Good morning, and welcome to Macy's, Inc. Fourth Quarter 2021 Earnings Conference Call. Today, our long conference is being recorded. I would now like to turn the call over to Mike McGuire, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us to discuss our fourth quarter and full year 2021 results. With me on the call are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO. Jeff and Adrian have prepared remarks that they'll share. After which, we'll provide time for questions. Given the time constraints and the number of participants, we ask that you please limit your questions to 1. As a reminder, today's call is scheduled for 90 minutes. Along with our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes additional facts and figures to assist your analysis of Macy's. Also note that given the pandemic's impact on 2020 results, unless otherwise noted, the comparisons that we'll speak to this morning will be versus 2019 as we feel that benchmarks our performance more appropriately. We noted in our press release this morning that on Wednesday, March 9 at 9:00 a.m. Eastern Time, Adrian will be participating in a fireside chat at the UBS Global Consumer and Retail Conference. This event will be webcast on our Investor Relations website, so please mark your calendars. Keep in mind that 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 in our earnings release and on our presentation on the Investors section of our website. And as a reminder, today's call is being webcast on our website. A replay will be available approximately 2 hours after the conclusion of this call, and it will be archived on our website for 1 year. With that, I'll turn the call over to Jeff.

Thanks, Mike, and good morning, everyone. Thank you for joining us. As we kick off 2022, I'm proud to say that Macy's, Inc. today is a stronger, more agile and financially healthier company than we were before the pandemic. We delivered strong results in the past quarter and year. We continue to make good progress on the transformation of our company and build momentum. And we are much better positioned for long-term success. Our business has changed dramatically since 2019 when we began to lay the groundwork for our Polaris strategy. We stayed focused on that plan, and we have delivered. We are now more digitally led and customer-centric in our planning and execution. We have also demonstrated the value of an integrated company, meeting customer expectations for a more seamless shopping experience across digital and store offerings. Digital has been a particular priority for us. This morning, I will walk through our 2021 performance highlights, and Adrian will share the details of our financial results, which exceeded our expectations every quarter. Then I'll discuss the outcome of the Board's recent review of our operating structure and how we are enhancing shareholder value. From there, I'll review the specific initiatives we are accelerating to enable sustainable sales growth and strong and stable margins in the future. Adrian will wrap up with details on our financial outlook for 2022 and beyond. Let me start with the performance highlights. Comparable owned plus licensed sales for the fourth quarter increased 6.1% versus 2019. This performance reflects strong November and December holiday sales that exceeded our expectations as well as softer sales in January. Total company AUR was up 11.5% for the fourth quarter and for the full year was up over 11%. For the year, comparable owned plus licensed sales increased 3% compared…

Thank you, Jeff, and good morning, everyone. We're excited about the momentum we gained through Polaris in 2021 and are focused on maintaining that momentum over the course of the coming year. Our top priority remains driving shareholder value through a combination of strong performance and the strategic allocation of capital. Our ambition for Macy's, Inc. is even bolder now given a much healthier business and our increased confidence and conviction in our Polaris strategy. With this context, I will walk through a summary of our fourth quarter performance against our 5 value creation metrics: sales, gross margin, inventory productivity, expense management and capital allocation. First, sales. We generated $8.7 billion in net sales during the quarter, up $328 million or 3.9% from the fourth quarter of 2019. Comparable sales on an owned plus licensed basis increased by 6.1% despite the approximately 125 basis point headwind from the Friends and Family shift we mentioned on our last call. Holiday sales were stronger than expected. Yet with the emergence of the Omicron variant, tempered consumer sentiment contributed to weaker January sales than we had anticipated. To a lesser degree, the absence of the 2021 government stimulus payouts was also a factor. The overall softness in the month of January appeared to be industry-wide and temporary in nature. Now on to gross margin. Gross margin for the quarter was 36.5%, down 30 basis points from the fourth quarter of 2019. Notably, holiday delivery surcharges, which were essentially non-existent in 2019, reduced margin by approximately 85 basis points. Merchandise margin increased 160 basis points from the fourth quarter of 2019. Leaner, more productive inventories and lower markdowns were the primary drivers. Our pricing initiatives also helped drive higher full-price sell-throughs and AURs. Versus 2019, full-price sell-throughs improved 660 basis points and full-price AUR…

Thanks, Adrian. As we discussed on our call last quarter, our Board of Directors undertook a more extensive review of our e-commerce and brick-and-mortar operations to determine the best path forward for Macy's, Inc. to enhance value for our investors. This was additional work to review business and strategy that our Board and management team perform on a regular basis. Throughout this extensive review, the Board and management were focused on 2 core objectives: one, ensuring we deliver for our shareholders in the near, medium and long term; and two, provide the most convenient and seamless shopping experience for our customer across all omnichannel touch points. In every scenario we considered, we found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders than a separation of our digital and physical assets. This was true at both Macy's, Inc. and brand levels. Furthermore, after a comprehensive review, we found that the integrated omnichannel Macy's, Inc. with multiple nameplates from off-price to luxury continues to be the most appealing to our diverse and multigenerational customer base. We conducted the review with the assistance of AlixPartners and our financial and legal advisers. There were no constraints imposed on AlixPartners or our advisers with regard to the options analyzed. This review included a valuation of a separation of the digital business overall as well as the potential merits of a separation of the Macy's or Bloomingdale's digital businesses individually. We analyze revenue growth drivers, unit economics and the financial profiles of our digital and store businesses. We also evaluated possible benefits of a third-party investment, considering any need for capital as well as a potential exit path for a financial partner. And we considered whether there would be value in issuing a special equity offering…

Thanks, Jeff. We believe that shareholder value will be enhanced through strong performance, driven by the successful execution of our Polaris strategy, combined with the efficient allocation of capital. We will make disciplined risk-adjusted decisions when deploying the cash we generate. Given the ebbs and flows of consumer sentiment and the need to weather unforeseen risks, our first capital allocation priority is maintaining balance sheet strength. By doing so, we preserve the ability to fund investments that foster profitable sales growth and deliver healthy long-term returns. We will fund these types of investments and return excess cash to our shareholders and will deliver direct returns to shareholders through a modest yet predictable dividend and meaningful share repurchases. With that in mind, let me walk you through our updated 3-year outlook. In light of the headwinds and tailwinds that Jeff spoke to earlier, we do believe that the macro environment will continue to offer some challenges. Nevertheless, we remain committed to achieving low double-digit adjusted EBITDA margin annually, and in 2024, expect to be within a range of 11.5% to 12.0%. For sales, we're targeting a low single-digit compound annual growth rate for net sales. We expect our long-term sales growth to be driven in 3 ways. First, the scaling of our digital marketplace, including expanding the depth and breadth of our merchandise categories as well as the replatforming of our core digital platform; second, improving mall-based trends, supported by our investments in omnichannel capabilities and technologies; and third, the expansion of our off-mall stores. As we referenced earlier, the recovery of international tourism to pre-pandemic levels is not anticipated for some time. So there is potential upside should that occur within the next several years. For gross margin, we're targeting a rate in the high 30s even as digital penetration…

Thanks, Adrian. Today, Macy's, Inc. is a transformed organization. We are well positioned to compete successfully and profitably in today's market. We operate businesses, integrated with a nationwide footprint of stores and fulfillment centers. We are confident in our path forward as one integrated company, continuing to execute our Polaris strategy and the accelerated initiatives we shared today, allowing us to unlock additional value, acquire new customers and grow market share. I want to express my gratitude to the entire Macy's, Inc. team for their passion and dedication in serving our customers and delivering strong results. We have a lot of work ahead, but I am excited to put these plans into action and deliver an even bolder and brighter future for our company, our shareholders and our customers. And with that, let's begin the Q&A.

[Operator Instructions] We'll take our first question, which comes from Matthew Boss of JPMorgan.

Congrats on another nice quarter. So Jeff, revenue growth exits this year at a positive low single-digit CAGR matches your long-term Polaris plan. So near term, could you speak to momentum that you're seeing in the business, driving your first quarter outlook? And then as we think beyond how are you thinking about the time line and opportunity if we think about international travel, smaller format stores in this digital marketplace model?

Matt, thanks for your question. So as Adrian just said in his comments, we expect the first quarter on a 1-year stack. So we're now going to be comparing to 2021. It's going to be our best quarter relative to last year. And I think what all of our -- what we should look at is really the penetration of each quarterly business and look at a year like 2019-2018 to see how we're kind of cadencing the business. So that's how I would just look at -- and to Adrian's comment, we do expect that the other quarters are going to be less than overall growth to '21 than the first quarter is. To the second part of your question, let's talk about the 3 individual pieces you mentioned. First, on international travel. So this is an interesting one because you've heard us say that it means about 3% to 4% of the total business at Bloomingdale's and Macy's, and that has certainly been our experience pre-pandemic. We got about 50% of it back when you look at 2021. A big chunk of that was basically with an increased digital business to those international Zip codes. We did see some return in the month of December. Bloomingdale's had more the affluent international customer coming back more there. It was our best quarter when you look at the 4. But then, you basically saw it go back to lower levels with Omicron. So we don't expect -- when you think about that 50% that's yet to come, certainly going to be a tailwind. We know it will come, but we're not anticipating seeing that in 2022, and we're looking at future years for that. Your question about small format stores, this is one that we've opened in both Bloomie’s for…

We will now move on to our next question from Lorraine Hutchinson of Bank of America.

I just wanted to focus on CapEx for a minute. How much is included in that $3 billion for this fleet transformation that you're talking about? And then how should we think about the pacing of the share buyback program?

Thanks very much for your question, Lorraine. So with regards to CapEx, we do have now, a smaller portion of our capital around the new store rollout. This is one thing that we want to make sure that we're continuing to prove ourselves into. As Jeff mentioned a bit earlier, we feel really good about the performance of these stores. We feel that we have the formula rights. We're highly focused on location, location, location. But as we continue to think about the scaling of those stores, we'll continue to update our capital plans. Where we're spending a lot of our dollars in terms of the $3 billion is really around the omnichannel capabilities. And those things are things like personalization and the data science across our entire operation, our fulfillment infrastructure upstream and downstream, our digital marketplace. Those are the kinds of things that we're actually focused on in terms of our capital spend. And then your second question is really around share buybacks. We have $2 billion authorized, and we view that as very much open-ended. And as we think about the deployment of that excess cash, we're really focused on what's in the best interest of our shareholders. And so as we've talked about before, our first priority is really maintaining a healthy balance sheet. The next priority is investing in high-return initiatives, including strategic opportunities that will allow us to accelerate our Polaris strategies. And absent more attractive investments, we'll certainly return capital to shareholders in the form of dividend and a meaningful share buyback program. But the timing is very much open-ended for us, but we'll be very opportunistic about the $2 billion authorization.

We'll move on to our next question from Omar Saad of Evercore.

Jeff, quickly quick follow-up on the study you guys did on the e-com business, looking at the possibility of separating it. It doesn't sound like it was a close call at all, was it? And then a quick follow-up on sales. It seems like it's all macro issues kind of dampening the outlook for 2022. Any company-specific or sector-specific trends have you seen fashion and apparel sales peak? Or is it really all the macro inflation issues that are kind of guiding to -- tempering the guidance?

So let me take the first question on kind of the e-commerce study that we did with the really kind of business review and shareholder value. So just to kind of reiterate, we had 2 big main objectives in this. And one was how we going to deliver shareholder value in the medium and long term. And the second one, as we said, I really want to respect the customer, the omnichannel behavior of the customer at all touch points. Was it a close call to your question. I would just tell you that it was a very unconstrained, and it was a really comprehensive review. We have very strong advisers. We've been working with the Board on this for many, many months. We brought in AlixPartners, as you know, in that October time frame. And we just went through every single scenario and basically came around to that one integrated Macy's at both Inc. and the brand levels deliver greater value than a separation of digital and physical assets. And I would just kind of hook on 4 things that were really key to our decision. The first one is, as Adrian described, was just our free cash flow. We are not capital-constrained to be able to invest in the business and in the digital elements of our business. That's one. The second one is just the high separation costs that come with separating digital and stores. As well as, number three, would be the ongoing costs from operations of having separated business. And then just the last one would be the executional risk to the customer, to our brands and what would happen with that. Because of the extensiveness of this review, it did give us an opportunity to say, okay, what in the Polaris strategy is working? What should we shed? What should we pick up, and really, just being clear-eyed about what our opportunities are on that. So we are, as we mentioned, accelerating a number of initiatives within that. First one, obviously, is one that was already in the works, which is digital and what we're doing with the marketplace. So $10 billion in digital, more to come in marketplace. New and expanded categories. So we can go into a lot of conversation about that, but let me just suffice it there. But the opportunity to go or expand the ones that we're existing. Big opportunity with data-driven personalization. And now that we've got 70% of our business being tied to our loyalty programs just gives us a lot of flexibility to move away from a broad-based promotion and really personalizing our message all the way through the customer journey. And then the fourth one that Matt asked about earlier is really off-mall small format so -- and opportunities for that. I would love for Adrian to kind of weigh in on this because there are things that came up out of this that I'd love him to comment about. So just talk about it.

Thank you, Jeff. One key thing that was really important from this work that Jeff described is just the fact that our strategy is durable. And it's important to acknowledge that today, we're in just a much different competitive position than we were even just 2 years ago. We're financially a much stronger business. We have a healthier balance sheet. And we're more efficient in how we think evidenced by the $3 billion that we're planning to invest in capital spend over the next 3 years, in addition to the target of $3 billion of free cash flow that we're also expecting over that same time period. So the net of it is we got through the research with our advisers was, we're not capital constrained, as Jeff alluded to earlier. And the accelerated initiatives that Jeff highlighted are initiatives that we can pursue now and into the future.

Yes. Omar, your second question really kind of about the macro trends. What I'd say what's interesting right now is just that the dormant categories that we're all the way through the pandemic. They're very strong right now and to be expected. And they haven't fully fully rebounded to the levels that they were in 2019. So when you think about women's shoes and dresses and tailor clothing, which are all strengths for the Macy's and Bloomingdale's brands, those are going to continue. They're giving us great strength right now, but that will continue. But what I'm encouraged by was the brands and the categories that were strong all the way through the pandemic just continue to be strong at a good pace. That would be brands like -- or that would be categories like fragrances and home store, both in big ticket as well as in soft comp. Big ticket was not -- there was never a demand issue. There was a supply chain issue that's starting to really improve. Fine jewelry was dormant -- or excuse me, was quite strong through the pandemic, continued strong; fine watches; sleepwear. So we're continuing to watch the apparel areas, they're still down, but they're getting better. And casual and athleisure was always good. The dress categories are picking up. So we expect that's going to be the momentum going forward. Emerging categories are coming up. Obviously, everybody knows we're in a denim cycle right now. That definitely has been strong for us. And then new categories for us, things like toys, which we really didn't have a strong business. We doubled our business in 2021. We expect to double it again in '22. So I would tell you that that's kind of the movement of what's going on at the FOB level. I think the thing we're watching carefully is what continues on the supply chain, what continues on with inflation. And as we lap the stimulus package and really looking at that demand that we're up against. So that's all factored into our guidance.

We will now move on to our next question from Kimberly Greenberger of Morgan Stanley.

Good morning. And I want to extend my great appreciation for all of the detailed guidance and the outlook, it's very helpful. I had a question. My couple of questions are really about the outlook for 2022 and beyond. I'm wondering, Adrian, if you can just start with SG&A, for example. It looks like at the midpoint of your revenue guidance and the midpoint of your SG&A guidance, we're looking at about $8.3 billion of SG&A here in 2022. How should we think about varying your SG&A either up or down? If you were to beat your sales guidance or come in short of your sales guidance? Maybe you can just help us how to think about the variability there. And then on the quarters for 2022, obviously, with Q1 exhibiting the greatest year-over-year growth. Adrian, does the guidance imply that, that total revenue could be down year-over-year in the second and third quarter? And then I'm not sure if you were, Jeff, would like to share, just any overarching philosophy or strategy when you look at inventory management, it looks like you've got really super lean levels here coming out of the fourth quarter. As I look back to the fourth quarter of 2019, inventory was about 20% higher. Is there -- do you feel comfortable running with inventory at this level compared to 2019? Or at some point this year, would you look to at least close a piece of that gap?

Thank you, Kimberly. So let me just start a little bit talking about our outlook. And as we think about our long-term targets, what we would say is that we believe they're achievable and that they also reflect the momentum that we've already achieved and that we're building at Macy's. Now as it relates to the P&L, and I'll highlight a bit more around the SG&A, which is a key part of your question, as we look at 2021 and move into 2022, we feel that we've built a track record and are building a lot more confidence and conviction around the strategies that we're executing and also what's in the Q. So look, we exceeded top and bottom line expectations every quarter in 2021. We expanded merchandise margins every quarter. And a lot of this was driven by new capabilities around inventory productivity and our pricing disciplines. And we created SG&A leverage as sales grew this year. And we learned a lot about that. And as we think about 2022, we do expect to see an elevation in SG&A. But peeking in 2022, we expect SG&A leverage as we move beyond 2022 into the out years. So a lot of that really results in a healthy level of adjusted EBITDA margin, which we're committed to having at low double-digit levels, and at the same time, being able to generate strong free cash flow in order to support a lot of our investments in the business as well as returning value back to our shareholders. With regards to the quarters, to your point, if you think about where we were in the first quarter of last year, we're still very much dealing with the pandemic. And so we do expect that our first quarter will be stronger relative to our…

And we'll take our next question from Paul Lejuez of Citigroup.

Curious, as you think about the sales CAGR over the next several years through '24, how are you thinking about the breakdown between transactions versus ticket? And how will pricing factor into that? Curious just how you're thinking about how to build on the AUR gains from this year.

So as we think about our sales CAGR for the next several years, we're very much focused on low single-digit growth in terms of the top line. When you look at 2022 on a stack looking back to 2019, what you see is that we're up about 1.1% to 1.4%. Now when we think about the combination of things that are driving that, number one is the importance of having active customers that are shopping more frequently and that are expanding their spend, not just in the core categories that you've known Macy's core for a long time, but also new categories that we're extending to within our business as well. So we do expect, as we move forward, that AURs will certainly be a dimension of that, but much more modest levels than what we saw in 2021. But importantly, getting the frequency of customer purchases, getting them to expand into new categories, keeping the active customer file increasing, those are kind of the key drivers that's going to support our low single-digit growth in the upcoming years.

We will now move on to next question from Oliver Chen of Cowen.

Jeff and Adrian, congrats on a great quarter. With the digital business near and longer term, what's the interplay going to be with margins as you think about the bottom line as well as gross margin? And you also mentioned replatforming. That sounds like a major opportunity. Would love your thoughts on some of the key priorities there. As well as how you're driving differentiation in the marketplace. And as we look beyond to augmented reality and rethinking the mall virtually, how you're approaching the metaverse as well?

You want to go with repositioning? Let me go through our marketplace.

Sure.

Yes. Oliver, let me just say with marketplace, we're currently in the stages we're not ready to announce how we're approaching the categories. But I would tell you that the merchants are looking at kind of tangential categories to existing content digitally that we have either through owned inventory or through VDF. And obviously, when you look at the breadth of offering that we have, we still have a lot of categories that we're not in, where customers accept Macy's as a trusted resource for that. So that's guiding kind of when you think about the road map of how we're looking at this, we're looking at what that what the introductions will look like over the next number of years, but kind of expect kind of tangential categories is how we will launch in August of 2022.

Oliver, as it relates to gross margin, we expect to have higher levels of digital penetration over time. And the offsetting to that are really 2 key things. One is around the increased improvement in our retail margins driven by our pricing initiatives as well as how we're managing our inventory productivity as well as the initiatives that we're pursuing with regards to delivery expense. So we have a number of initiatives that's getting a lot of traction coming out of last year, entering into this year around reducing the number of split shipments, reducing the distance that our inventory and orders are relative to delivering into our customers. So we're pretty excited about the traction we're seeing there. And that's one of the reasons that we provided an outlook of elevated gross margin in future years into the algorithm. As we think about differentiated experiences with regard to replatforming, this is really an extension of the work that we've done with regards to our mobile apps. As we've talked about a bit earlier, the refreshing of our mobile assets resulted in higher conversion and just a better experience for our customers since we launched it in October. And our expectation around the broader replatforming of our website is very similar. We want to be able to manage a healthy level of conversion, AOV, help our customers navigate through our sites seamlessly and in a very convenient manner connected to our store experience as part of our omnichannel strategy. So it's really continuing the things that you heard us talk a lot about in 2021, which is around differentiated experience, new features, easy way to navigate the website. And we believe that those kinds of investments and experiences will be accretive to the brand.

Okay. And a quick follow-up on pricing and the pricing environment. What do you think about the customers' appetite for increases in elasticity? And how might you be sharing that with vendors as we think about inflation more broadly as well as cost inputs and demand?

Yes. Oliver, it's a great question, and it's a different story depending on what category you're in and what brands you're in and what the actual item is, whether or not it is a key item, the opening price, whether or not it is fashion. So all of them have different rules. What I'd say is that where we have done this, we saw it the most in big ticket because big ticket based on the supply chain challenges and just production, we were dealing with price increases really in the very beginning of '21 all the way through. And what we found is that you get into like some of the sectionals and some of the price points for the larger big-ticket items, we could pass on. We basically -- those cost increases led to higher retail prices and higher tickets. Customers accepted those. As you get into kind of the opening price mattress or sofa business, something that might have been $500, $499 1 year by -- with the cost increases to make the same margin, it might have needed to have gone to $549 or $599. In those cases, the customers pushed back. So we've made those adjustments. We're looking at all of the kind of the architecture within each of the businesses. So we've got that -- in bulk of our categories, we've had those learnings, and we're building that into our private brand sourcing to be able to mitigate the cost there for where we don't believe a customer will take an additional ticket or higher ticket in those areas. When we think about our -- your question about our brand partners, working with each of them. So if it's the bulk of the business, which in many of our brands are fashion, we're really…

We will now move on to our next question from Michael Binetti of Credit Suisse.

Thanks for taking my questions here and for all the detail today. Maybe -- you gave us some thoughts on tourism for the year. Would you help us understand what tourism was relative to 2019 levels as you look at third quarter and fourth quarter, just so we can kind of understand the trend there? And then I guess first quarter seems like it, to us, leaves a little bit of room for outperformance on the sales side. You just did -- your fourth quarter sales, retail sales were almost 4% above the fourth quarter of '19. But your first quarter guidance is a little over 3% below first quarter of 2019. I'm just trying to think about how you guys frame the upside, downside in the near term here in the first quarter?

Hey, Michael, let me take the first question. And I'll have Adrian take the second one. So with tourism, what I'd say is that the only quarter that was any different, so quarters 1 through 3 was over a 50% drop. And quarter 4 was slightly better, particularly at the Bloomingdale's brand. So pretty consistent. And as I mentioned on the earlier question, we what we did see was we saw a mix change within that international tourism business. More of it went to digital. Generally, it's about 12% of the business is digital. And it was 33% in '21 that was digital, to be expected. So what I'd say is that we're looking very carefully at any signs. We know it by country. We know it by store. Obviously, we're very connected with what's going on with tourist bureaus and advanced travel plans, what that looks like, what bookings look like on hospitality. Clearly, this affects -- there's like 30 doors in the Macy's chain and the number in the Bloomingdale's chain that are disproportionately affected by it. So we're watching it very, very carefully. And as mentioned, we do believe it's going to come back. But we were 50% down in aggregate. We don't have that built into our planning for '22 if any of that were to come back. We're expecting more of that to come back in '23 and beyond.

So Michael, thank you for your question. As it relates to the momentum coming out of Q4, we were able to perform in Q4 primarily because of our competitive position, our inventory position, which we spoke to a lot in 2021 in terms of just inventory availability. And as we came into looking at our forecast and our guidance for 2022, including the first quarter, we really just have to be very measured and thoughtful in how we thought about that cadence, that quarterly cadence throughout the year. As Jeff mentioned a bit earlier, we really had to think about the evolution of potential headwinds balanced with the potential tailwinds that we've seen even more recently with the geopolitical uncertainty, with shifts in demand, with continued wage inflation and increases. So this makes our year-over-year comparisons more modest than what we would have seen in 2021. But yet, we actually expect to have growth as we look at our comparisons relative to 2019. So those are the kinds of things that we consider that really factor into how we thought about the first quarter and also the subsequent quarters for 2022.

And Michael, just to add to what Adrian said, when you look at the first quarter of '21, it really was that March stimulus drop that happened in March and the effect that, that had on our business. So when you think about it as a comparison between that and '19, think about it that way.

We will now move on to our from Carla Casella of JPMorgan.

This is Mike on for Carla. And congrats on the quarter. Just wanted to ask a question about ahead of schedule, I was just kind of curious, were there any noteworthy updates in regards to your conversations with the rating agencies? And should we kind of expect that the debt pay down, at least in the top line of the gross debt-to-EBITDA metric, is kind of put on pause for now as you kind of focus on other capital allocation priorities?

Thank you for your question. To your point, we're just very pleased with the efforts that we've taken to delever the balance sheet. As I mentioned a bit earlier, the #1 priority for us is to maintain a healthy balance sheet. And as you know, we paid down the $1.3 billion of senior note in August of last year. And on an accelerated basis, we paid off the $294 million notes in October that was actually due in January. When you think about the performance that we've had in 2021, we ended the year with a 1.8x leverage ratio, which is well under our target of 2.5x. So going forward, our focus is to make sure that leverage ratio remains below 2x or at 2x or below. So we'll just continue to pay debt as it matures and continue to have constructive dialogue with the rating agencies with regards to the health of our balance sheet and our capital structure.

We will now move on to our next question from Chuck Grom of Gordon Haskett.

I apologize for the near-term question, but I'm just curious, you spoke to January being softer. And I guess I was just curious if you're seeing any noticeable change in spending patterns by income, cohorts in light of some of these inflationary pressures and the lapped stimulus, the end of Child Tax Credits, et cetera?

Chuck, no difference really when you look -- when I looked at the slowdown between January and November, December when you look at it by customer cohort. So obviously, if we look at all of our segmentation. And there were some aberrations based on weather in parts of the country. But when you look at it at an income level or you look at it by spend type, not a lot of differences.

We will now move on to our next question from Dana Telsey of Telsey Advisory Group.

Good morning, everyone, and congratulations on the results. As you think about the new customer number, which was a great increase in 2021, how are you thinking about that new customer target for 2022? And then just following on just delivery expense mitigation, how are you thinking about that over the next 2 or 3 years?

Let me take the customer, and I'll have Adrian take the second part, Dana. So I think the real focus that we have right now on customers is taking that 19.4 million customers that came into the brand in 2021 and getting a second and third and fourth purchase from them. And so really working through all of our personalization technique and seeding content that could be of interest to these customers to make sure that they're not one and done. We do have -- because you've got the bulk of them that are coming in via digital, a majority of them now are younger and more diverse. So making sure that we get a second purchase out of them and using our data and analytics technology and personalization to see that content. So that's a big focus of ours. Obviously, when you've got new initiatives coming in, we're going to get new customers. One of the big opportunities for us with marketplace was the front of new customers that will come in through that. So but when I think about one of our biggest opportunities overall in terms of our loyalty program is personalization. So looking at those, all those new customers coming in and making sure we have great offers for them to stay with us.

Dana, as it relates to delivery expense, we just strived to achieve greater efficiency as it relates to delivery expense. And this is really important because the growth of our digital business is just so paramount to the enterprise. Now as a bit of context in 2021, we did increase digital penetration to 39%, which was up about 9 percentage points over the fourth quarter of 2019. And so given this pace of increased digital penetration, we have a number of initiatives that we're pursuing to mitigate the delivery expense increases over time. Let me just give you a couple of examples. One is just really managing the number of packages that a customer receives with their order. And this is really about reducing the number of split shipments. And the kinds of initiatives that we put in place is really consolidating slow-moving items into one location so that we can actually minimize any excess packages when actually selling these fast-movers. The other piece is really around how we think about where the inventory should be located. So as we think about inventory allocation and our replenishment strategies, we're using data science to just better align where the demand is by channel and location across the country with where we're actually placing the appropriate level of inventory all the way down to an item level. The third thing that we're doing is really looking at 2 item level profitability. We call it dead net profit. And we look at this very actively within the organization to really understand how our buying decisions and how customers respond on things like return rates impact the profitability of those individual items. And by managing that effectively, we can also help mitigate some of the complexity in terms of delivery expense within the supply chain as well. So the sum of it is, we're using a lot of analytics to really de-average the business, look at what's happening with our products to really understand ways to continue to mitigate delivery expense as digital penetration increases within our business.

And we'll move on to our final question from Blake Anderson of Jefferies.

Just wanted to ask on the promotional environment, and apologies if we missed it. But for fiscal 2022, I know you mentioned you continue to expect AUR growth of 5% to 6%. Did you -- have you talked about how much you may be baked in for conservatism on the promotional environment, if that picks up at all?

So I would just say that we've got -- we do expect the promotional environment to heat up. But what I'd say is that I think everybody has learned the value of leaner inventories. And we're all buying a lot closer to lag than ever before. So to Kimberly's earlier question, when you look at the amount of our book stock versus the expected demand, we do expect the stock-to-sales ratio to be very favorable to margin expansion. So we're also looking to -- we've certainly seen some of the issues with having cluttered stores and too much content and really curating those and be more aggressive about the edit in our stores is really helping overall sell-throughs and for the offer for the customer, for the clarity of that. So we do expect that we're going to be able to bring the inventory level in consistent with the demand we expect. And we're going to basically continue to leverage the lower base that we've gained over the past couple of years. So even when the promotional environment, if and when it increases, we will be ready for it. And I think one of the other big tools of that is really everything we've learned through our data science and all of our pricing initiatives will help us with whatever the demand, how that changes, we're going to be ready for maximizing the margin for the customer at the right time.

It appears we have no further questions over the audio at this time, sir. I'd like to turn the conference back for any additional or closing remarks.

Thanks, everybody, for your attention and your interest in Macy's, Inc. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.