Macy’s, Inc. (NYSE:M) Q3 2023 Earnings Call Transcript

Macy’s, Inc. (NYSE:M) Q3 2023 Earnings Call Transcript November 16, 2023

Macy’s, Inc. beats earnings expectations. Reported EPS is $0.21, expectations were $0.02.

Operator: Greetings, and welcome to the Macy’s, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

Pamela Quintiliano: Thank you, operator. Good morning, everyone, and thanks for joining us. With me on the call today are Jeff Gennette, our Chairman and CEO; Tony Spring, President, Macy’s, Inc. and CEO-Elect; and Adrian Mitchell, our COO and CFO. Along with our third quarter 2023 press release, a presentation has been posted on the Investors section of our website, macysinc.com. Unless otherwise noted, the comparisons we provide will be versus 2022. Comparisons to 2019 are provided where appropriate to best benchmark performance. All references to our prior expectation, outlook or guidance refer to information provided on the August 22nd earnings call, unless otherwise noted. All forward-looking statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used on the Investors 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 Jeff.

Jeff Gennette: Thank you, Pam, and good morning, everyone. As you’re all aware, in March, we announced my pending retirement as CEO. At that time, Tony Spring became President and CEO-Elect of Macy’s, Inc., and Adrian Mitchell was promoted to the dual role of COO and CFO. While I remain the CEO through the end of this fiscal year, today marks my last earnings call. Between now and then, I will work to ensure a smooth and successful holiday season, which for many starts with our iconic Macy’s Thanksgiving Day Parade. This year, we had the incomparable share as our headliner. Following Thanksgiving, we enter our most important sales period. Across nameplates, we have refined our gift assortment and improved our shopping experience.

We know our customer is looking for value, so we have simplified our promotions. We are confident the strategic changes we have made will be well received by our customers. I’m now going to turn the call over to Tony to discuss our Q3 results, holiday plans by nameplate and how he’s thinking about the future. From there, Adrian will go over our five value creation levers and outlook for the remainder of the year. And then, I’ll close with reflections on my time as CEO. With that, Tony, I’m going to hand it over to you.

Tony Spring: Good morning. I’d like to begin by thanking Jeff for his support. Jeff, as we sit here today on your last earnings call, it has been a privilege working with you. Throughout the years, you’ve illustrated what it takes to be a successful and empathetic CEO. From everyone across the Macy’s, Inc. family, thank you for your service. And on your last call, I’m pleased to report the third quarter adjusted diluted EPS of $0.21 was above our expectations. Our sales, gross margin, and SG&A rates were all better than expected. We also benefited from lower interest expense and a lower-than-anticipated tax rate. We ended the quarter in a clean inventory position, down 6% to last year and down 17% to 2019 with Macy’s and Bloomingdale’s aged inventory down a combined 26%.

By nameplate, Macy’s net sales declined 7.9%, and comparable sales declined 6.7% on an owned-plus-licensed basis. Sales results exceeded expectations with strength in beauty, particularly fragrances and prestige cosmetics, women’s career sportswear, and men’s tailored clothing. Women’s casual sportswear, big ticket and handbags were challenged. In late October, Nike arrived in 75 stores and online and we introduced UGG Home in 200 stores and online. Both are off to a strong start. At our off-price division Backstage, comparable owned sales outperformed the Macy’s full-line stores in which they operate by about 720 basis points. At Bloomingdale’s, results were roughly in line with our expectations as we lapped last year’s 150th anniversary celebration, which included over 8.6 billion organic media impressions.

Net sales declined 2.6%, and comparable sales were down 4.4% on an owned-plus-licensed basis. Beauty, women’s contemporary apparel, and shoes were top performing categories, while men’s, home, and designer handbags were more challenged. During the quarter, we added several exciting new brands such as Veronica Beard, Hatch and Alex Mill. We also launched an Aqua collaboration with Kerri Rosenthal in honor of Breast Cancer Awareness Month. Bloomingdale’s outlet comparable sales outperformed full-line Bloomingdale’s stores by about 860 basis points. Bluemercury had its 11th consecutive quarter of growth, with both net and comparable sales of 2.5%. Customers responded well to skincare and color cosmetics, which are our largest categories. And feedback on Cerulean 6, its recently launched proprietary bath and body brand, has been positive.

During the quarter, Bluemercury also unveiled a redesigned luxury store and spa experience in New Canaan, Connecticut. This will serve as the prototype for future locations. Looking to holiday, our outlook, which Adrian will discuss shortly, assumes that our customer cross-nameplate continues to be under pressure and discerning and how they spend in discretionary categories we offer. We have the flexibility to react to customer demand with increased open-to-buy reserves versus last year. We will be nimble and competitive with promotions as needed while sustaining healthy gross margins and plan to end the fourth quarter in an appropriate inventory position. Each nameplate in our portfolio is focused on providing the best experience for their respective customer this holiday season, with new and exciting gifts across the value spectrum.

And we’re ready to fulfill our customers’ needs online, in-store, and through our gift guides. At Macy’s, the messaging around “Give Love. Give Style” holiday campaign, first introduced last year, has evolved. We have clear customer-facing language that drives authority, discovery, and conversion. In the fourth quarter, we over-indexed in beauty with sales penetration in this top-performing category typically rising by approximately 300 basis points compared to the balance of the year. This year, we have new partners like JLo Beauty and are offering Make Your Own gift stations and exclusive sets from many of the biggest brands in the industry including CHANEL, Dior and La Mer. Outside of beauty, we have updated our private brand Cashmere, refined our fine and fashion jewelry selection, including offering Pandora in more stores and online, and added exclusive Disney 100th anniversary product and experiences to our gifting selections.

At Bloomingdale’s, we’re embracing retail as theater through our “Best Holiday Ever” campaign, which features in-store and digital activations. Throughout the season, customers can look forward to exciting curated gift assortments from our top brands, including MFK, [Montclair] (ph), and Baccarat, as well as immersive shopping experiences and celebrations including our Wonka-inspired collection featuring exclusive products from David Yurman, Kurt Geiger, [Reese] (ph), and more. At Bluemercury, we’re featuring new brands in critical skincare, body and fragrance, including SkinMedica, Aesop, and D.S. & Durga. Our customers have the opportunity to experience new in-person spa treatments, complimentary gift consultations, and exclusive loyalty member activations.

Looking beyond holiday, I am confident we can evolve Macy’s, Inc. into a more relevant destination of choice for our customers and partners. The fundamentals are there. We have a balanced portfolio of nameplates, each with its own identity. This is a distinct advantage. We can learn from each other without becoming one another as we remove silos to optimize our collective customer insights. We are also balancing art and science. I like to say that this is STEAM, not STEM. We are embracing data science tools, including AI and machine learning, to drive more accurate and agile decision-making based on changes in demand. This, married with the art of human judgment, helps us become more proactive and customer influenced. We’re emphasizing variety versus redundancy.

The customer today does not want an endless aisle. They want the best aisle, which provides an improved assortment, leveraging the use of data-driven tools working closely with our vendor partners. Our balanced approach rooted in customer insights will help us strengthen our core business and scale our five growth vectors, which I’ll delve into now, starting with Macy’s private brand reimagination. We launched our new private brand, On 34th, in August. Then in September, we rolled out the next phase of the I.N.C. reimagination, further elevating our design strategy and fashion offering. We’ve been pleased with the performance of both and are taking learnings to fuel our comprehensive private brand strategy. In our second growth vector, small-format stores, we continue to open new Macy’s and Bloomie’s locations.

As a reminder, these average roughly one-fifth the size of our full-line stores. Our portfolio of small-format stores continues to generate year-over-year comparable owned-plus-licensed sales growth. Customers appreciate the store environment, service, and ease of checkout, while feedback on shopping inspiration and styling ideas has been steadily improving. Today, we operate 15 small-format locations, including 12 Macy’s and three Bloomie’s. In the third quarter, we opened a small-format Macy’s in Las Vegas, Chicagoland and Boston. And this month, we opened another in San Diego and a new Bloomie’s in Seattle. This is our first physical brick-and-mortar Bloomingdale’s representation in the market and it’s off to a great start. As announced in October, we plan to open up to 30 additional small-format Macy’s locations through fall 2025, and are committed to expanding Bloomie’s as well.

Touching on the remaining growth vectors, Macy’s digital marketplace continues to scale. It had over 1,500 brands on the platform at the end of the third quarter and grew gross merchandise value by approximately 22% on a consecutive quarterly basis. Bloomingdale’s introduced its marketplace in July and had 55 curated brands available at the end of the quarter. Across both marketplaces, we’re experiencing healthy cross-shopping, resulting in higher average order value and increased units per order. Turning to our fourth growth vector, luxury. We view Bloomingdale’s as a winning option for multi-branded upscale retail. Our mix of aspirational products across categories and price points combined with a modern personalized shopping experience resonates with our customers.

Bluemercury is establishing itself as a skincare authority with a leading assortment of cutting-edge derma products and services, and Macy’s Beauty as an accessible luxury beauty destination with the power to scale elevated brands. We view our positioning and offerings across all three nameplates as a competitive advantage as the luxury business continues to normalize. We remain confident in luxury’s long-term growth potential. Our fifth growth vector is personalized offers and communications. Our team has been testing and learning throughout the year, including the recent launch of several new multi-touch journeys. We’re seeing positive signals and are excited to move from testing to scaling in 2024. Before handing it over to Adrian, I want to thank our teams for their hard work and dedication to our customers.

And, I’d like to extend a warm welcome to our new Bloomingdale’s CEO, Olivier Bron. With 20-plus years of international retail and consulting experience, Olivier brings a differentiated global view that will further elevate Bloomingdale’s. I am confident in our leadership team and their ability to navigate an uncertain environment, macroeconomic challenges, and industry headwinds. We are committed to making the appropriate strategic investments to fuel our ongoing evolution and achieve low single-digit sales growth beginning in 2024. With that, let me turn it over to Adrian.

Adrian Mitchell: Thank you, Tony, and good morning, everyone. Before discussing our five value creation levers, I would like to thank Jeff for his partnership, guidance, and support. When I joined the company three years ago, it was because of the quality of the team led by Jeff and his commitment to transforming Macy’s, Inc. into a modern omnichannel retailer. Under Jeff’s leadership, we have returned the company to financial health and operational stability and have established the foundation for growth. Now, let’s discuss third quarter results and our five value creation levers. First, omnichannel sales. Net sales of $4.86 billion declined 7.1% versus the prior year. Comparable sales on an owned-plus-licensed basis decreased 6.3%.

Owned AUR rose 5.2%, driven primarily by changes in product and category mix. Other revenues of $178 million were 3.7% of net sales. Macy’s Media Network revenue grew $5 million, or 16%, from the prior year and was better than our expectations. Credit card revenues of $142 million, or 2.9% of net sales, declined $64 million or 100 basis points versus last year. The decline was primarily due to higher bad debt assumptions within the portfolio as expected. Credit card revenues as well as delinquency rates and bad debt levels within the portfolio were in-line with our expectations. Our card holders have the capacity to spend on their proprietary and co-brand cards. FICO scores for new accounts have risen over the last three years and are higher than the overall receivable portfolio, which is largely prime.

Looking to the remainder of the year, there is no change to our annual credit card revenue assumption as a percent of net sales or expected delinquency rates and bad debt levels. The second value creation lever is gross margin. Our gross margin rate was 40.3%, 160 basis points higher than last year. Merchandise margin improved 110 basis points, largely due to lower permanent markdowns within the Macy’s nameplate. Improved freight expense also benefited merchandise margin during the quarter. Partially offsetting these benefits were anticipated changes in category mix inclusive of the transitional impacts of our private brand reimagination as we exit brands and, as discussed on our second quarter call, a shift in the timing of shortage recognition informed by June physical inventory counts.

The third quarter shortage impact and our annual shortage assumption remain materially unchanged from our prior expectations. Compared to last year, delivery expense as a percent of net sales improved 50 basis points, primarily reflecting improvement in merchandise allocations resulting in reductions in packages per orders and distance traveled. This work is closely tied to the third value creation lever, inventory productivity. Our supply chain is flowing smoothly. End-of-quarter inventory was down 6% year-over-year and down 17% versus 2019, inclusive of the typical seasonal build for holiday. Trailing 12-month inventory turn was up 1% to last year. Expense discipline is the fourth value creation lever. SG&A of $2 billion declined $48 million or 2% from prior year.

SG&A dollars benefited from our commitment to ongoing expense discipline. Versus our prior expectations, SG&A dollars were favorable due to a roughly $10 million timing shift of certain previously forecasted expenses from the third quarter to the fourth quarter. SG&A as a percent of total revenue was 40.5%, 230 basis points higher than last year, reflective of the year-over-year decline in sales. Third quarter adjusted diluted EPS was $0.21 versus $0.52 last year, benefiting from better-than-expected sales, gross margin and SG&A rates, improved interest expense and a low tax rate. The shift in timing of $10 million of SG&A expenses, combined with the lower interest expense and tax rate, contributed roughly $0.10 to EPS versus our prior expectations.

Lastly, the fifth value creation lever, capital allocation. Year-to-date through the third quarter, we generated $158 million of operating cash flow versus $488 million last year; had $749 million of capital expenditures; free cash flow, inclusive of proceeds from real estate, was an outflow of $555 million; and we have paid $135 million in dividends. Liquidity and a healthy balance sheet remain top priorities. We continue to deploy capital prudently to ensure financial flexibility and to invest in long-term growth. Now, let’s discuss our fourth quarter and full year outlooks. For the fourth quarter, we expect net sales of $7.95 billion to $8.25 billion, including the 53rd week. Our sales outlook reflects our confidence in Macy’s, Inc. as a gift-giving destination, including the expected increase in beauty sales penetration, particularly fragrances.

Gross margin rate to be at least 220 basis points better than the fourth quarter of 2022. As a reminder, in the fourth quarter of 2022, we experienced higher markdowns and promotions as we took actions to respond to the heightened competitive environment. Our gross margin outlook gives us the latitude to respond to changes in the promotional landscape. Adjusted diluted EPS of $1.85 to $2.10, which takes into account the previously discussed $10 million shift in timing of certain SG&A expenses into the fourth quarter as well as an incremental $15 million of combined investments in marketing and our growth vectors. Together, these items are anticipated to impact fourth quarter EPS by $0.07. End-of-quarter inventory is roughly flat to last year and down approximately 18% to 2019.

Inventories reflect a higher penetration of transitional and seasonal merchandise relative to last year and a build in our reimagined private brand portfolio, and the anticipated closure of less than 10 locations in early 2024. Taking into account third quarter results and our fourth quarter outlook, this brings our full year expectations to net sales of $22.9 billion to $23.2 billion; a comparable sales decline on a 52-week owned-plus-licensed basis of 6% to 7%; other revenue to be about 3.2% of net sales, with credit card revenues accounting for roughly 81%; a gross margin rate of 38.4% to 38.5%; SG&A as a percent of total revenue to be about 35.2% to 35.5% or 36.4% to 36.6% as a percent of net sales; asset sale gains of approximately $45 million; adjusted EBITDA as a percent of total revenue of roughly 8.9% to 9.1% or 9.1% to 9.4% as a percent of net sales; and interest expense of approximately $140 million.

After interest and taxes, we are narrowing our annual adjusted diluted EPS outlook to $2.88 to $3.13, which includes an updated annual diluted share expectation of 278 million shares. As we position for sales growth next year and beyond, our decisions are centered on our customer. We must deliver relevant products, strong value and a more enjoyable shopping experience. From optimizing our physical footprint to providing compelling experiences across channels, to modernizing technology, to driving efficiencies, to automating personalized offers and communications, we are committed to bringing more inspiration on a daily basis to our customers. We look forward to sharing more on how that ladders to long-term profitable growth on our fourth quarter call.

And with that, I’ll hand the call back over to Jeff one last time.

Jeff Gennette: Thank you, Adrian. Before turning to Q&A, I would like to comment on my seven years as CEO. While I did not achieve everything I had set out to accomplish, I am proud of my contributions. We exited the pandemic a healthier and more agile company, leaning into data-driven tools and processes to guide a renewed focus on expense and inventory disciplines. In addition, we significantly improved the health of our balance sheet, paid down debt, pushed out material debt maturities to 2027 and extended the term of our asset-based credit facility. We invested in our colleagues across the company and strengthened our culture of inclusivity. We introduced our social purpose platform, Mission Everyone, directing $5 billion through 2025 to partners, products, people and programs that help create a more equitable and sustainable future.

We also reached 99% pay equity across gender and race and launched S.P.U.R. Pathways, which provides funding to diverse-owned and underrepresented businesses. And we have a very committed leadership team with strong continuity shifting to Tony, who is ready to lead Macy’s, Inc. to profitable sales growth. I would like to thank the Board of Directors for their guidance and support, our senior management team for their leadership and dedication, and our colleagues across stores, distribution centers and corporate offices. It has been an honor to work with such a talented team. I am confident the foundation is in place to build on Macy’s legacy as a cornerstone of American culture and style. And with that, I’ll turn it over to the operator for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Today’s first question is coming from Matthew Boss of JPMorgan. Please go ahead.

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Q&A Session

Matthew Boss: Great. Thanks. Sorry to see you go, Jeff, and congrats, Tony. So, maybe Tony, can you elaborate on the scale opportunity that you’ve cited from the portfolio approach? Maybe how you see your three nameplates positioned in the holiday and also the ability for them to drive the low single-digit growth next year? And then, Adrian, could you outline fourth quarter gross margin drivers and just how best to think about gross margin opportunity multi-year?

Tony Spring: Thanks, Matt, for the question. We remain excited about the power of the Macy’s, Inc. portfolio. Macy’s, Bloomingdale’s and Bluemercury are three of the most important names in retail. We speak to 40 million customers at Macy’s, 4 million customers of Bloomingdale’s and upwards of 1 million customers at Bluemercury. Between the three nameplates, we offer a range of price points from off-price to luxury. This year, we’re excited about the gift assortments at all three nameplates, the improvement in our gift-giving assortments in the beauty and fragrance area at Macy’s, the expansion of cosmetics and cashmere, the expansion of toys with our celebration of Disney’s 100th anniversary, and the opportunity that we see and fine and fashion jewelry with the expansion of Pandora.

At Bloomingdale’s, we’ve partnered with Wonka to do an incredible carousel in 59th Street and online as well as expand our gift assortment across the entire chain. And finally, Bluemercury, our new prototype store in New Canaan, Connecticut, I think, sets the standard for what upscale beauty retailing can be in the future. With regard to 2024, we’ll talk more about that on the fourth quarter call, but I would only remind the group that we’re in the early innings on our five growth vectors, and we see plenty of opportunity across each and every one of them.

Adrian Mitchell: And good morning, Matt. The first thing we would say on gross margin is that as we think about the risks and opportunities in the fourth quarter, that’s reflected in our outlook. And as you know, we’ve done a lot of work the last several years around this topic of gross margin, whether it be the composition of our assortment, the focus on delivering value, or even improving our shopping experience. What’s most encouraging going into the fourth quarter is how we think about our inventory. So, we start the fourth quarter in a solid inventory position. Inventory down 6% year-over-year, down 17% to 2019. Now, as we think about kind of where we are with regards to gross margin, we’re controlling what we can control.

We recognize that the consumers under pressure, we recognize that there’s uncertainty in the environment that we’re operating in, we recognize that there’s pressure on discretionary, but from our perspective we have a lot of optionality. We have the ability to adjust. We have flexibility. As we think about the transition from the fourth quarter to next year, the thing that we feel good about is that we have a seasonally appropriate target ending in the fourth quarter. We expect to be about flat to last year, but down approximately 18% to 2019. So, we’re very focused on gross margin, we’re very focused on profitability, and looking forward to the holiday season.

Matthew Boss: Great color. Best of luck.

Adrian Mitchell: Thank you.

Operator: Thank you. The next question is coming from Oliver Chen of TD Cowen. Please go ahead.

Oliver Chen: Hi, Jeff and team. Congrats, Jeff. It’s been great working with you. Congratulations on what’s next.

Jeff Gennette: Thanks, Oliver.

Oliver Chen: So, we’d love your thoughts, Jeff and Adrian, on what’s happening with the consumer. And also, traffic has been pretty bumpy as we look across the sector, and many positives and negatives with the health of the consumer. We would love your thoughts there. And then, Tony, as we look ahead, which areas of the product assortment do you think have the greatest opportunity or are you most excited about? And Adrian, regarding the credit card trends that you’re seeing, higher bad debt assumptions and delinquency rates were as you expected. Have trends stabilized here? What should we know about your expectations ahead with those assumptions as well? Thank you.

Jeff Gennette: Hey, Oliver. I think it’s really as we’ve talked about with the consumers. So, very uncertain times, the consumer has been under pressure, nothing new on that. We’re reading and monitoring the same signals as you are. The consumers are dealing with many of the same headwinds we’ve been talking about. There’s some additional ones; student loan repayments, obviously is the one, rising interest rate in that environment, some geopolitical issues. But all that’s baked into our guidance. And we’ve been clear on that really for the last number of quarters. So, we do expect that the consumer is under pressure. They are, in some cases, continuing to shift into experiences and away from our discretionary categories. But because of the broad bandwidth of customers we serve to what Tony talked about earlier, when you look at from kind of off-price to luxury, we have lots of categories and we’re getting more categories when you think about what we’re building in our prowess with marketplace.

So, the big thing that is going to enable all that is our liquidity, and that really where our inventory is right now. We’re obviously controlling that well, we’re controlling gross margin well, we really had the opportunity in liquidity to jump on trends and expect us to continue to do that.

Tony Spring: Oliver, in answer to your question about the categories, the piece that I love about department store retailing is that we can shift to where the customer is going. And while I certainly love the beauty and fragrance business this time of year, because it adds 300 points of penetration to the Macy’s business or accentuates the power of Bluemercury or the luxury fragrance business at Bloomingdale’s, I embrace all the categories. And the reality is if we do a good job as a leadership team, we have the agility to move inventory, move marketing, move web exposure, move presentation in stores to the businesses that are trending best. You’ve certainly heard us talk with confidence about our opportunities in private brands.