Good morning, and welcome to Macy's, Inc. Q1 2022 Earnings Conference Call. Today's conference is being recorded. I would now like to turn the conference 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 first quarter 2022 results. As always, with me on the call today 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 your questions. Given the time constraints, we ask that participants in the Q&A please limit their questions to one, hopefully, single part question. Along with our press release from earlier this morning, the slide presentation has been posted on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes supplementary facts and figures to assist you in your analysis of Macy's. Also note that unless otherwise noted, the comparisons that we'll speak to this morning will be versus 2021. Comparisons to 2019 are provided where appropriate to best benchmark our performance, given the impact of the pandemic in 2020. I do have one housekeeping item to share with you this morning. We noted in our earlier press release that on Tuesday, June 7, at 8:00 AM Eastern Daylight Time, Jeff and Adrian will be participating in a fireside chat at the Evercore ISI Consumer and Retail Conference. This event will be webcast live on our Investor Relations website. So please circle the date on your calendars and plan to tune in. Now for the good stuff. 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 our presentation on the Investors section. Finally, as a reminder, today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call and it will be archived on our website for one year. With that, I'll turn the call over to Jeff.

Thanks, Mike, and good morning, everyone. Thank you for joining us. The first quarter presented a unique combination of challenges across a highly dynamic and uncertain operating environment, with mounting inflation, rising interest rates, a volatile stock market, COVID-19 lockdowns in Asia and the war in Ukraine. Nevertheless, I'm pleased to say that Macy's Inc. delivered solid results, thanks in large part to the efficiencies we built into our business through the Polaris strategy. Throughout the quarter, our team stayed focused on the customer and we executed on our plan for long-term growth. We leveraged our transformation muscle and quickly pivoted to satisfy customers with what and where they wanted to shop. As a result, quarterly net sales were in line with our expectations at $5.3 billion, a 13.6% increase compared to the prior year. Comparable owned plus license sales increased 12.4% and average unit retail was up approximately 8%. We beat our earnings expectations. We generated $211 million more in adjusted EBITDA in the first quarter than in the same period in 2021. And our adjusted diluted EPS was $1.08 for the quarter, almost 3 times higher than the prior year's $0.39. Looking at each of our nameplates. Comparable sales for the Macy's brand increased 10. 1% on an owned plus licensed basis. We saw a notable shift in consumer shopping behavior between channels, with better-than-expected sales in stores and lower-than-expected digital sales. This dynamic, underscores the resilience of our omnichannel strategy, which I'll talk about in a couple of minutes. Macy's sales were also affected by an accelerated category shift, away from the popular pandemic categories, such as casual and activewear as well as Soft Home, and into more occasion-based apparel, like dresses, women's shoes, men's clothing and furnishings. This shift, accelerated faster than we expected. It contributed…

Thank you, Jeff, and good morning, everyone. Driving shareholder value remains our top priority. And we're doing this by combining effective operational execution with the strategic deployment of capital. Our disciplined actions have improved the financial health of our business and have allowed us to successfully navigate today's volatile and uncertain operating environment. As Jeff said, we delivered first quarter sales as anticipated while our bottom line exceeded expectations. I'll highlight our successes as I walk through our results, focusing on our five value creation metrics: omni-channel sales, gross margin, inventory productivity, expense management, and capital allocation. First, omni-channel sales. We generated $5.3 billion in net sales during the quarter, up $642 million, or 13.6% versus last year. Comparable sales on an owned plus licensed basis increased by 12.4%. As you may recall, our first quarter last year did not fully benefit from the accelerated economic recovery and stimulus payments that were just beginning to drive macro trends in the market. These had a larger impact later in the year. Nevertheless, we are pleased with our performance, particularly in light of the channel and category dynamics that we’re navigating further. Now on to gross margin, where we saw another strong quarter of expansion that contributed to our outperformance. For the quarter, gross margin was 39.6%, up 100 basis points from the prior year period and above our expectations. Merchandise margin increased 50 basis points, benefiting from higher AURs. Our AUR performance was driven by three big factors: first, lower promotions, particularly on regular priced goods. This was driven by our POS pricing optimization work. Second, higher ticket prices. The big contributors here were fragrances, mattresses, textiles and fine jewelry. And third, category mix, driven largely by furniture and fragrances in addition to the increased penetration of in occasion-based apparel categories.…

Thanks, Adrian. In summary, we delivered a solid first quarter, despite the unprecedented macroeconomic environment, demonstrating our improved operational agility, driven by our Polaris strategy. As we move forward, we recognize this coming year presents unique challenges for both our business and our customers. Our strength is in our omnichannel ecosystem. We operate across the value spectrum, from off-price to luxury and have a balanced portfolio that can shift and flex with consumer demand. Our Polaris strategy has proved durable. And we have confidence that it enables us to weather any storm we may face in 2022 and in the future. And with that, let's begin the Q&A.

[Operator Instructions] We will take the first question from Chuck Grom from Gordon Haskett. Please, go ahead.

Hey. Thank you. Good morning. And great results to the team. Jeff, I'd be curious on your comp performance during the quarter and into the month of May, but also by income cohort. You touched on a little bit in terms of the low versus the high. But given the wide range of customer you serve, can you perhaps share any color on that front? And then on Adrian, for the gross margins, how should we think about the puts and takes here in 2Q? I think you said no lower than the 38.8 you posted in 2019. But just trying to contextualize what we should think about the balance of the year for gross margins.

Hey, Chuck, on the -- let's talk first about the -- when we talk about the customers and who were affected by whatever might be happening in the macro environment, I think what we -- one of the headlines is that, we saw the customer count and the customer spend across all of our kind of income buckets go up in the quarter. And when you look at the customer that's under $75,000 of annual income, they were the most affected. But they still -- the spend was up, the count was up. And their shift is into those categories that -- when you've got a brand like a Backstage that's helping them. When I look at kind of the mid-tier customer as well as the luxury customer, above $150,000, very healthy, and spend levels were quite strong. I think the -- when you think about just kind of aggregate comment about category, what we saw about the spend levels were definitely a downshift in the casual, active and soft home categories from the trends that we saw in 2021 and definite upshift in the categories versus fourth quarter and first quarter, when you look at the dress-up categories, special occasion, travel categories. I think when we look at the month of May, the month of May has started out quite strong. And so, we look at the kind of quarter-to-date. The performance really related to kind of three things. The first one was, Mother's Day gifting was very strong. And it gives us some confidence as we think about our gifting strategy for the back half of the year and what we learned in Mother's Day. The second was these kind of high octane events like one-day sales were very strong. And so, we had one of those in the month of May thus far and good performance. And the last one and importantly is really what we're seeing going on in the apparel areas, particularly as kind of serving our Own Your Style platform that we launched. So when you look at men's, women's and kids, those apparel businesses and the amount of linkage products we're getting. So we're selling full outfits versus just particular items, that, that is working for us. So our customers are responding to great brands and great values from off-price to luxury. We're a gifting and special location destination. And we expect that demand to continue. But as we've said at the top, lots of uncertainty, and we're being prudent in our outlook.

Good morning -- excuse me. Good morning, Chuck. Just to speak to gross margin. Kind of the big headline on gross margin is that we're managing gross margin pretty tightly. One of the things that we signaled in on this call is the decrease in digital penetration, which would typically imply that you'll see some favorability in gross margin. But as we think about kind of what we're working through in the second quarter, it really reflects the markdowns that we need to clear some of the excess inventory on those decelerating categories that Jeff spoke to, in addition to the rising fuel costs that we do incur as part of our delivery expense. But we spoke about in the previous earnings call some of the work that we're doing around our delivery expense initiative. And we're beginning to see some of those gains. And so we're just really balancing the benefits and the headwinds. We are seeing reduced splits or reduced packages per order. We are making good progress on placing larger fulfillment operations across 36 stores before holiday, and that's progressing well. And we're also seeing that we are fulfilling more orders from stores up about 3.5 points versus the first quarter of last year, which is a good thing in terms of the distance that packages have to travel to get to the customer. But again, this is really offset by higher fuel costs. As we progress through the balance of the year, we typically have holiday surcharges as well as the fuel costs continuing to rise is something that we've contemplated in our guidance for the balance of the year.

Great. Thanks very much.

Thank you, Chuck.

The next question comes from Matthew Boss from JPMorgan.

Great. Thanks and congrats on a nice sprint.

Thanks Matt.

So, Jeff, maybe to elaborate on the shopping trends that you're seeing by category. How are you thinking about the duration of occasion spending for apparel? And then what's your comfort with current inventory on hand? And just how quickly can you pivot the assortments if trends shift across both apparel and hard goods as we think about maybe the back half of the year and into early 2023?

Yes. So, Matt, I think we are definitely pivoting and have pivoted. So, I would -- let me just characterize, give you a little more detail on what we're seeing. So, the first thing is really, if we want to talk about kind of the downshift in the pandemic category, so casual, active, soft home. We had about a 20-point down shift from the fourth quarter to the first quarter, and we didn't anticipate it to be that extreme. So, those categories have -- or the inventory levels have certainly built up there. And this is where all the work that we've done in our pricing. Science tools is really helping us. And we -- as Adrian talked about in his comments, we've incorporated that, particularly in our second quarter margin guidance. So, I think we're -- we've adjusted all of our go-forward orders. We don't think that's going to get better. Particularly when you look at our inventory levels and that of the competition's, that is building, and customers have clearly signaled a down shift there. Conversely, to the other part of your question, on big acceleration and dress-up categories, and those have gone up 10 full points when you look at where the trend was in the fourth quarter and the first quarter and that's getting even better in the second quarter. So, we've been very aggressive with additional receipts. We've got very strong vendor partnerships. We're working very closely with them on all the right brands. And as Adrian -- as I mentioned, this is really where we shine. As we think about kind of the trends that we're looking at for the back half of the year, I kind of would bucket it into like five things. The first one is just this -- the pullback…

Its great color. Best of luck.

We will now take the next question from Bob Drbul from Guggenheim. Please go ahead.

Hi. Good morning. I guess if you could -- I think you talked about the marketplace initiative. Is there any more information you can give us either time line or expectations or just the development in terms of where it is today? And then the second question I have is, can you just talk a little bit about big ticket items and really what you're seeing in those areas of the business? Thanks.

Hey, Bob, I'll take both of those. So I think the headline here is that we're going to provide more details on the marketplace later this year. We are very excited about this one. We're launching in third quarter with the expectation to scale it over the second half. And we're going to be test and learn from day one. What I can tell you about it is that our initial focus is going to be in categories that we have meaningful market share opportunities, categories that we don't have developed businesses in either VDF or an owned inventory. So categories like pets, electronics, which would include portable and home, home improvement, gardening, video games. Those should be categories that you would expect us to launch with. So stay tuned. I do hope to have an update -- well, we will have an update for everybody when we next speak. So that would be -- that's on marketplace.

Big ticket?

Big ticket, yes, what we're seeing in there is similar to what we talked about on the last call. That the supply chain is starting to loosen up a bit. They're definitely -- when you look at what's going on in the costs in those businesses, what we talked about before was you can pass some of those costs on to the consumer, the bigger the item is or the more of a brand name it is. But when you were in a price point in business like a $499 couch or a $599 couch or an opening price mattress, we're very careful about what we're doing with pricing there. So we're catching up with all the demand that is now delivering from the previous orders. And we're watching the environment carefully about how the customer is voting by category, by price point. And we're making those adjustments.

Great. Thank you very much.

You bet.

The next question comes from Dana Telsey from Telsey Group.

Good morning, everyone. Congratulations on the nice progress. Can you expand on the relaxed supply chain and what you're seeing there and how you see it moving to the balance of the year? And then just to touch on the AUR increase of 8%. How are you thinking about that for the rest of the year? Thank you.

Dana, let me take those. So what I'd say is that what happened in supply chain, we didn't anticipate the loosening of order replenishment on this. So generally, what we were getting on each of our orders was a fallout of about 30% that we kind of built into our estimates. And that was what we were getting in the back half of 2021. So -- and that fallout has become more like 20% when you look at the first quarter. So -- and that really is kind of across the board. We've been getting -- I mean, there's certainly exceptions, but the vendors have been shipping better. That doesn't mean that the supply chain is loosening. What we're seeing is that there's definitely some headwinds coming, particularly as you start to see about the Shanghai port, that's how that's going to affect. We have like 30 tankers right now that are in the L.A. port down from about 120. We do expect that to build as some of that freight moves from the Far East. And so the way we're approaching it, we've got to protect back-to-school. We've got to protect the fourth quarter. So we're going to ensure that some of the lead times that we did during the pandemic and certainly during 2021 were actually, we're moving that -- those kind of those same lead times in terms of our orders. So it might be lumpy how we receive goods in the second and the third quarter. It's all built into kind of our forecast that we shared with you earlier. But we will be ready for the customer based on what we anticipate to be issues. When you think about kind of the domestic supply chain, I think we're in pretty good shape. Obviously, when you…

Thank you.

The next question comes from Omar Saad from Evercore. Please go ahead.

Thanks. Good morning. Thanks for taking my question. I wanted to follow-up on a couple of things. In terms of the pandemic categories versus the post-pandemic categories, maybe you could you dive in a little bit deeper on active, casual, home. Which are there segments within these categories that are holding up better and others that are pulling back -- you're seeing the spend pull back faster, or is it just very broad across all things, athletic, casual and home? And also, any other signs of some price sensitivity? You mentioned opening price point mattresses and couches. Any other areas of your business where you're seeing the customer balk at higher prices? Thanks.

Yes. So Omar, on the -- your questions are related. It's really kind of the same answer. In the casual active and soft home categories, we're definitely seeing some balk at some of the prices. And we're going to -- we've made adjustments there. I would expect us to continue with those adjustments. With our pricing science, we have the opportunity to do that at a store level. And that obviously gives us more margin versus what it would be if we didn't have that tool. But I do expect those are going to be the ones that are most under duress. I think that when I look at the opportunities in the other categories, and let me give you some more color on that. When you look at Soft Home, the ones that are most affected would be categories like; textiles, top of the table, housewares, typically where we would have a soft category, like luggage is off the hook. That really goes into our travel trend. So, we are very, very high double-digit increases there. But those categories which we had really good run for the last two years, textile, top the table housewares, they're most affected, so we're pulling down our expectations there. We are looking at realistic AURs. We're going to be – we're going to play where it's really important for the customer, and those categories are important. We'll be there with great values. But they are going to be less than the penetration of our business than what they were in '20 and '21. So that's – when I look at – so that was look at it. When you look at the trending categories, we're getting AUR improvement across all of our value bands. So we have over 50 categories. There's a different story for each of them. Some brands carry real premium and you were getting massive increases in AUR there. I look at Ralph Lauren where we're enjoying big AUR increases, but that's more of a premier brand. They've reduced their distribution. We've really ramped up our efforts to make sure that we're giving a fulsome lifestyle presentation of that content, both online and our stores. We're building. When I look at our fragrance business, you're seeing more of our business go into like jumbos and building. The higher AUR, gift baskets, building value into things that we can uniquely create that drive higher AURs that might be different from our competitors. So, each FOB has a different story. Q – Omar Saad: Got it. Thanks Jeff.

We will take the next question from Jay Sole from UBS.

Great, thank you so much. Jeff, obviously, it was a strong quarter. And you're raising guidance in an environment where some of your off-price competition is doing the opposite. Weaker quarters, lowering guidance for the year. Do you think this difference is really just about the income demographics and maybe some of your off-price competitors are serving and maybe a little bit better execution on your part than their part of the quarter? Or taking a step back, do you see the company really closing the gap in terms of your competitive position versus those retailers where you feel like that your ability to take share back from them is improving or at least maintain shares improving? Thank you.

Yes, Jay. I think it's -- I do think the Polaris strategy is working, which incorporates all the kind of the contours of your question. I do think that as a department store and having 50 categories that we can really shift where the customer goes, and you got some of our competitors that may not have had great posts, that may be more – their business may be more focused and their penetrations may be higher in those categories where the customer is not signaling as much interest, it gives us the opportunity to really shift it into those categories that are. And I do think that, when you look at the affluent customer, we're not seeing a slowdown there. And so that touches some of the Macy's businesses. But it's a real testament to the strategies that are working right now at Bloomingdale's and Bluemercury. And when I look at that middle income customer, again, count up, spend up and we've got a real breadth of offering to be able to ensure that they stay with us. So, I would tell you that the strategy – the Polaris strategy is working. It definitely helped us with the headwinds increasing from the fourth quarter into the first quarter. And I think we're having a good quarter right now and obviously have a lot of confidence as I look at the back half of the year based on the muscle that we've developed through kind of the pandemic transformation that we went through. So I think Polaris is working. I couldn't be prouder of the team and how they're responding. Always following the customer, with a lot of tools to be able to do so.

Got it. Thank you so much.

The next question comes from William Reuter from Bank of America.

Hi. I just have one. In terms of the share repurchases in the quarter which accelerated, can you talk about, given the large authorization that still remains, how you're thinking about that? And if you currently have a leverage target? Thanks.

Terrific. So thanks very much for your question. Good morning. As we think about share repurchases, in this dynamic environment, we're very much focused on flexibility. Flexibility is really our key priority. And that flexibility at this point in time is defining our ability to lean into those consumer demand trends that Jeff spoke about earlier, while at the same time, making sure that we maintain our commitment to a disciplined and healthy balance sheet as well as continued investments in the Polaris transformation, which Jeff spoke about. That's really working for us. The third commitment we've made is to return capital to shareholders. And as you pointed out, we did receive the $2 billion of authorization earlier this year. But it's been open ended, which gives us the ability to be flexible in how we allocate our cash. And so we're just going to be very balanced in this pretty dynamic environment and continue to make sure that we are returning value to shareholders, but at the same time making sure that we’re making investments in the growth of the business. As we think about our leverage ratio, we really entered the year with a lot of strength. Our leverage ratio target last year was 2.5 times or below. We ended the year at 1.8 times, And we continued to pay down debt in the first quarter. We paid down an additional $300 million of debt. So very disciplined as it comes to the leverage ratio, very disciplined on the balance sheet. And we'll continue to be very thoughtful about how we allocate our capital.

Thank you.

You’re welcome.

The next question comes from Stephanie Wissink from Jefferies.

Hi, good morning. It's Blake on for Steph. Thanks for taking our question. You've given a lot of good details so far. We just were curious on Macy's media network and how that's performing versus your expectations. And maybe how the conversations are going in this environment of increased uncertainty? It sounds like their growth is still pretty strong, but curious if there's any change in the conversation tone. And then maybe also, you talked about the category shifts. Wondering if that's maybe playing more into your strength in the conversations. Thank you.

Hi, Blake. So Macy's Media Network, it continues to grow, and it's above expectations. So continuous growth in the number of advertisers, and frankly, the volume of the campaigns that we're doing. So as you heard in our post, the first quarter net revenue was $26 million. That was nearly double the previous year. A little more color, across Macy's and Bloomingdale's, we had more than 320 vendors that have participated in the program to date, with just lots of pent-up interest for us. We do expect that, that the vendor and the campaign count is going to continue to grow as the company -- as Macy's and Bloomingdale's, as we expand our vendor base, and as well as with the upcoming launch of the Macy’s marketplace, which is going to be in the third quarter So we're quite bullish on this. As it relates to category shifts, yes, I do think that when you have categories that are trending where Macy's shine, that is certainly helping us. And when you think about there's big benefits of us having the omnichannel engine that we have, so if you have a customer that's shifting more to stores, we've got a great store base for them. They're still starting most of their journey online. They're doing lots of research, lots of price checking, looking at what influencer saying. They may be looking online, but then purchasing in-store. So, the channel shift that we talked about are going from 37% in m-comm to 35% in where we're now expecting it is still on a very healthy digital business. But the categories themselves, as I mentioned in the answer to two other questions, I think, is part of our success. And also having -- when we're dealing with those that are down trending of having all of the analytics and the pricing engines to basically respond accordingly. So, we have -- I think we've responded quite well with that. And that's going to maintain exactly where we need to be in our margins and ensuring that we have all the receipts and the firepower to put against that which is trending. So, we follow the customers, and we've got a very flexible model to do so.

We will take the next question from Oliver Chen from Cowen. Please go ahead.

Thank you. Hi Jeff and Adrian, in your remarks, you mentioned intensification of uncertainty. Just would love for you to elaborate on those factors that you're paying attention to from the consumer and what indications may be leading? And then as you think about promotions, it sounds like you're prepared for promotions. How will you execute those in a customer right manner just to preserve brand equity and your relationships with customers to ensure that you're executing them against the competitive environment, yet balancing what's right for the business? Thank you.

Hi Oliver, so your first question about kind of economic indicators. We have a little chart that's like, hey, what are the tailwinds? What's neutral? What are the headwinds? And obviously, when you look at the tailwinds, the label market, tourism is a -- we're starting to see good seeds of that. And as we have talked about, 3% to 4% of Macy's Inc. business historically has been in international tourism. That's starting to come back, which is good news. This return to office has been quite interesting. And when you look at a lot of companies now, based on their kind of hybrid work environments, there are wardrobes that need to be refreshed. We're clearly seeing that. If you look at the blazer, if you look at the dress, if you look at all the dress-up categories as well as accessories that go with them, that is a great tailwind. What's neutral is when you think about the personal disposable income and what the savings rate looked like a year ago and what it is now, it's still good, but it's not as good as it was a year ago, so I call that a neutral. Consumer credit is still good. Their open to spend is still good. But we're watching consumer sentiment very carefully to see how they want to spend it. And then promotions, I would say, neutral because we're not adding promotions. We're just being more surgical on the ones that we do. When I look at the headwinds, clearly, inflation. When you look at what's going on with housing or gas prices, what might go on with the interest rates, geopolitical, those are all things that we're watching carefully, but again, all factored into our estimates. To your question about how are we going to talk about these great values, the team is -- it's a different story depending on FOB. But I would tell you is that a clear price point always works well for us. And when you start to think about those categories that are down trending, those casual categories and active categories, those lend themselves well. They're generally key items. There's got good depth behind them. They have good fixture fill, having a price point that's really clear to the customer that they understand, that's not too complicated is the way we're going to approach it. So, we want to make sure that with all of our online scrapes, we know where our competitors are going to be on an hourly basis. We're making adjustments. We will get through that inventory. And we've made adjustments on future inventory in response to that.

Regards. Thank you.

Thanks, Oliver.

As there are no further questions, I would like to hand the call back over to your host for any additional or closing remarks.

Thanks, everybody. Appreciate listening, and everybody have a great day.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.