Macy’s, Inc. (NYSE:M) ICR’s 25th Anniversary Conference 2023 January 9, 2023 9:00 AM ET
Company Participants
Jeff Gennette – Chairman and Chief Executive Officer
Adrian Mitchell – Chief Financial Officer
Nata Dvir – Chief Merchandising Officer
Conference Call Participants
Oliver Chen – Cowen and Company
Oliver Chen
Hi, everybody. We’re thrilled to have Macy’s here. At Cowen, Macy’s is one of our top department store ideas. We have a price target of $27 on 6 times, 22% ETR. I’m Oliver Chen. Thanks for joining us for – Cowen’s retail new platforms and luxury analysts. We’re thrilled to be hosting Macy’s CEO, Jeff Gennette, alongside Macy’s CFO, Adrian Mitchell.
Macy’s operates the Macy’s banner as well as Bloomingdale’s and Bluemercury, a next-gen beauty retailer. And last year, the company reported over $24 billion in sales across banners and operate 700 stores across the U.S. We’re excited to share the stage with Jeff and Adrian. It’s their first time at ICR and modernizing Macy’s and a new platform, rethinking inventory management and artificial intelligence personalization. These are all great aspects of the story. So we’ll kick it off with a few questions and I’ll turn it to Jeff, who will have some prepared remarks now. Thanks, Jeff.
Jeff Gennette
Thanks, Oliver. Good morning, everybody. So good morning, and I think for everybody that saw our Friday press release, just to reiterate a couple of things that came in it. First thing is that we looked at our guidance from the third quarter and we modulated that on the sales line. So it’s now going to be in the mid to low range of our – where we had sales before.
Gross margin to come in roughly as we discussed at the end of the third quarter for the fourth quarter. The adjusted fourth quarter EPS is going to be in the previous range. And importantly, the end of quarter inventory levels on a 1-year stack are going to be down slightly to 2021 levels and down mid-single digits to 2019 levels. We also in the press release, we characterized how the holiday business was. For the followers [ph] that those peaks were in line as we looked at the Thanksgiving week and the week after week 1 of December, where we had Cyber Monday, and it exceeded the peaks as we looked at weeks 4 and 5 of December. So holiday gifting and post Christmas, where it wasn’t in line and it was – when we had deeper lulls than we expected was in weeks 2 and 3 of December as well as when we think about going into the holiday time frame weeks 1 through 3 of November. So we’ll talk about that and where that came out.
But overall – and all through the holiday season, both Bloomingdale’s and Bluemercury, the luxury sector is quite healthy and they outperformed. Overall, we’ve responded quite well to what we needed to do with planned promotion to respond to the competitive environment. What we saw was occasion-based shopping was robust as was gifting as we got into the balance of the Christmas Hanukkah time frame.
And that was fortified through what we are doing with pricing science as well as our commitment on newness. Obviously, when you think about newness and fashion freshness, it’s the lifeblood of a fashion retailer. And when you think about gifting, we had about 55% newness, which was up about 30 points from where we were in 2019. So we are at the right price in the right categories for that.
I think importantly to point out is that when we saw this deeper lull, we did make the decision not to chase unprofitable sales. So they were certainly out there, but we made the decision. We didn’t have – I think when you look at our carryover by category, by channel, by brand, we’re in good shape. And we didn’t need to take unplanned markdowns to get those to the right status, at least through the month of December. And from that, we made the decision not to chase unprofitable sales and we saw that deeper lull.
As we think about 2023, we do think that the consumer is under pressure and especially in the first half, and you heard us talk about that. And we have planned accordingly. Clearly, when you think about what’s happened with Macy’s since the pandemic, we definitely have changed our buying patterns. We took the pandemic to basically solve what has been a historical pattern of buying into markdown allowances. We stopped that.
We also went into – when you think about incentives for our merchants, they’re now basically at the enterprise level versus at the functional level. So it gave us the opportunity to basically plan receipts and markdowns at an enterprise level, which we can be much more judicious with data science and placing those bets in the right areas. That certainly is helping us.
But when you think about how we’re looking at 2023, we’re going to be more conservative with our receipts, and we’re holding back a healthy open-to-buy reserve to be able to respond as the customer does by category in the season. So while we’re taking a cautious view, we’ll be ready if the customer pivots. So we’re staying close to that.
We are definitely committed to compelling value. We’re clearly committed to an omnichannel experience that is seamless and we’re doing that across all omnichannel with a very strong balance sheet, which gives us the flexibility and the agility to be able to respond as the customer goes.
I think Oliver has been covering us for some time. But for those of you that are not familiar with the Macy’s Inc. story, I wanted to isolate kind of four – or really 5 things that we’ve been working on through the Polaris strategy.
The first one is and who’s with me today from our senior leadership team is Adrian Mitchell, who’s been our CFO for the last couple of years and doing a bang-up job with us. And then Nata Dvir here in the front row is our Chief Merchant. She’s been with Macy’s for 18 years. She’s been the Chief Merchant for the last 2 and is really reshaping the Macy’s brand and the direction of where it’s going. It’s a combination between private and our market brands. So very happy. They are representative of a very strong team that is very aligned, very scrappy and very hungry to follow the customer. So that would be number one, a reason to believe.
I think when you look at the financial health of Macy’s, Inc. since the pandemic, and you look at where we are, certainly, we have improved substantially. When you think about we have no new term, near-term debt maturities and the debt maturities that we do have are unsecured. So that piece is really good. We also have several credit agencies that have recently given us upgrades. And our reduced leverage ratio gives us tremendous flexibility to respond to whatever is needed to drive more profitable growth.
The third thing is really just developing a stronger prowess with inventory freshness and really just being laser-focused on inventory control and inventory productivity. As mentioned, just the collaboration that we were able to achieve with the incentive pays that we’re doing across our buying, planning and finance organizations help us with that. We are much less reliant on MDAs. So we’re not buying into the reconciliation that happens at end of quarter, end of season, end of year, and we’re – the onus is on the merchants to get that right and the art and the science of the business and the reserves that we talked about and the reserve basically to chase after demand that is profitable versus chasing after demand that isn’t. So that is new.
And also, you saw in our campaign that we launched in the March time frame of Own Your Style with the Macy’s brand. And if you walk our stores or go to our website, you will certainly see our focus on really fashion and trend that isn’t necessarily dedicated to a particular brand, but the way that a customer might see themselves in opportunities for inspiration.
The fourth thing is really our commitment to increasing value and engagement and doing that through our pricing science, personalization and loyalty program. And we’ll talk about that. I’m sure we’re going to get questions on that. But what I’d say is that these are opportunities for us.
Pricing science. We’ve done a good job with that, and we’re in the middle innings of that. Personalization, we’re in the very early innings of that. And then with loyalty, now that we’re at 70% of our known customer base as part of our loyalty platform, up from about 50% from where we were in the beginning of the pandemic gives us tremendous flexibility to see good behavior with customers who are with us and acquiring new ones.
When I look at the fifth opportunity, it’s really the pipeline of customer first initiatives that we’ve got coming. And the first one I’d want to mention is really our private brand reinvent. So Nata and team is really orchestrating a 3-year path to reinvent all of our private brands, either refreshing existing ones, developing new ones, really looking at the life stages of our very diverse multigenerational customer base and ensuring that we have the right content that we uniquely control.
And so you’re going to see our penetration of business in private brand go up. You’re going to see the COGS improvement in that, the profitability opportunity that’s going to come from that. And a testament to that is what’s been happening with the INC brand, which is our number one women’s sportswear brand. That has been under development over the past year, and you really see it in the comps that we’re now getting. We’ll talk about that in detail during the fourth quarter call.
The next one is marketplace. And we are a large – we obviously fight above our weight when you talk about our digital platform, and we were one of the last to go to a marketplace. On the Macy’s brand, we launched that in September. It’s been quite successful. We’ll give you detail about that in fourth quarter, but 400 new brands.
I think the big hallmark there is the amount of tangential categories that we’re now in and categories that, frankly, from an owned and licensed model was not profitable for us to carry. Now with marketplace, we have a new model that gives us lots of leverage in categories that customers expect from us and trust us to carry at profitable levels. In the holiday time frame, you saw that in the electronics business, in the game business, Xbox business, those were all the best sellers for us.
The next one up is really what we’re doing with the Macy’s media network, and that’s bringing new customers, new brands with a new profit pool. And that has been a very fast start that we expect it’s becoming you know, marked in terms of its contributions to our overall profitability.
And the last one I bring up is really what’s going on with market by Macy’s. And it’s our opportunity to bring a small format where we’ve got great customer signals. We’ve got a good digital business, but it could be better with the omnichannel flat wheel that you create with brick-and-mortar and the interaction with digital.
So you’ve seen us do that in three different ways, densification of existing markets where we’ve got a strong brick-and-mortar mall portfolio replacement strategies where we’re basically moving from unprofitable store in a – potentially a decaying mall and opening up a store that would be in a high-traffic node of a strip center. And then we’re also looking at the third bucket, which is new markets.
So we announced last week, Bloomingdale’s. Their concept is called Bloomy’s [ph] is going to do one of those new markets. They’re going into the Seattle market that they’ll open up in 2023. We’ve now got 10 of these and we’re watching, the Board is watching the signals of this very carefully. We do believe when you think about the bulk of business in our categories that’s done in brick-and-mortar, it’s about half and half between on-mall and off-mall. We’re continuing to prune our on-mall portfolio, and we need to have an answer for where customers expect the Macy’s brand, but they can’t currently or conveniently find it. And we’re drilling that through off-mall, but we’re looking through all the signals to get a profitable model to scale.
So while we’ve done all this in the last year, I think we really have found our cultural center. You saw that we introduced Mission Every One, which is our opportunity to really help our colleagues, our communities, our customers and the planet. I won’t go into a lot of detail. It’s well documented on our website. But it really is galvanizing the culture and the morale of our organization that we’re doing right by those factors.
So I’m just going to end with saying we’re excited. Even though we’ve got a lot in front of us in a very competitive environment, we’ve got the team that is, I think, making the appropriate choices. Ultimately, our goals are low single-digit growth and double-digit EBITDA growth. So that’s where we’re at. So Oliver, I’ll turn it over to you.
Oliver Chen
Great. Jeff, thank you. There’s both a lot of optimism and modernization as well as caution in the consumer. How would you describe your performance during the holiday period? And you see a lot of data about the health of the consumer, what’s happening with the consumer?
Jeff Gennette
Yeah. Let me – I’ll start with what we saw in the holiday and then turn it over to Adrian on kind of the health of the consumer. But what I’d say is what I just mentioned, which is that I think gifting met or exceeded our expectations. And this was a holiday that it mattered to customers. And so it was really important for us to position ourselves in the categories that they cared about. And so I think the team did a good job of being well positioned on that.
And one of the things that we did because of kind of the supply chain hazard [ph] is that we were able to bring in really all – we were well positioned for holiday by the end of October, and you saw that in our inventory comp. So we were up 4% to last year as we entered the month of November. That was absolutely the right thing, as we were well positioned, we were set. And when you think about all of the gifting categories, there were very few missteps from what we expected and what we wanted. And so that piece was good. We were ready for that.
When you looked at the balance, when you looked at the low periods, it was really about the self-purchase that was concerning. So the – when you think about self-purchase, so we kind of look at our business in the three buckets, so they’re self-purchase, there’s occasion-based and then there’s gifting. And that when I’m talking about the fourth quarter.
And as mentioned, occasion-based because people were going to New Year’s parties, they were going to weddings, they were going to holiday parties. That had been strong, and we had been talking about that in the first, second, third quarters, that persisted as we went into the fourth quarter. And that was quite strong. I think about men’s clothing, you think about dress up shoes, you think about men’s suits, all luggage business. All of those were strong.
But when you look at the self-purchase, so a lot of the sportswear businesses, casual apparel, some of the home categories, that lull was more – it was deeper than we expected. And so looking at that and then the gifting categories, as you would expect is whatever you’re buying for somebody during the Christmas holidays was quite strong.
So as we’re thinking about self-purchase is a more fundamental part of the first half of ’23 as a percent of our overall sales. And looking at what it was at the end of October, in the two lulls of the two months of November, December, we’re cautious about that. We want to make sure that the customer is ready.
And then we are also looking at our credit data, and our credit portfolio as well as the macro conditions. That is why we came out with some conservatism as it relates to 2023. We’ve been signaling it since the second quarter of this past year. We definitely commented about it on our third quarter call. We’re now just underlining it as we think about the future, is that self-purchase is a question for us.
Adrian Mitchell
Just adding some commentary about the consumer, we do believe that the consumer will remain under pressure. Jeff just spoke quite a bit around kind of the composition of purchases. Clearly, for the holiday season, folks were buying toys. They were buying occasion-based items, they were buying gifting. But for things for themselves and their homes, that’s where we saw the drag with regards to the lull that Jeff spoke to.
But as we look at our credit card data, there are some indicators that continue to trend in a direction which is payment rates are deteriorating, debt balances are higher. And that’s just an indication that the consumer just has less capacity to spend.
As we look at the macro factors, we see that inflation continues to outpace wage growth, wage growth is beginning to slow down. Inflation is beginning to slow down, but the capacity of the spend is really under pressure, and we believe that that’s going to continue into 2023 in the way that Jeff described.
Oliver Chen
One of the reasons at Cowen, we’re also recommending Macy’s is based on inventory agility and what you’re doing with test, read and react. Adrian, what’s happening there as you think about reserves and new strategies you’re pursuing?
Adrian Mitchell
Yeah. You know, so inventory has been a big priority for us, and it’s really been really quite important in terms of liquidity and in terms of cash preservation. From an inventory standpoint, a lot of what we’ve done to date is really being much more disciplined in our buys and changing fundamentally the way we think about leaning into the demand with the inventory from an inventory management standpoint.
Some of the key things that we’ve done is we are very much making sure that we’re matching the demand that we believe is out there with the inventory that we’re buying into with the appropriate level of reserves. So what that fundamentally means is if we see demand that’s outpacing our expectations within a particular style or particular category, we can chase into it. We can buy into the reserves.
But if we see demand in a particular style or category, slower than we expected, we do not buy into the reserves, we actually preserve that cash. But more importantly, it allows us to protect our margin profile.
Now we’ve built this capability over time. We have new reporting. We have a cross-functional team of merchants and planners and finance folks and supply chain folks that’s really looking and forecasting one to two seasons out what our profile looks like. But we’re pretty excited about the continued science that we’re doing in terms of inventory placement, understanding what’s selling, leaning into inventory productivity, which is some of the new things that we’re beginning to lean into. But the discipline of inventory is critical from a liquidity standpoint, from a financial health standpoint, we’re going to continue to build those capabilities.
Oliver Chen
And a stressful industry point has been promotions and inventory management. Jeff and Adrian, what’s happening? What did you see with promos? And what should we think about in terms of January?
Adrian Mitchell
Yeah. I think that’s a big question for us is when you look at – when we told the Street that we were going to be roughly in our gross margin range, one of the things we anticipated was two things. One is, where are we with those categories that we want to be at a particular inventory level by the end of January? And what is the right level of categories that we want to carry into the spring season with us.
What we’ve seen through the third quarter and so far in the fourth quarter is a decelerated sell-through in those categories where there’s lots of competitive overhang in those same brands or in those same items in the industry. So looking at our models to make sure that we’re properly calibrating the sell-throughs that are required over the next – the four weeks that were into the month of January to get where we want to be in our inventory level by category, by channel, by brand. So that’s the one thing that we’re looking at right now.
I don’t think we fully know the extent of where the industry is in our competitive categories by brand, and we won’t really see that until we get the fourth quarter prints. But I do think, obviously, everybody – every management team is looking at that one very carefully to make sure that we’re getting – they’re getting the right inventory levels.
And that is in a vacuum where all the consumer is quite savvy. When you look at the amount of information we’re getting from all of our daily price scraping on the Internet to see exactly where the prices are by category. We’re making those adjustments. So that’s one factor.
The other factor as it relates to gross margin is what’s going on in inventory shortage. So I think that you’re hearing a little bit of that going on in the industry right now. There is a couple of factors that I would call out. And one is that we reconcile our shortage on a yearly basis in the month of January. We’re in the midst right now of doing that inventory.
But we have enough from our cycle counts, which we do daily, where we’re doing RFID counts to make sure our autumn [ph] file is clear. We’re keeping our replenishment orders up at the right level to know that there is more discrepancies this year than there has been in time past. A couple of things that can contribute to that. The first is just the penetration of the business that’s moved from being online back into stores.
So you’re going from a very low shortage environment, which would be our CFCs, customer fulfillment centers into stores which have more porous borders. And so be that occasional shop lifters are organized theft or grabbing runs, that does come into effect. So we’re watching that carefully.
Because of that, we have put more reserve against, which is inventory, our ability to – we basically carry a shortage accrual. We’ve put more into that bucket that’s all comprehended in our guide. That gets all reconciled within the next couple of weeks. So those are the two things that we’re looking at. We’re committed though to getting to the right inventory levels going into the month of February, and our gross margin guidance comprehends that.
Oliver Chen
Very helpful. So rapid fire as we’re wrapping up marketplace model, market by Macy’s. These are very modernizing features and Adrian return of capital to shareholders, loyalty program, and we have 2 minutes and 18 seconds.
Adrian Mitchell
All right. Rapid fire. Market by Macy’s. We’re excited about market by Macy’s. Fundamentally, what market by Macy’s allows us to do is to optimize the physical footprint to where the consumer traffic is. And we know that the consumer traffic is more towards off-mall than on-mall.
The reality is that a significant portion of our on-mall portfolio is still quite relevant. So we have some more pruning today. From an off-mall standpoint, we’ve really built the science that gives us much better confidence in the actual location of our market by Macy’s. So as Jeff pointed out, we’ve already opened 10 and we will open more. But what we want to make sure that we’re doing is that we have the right level of sales per square foot productivity in those locations.
Now we have three strategies. We have an infill [ph] location. Our test stores are very much in that category where we’re looking at markets like Atlanta and Dallas where we have big box stores. We see opportunities for more spend, more trips, more new customers by putting in these market by Macy’s small-format locations.
We also have the replacement strategy that we’ve done in St. Louis as an example, our Chesterfield store, market by Macy’s opened the same day we closed our big box Chesterfield store. And then obviously, there are markets around the country that we’re just simply not in.
Marketplace, we’re very excited. We have started marketplace with categories that are adjacent to what we would have in our core assortment. And the response has been very encouraging. So we’re seeing customers give us permission to transact on big screen TVs, on video games, on extended assortment around kids and toys. We’re very excited. We’ll share more on the fourth quarter call.
Financial health, we’re in a position to invest. We spoke to earlier this year the ability to invest $3 billion over the next 3 years, including the $1.2 billion we’re projected for this year. We still are focused on that. We’re investing for growth in the long term.
So our ability to continue to invest, given the inventory health that Jeff spoke to. We don’t have any material debt maturities for 5 years. It’s a modest tower in 2028. So we feel very good about our ability to invest in this modern department store evolution. So that’s where we are.
Jeff Gennette
The only thing you didn’t mention was loyalty. So obviously, when you look at – we’re now at 70% of our known [ph] file is on our loyalty program. So we’re in the very early innings of personalization. You’re hearing about that. It’s a huge opportunity for us, particularly with those customers that are potentially going to a treat from us. And so we have triggers by category, by customer, about when that could potentially happen. And then what are those potential offers that we want to give them that would get them to a second purchase or third purchase.
So we’ve been building this for the past 14 months and now have the capability. You’re going to start to hear us talk about that with more regularity. For a first inning opportunity, we expect this to pay good dividends for us in both margin, customer loyalty and net sales in the future.
Oliver Chen
It’s been great to hear about modernization. Private label is a huge opportunity as is personalization, and this journey for inventory management has just started. So there’s a breakout with Macy’s at 10:00 a.m., feel free to join. This was really just an appetizer for much more to come. Thank you, everybody.
Jeff Gennette
Thanks, everybody.
Oliver Chen
Have a great call.
Question-and-Answer Session
End of Q&A
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