooke Roach
Good morning, everyone. My name is Brooke Roach, and I cover the apparel accessories and the brand sector here at Goldman Sachs Research. I am very pleased to introduce Macy’s. We’ll be kicking off our first session of day two of our 29th Annual Global Retailing Conference. Here with me today is Adrian Mitchell, CFO. Welcome Adrian.
Adrian Mitchell
Thank you, Brooke. It’s great to be with you.
Brooke Roach
Adrian, perhaps we could kick it off with a macro question. There’s a lot of macroeconomic uncertainty right now. And is there a lot of focus on what’s happening with the consumer. How is Macy’s focused on navigating this time period?
Adrian Mitchell
Yeah. You know, we’re continuing to be very focused on the long term. And for us, we have a major transformation that we’re currently going through. So our three priorities are very simple.
Number one is execution. We want to focus on really strong execution that’s consistent with our outlook. We want to be transparent about the performance of our transformation initiatives, and we want to be consistent in our performance over time. So execution is very, very key for us.
The second thing that’s really important for us is balance sheet health. And you’ve seen a number of really strategic actions that we’ve taken, very aggressive actions we’ve taken over the last year to really make sure that we have a healthy balance sheet. That’s around inventory efficiencies, that’s around really taking down our debt, pushing out our debt maturities, collateralizing our security bonds. And so those things are really critical for us to have financial flexibility. So that’s kind of the second thing.
But the third thing that’s really important is really investing in capabilities. And so this is a long game for us. We’re navigating the short term as best we can. We know it’s a challenging environment. But our financial health and our operational efficiency, gives us really a lot of confidence and give you the capability and capacity to navigate the short term. But we’re committed to our $3 billion of capital investments in the business over the next few years, and we’re seeing the benefits of those investments. So investing in the business is really the third thing that we’re focused on.
Brooke Roach
That’s really great commentary. Thank you so much for sharing. How would you characterize the health of the consumer today? Are you seeing any new shifts or demographic trends emerging? And any call-outs to highlight as you started to navigate the back to school period?
Adrian Mitchell
Yeah. So as we think about the consumer today, we think the consumer is still relatively healthy, especially going into a slowdown. But what we saw in the second quarter was a situation where all income tiers for our Macy’s brand actually saw a slowdown, particularly in the back half of the second quarter.
And so as we think about kind of what we came into the year planning, we really planned a lot of our, for example, pandemic categories down. But surprisingly, some of those categories actually slid down faster than we had expected. At the same time, our luxury customers, we look at the Bloomingdale’s brand, looking at the Bluemercury brand, brand, very resilient. And so what we continue to see is strong momentum that’s outperforming last year.
So you know, look, as we think about the consumer, we’re very much focused as we get into the fall season on continuing to be very relevant. And the kinds of things that we’re focused on as we think about the fall season, it’s having inventory available for that customer so that they can transact on the right side.
And so we recognized that last year, when we invested in getting inventory, it was a real differentiator for us. This year, we want to make sure that we have that inventory early enough to be available for the customer as we lean into the holiday season.
The second thing for us is really the right composition of inventory. So they are parts of our business that are really on fire. Those occasion base categories, the dressing categories, the shoes categories, the fragrances categories, those are really on fire. So there’s a composition element that we think is actually quite important right now. So we’ll continue to lean into freshness as we get into the back half of the year.
And then the third piece is we’re going to continue to be disciplined on managing inventory. That’s just really critical for us. So even though we’re going to move into freshness, and get a better balance between our private brand products and our market products, we’re going to be disciplined on our box. And that requires really looking at the item level SKU velocity, really understanding the demand, really being thoughtful about the inventory we have on hand and in transit, and just being super disciplined.
And as we look at the third quarter so far, the good news is we’re still on track with the outlook and guidance we provided in our Q2 earnings. So coming out of Labor Day holiday, the first month was certainly what we expected. So we’re pretty pleased with that.
Brooke Roach
Adrian, you mentioned that dresses and occasion wear were on fire. And that conflicts with some of the trends that we’re seeing in pandemic winter categories.
Adrian Mitchell
Yeah.
Brooke Roach
Let’s dive a little deeper into some of those pandemic winter categories. You bucketed them all together on your 2Q call. Any specific trends you’re seeing within the subcategories of the pandemic winner? And any outlook on when those trend – will those trends might stabilize or normalize?
Adrian Mitchell
Yeah. So you know, as I mentioned a little bit earlier, we actually planned a lot of the casual wear, casual sportswear. A lot of those really soft home categories, things that were really peaking the last couple of years in the pandemic, we planned that. But to our surprise, the trajectory of the decline in the first half of the year was much deeper than we expected. So we’re very focused on moving through those pandemic categories, moving through the seasonal portion of those categories from the spring so that we are in a much healthier position going into holiday and going into next year.
We do believe that we’re in a position where we should be able to get out of a lot of that inventory this year. We’re focused on the third quarter, so that we’re really fresh and clean for holiday. But what we’ve seen, for example, in the second quarter, these categories were down about 18% versus last year. So there’s really a pullback on that demand as the consumer is kind of shifting their spend.
But you know, from our perspective, from a consumer standpoint, unless there’s a material shift in the dynamics we’re seeing with inflation, with wage growth, we believe that the pressure is going to continue into next year. And so we’re very cautious about next year. We’re very deliberate about the fall season. But we do believe that there will be pockets of spending, and we want to lean into that.
Brooke Roach
So no material differences in that pandemic category between soft home or apparel or anything else that you want to call out…
Adrian Mitchell
Depends on the category, but clearly down.
Brooke Roach
Okay…
Adrian Mitchell
Clearly down. I think a lot of the consumers have bought a lot of that stuff already.
Brooke Roach
Make sense. You mentioned inventory several times, in your opening – in the first couple of comments. Can you dive a little deeper into that. Macy’s inventory at the end of the quarter was only up 7% year on year? And from the outside looking in, that looks better than a lot of peers in the retail environment broadly? Can you talk to the composition of your inventory and your comfort level with it? So on a unit and category basis?
Adrian Mitchell
Yeah. So there are three priorities that we’re very focused on. The first is the right level of inventory by category, by nameplate [ph] The second is the composition of that inventory. So we think about pandemic and occasion based in this environment in a different environment can be different. But also making sure that that inventory is distributed in the right channel and the right geographies in the most efficient way, that helps our margin profile that helps our sell through.
And when we think about those three variables, we’re still very much focused on doing that in a way, that’s the mentality of chasing sales. We’re willing to leave the man on the table in order to have healthier margin profile because we recognize the risks o over buying that inventory.
Now, this year, we’re very much focused on the rebalancing. So we’re rebalancing by channel and by category. And so what we saw in the first quarter was early signals of slowing demand. And so we started cutting back on inventory, primarily a lot of the market brands, quite frankly, because that’s where we have a lot of flexibility in terms of the timing of ownership, We did not want to get over our skis. We had inventory turn target.
So it was very important for us to protect the business and to protect our liquidity position as we’re entering a slowdown, But the fall season is going to be different. We’ve been very deliberate in our pricing science and moving through and taking the markdowns necessary to really move through those – that slow inventory where we see some of those blips in those specific categories to your point. But we’re going to be leaning into more freshness. We’re going to be leaning into those market brands because we believe that’s what the customers are looking for, we believe the customer is going to be active this holiday season.
Brooke Roach
Hand in hand in some of those inventories and clearing through that is the promotional cadence and that’s certainly been a focus for investors. How should we be thinking about the cadence of promotions for Macy’s and for the industry in the second half of 2022?
Do you think that the promotions are largely going to be constrained to the COVID-winning category? Or do you think it will be across the business overall. And into the 2023, if we start to see inventories get a little bit better. Do you think the promotions versus ’19 will remain better?
Adrian Mitchell
Well, a couple of things. The first thing I would say is that our gross margin guidance reflects what we perceive as the intensity of promotions this fall season. We do believe it’s going to be intense. We do believe it’s going to be centered on those casual categories, those home categories where there’s excess inventory. And we do believe that it’s going to be contained within those categories.
We’re seeing very healthy sell-throughs, very healthy AURs, for example, in those occasion-based categories. So our dress up categories, our shoe categories, we’re seeing AUR as high as 12.5% over the last year. So where there is demand, there’s health and the consumer is able to absorb those prices.
But from our standpoint, given some of the floods that we are working through, we will take the necessary markdowns, and we price that into our gross margin forecast. We will also be competitive through our pricing science on those slower moving items where there’s a lot of casual in the marketplace. There’s a lot of Qualcomm [ph] in the marketplace. So we have that pretty much priced in.
But I think the important thing for us is to make sure also that we’re enhancing margins as best we can even in this choppy environment. So we’re still very disciplined on the inventory productivity. We’re looking at our terms very closely. We’re looking at it all the way down to a style and a SKU level and making sure as we lean into freshness in market brands, we’re still being disciplined in the overall terms of the business.
You also feel that the pricing science is actually a great thing to have now that we didn’t have independent pre-pandemic, because we’re able to look, by style, by store, by channel, you know, what is the velocity of the SKU? What’s the inventory liability? And what is the appropriate time to really think about those markdowns and the magnitude of those markdowns that’s all about maximizing sell through. But it’s also about maximizing the selling margins in any given context, including the one that we’re in.
And then the third thing is we’re going to watch the patents closely. You know, we saw some indicators early in Q1, we made some adjustments, we’re going to continue to do that. We want to make sure that we understand the profile of the occasion based categories, because we do believe as we get into 2023, there has to be a normalization across the two categories.
You know, we do believe the pandemic categories will pick up at some point. We also believe that the non-pandemic or occasion based categories will also normalize.
Brooke Roach
You mentioned prices several times in that answer. And that’s been a key strategic initiative for Macy’s. Can you talk a little bit more of credit digital context, investors sitting in the room about how that product pricing science is making a difference for Macy’s this cycle versus the last cycle? And then as usual to head, what’s the next stage of the implementation of the pricing science initiatives?
Adrian Mitchell
Yeah, it’s a great question. So when you think about the pricing of the products, we think about it in two tranches. One, the pricing plans we’ve referred to is more about markdown optimization. And so what that allows us to do is, by style, by channel, by specific store location, we can actually make choices about the timing of a markdown, as well as the magnitude of the markdown, the variables we take into account is the sell through rate by style or by SKU, as well as the inventory available. So we’re basically optimizing how much can we maximize the sales in the margin, given the demand in the market. And given the available supply we have in terms of inventory.
Where we are right now is we’re continuing to scale it. By next year, we’ll have all categories, all channels, all stores with that capability. We didn’t have that capability two years ago. So you think about the de-averaging of a style at a specific local market versus four or five regional markets, significant margin benefits. So next year, we’ll be focused on scaling that to all of our categories.
The other dimension is personalization. We’re very much in the early innings of personalization. But what that allows us to do is to drive incremental sales and incremental margin, by really tailoring the customer and the content, tailoring the content to individual customers.
So looking at their buying patterns, understanding their activity, given the scale of our loyalty program, we can then have some predictive or propensity models that give us a sense as to what is the likelihood of Brooks to buy shoes, versus sofa.
And so we would tailor that content either through email, push notification, and text. And based on the response rate, we can optimize the algorithms over time. So we’re in the early stages of that. But those two in combination is about sales and margin expansion. And the early indications are very favourable, margin expansion continues to be a priority for us.
Brooke Roach
That’s great. I don’t think you need an algorithm to determine the shoes versus sofa, propensity for Brooks to spend, it would be shoes. But I also like sofas. For house we can go you mentioned 2023, a couple of times. And as you look ahead, pricing and pricing science has been a driver here. But going forward, how are you thinking about the growth contribution between units and price into 2023 and beyond?
Adrian Mitchell
Yeah. So we started at a very macro level, which is what is the consumer’s capacity to spend? Because we do recognize, particularly in this year, which was one of our theses in the first quarter, is that given the amount of capacity the consumer has to spend, they have a choice between discretionary and non-discretionary.
And when you think about the trade off that consumers are making right now, you know, given the inflation, they’re making trade offs on essential goods, whether it be fuel or food, then making choices on services spend, travel, going out to eat, getting out with friends, and then the discretionary spending the categories that we operate in.
So from our perspective, it’s first of all really important to understand just the demand profile of what’s happening in the US market. From there, what we bend us to say, okay, what’s the customer’s capacity to take AUR increases? That’s based on, again, the availability of the inventory we have, in addition to the inventory available in the marketplace, which is why the composition of inventory is so critical for us.
And then based on that we make choices given what’s happening with inflation. With regards to cost of goods, what’s the appropriate number of items that we want to actually bring into the assortment. So we’re constantly making that trade off. We’re constantly looking at all those different variables. You know, from our standpoint, we have to optimize the buys based on that capacity spend.
So what we’ve seen so far this year is we’ve had healthy AUR growth, it’s about 5%, on average, given the puts and takes the pandemic and non-pandemic categories. And we expect that to probably continue through the balance of the year, based on what we’re seeing, especially given our investment in freshness and in market brands.
But what we also have seen at the same time is that transactions with them, leading us down, and again, as we think about the pressures on the consumer heading into next year, there’s a very strong chance that that will continue.
Brooke Roach
One of the questions that we’re asking just about every company in our conference this year is the view of each business and their normalized market structure. Can you discuss your view of that, versus the 10.5 guide for this year? And what are the key levers that you would consider within that both what’s in Macy’s controllable, but also what’s the function of the external environment?
Adrian Mitchell
Yeah. So we are very committed to our long term goals. We are very committed to low single digit top line growth. And we are very committed to low double digit EBITDA margin profile. And we’ve continued to see a path there in the medium term and also in the long term.
From a top line perspective, if you think about it, there is some new capabilities and existing capabilities we’re leaning into. You think about digital marketplace, we’re actually launching digital marketplace as we speak. We expect to have hundreds of new brands on the platform over the next several months. So we’re feathering that in. But that’s a very exciting capability.
You know, we’re continuing to invest in personalization. Again, as we lead into this very actively next year, it’s about incremental sales and incremental margin. So that’ll drive behavior both in stores, as well as online. When we think about our private brand reinvention, which we talked about in the past couple of quarters, that is really about having a great product that customers love and want to buy from Macy’s, and it’s only exclusive – exclusive to Macy’s. So that’s a real opportunity for us. And that’s going to be feathered again more accurately, in the back portion of next year through 2025.
And then we’d have to invest in the core, we want to right size our mall based stores. We’re investing in all small stores market by Macy’s. We’re elevating brand standards. We’re really leverage – leading into our own yourself platform. So there’s a lot of things to be excited about in terms of creating demand, you know, for – in the marketplace with consumers.
On the margin side, we have – we have a very different profile than we did pre-pandemic. So we are investing in inventory productivity. We will not go back to the level of inventory levels per unit of sales that we had in the past. We feel that we can really be much more productive, much more surgical in terms of how we manage turnover, and gross margin return on investment.
But we also have beta funds that’s helping. And we’re seeing that in a number of places. We’ve seen it in personalization. We’ve seen it in pricing science around markdowns. And we’re also in the very early stages and seeing a good early wins in terms of predicting demand by local markets. So that’s another lever that will be leading into over the next year or two.
And then we have profit pools. Our credit card business is still under penetrated relative to pre-pandemic. But growing and growing at a healthy clip. We see the spend on the card increasing as a percent of sales within Macy’s brand, but really strong demand on the Co-brand side, which we’re pretty pleased with.
We also have Macy’s Media Network continues to be very productive. And then we have marketplaces that spoke to you earlier, which really is you know, no inventory liability. But we certainly get a take on – on the top line sales.
So you know, look, we – we’re very comfortable with the path that we’re on. We see a lot of wins. And we just have to continue to execute consistently as we bring these programs and capabilities online.
Brooke Roach
Thank you. A lot of things to dive into on that. But maybe we can start with marketplace given the -launch that’s expected this fall, any new details or news to share on the upcoming launch? And then how are you thinking about the contribution opportunity of that, the financial algorithm over the next few years?
Adrian Mitchell
Yeah, so we’re very excited about marketplace. If you think about the rationale for marketplace, it really started with the notion that we’re seeing searches online for products, we don’t care. And I’m sort of so effectively the customer has given us permission to lean into some of these different categories.
And so what we took the time to do is learn from what other marketplaces in retail have actually done. We built a team and invested in a team. We took the time to build the right capabilities for Macy’s this year, and we will actually have Bloomingdale’s in the future. And we really are, you know, focused in the short term on pets, on home, on kids, on baby and maternity, on health and beauty, on toys and on electronics.
But, you know, the sky’s the limit with marketplace as long as we continue to provide a healthy experience for the consumer. And also make sure that we’re continuing to manage a great relationship with our vendor partners and our sellers. So you know, this is a key part of optimizing our profitability, and also optimizing our inventory profile.
The thing that I get excited about as well is when you think about the marketplace platform, we’re also allowing sellers to have permission to participate in Macy’s Media Network, so they have the opportunity to promote their products on our platform as well. So we’re pretty excited about the expansive capability that this provides.
Brooke Roach
You mentioned Macy’s Media Network. So look, follow up there, $30 million last quarter, an opportunity for the marketplace brands to participate. What do you see as the key learning so far? And what does that drive from an enthusiasm perspective as you look ahead?
And then perhaps for those who are looking at other retailers that are also pursuing a similar Media Network strategy, what differentiates Macy’s Media Networks, versus all the others that these brands could participate with?
Adrian Mitchell
Well, if you think about it, we are – we’re now two years into this with Macy’s, and we launched Bloomingdale’s last fall. And what’s interesting is industry report came out in March of this year, that ranked us number three, so we’re actually ahead of more mature, you know, retailers who have a marketplace.
But from our perspective, it’s an important balance. It’s not only about the margin profile for Macy’s, but as important, it’s also about the customer experience, and the brand partners experience. So from a customer experience, we view it as a way to have customers really immerse themselves in new products and new brands that they may not have exposure to.
So as we think about the placement of these ads and these different campaigns is really introducing a broader set of products that comes to consumers, and in a delightful way, in an immersive way. So we’re constantly looking at creative ways to actually bring that content to the customer, whether it’s a landing page, or whether it’s other capabilities that we’re – that we’re experimenting with this fall.
From a vendor partner standpoint, it’s about the efficiency of their spending. It’s about acquiring new customers, about driving incremental sales, and about the vendor partner being able to create an experience within our Macy’s experience in our Bloomingdale’s experience that really draws customers into their brand experience.
And so we’re spending a lot of time thinking about what’s the value to the brand partner, there’s a marketing efficiency, but they’re also brand building as well, just like Macy’s. And then to your point on Macy’s, you know, $30 million in the second quarter 60% growth over the last year.
So we’re seeing a pretty healthy trajectory in growth there. And so we feel that we’re just at the cusp of this. The big thing that’s driving the growth is the number of campaigns and the number of advertisers. So we’re seeing more and more vendors really lean into this opportunity.
Brooke Roach
That’s great to hear. Thank you. The other thing that you mentioned, when we were discussing margins a little bit earlier, with some of the enthusiasm excitement that you have for the private label brands reboot that is launching into next year.
Can you talk a little bit about what’s different about this private label brands reboot versus prior years when you tried to kind of similar strategies, maybe to less enthusiastic results?
Adrian Mitchell
Yeah, I think the biggest change this time, is the level of investment and focus that we’re putting against it. So for example, we have a new head of design, private brand design, Emily, who has joined us from Target. And so you know, she’s doing a fantastic job. And that advisor, we’re looking at it just really incredible. So we’re really excited about that level of investment.
But I would say the two things that we’re very much focused on. One is what the customer sees, and then one is the sourcing side of it. So from a customer standpoint, you know, we’ve historically been known for building great brands, we want to get back to. We’ve kind of moved away from that, we want to get back to that.
And so that’s about building a set of products that customers love and want to buy. But it’s only available at Macy’s. And so that’s about the design, the quality of all the different aspects of brand building, we want to get that back to that, we’re leaning into that.
But we also have to do the sourcing side, because we’re very clear eyed about the fact that private brands is something has – has greater inventory ownership further up in the value chain. So we’re also transforming the margin profile of private brands as well. So we’re going to be consolidating our factories and our vendors. So that we have high quality vendors with competitive pricing. And we’re simplifying the fabrics across the portfolio, so that we add, you know, just much more simplification in terms of producing those products.
So the margin profile is really important. We’re under penetrated right now in product brands relative to where we were pre-pandemic, but we want to get back to an optimal balance between say 20% to 25%. And we feel that we have a very clear path to get there.
Brooke Roach
You mentioned supply chain, it’s been a big focus of the conference. Anything that you’re willing to share on Macy’s outlook for that, as you head into next year?
Adrian Mitchell
You know, the decisions that we’ve made around supply chain is that we have the inventory and we can get it early. We will continue to get it early. We continue to see that fill rates are higher than in recent past. So we’re getting the products that we’re ordering.
We continue to see that the diversification of ports that we’re pursuing to get products into our network, that’s working quite well. So we’re getting the inventory, you know very well ahead of schedule. And so that positions us well, for example, for holiday. We believe that holiday again, this year will start early. We believe it’s going to start in October. And we’re well positioned to be able to lean into holiday that early in the season. So from a supply chain standpoint where it gets good position, it’s not that completely back to normal. But we’re getting the stuff that we’re – that we’re searching for.
Brooke Roach
Holidays always been an important part for Macy’s. What different this year in Macy’s holiday strategy, and against some promotional and competitive environment, what makes you confident that you’ll win holiday again?
Adrian Mitchell
Freshness and competition of inventory. So from a freshness standpoint, we have about 55% in freshness relative to our assortment in 2019. That’s about 30 points higher than 2019. We do believe the consumer is going to shop, we do believe the consumer is going to travel.
So the second thing that gives us confidence is the composition. We feel we have the right stuff. When you think about the things that are selling really well, how we’re positioning ourselves as a gifting destination in the fall season, we’re pretty pleased with the position that we’re in right now. And given the confidence that we have with the sell throughs we’re seeing with the markdowns that we’ve taken, you know, in August and into this month, around kind of a glut of inventory around the pandemic categories, we’re very pleased with the right composition, leaning into market brands, leaning into freshness. So we’re excited about it.
Brooke Roach
Let’s pivot to another aspect of Macy’s strategy, which is stores. You have small format stores that you’re embarking on a rollout plan for and there is three sub formats that you talked about on your recent call.
Can you talk a little bit about differences between the three sub formats that you’re testing? And how you’re positioning the backfill store, the replacement store and the new market store?
Adrian Mitchell
Yes, absolutely. So as a bit of context, what we’re fundamentally doing is optimizing the physical footprint with a digital overlay. So if you look at the composition of transactions, non-grocery transactions in the US, the facts are very clear. In 2021, about 40% of non-grocery sales were actually online, 30% were all small, 30% was digital.
Now we recognize that digital continues to grow. But fundamentally, when you look at the economics and the trends that are happening, we do see that physical footprint is actually quite relevant. So from a mall based standpoint, we’re right sizing that portfolio.
We announced six closures at beginning of the year, we now have seven closures this year. We’ve been very methodical about how to get to the right number of stores for both our Bloomingdale’s brand, as well as our Macy’s brand. But on the off mall side, we’re really pleased with what we’re seeing for the customer response. We have stores in Dallas, and we have stores in Atlanta.
And so we’re very pleased with the response, even Jones Creek that recently opened up a little over a month ago, sales were exceeding expectations and customer feedback has been very strong. So we’re really kind of walking in that formula.
Now we have three key pieces of the strategy. The first is what we call an infill densification. If you think about the Atlanta market it has 11 full line stores, we now have three market by Macy’s. We’re seeing a higher composition of new customers than full lines, and a higher composition of under 40 customers than are full line stores.
So we’re really kind of looking for some pockets of demand within that market, through a convenience – convenient location that’s sorted appropriately for that local neighbourhood and that local market.
The second strategy is what we call the replacement strategy. So we just announced the closure of our Chesterfield store in the St. Louis area. Two miles away, we’re opening up the market by Macy’s store. So we’re going to be moving the customer at the same time we’re closing from one store full line underperforming store, to the market by Macy’s store.
The reason that’s critical is we want to maintain a physical presence in that market. There are many markets we’ve exited over the last six, seven years. But we want to maintain a physical presence in markets because we know the spend profile for customers when there’s a store and digital is much higher than when there’s only digital.
The third dimension is really entering new markets, or going back to markets that we’ve exited, where we’re only digital only. You think about Jacksonville, one of the top 50 markets in the country. We don’t have a store there. We see in the digital data that there’s opportunity there.
So how do we think about Jacksonville and other markets that we may have exited or have never entered as an opportunity for us to really get into those markets, and really take advantage of opportunities to grow the business, new customers, diversification but the omnichannel footprint is really critical.
I think the biggest thing when you think about the small format is it gives you flexibility. There are certain markets that don’t have the population of the demand to be able to build a 200,000 square foot full line store, but it can you know absorb a 40,000 square foot Macy store.
Brooke Roach
[indiscernible] color capital allocation…
Adrian Mitchell
Yeah…
Brooke Roach
Macy’s capital, would also like to hear what your priorities are now. And does inflationary environment change that at all?
Adrian Mitchell
When if you think about where we are now, excuse me. If you think about where we are right now, we have a lot of financial health, and we’re driving a lot of operational efficiency. So our capital allocation strategy is actually not changed.
So the first thing is maintaining balance sheet health, we’re doing that. We’re driving inventory productivity and inventory efficiencies. We’ve taken down our debt. We paid off 1.3 – $1.8 billion of debt over the last year alone. And we have debt maturity through our refinancing that’s pushed out, no material debt maturities until 2028. And so from a balance sheet standpoint, the real focus continues to be on inventory productivity, and just making sure that the balance sheet stays very healthy.
The second priority for us, given the capacity we had is to invest in the business. We’re in a transformation. The Macy’s of tomorrow is different from the Macy’s of the past. And so we’re investing in these new capabilities we talked about today. And we’re seeing the returns. So given the capacity we have our second priority is invest in the business.
The third priority is to return excess capital to shareholders. We remain committed to that. We remain committed to our dividend. We remain committed to growing that dividend 5% per year. We remain committed to share buybacks. Over the last year, we’ve returned about $1.3 billion of capital to shareholders, either in the form of dividends, or share buybacks. And we still have $1.4 billion of capacity. And so even though that capacity is open ended, at that authorization, I should say it’s open ended, we’re still prioritizing that as our third year.
Brooke Roach
One of the other questions that we’re asking just about every company in our conference over time, is how they’re planning for the consumer into 2023?
Adrian Mitchell
Yeah.
Brooke Roach
Do you think that the consumer is going to be weaker, stronger, or about the same in ’23 versus ’22?
Adrian Mitchell
You know, we believe that if the trends hold up, which is inflation is beginning to kind of taper down, still elevated – will taper down, the labor market continues to be strong. And savings rates continue to stay healthy, but stable. We think the consumer is going to get healthy as we get into next year. We do recognize the challenges with inflation on essential goods, inflation on home. But we do believe that there’s a resiliency in the market. And we do believe that as we get into 2023, there’ll be a bit more stability and more growth, as particularly as we get into the back half.
But we’re watching the tea leaves, you know, we’ll provide guidance as we get through this fall season, get through holiday we’ll have a better picture of what next year would look like. But this is an unusual time, quite frankly. We’re seeing a lot of spend, maybe not necessarily in all the categories we’re in but the consumer absolutely spending. And I think the consumer is going to be resilient.
Brooke Roach
That’s great. Thank you for that color. We have a couple of minutes to open it up for questions from the audience. So if you have a question, please raise your hand and our mic tech will bring a mic around to you.
Question-and-Answer Session
Q – Unidentified Analyst
Thanks. So Adrian, we’re seeing a lot of dramatic shifts going on, even in terms of consumer preferences behaviors across certain categories, year-over-year, pre-pandemic, post-pandemic. You’ve been making a lot of changes across the operational infrastructure at Macy’s, as well as merchandising.
So when we look at sort of the new Macy’s versus the pre-pandemic Macy’s and the consumer normalizing, right, in terms of their demand, demand for across all category groups, how do you see your inventory is on that journey? Okay, so that normalization process.
And then, you know, investors we’re obviously fixated on the economy and what happens next, but a normalized new Macy’s, what is – what does that look like in terms of that margin stability? And cash flow generation versus the, you know, the three, four years even before the pandemic?
Adrian Mitchell
Yeah. So, number of pieces they’re in. And thank you very much for your question. On inventory, there is no question that we’re going to be a more efficient from an inventory standpoint. So what we did last year was the biggest risk that we talked about is that given the recovery, the strength of the recovery is that we lose sight of discipline on inventory management. So there are a number of things that we did.
The first thing is we actually created some new reporting. And we actually put in place new processes that was really across the company. So now we have a monthly review with real transparency, both looking at what inventory we bought, as well as the forecast of inventory relative to demand that includes finance, the planners, the merchants, and supply chain, so that discipline around inventory is not going to go away. And that’s going to really help us quite a bit on the working capital.
The other thing that we talk a lot about is that we have to win on the experience. So we’re investing in the digital experience, not just in terms of expanding the assortment, so you’re going to see products that you’ve just never seen before, at Macy’s, it’s going to be available, but also doing it in a way that’s inventory productive.
So when we think about marketplace, we don’t handle the inventory, we don’t have the inventory liability, whether the price is $10 or $5, you get a take rate on that product. So it’s a very efficient model. But what’s exciting about that model is it gives us three sub platforms in digital, we have our 1P, our vendor direct and our 3P platform.
So if they’re unprofitable, unprofitable products, from a dead net profit standpoint, on our own platform, we can move it over to 3P, if there’s a high velocity brand, on 3P, we can put it into our distribution channel in stores, and in our own digital platform. So that flexibility on a broader assortment is a great market share approach.
The other thing that we’re pretty excited about is we talked a bit about them, the private brands piece of it. You know, we used to be known at Macy’s years ago, many of you probably remember for being the Brand Builder, other retailers would look to Macy’s about great products and great brands, we’re going to get back to that.
But as we talked about earlier broke, we have to invest to be able to do that. And we’re very clear out about the fact that given that we have an inventory ownership that’s different from market brands, that is going to be very important for us to actually transform the margin profile. So that’s why the consolidation with factories, as well as the simplification of fabrics across all the different brands are going to be so key.
So when I think about cash flow, when I think about margin profile, I don’t have any words, because all the things that we’re doing are showing benefits. You think about a year ago, we talked about marketplace, marketplaces launching right now. A year ago, we talked about pricing science, we’re scaling pricing science. We’re using the machine learning and automation to get into all categories, all channels, all store locations, by next year. We talked about personalization. We’re in the midst of building those algorithms.
So what’s exciting to me is that we’re putting in the building blocks, you’re seeing the benefits. Macy’s Media Network didn’t exist two years ago pre-pandemic. So you think about these margin or profit pool capabilities of rebuilding, in addition to just strengthening the core and running a better retail business, we were very excited about the margin profile and the cash flow profile…
Unidentified Analyst
And the durability of that even while you’re investing…
Adrian Mitchell
Absolutely. You know, you’ve heard me say this before, retail is all about discipline. It’s about sweating the details. And the discipline that we had at Macy’s now, it’s about sweating the details. And that’s why you’re seeing the performance we’re having. You know, we look at the market, and we say, gosh, you know, folks are recognizing that we’re executing better.
But internally, we are – the conversations, we’re having this gosh, we could do better. So it’s just a very different culture at Macy’s, one of innovation, one of the discipline execution. And, you know, we’re just excited. We have great new talent within the team. We have great talent that’s been within the organization, but culturally, we’re just really operating differently. So we’re pretty excited about it.
Unidentified Analyst
Thank you.
Adrian Mitchell
Thank you.
Brooke Roach
With that, I think we are about out of time. Adrian, do you have any closing comments that you’d like to make?
Adrian Mitchell
Well, first of all, thank you for inviting me to be here today. It’s really been a great conversation. We’re excited about the future of Macy’s. I thought your question was terrific. We are in the Macy’s and we’re still building. So we’re excited about the future.
Brooke Roach
Great. Thank you so much.
Adrian Mitchell
Thank you, thank you.
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