Macy’s - Q3 2024

Transcript

Operator (participant)

Greetings, and welcome to the Macy's, Inc. third quarter 2023 earnings call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this call is being recorded. I would now like to turn the call over to Pamela Quintiliano, VP of Investor Relations. Pamela, you may now begin.

Pamela Quintiliano (VP of Investor Relations)

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, our 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 investor 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 expectations, 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 investor section of our website. Today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call. With that, I'll turn it over to Jeff.

Jeff Gennette (Chairman and CEO)

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 have the incomparable Cher 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 customers are 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 third quarter 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 (President and CEO-elect)

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. On your last call, I'm pleased to report that 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 stores by about 860 basis points. Bluemercury had its 11th consecutive quarter of growth, with both net and comparable sales up 2.5%. Customers responded well to skincare and color cosmetics, which are our largest categories, and feedback on Trillian 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 across nameplates continues to be under pressure and discerning in 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. 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-index 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 J.Lo 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, Aqua collaboration with Kerri Rosenthal . We find 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 retailer 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, Moncler, and Baccarat, as well as immersive shopping experiences and celebrations, including our Wonka-inspired collection, featuring exclusive products from David Yurman, Kurt Geiger, Reiss and more. At Bluemercury, we're featuring new brands in clinical skincare, body, and fragrance, including SkinMedica, Aesop, and Dior. 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 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 INC 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 Bloomingdale'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 Bloomingdale'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 Bloomingdale'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 Bloomingdale'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 is 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 factor 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. I'd like to extend a warm welcome to our new Bloomingdale's CEO, Olivier Bron. With 20+ 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 (COO and CFO)

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, omni-channel 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, omni-channel 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 cardholders 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 improvements in merchandise allocation, resulting in reductions in packages per order 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 twelve-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 lower 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-$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 200 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-$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. 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-$23.2 billion. A comparable sales decline on a 52-week owned plus licensed basis of 6%-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%-38.5%.

SG&A, as a percent of total revenue, to be about 35.2%-35.5%, or 36.4%-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%-9.1%, or 9.1%-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-$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 product, 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. With that, I'll hand the call back over to Jeff one last time.

Jeff Gennette (Chairman and CEO)

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. 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. With that, I'll turn it over to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue.

...For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up. Again, that's star one to register a question. Today's first question is coming from Matthew Boss of JPMorgan. Please go ahead.

Matthew Boss (Equity Research Analyst)

Great. Thanks. Sorry to see you go, Jeff, and congrats, Tony.

Tony Spring (President and CEO-elect)

Thank you.

Matthew Boss (Equity Research Analyst)

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 (President and CEO-elect)

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 at 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 in 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, at 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 (COO and CFO)

Good morning, Matt. You know, 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. 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. 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, you know, the consumer's 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, you know, 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 (Equity Research Analyst)

Great color. Best of luck.

Adrian Mitchell (COO and CFO)

Thank you.

Operator (participant)

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

Oliver Chen (Managing Director of Retail, Luxury, New Platforms Sector Head)

Hi, Jeff, and team. Congrats, Jeff. It's been great working with you. Congratulations on what's next.

Jeff Gennette (Chairman and CEO)

Thanks, Oliver.

Oliver Chen (Managing Director of Retail, Luxury, New Platforms Sector Head)

So would love your thoughts, Jeff and Adrian, on what's happening with the consumer, and also traffic's been pretty bumpy as we look across the sector, and many positives and negatives with the health of the consumer. 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, 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 (Chairman and CEO)

Hey, Oliver. I think it's really, as we've talked about with the consumer, so, very uncertain times. The consumer's been under pressure. That is 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 one, rising interest rates 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's under pressure. They're, 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, the what 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 gonna enable all that is our liquidity and the really where the where our inventory is right now. We're obviously controlling that well. We're controlling gross margin well. We really have the opportunity and the liquidity to jump on trends and expect us to continue to do that.

Tony Spring (President and CEO-elect)

Oliver, in answer to your question about the categories, you know, it's 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. We're in the early stages of a reimagination, pleased with the growth of On 34th in its first few months, the reimagination of INC, and more to come. But we also love market brands. We wanna be the best partner out there to the retail community, and so we're gonna be flexible in our financial models.

We're gonna keep pursuing our go-get list of brands that we wanna be a part of Macy's, Bloomingdale's, or Bluemercury, and expect that we will have the brands and the products that customers expect from each of these three nameplates.

Adrian Mitchell (COO and CFO)

However, just to close out on credit card, no changes with regards to credit card. You know, we spoke on our last earnings call about our outlook for the balance of the year. In Q3 was very much in line with our expectations, and as we think about Q4, very much in line with our expectations. As we think about what this means into next year, there's just a number of unknowns that remain out there. As we get a better sense as to what's happening with the bureau's decision on late fees and a number of those other factors, we'll share more of a perspective on 2024 and beyond.

Oliver Chen (Managing Director of Retail, Luxury, New Platforms Sector Head)

Great. Happy holidays. Happy Black Friday. Best regards.

Adrian Mitchell (COO and CFO)

Thank you.

Tony Spring (President and CEO-elect)

Thanks.

Operator (participant)

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

Brooke Roach (Managing Director of Equity Research)

Good morning, and thank you for taking our question. I wanted to follow up on Oliver's question about the consumer and get your thoughts on what you're seeing from consumer discretionary demand across income cohorts relative to what we saw a few months ago. Have there been any changes in conversion or traffic across each of these cohorts, and how is that driving your strategy for the holiday season? And then, as a follow-up, Adrian, can you provide your updated thoughts on the levers that you can pull to protect profitability and EBITDA dollar generation next year if the macro backdrop or credit outlook weakens further? Thank you.

Tony Spring (President and CEO-elect)

Thank you, Brooke, for the question. I think the consumer remains under pressure. You know, we know the discretionary categories remain challenging. And yet, as a modern department store, we have the ability to be in multi-brand and multi-category, multi-channel, and cater in off-price all the way to luxury with content the customer is interested in. And certainly, the gift-giving period, even in a year where discretionary categories are more challenged, this is the time of year where they come to life. Gift-giving, Christmas, Kwanzaa, Hanukkah, they still come, and our stores and our sites and our teams are prepared for the holiday with 26% less aged inventory this year, and I think a refreshed assortment of content across all three nameplates. There's no doubt that there's a normalization happening in the luxury sector, in answer to your point about the different income brackets.

However, we believe in luxury long term, and I think the opportunity is there, even in a challenged environment, for each of our brands to capture more points of distribution. Adrian?

Adrian Mitchell (COO and CFO)

Thanks, Tony. Brooke, really good question as it relates to 2024. You know, we remain committed to low single-digit growth beginning next year, and also low double-digit EBITDA margin over time. Right now, we're controlling what we can control. You know, we're working to maintain a healthy balance sheet. We're putting in place more and more operating disciplines around inventory management, expense management. We're investing in our growth vectors and investing in the fourth quarter in our growth vectors as we move from testing to scaling in 2024. As we stand here today on this call, you know, the primary headwind to achieving low double-digit EBITDA in 2024 is really around credit card revenues, inclusive of the pending credit card late fee ruling that still has not been released. But our fundamentals remain intact. We're excited about what we're seeing with our growth levers.

The development and scaling of that is on track, and that's why we're leaning into some additional investments in the fourth quarter. We're encouraged.

Brooke Roach (Managing Director of Equity Research)

Great. Thanks so much.

Adrian Mitchell (COO and CFO)

Thank you.

Operator (participant)

Thank you. The next question is coming from Ashley Helgans of Jefferies. Please go ahead.

Ashley Helgans (SVP)

Good morning. Thanks for taking our question. To start, we're just curious what kind of promotional levels you're embedding in the fourth quarter guide. I know you've mentioned the guide gave you some flexibility to respond to the promotional environment. And then also, we wanted to ask about your expectations for holiday shopping cadences this year. With more pressure on the consumer and higher rates, do you expect people to shop a little closer to holiday than they have in the past couple of years? Thanks.

Jeff Gennette (Chairman and CEO)

Ashley, let me take the second part of your question, and I'll throw the first part to Tony. So when you look at the pace of our, you know, of the holiday shopper, clearly next week and the following week are really critical. So when you think about Black Friday, the competitive landscape has really shifted to Black Friday deals prior to Black Friday. We're in the midst of that, along with our competitors. Customers are taking advantage of that. But there is a pilgrimage that goes to brick-and-mortar and our sites for Black Friday and that full weekend. We're well ready for that. And then Cyber Week, obviously, starting with Cyber Sunday, Cyber Monday, really important. Then we go into a 10-day or so lull, which is very typical. We're ready for that in terms of where customers are resetting.

We're resetting for the last 10 days. That's a really important timeframe for us. One thing that sets up well for all retailers is that full weekend before Christmas, with Christmas dropping to a Monday. So, all that is anticipated. I think the big thing that you're gonna see is really powerful assortments across all three of our brands, as well as the real focus on simplified values and how we're communicating that, so we are well ready.

Tony Spring (President and CEO-elect)

I would add to Jeff's comments that the benefit of being a department store, again, is that we can handle the range of these cycles. I'm 36 years into this, and I haven't known a fourth quarter that isn't competitive and isn't promotional.

That being said, our guidance and margin gives us the opportunity to offer compelling value, to have a strong Black Friday, and take advantage of, as Jeff described, the extra days in front of the Christmas holiday season. Our website is prepared to deliver on time. Our gift guides have got a nice range of products and price points that I think show compelling value, as well as a degree of newness that we just didn't have last year.

Ashley Helgans (SVP)

Great. Thanks so much.

Tony Spring (President and CEO-elect)

Thank you.

Operator (participant)

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

Michael Binetti (Senior Managing Director)

Hey, guys. Thanks for taking our question. Jeff, congrats on the retirement. It's been a pleasure. And Tony, we very much look forward to working with you ahead. I guess, Adrian, just to clarify one thing, the low single digit sales growth, that's referencing net sales for next year. I'm assuming you're excluding the other revenue line because of credit, but if that's true, could you, would you mind just helping us think, even if at a high level, through the contributors that you see between comps, new store contribution, new store productivity? I know we have small format stores coming on, smaller but more productive. You mentioned some store closures. So maybe just a little, like, even if qualitatively, what some of the contributions we should think about are.

And then I'm curious about the SG&A leverage point as you think ahead to next year, based on some of the qualitative comments you gave to Brooke there. You guys have really hustled and taken out a lot of costs and found a lot of efficiencies. Obviously, the magnitude of sales declines this year has made SG&A a deleverage point. But maybe help us through this, think through scenarios if, you know, if comps are slightly negative next year versus slightly positive next year. Is there, is there a point that you feel comfortable saying SG&A can leverage, in, in a couple scenarios next year?

Adrian Mitchell (COO and CFO)

Thanks for your questions, Mike. As it relates to growth, you know, we've been pretty consistent with our investments in our core business and our growth levers. What Tony talked about a little bit earlier is really the scaling and maturation of a lot of those growth vectors. So when you think about small format stores, you think about growing our core business, you think about the health of our different channels, it's all focused on better shopping experience, value for the consumer, and in continuing to strengthen our assortment. Those are the things that give us confidence about growth next year, and we'll certainly share the composition of that as we get into 2024 in the Q4 earnings call. Expense discipline is always a top focus for us. We spoke earlier this year to the $200 million of capturability in 2023.

That's about $300 million-$350 million in 2024. SG&A leverage is just good retail business. So expense discipline is really important for us. We're continuing to lean into opportunities to drive greater productivity within the business, and that's what will lead, you know, for us, to a double-digit EBITDA profile over time.

Michael Binetti (Senior Managing Director)

Okay, thank you. Thank you very much, guys. Appreciate it.

Adrian Mitchell (COO and CFO)

Thank you.

Operator (participant)

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

Arian Razai (VP of Equity Research)

Good morning. This is Arian Razai for Bob Drbul. Jeff, it was a pleasure working with you. Adrian, can you please speak to units? We've been hearing that the industry units have been trending down, low single digits. Do you see any reduction in the average basket? Just wanted to hear your thoughts. And, and if I may, on a broader consumer health, what are the expectations for tourist traffic, for the holidays? Are there any sequential improvement embedded in the guidance? Thank you.

Adrian Mitchell (COO and CFO)

Yeah, as we think about, you know, units, what we saw was in the third quarter, AUR was up mid-single digit, sales down. So obviously, we would expect our unit volume to actually be down. As you think about the consumer, we think the consumer is... remains, you know, under pressure, and I think most importantly, the consumer is discerning. No change in what we've spoken to about the consumer. We expect that to extend into next year, but we do expect the consumer to continue to be challenged.

Tony Spring (President and CEO-elect)

Let me take your tourism question. So when you look at, kind of, we look at tourism domestically and international, but let's talk about international. It just continues to be below 2019 levels. Q3, we did see an uptick, which was encouraging, particularly in Latin America, Central America, some countries in Europe. That has benefited our downtown stores when you think about the kind of tourist destinations, some of these downtown metro cities, because our flagships did outperform the fleet in Q3. But we're not anticipating a meaningful benefit for the balance of this year, and we are hopeful that, you know, we, we've always talked about the fact that with tourism being 3%+ of our overall business, international tourism, that we will, that will be a tailwind. So we do expect an uptick in 2024 and beyond there.

Arian Razai (VP of Equity Research)

Got it. Thank you.

Tony Spring (President and CEO-elect)

You bet.

Operator (participant)

Thank you. The next question is coming from Chuck Grom of Gordon Haskett. Please go ahead.

Greg Sommer (Research Associate)

Hi, this is Greg Sommer on for Chuck. I was hoping you could just provide any color on if you saw any variability in the quarter as we saw, like, warmer pockets of weather around the country or even as student loans kicked off when the repayments restarted.

Jeff Gennette (Chairman and CEO)

Yeah, when I said just an overall comment, sales and profit in Q3 it was better than our expectations. So, you know, we were strategic with our promotions. That definitely helped us drive conversion. We're not commenting on kind of the monthly performance, but the overall quarter performed better than expectations. I think the main point is that, you know, we're definitely ready for holiday, and

... you know, we're confident in our curated offering, strong value that we're gonna be providing the customer. So pleased with the quality of the assortment. As Tony and Adrian have both spoke to, our building flexibility to respond to how the customer signals and that inventory position that we have and our commitment to really staying liquid, to respond to the changing customer behavior across all of our categories and price points is gonna be critical.

Adrian Mitchell (COO and CFO)

I would just add that the work the team has done to have more transitional product, and even in a quarter where the weather was a little warmer than we would have liked, we saw a great sweater selling. So that's one of the things we've come to accept: we don't control the weather, but we can diversify our assortment to take advantage of opportunities for gift giving and self-purchase.

The only other thing I would add is to your question about student loan repayments. It's really difficult to determine the specific impacts due to student loan payments. But as we think about the 2023 outlook for the balance of the year and the fourth quarter, that's very much reflected in our outlook. And also incorporates, you know, the variable of student loans. This would be a pretty important consideration as we get into 2024 as well, but we're just continuing to monitor it pretty closely. Great. Thank you. Thank you.

Operator (participant)

Thank you. The next question is coming from Alex Straton of Morgan Stanley. Please go ahead.

Alex Straton (Managing Director of Equity Research)

Perfect. Thanks so much for taking the question, and Jeff, congrats on a great career at Macy's. It's been great getting to work with you. Really just a couple from me. First, I think you highlighted Backstage and Bloomie's Outlet as outperforming the full line this quarter. I'm just wondering, has that been the case for some time, or was there some sort of step change this quarter that you'd highlight? As well as just how you're thinking about those banners heading into holiday. And then secondly, many wholesalers have trimmed their order book outlooks from three months ago in their latest earnings reports, citing weaker partner orders. Is there anything you can share, even qualitative, on how you're ordering or thinking about the front half inventory buys? Thanks a lot.

Tony Spring (President and CEO-elect)

Thanks, Alex, for the question. We feel good about the business at both Backstage and Bloomingdale's Outlets. There isn't a quarterly change because they've been performing all year long. I think it speaks to the value-conscious consumer, and we're glad that we have both of these nameplates having an offering in the sector. In the case of Backstage, it's inside of our four-wall stores, and we know that the Backstage customer is also a full-line customer. So bringing them in for value gives us the opportunity, certainly as you look at the fourth quarter, to sell them other gifts in size and color and in breadth and variety that we wouldn't have necessarily in a freestanding store.

And conversely, at Bloomingdale's, you're providing access to a brand that I think is on the upswing, and there is still a consumer, I think, that at times is price sensitive. So how do we cater to that customer and ultimately bring them over to the full price brand at the appropriate point in time? So we feel good about both Backstage and Bloomingdale's Off Price. Just, I guess in follow-up to the second part of your question, we intend to be the better wholesale partner out there. And when I say wholesale partner, that doesn't mean that we won't have a concession relationship, a consignment relationship or a hybrid relationship. Our objective is to have the best relationship. We don't view it as a zero-sum game.

And while there are gonna be times where we are adding orders and canceling orders, we try to do it with great transparency. And what I found is our partners appreciate our willingness to forecast with them and talk about our future objectives. As Adrian said, our commitment is to get to low single digit growth next year, which means we need brand partners in the wholesale market who are betting on both Macy's and Bloomingdale's.

Alex Straton (Managing Director of Equity Research)

Thanks a lot. Good luck.

Tony Spring (President and CEO-elect)

Thank you.

Operator (participant)

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

Dana Telsey (CEO and Chief Research Officer)

Good morning, and Jeff, best of, best of luck. As you think about Tony and Adrian, the opportunities on the real estate side, you've obviously had some small just a short time period of the small format stores. But as you think of the landscape opportunity for Bloomingdale's and for Macy's and what the assortment could look like, how do you envision it? What does it mean for margins? And just in the near term, as you think about the first half of 2024, does the cadence of orders or how you're thinking about the ordering patterns, do they change at all from the back half of 2023? Thank you.

Jeff Gennette (Chairman and CEO)

Yeah, let me take the first part of your question, which would be on the real estate side. So obviously, Dana, we look at our portfolio very closely and what's the value to operate a particular unit, what's the monetization opportunity with that. The thing that you're hearing from us is really taking a full market view and really looking at all of our assets that serve customers in a market, and that's our digital assets, that's our mall-based assets, as well as this emerging opportunity that we see in small-format. So when you look at, you know, the Macy's brand is in, you know, 49 of the top 50 metro markets. So from that perspective, we're well-placed. There's always opportunities to look at individual units and expect that we'll continue to do that.

So when you think about when we announced the Polaris strategy, we announced how many door closures. We've closed 80 of those. And you've also heard that what we're doing with the small-format on the Macy's side, we've opened 12 through the fourth quarter of this year. The intent is to open up to 30 by the end of 2025.

... Very excited about what Bloomingdale's is doing. So if you think about Bloomingdale's, Bloomingdale's is in a substantially less number of the major metro markets of the country, and we just hit a milestone, you know, in the last week by opening Bloomingdale's in Seattle, and pleased to say that that has gotten off to a great start. So there is opportunity in brick-and-mortar, but it coupled with our prowess in digital, to be able to create two powerhouse national omni-channel brands that really span the level of price points and customers and categories, that we continue to traffic in.

Adrian Mitchell (COO and CFO)

Let me add, obviously, I have a soft spot for Bloomingdale's, so I believe there's growth opportunity digitally, physically, in both small format stores and in our off-price division. As Jeff mentioned, we cover a fraction of the country, but we're gonna be surgical in how we expand. We've done too good a job, I think, in having a highly productive portfolio of stores to sacrifice that now. Expect also that we're gonna continue to lean into the opportunity to expand margin. That is both in the pricing science as well as in the mix of products that we sell. Sometimes I think AUR gets mistaken for charging the customer more.

I just want to emphasize, we will be competitive on price, but we will look for opportunities to expand our AUR and expand our margin through the mix of categories and the types of products that we sell. Remember, we're in the early stages of New Order at Macy's. We've seen the margin expansion that we enjoyed at Bloomingdale's through having greater visibility to our assortment through assortment visualization.

Dana Telsey (CEO and Chief Research Officer)

Got it. Thank you. And then ordering patterns, as you think about it for the first half of the year?

Jeff Gennette (Chairman and CEO)

So Dana, we're not commenting on the ordering patterns of next year, but what I would say, I wanna emphasize one thing that Tony brought up, which was the level of transition that we're having, the balance of our assortments and seasonless content. I think when we were looking back at the first quarter of 2024, you know, we ran out of cold weather units faster than we should have. And so we commented about that on our first quarter call. Obviously, that comes with getting the right receipts in the fourth quarter, carrying the right level of units in all cold weather categories, transitional categories for the warmer parts of the country. I think the team has done a good job on that this year, and that should be a nice, that should be a nice tailwind for us in the...

Going into the 2024 time. In terms of the content of the rest of the orders, stay tuned for the fourth quarter call, where we will review all that detail.

Dana Telsey (CEO and Chief Research Officer)

Thank you.

Adrian Mitchell (COO and CFO)

Thanks, Dana.

Operator (participant)

Thank you. The next question is coming from Gabby Carbone of Deutsche Bank. Please go ahead.

Gabby Carbone (Senior Equity Research Analyst)

Thanks for taking my questions, and, congratulations, Jeff. So you just touched on this a bit, but I was wondering if you can dig into the potential levers that you have for additional improvement in the gross margin rate as you look to next year. If you could maybe walk us through the biggest buckets there, that would be helpful. Thank you.

Adrian Mitchell (COO and CFO)

So I'll, I'll comment on a few things. Even though we haven't shared the gross margin outlook for next year, as Tony pointed out, it's a big focus for us. The one discipline that will not go away is our discipline on inventory management, and that has been very helpful to us in terms of margin expansion with our pricing science, our discipline on having less markdowns than what we had pre-pandemic. So that'll continue to be a strength for us. As Tony talked about, there are other opportunities around mix. There are other opportunities around how we manage our delivery expense. There are just a number of initiatives that we're going after to increase our retail margin, reduce our delivery expense, and ultimately increase our gross margin.

It starts with inventory discipline and working capital discipline on that balance sheet, and then making good choices about our assortment and managing the flow of those goods well, so that we have solid sell-through and unit velocity in all of our channels.

Gabby Carbone (Senior Equity Research Analyst)

Great. Thank you so much.

Adrian Mitchell (COO and CFO)

Thank you.

Operator (participant)

Thank you. The next question is coming from Lorraine Hutchinson of Bank of America. Please go ahead.

Lorraine Hutchinson (Managaing Director)

Thank you. Good morning. You've done a great job of managing the expense structure. Adrian, I was just hoping that you could elaborate a little bit on, you know, the $300 million-$350 million of 2024 cost savings. How much of that is slated for reinvestment in your growth vectors?

Adrian Mitchell (COO and CFO)

It's a very good question, Lorraine. You know, the reality is that there are gonna be puts and takes. But fundamentally, what we've been focused on is the incremental value from expense management. As we think about the composition of the expense reductions, about a third of it is coming from gross margin expense, and the balance of it is really showing up in SG&A. But, you know, our fundamental focus for next year is around profitable growth, and so we're making investments in our growth vectors in order to accelerate the top line. And so that's a big part of where our investments have been. I spoke a little bit earlier to some of those investments starting in the fourth quarter, but those investments that are going back is all about incrementality on the top line.

Lorraine Hutchinson (Managaing Director)

Thank you, and Jeff, best of luck.

Jeff Gennette (Chairman and CEO)

Thanks, Lorraine.

Operator (participant)

Thank you. The next question is coming from Janet Joseph of JJK Research. Please go ahead.

Janet Joseph Kloppenburg (President)

Morning, everyone, and congratulations to you, Jeff. I'm wishing you all the best. I was wondering if you guys could talk a little bit about the private label push. I really like On 34th and excited about the evolution of INC. And, I was just wondering, you know, what the margin impact of that could be here in late fiscal 2023 and as we look forward to fiscal 2024, and, if, you know, if it's too early to be asking that, I understand, but I'm just wondering if there's some positive influence coming on the gross margin side from outperformance in private label. And Adrian, on the cost efficiencies you've achieved this year, which have been, you know, better than I expected, I know how you just answered Lorraine's question.

I'm just wondering how they influence those savings, how those influence fiscal 2024, in that, was there some pull forward of savings in 2023 that might impact the opportunity for better than expected SG&A next year? Thank you. Thank you all so much.

Tony Spring (President and CEO-elect)

Thank you, Janet. Appreciate the question. First, I'm a huge believer in private brands. Private brands have a wonderful heritage in the Macy's brand. Macy's brand has been known over the years for having some of the best private brands, and we're excited certainly about the performance of On 34th and the refresh of INC, and what's to come over the next couple of years. I think the commitment of the team to refresh the entirety of our private brand portfolio with exclusive design, customer influence product, and true focus on white space opportunities, gives me confidence in our private brand strategy. Private brands are important to Bloomingdale's, too, with success in both Aqua and Hudson Park. And I think you're right, there is margin opportunity, when we scale this particular growth vector.

Again, you trade a little liquidity for margin opportunity, and you can expect us to watch that carefully, because we love the exclusivity and the natural margin that comes from private brands, but we wanna make sure we're always buying the best brands that are available, and we wanna leave ourselves that flexibility to make sure that we're adding the appropriate market brands as well. That's what makes Macy's and Bloomingdale's more compelling, is when we have the right balance of both private brands and market brands.

Adrian Mitchell (COO and CFO)

Janet, good morning, and thanks again for your question. You know, when we think about profitable growth over time, that requires SG&A leverage. And so when we think about the cost efficiencies, they have to be sustainable, and they have to be recurring over time. The thesis that we talk a lot about within our business is around simplification and automation. So, you know, we're looking at our processes, you know, all over the business to really take out complexity, put in new ways of working, placing in automation where it makes sense. The strength of our foundation is based on the simplification of our core. And so what we are continuing to lean into is simplify the business, which will remove the headwinds for growth. So that's how we're approaching our cost efficiencies over time, with the ambition over time of achieving SG&A leverage.

Janet Joseph Kloppenburg (President)

Thank you so much. Happy Thanksgiving.

Adrian Mitchell (COO and CFO)

Same to you, Janet. Thank you.

Operator (participant)

Thank you. That brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Tony Spring for closing comments.

Tony Spring (President and CEO-elect)

Thanks, everybody, for joining us on the third quarter call today. We wanna take this opportunity to wish you and your families a very Happy Thanksgiving, and we hope you'll join us all in watching or joining us in person at the Thanksgiving Day parade next week. Happy holidays, everyone!

Operator (participant)

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.