Greetings and welcome to the Macy’s, Inc. Fourth Quarter 2022 Earnings Conference. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.

Thank you, operator. Good morning, everyone and thanks for joining us to discuss our fourth quarter 2022 results. 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 will share, after which we will provide time for your questions. Given the time constraints, we ask that participants in the Q&A please limit their questions to one single-part question. Along with our press release, from earlier this morning, a 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 data to assist you in your analysis of Macy’s. Also note that, unless otherwise noted, the comparisons that will speak to this morning will be versus 2021. Comparisons to 2019 are provided where appropriate to best benchmark our performance given impacts from the pandemic. 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. The 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 of our website. Finally, 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 will turn the call over to Jeff.

Thanks, Pam and good morning and thank you for joining us today. So I’d like to start by recognizing our colleagues. In 2022, as consumer behavior rapidly changed, we adjusted our receipts and operations accordingly. At the same time, we fortified our balance sheet and continue to execute our long-term goals. In the fourth quarter, we achieved net sales of $8.3 billion. Beauty, dresses, tailored clothing, luggage and gift giving outperformed while soft home, active and casual were challenged. We offered freshness in every category and brand, even down trending ones that are still important to customers. Peak holiday selling periods mirrored pre-pandemic patterns, but lulls were longer and deeper. Post-holiday demand for remaining winter and early spring product was stronger than expected and markdowns were shallower than contemplated when we provided our updated guidance in early January. End-of-year inventories declined 3% to 2021 and were down 18% to 2019. Looking back on 2022, we began to see signs of consumer weakness and a shift in category demand late in the first quarter. We adjusted the timing, amount and composition of receipts by channel, category and brand. As macro pressures mounted and industry-wide inventory built on easing supply chain constraints, we bought closer to meet, held open-to-buy reserves and bought into areas of strength. We were measured with promotions and markdowns and did not chase unprofitable sales. These actions benefited fourth quarter results. We had our ninth consecutive quarter of AUR improvement and a better-than-expected gross margin rate of 34.1%. Our adjusted EBITDA margin rate was 11% and adjusted diluted EPS was $1.88, including a $0.17 discrete benefit related to the favorable resolution of a state income tax litigation. Our financial health and stability enabled us to navigate uncertainties while continuing to invest in growth drivers. At the end of…

Thanks, Jeff and good morning everyone. 2022 was a year of volatility and uncertainty and provided further proof that the disciplines we have built into our business are driving us forward and strengthening our modern department store positioning. Our diversified model allows us to respond to shifting demands of our customers across categories, brands and the value spectrum. As we look ahead, we are confident that the investments we are making today in our five vectors will drive long-term profitable growth. We will balance testing and iterating to ensure that we scale these critical initiatives with an educated perspective on their ability to contribute a high return to our business. Now, I will take a few moments to walk through the fourth quarter results of our five value creation levers before providing additional details on our expectations for 2023 and beyond. First, omnichannel sales, we generated net sales of $8.3 billion for the fourth quarter, a decline of 4.6% versus the prior year and down 0.9% to 2019. Comparable sales on an owned plus licensed basis decreased 2.7%. Moving to the second value creation lever, gross margin. Our gross margin rate was 34.1%, down 240 basis points from the prior year and down 270 basis points versus 2019. Of the year-over-year decline, 300 basis points was due to lower merchandise margin, primarily driven by higher markdowns and promotions relative to last year when inventory constraints in the industry led to low promotion and robust full price sell-throughs. This year’s higher level of markdowns and promotions reflected our commitment to N22 at the right level and composition of inventory and our response to the competitive retail environment, both of which were contemplated when we provided our fourth quarter outlook. While markdowns and promotions were elevated versus last year, they were better…

Thanks, Adrian. So as we look to 2023 and beyond, we have the capabilities, infrastructure and discipline in place, supported by a highly engaged team that is incentivized to win. We are taking a prudent approach to our capital allocation to protect our financial health, which provides us with significant flexibility to respond to changing trends while also prioritizing our five growth vectors. This provides the fuel to achieve sales growth beginning in 2024. We look forward to sharing more on our progress in the coming quarters. And operator, we are now ready for questions.

Thank you. [Operator Instructions] The first question is coming from Brooke Roach of Goldman Sachs. Please go ahead.

Good morning. And thank you so much for taking our question. Jeff, can you elaborate a bit more on the inflection to positive sales and comp growth that you’re expecting beginning in 2024. What gives you the confidence in that inflection against a choppy macro? And what are the key drivers there? And then perhaps for Adrian, can you also provide some additional context on how you’re approaching sales guidance for 2023 and in particular, 1Q? Have you seen a deceleration in the consumer recently that’s driving that conservatism? Thank you.

So good morning, Brook, and I’ll take the first part to your question about – so our growth outlook is really supported by the five growth vectors that we spoke to on the call. We’re not ready to size each growth factor individually, but it will definitely give everybody an update on that in the future. We’re in the early innings of these growth factors, but we’ve been building them for a couple of years, and we have a lot of confidence in that. So let me just kind of tick through them. I think the first one is the private brands reimagination. So this is – when you think about we are – we started touching the private brands about 2 years ago with new talent that we brought in. We looked at existing brands that we wanted to burns, INC is a good example of that. And you saw in the fourth quarter, INC is our biggest and most powerful Missy brand, picked up 28% in the fourth quarter. The new brands start to launch in the back half of ‘23, and we have a very aggressive schedule going through all – through 2025. Right now, private brands is about 16% of our business and we know that can grow. But it’s lots of refreshed content replacement of existing brands and adding new brands. The second one is really off-price or off-mall expansion. And we’re just really focused on unlocking the full potential of our off-mall fleet, knowing that what a storage base does to our overall omni-channel business. So I think the headline here is that the ones that we’ve opened, we have eight on the Macy’s side, two on the Bloomingdale’s side, when you look at those that have been open more than a year and…

Good morning, Brook and thank you for your question – excuse me. The first thing I would say is that we do enter 2023 in a position of strength. When you think about our disciplined inventories down 3% to last year, down 18% to 2019, our data-driven decisions, our financial and operational health, which from an execution standpoint has been on display in 2022, we really step into 2023 with confidence. But we also recognize that the consumer remains under heightened pressure. So as we think about the sales guide path for 2023, let me just kind of walk through kind of how we thought about it, which will provide a bit more context on the improved trajectory that we see for 2023. So in the first quarter, if you reflect on 2022, the first quarter was our strongest quarterly year-over-year compare. We’re up 13.6% last year in the first quarter. And this was a point in time when we were effectively government stimulus was still out there. There was a clear resurgence in terms of return to work, occasion, travel, and there was inventory constraints that we’re really beginning to loosen but still a little bit tight at that point in time. As we got into the second quarter, the consumer was still relatively healthy, and inflationary pressures began to intensify as consumers begin to reallocate from goods to services. So we saw that pivot begin to kind of pick up and as the supply chains loosened in inventory really flow into the retail context, the promotional landscape began to intensify. Now as we think about the third and fourth quarters, the macro pressures, the excess inventory surpluses the continued inflation really created a lot of challenges that you’re very aware of as we think about the third and fourth quarters. So as we think about the compare to last year, you have an intensifying period over the course of last year. And what we’re saying is that we expect to have more of a recovery as we think about our trajectory from the first quarter to the second quarter as well as targeting sales growth in 2024. And we assume that this growth that we expect in 2024 will remain in a situation where the consumer remains under pressure. But given the growth vectors that we’ve discussed, we have confidence that we can achieve that growth by 2024 from an annual basis. So that gives you a little bit of a sense of the composition. Now as we think about the fourth quarter, the only thing I would add is we learned a lot about gifting in 2022. That was a real strength for us and we’re excited about what we’re actually positioning ourselves to do in the fourth quarter of 2023. So that certainly gives us confidence in addition to the 53rd week, which we will benefit from in the fourth quarter.

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

Hi, thank you very much. You gave a lot of helpful comments on a cautious consumer. What’s in your control as you think about the product assortment and the switch of the consumer demand? And as we model forward, what are you embedding for traffic? Do you expect traffic to continue to be fairly volatile? And lastly, the younger customer as you intersect the brand renovation and private brands, what’s top of mind for captivating and getting the younger customer into the store? Thanks a lot.

So let’s talk about it. When you think about Oliver and your three questions on product assortment, we see similar trends to what we’re seeing right now. So you basically have occasion-based categories that are still strong. And so when you look at what’s going on in up, when you look at luggage categories like that, those will continue. We do have those models, the pace to start to abate as you get into the back half of the year, but still strong. When you look at the businesses right now that have been quite challenged for us, the pandemic categories, we do actually expect them to start to pick up as we get into the back half. I think the big thing when you look at our disciplines and what we’ve done with inventory control is that we’re ready to be able to pivot where the customer goes on this. We’re watching this very carefully, look at our trend curves, we look at what’s going on in Bloomingdale’s, which is, in many cases, early warning for us about things that are really doing well or will do well and those that are starting to taper off. The liquidity that we built into our open to buy is really gives us the flexibility what we call dry powder to be able to respond to where the customer is going. So we have done that well. We control our inventories, and we are very disciplined about how we’re allocating receipts. With respect to traffic, traffic has been relatively good. We expect that to continue. The consumer is still healthy. And we’re looking at conversions across both online and in-store to ensure that we are maximizing all that traffic that we’re getting. But the consumer is under pressure. And so – and…

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

Hey, good morning. Great execution, guys. Curious what you’re seeing on spend across some of your different income cohorts, the low end and at the high end. And then, Adrian, I think the real surprise here this morning is a gross margin guide, which obviously demonstrates a lot of confidence. So just wondering if you can dive into that, particularly things that you can control in terms of pricing on a localization level and other factors that give you that confidence that you can hit 38.7% to 39.2% in this year?

Hey, Chuck, it’s Jeff. So I’ll start with your question about income tiers, and then I’ll throw it to Adrian to talk about gross margins. So what I’d say is that all income tiers are going to be pressured in ‘23. As we’ve seen since the second quarter, we’ve actually seen very similar trends across income tiers of Macy’s. So really, for the last two quarters, I guess the good news on this is that we have a broad range of categories and price points that we get a lean into, the inventory discipline, the open to buy. I think the big thing to remember is what we did in really the beginning of 2020 when we went to kind of an upfront net cost model with most of our suppliers and massively reduced the reliance on markdown allowances. The other thing that we did at the same time was that we based our incentives for our merchants on the enterprise sales versus their functional sales. That really made receipt and markdowns to be an enterprise opportunity. And it gave us then the opportunity particularly what you’re going to see in ‘23 to layer in these open-to-buy reserves on top of a more conservative view and a more cautious view of where the consumer is going. So that is – we’ve been able to respond to that. I think when you look at it from off-price to luxury, when you look at our nameplates and our brands, what we’re seeing is that the consumer is pressured. I would like to comment about luxury. So luxury just continues to have strength. When you look at the loyalist program at Bloomingdale’s, that spend was up 7% in the fourth quarter. And the top of the list, which is the top of that, which is a big chunk of the overall business and very profitable business, that was up 9%. So we expect – when you think about share of wallet, we have opportunity to capture more and particularly that top of the list in that luxury consumer. They are really spending where they are scarcity and where they are specialness. So while we’re doing at Bluemercury, what we’re doing at Bloomingdale’s and what we’re doing in the beauty area of Macy’s, is really helping our customers see us as a place where they can buy these categories because they are so discerning in their purchases. So where we see to where we see strengths, we’ve got a model that is ready to respond to all income types.

Chuck, good morning to you. So as it relates to our gross margin outlook for 2023, I think one of the things that’s been very consistent that you’ve heard from us is our commitment to margin expansion as well as our commitment to inventory productivity. And so overall, as you look at 2023, we’re looking to have lower markdowns, more effective promotions to offset partially by lower ticket price increases. But let me just kind of give you a little bit of a complexion of the three things that we’re focused on. The first is healthy inventories. So when you think about inventory being down 3% to 2021, which 2021 was a year of inventory scarcity, our inventory composition as well as our levels are actually quite healthy. So the strength of freshness and to be able to sell through the items that we put in front of the customer, that’s something that we’re pretty excited about and we have the flexibility in our open to buy reserve to respond to sales demand signals to be able to get and maintain the right composition throughout the season. The second thing is really more focused on compelling promotional events and reducing our broad-based promotions while levering up our personalized offers and communications so that we can have more regular priced sell-throughs. We have already tested with millions of customers, our personalized offered communications thus far this year. We are pleased with the results that we are seeing. And in combination with that, we are really committed to not chasing unprofitable sales. That served us well in the fourth quarter, and that will also continue to be a principle as we get into the New Year. The third is really the mix of categories. We have been very disciplined operationally in terms of how we think about the pivot of the customer and where her or she is spending. And so we are going to continue to do that. But we feel that that freshness, fashion and newness is going to allow us to have more full-price sell-through, which is going to be able to help our gross margin. So, when you think about opportunities like dresses, and men’s tailored that’s not offered at scale and value retailers. We are just very well positioned for that kind of mix around the full-price sell-through to really enhance our gross margin throughout the year. So, those are the things that we are excited about. We are continuing to look at things like freight and raw material costs and opportunities there. We feel good about the progress that we have made there. But fundamentally, we have just been very disciplined on all the levers around gross margin and already have the momentum and traction to bring that into 2023.

Thank you. The next question is coming from Matthew Boss of JPMorgan. Please go ahead.

Great. Thanks. So, maybe two-part question. Jeff, when you think beyond this year about the sustainable top line model moving forward, where do you see white space market share opportunity? And do you see expansion opportunity given the lateral store closures that appear to be picking back up? And then Adrian, is it high-30s for gross margin in terms of the profile multiyear? And can you leverage the expense base at low-single digit sales growth?

Hey Matt. So, I think the white space question is related to how many categories or customers signaling interest in Macy’s. I think we are learning a lot from marketplace. And categories that when you think about video games, you think about electronics that were the most popular categories on marketplace during the fourth quarter. We are learning a lot about some of the apparel businesses and categories that we have added or brands that we have added. So, there is big opportunity with that. When you look at some of our lease opportunities and what we have been able to do, Pandora is a great example of that that has immediately energized our entire jewelry floor at big productivity level increases from what we had previously. We are going to be expanding that. So, we are looking at all of the categories where we are – we play in and what’s our opportunity to narrow our assortment on the most important things and expand in areas that we are not. We are looking at it by customer type. So, to Oliver’s earlier question about when you look at Gen Z and Alpha, what are those categories that they want to traffic in. And what’s the best way for us to bring that to market. From an owned model, it may not be profitably – we may not get the ROI on that, but on marketplace, it makes a great deal of sense. So, expect us to look at the full portfolio. We have a big tent, we do when you think about opening price, if you think about our off-price business is going out below $20, you look at Macy’s going out in the $40 range across the same categories and Bloomingdale’s is more than double that. So, depending on where those income tiers are and where those customers are, we are looking at our full arsenal between VDF, hybrid marketplace and owned to be able to respond to that. And we now have the tools to be able to do that. When we look at it in the context of market share gains and new customers, we are really looking at – and white space for us would also be customers that would consider our brands, but don’t go to data on them because they don’t find or brick-and-mortar, particularly convenient. So, there may be places, even though we are in 49 markets of the top 50 markets, there is many ZIP codes where we don’t penetrate because customers are going to off-mall and that’s how they are satisfying their needs. That’s why we are so excited about what we are looking at in terms of Market by Macy’s and Bloomies. So, expect us to continue to fortify that. When we do that, the digital flywheel and the omnichannel business, starts humming. So, that’s how we are looking at where we are going to go with white space and new customer opportunities.

Matt, good morning to you. So, to answer your question very simply on gross margin, we remain very focused on high-30s in terms of our gross margin rate. The thing to keep in mind is as we continue to scale Macy’s media network, continue to scale marketplace, those were additional profit pools that will certainly strengthen our margin profile. But you also raised an important question about SG&A. So, let me spend a little bit of time on that because I think it’s important to mention for us to understand. The first thing is, in 2020, we were very committed through Polaris to reset our cost base, and we actually did that. So, if you look at 2019 versus today, we have about 30,000 colleagues less in the workforce, that’s about 27% less colleagues on sales in 2022 that’s relatively comparable to 2019 levels. But the important thing you have to keep in mind is that we cannot fuel growth without investing in our talent. And this was on display in 2022 when you think about the quality of execution and the success that we have had with the priorities that we have committed to over the course of the last couple of years. So, that really was on display last year. But let me just dimensionalize our payroll investments and speak to our successes on the non-payroll side. On the payroll side, as we make investments in talent, the first and foremost thing is around the customer experience. And what we have done in terms of in-store and supply chain is as of May, we have actually have nationwide $15 minimum pay, but the important thing is that we are continuing to see productivity, for example, in our stores, above 20% relative to 2019. The second piece is really…

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

Great. Thanks for taking my question. Really two pieces. First is that you are already hitting this low-double digit adjusted EBITDA margin target. And I think that was your kind of longer term, so a nice outcome there. So, maybe is that still the right long-term target, or what are some puts and takes there? And then secondly, just following up on the luxury piece and the questions earlier, I just wanted to zoom out, it sounds like you are incrementally positive on Bloomies and Bluemercury as a part of the bigger luxury strategy. And I know some of the competitors in the space are struggling. So, maybe you could help us understand how that opportunity has changed in the market broadly compared to, say, pre-COVID, or if you are thinking about it any differently than you did then? Thank you.

Hey Alex, so let me start with luxury and then I will throw it to Adrian to talk about the double-digit EBITDA profile and how we are kind of thinking about that in the future. So, we are bullish on luxury. And this is a share gain for us in terms of going after the luxury opportunities. You have a customer that remains healthy. They have the resources. As I mentioned, they are really spending where there is scarcity and specialness. So, the full omnichannel experience is quite important. What is the experience like online, what is it in stores, what it is, in many cases, there is a colleague, customer relationship that is quite developed. And they are very discerning our customers on their purchases, so how do we think about that. So, we are definitely committed to additional market share in – particularly when you think about Bloomingdale’s and you look at Bluemercury. So, when you think about how that manifests when you look at Bloomingdale’s, so we have really want to be that customer’s consideration for a multi-brand upscale retail option. We just finished our 150th anniversary at Bloomingdale’s and spent a lot of time on content – exclusive content and really developing strong mutually productive relationships with established luxury brands. And this can be approachable to aspirational, a real curated expansion of luxury labels that our customers love. And those are adding new content, not only on the website, but in individual stores is – and these can have huge effects on overall comps. So, we are very focused on that. We are using data and analytics. We are leaning into the breadth of offering to ensure that we have the right content. As I pointed to a couple of areas that we are really focused…

Good morning Alex. I will be very sustained on your question. So, first and foremost, look, we are certainly focused on long-term sustainable growth. And that’s really around low-single digit growth on owned plus licensed sales as well as total revenue. And as Jeff shared, there are clear a number of vectors that we are excited about at different levels of scale and maturity. But the most important thing is we have actually built that foundation in 2021 and 2022. We will continue to complete a lot of our testing and pilot in 2023, but we are excited about the growth profile in 2024 and beyond. From a low-double digit EBITDA standpoint, we view that in terms of percent of revenue going forward. Starting in the first quarter, we will begin to report on a total revenue basis, but we are committed to that. We are committed to the growth vectors and the margin expansion vectors that will get us there.

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

Hi. Good morning everyone. As you think about the merchandise margin, which I believe was down around 300 basis points, how are you thinking about that going forward and especially the cadence as we move through the year? And on the data science journey, which seems to be very effective, how far along are you on that data science journey? Is there more to capture? And then just lastly, what are you seeing in shrink? How is that impact and how you are planning? Thank you.

Terrific. So, with regards to merchandise margin, we feel good coming into the year. So, much of our merchandise margin is dependent on our inventory position, not just the level of inventory, but the composition and where we tend to win is having fresh inventory where we can get full-price sell-through and our multi-category flexibility helps us quite a bit as well. As you can imagine, over the last year, we pivoted into occasion base and away from casual and that has served us well. But when the customer comes back, we will be able to respond well. I think the disciplines around the open to buy to really respond to demand signals in local markets is going to serve us quite well. So, we feel very good about that. We are in the, I would say, mid to late innings on data funds. The reality is, given what we are learning, it seems like the journey is not done. We continue to find more and more opportunities to expand margin profile through our data science. So, it’s really fascinating to see the insights that are coming through the learnings we saw in 2022, but we will definitely take the opportunity to lean into the beta at a much more granular level to make sure that we are finding even more margin opportunity. So, there is more upside for us, and we will be very clear about that as we continued to progress. As we think about our shrink levels, I will have Jeff speak to that briefly.

Hi Dana, so shortage was worse than anticipated. And I think as you are hearing from other posts, it’s an industry-wide trend. We definitely had an uptick since last year. Two factors, one is the shift – the channel shift that you have going from digital back to stores. So obviously, you have more porous forgers in your stores than you do in your warehouses that are fulfilling most of your digital orders, so that was anticipated. And then you do have heightened fact in particular pockets of the country and we are working aggressively with our teams and local officials on how we can better protect our assets in the future.

Thank you. The next question is coming from Paul Lejuez of Citigroup. Please go ahead.

Hey. Thanks. It’s Tracy Kogan filling in for Paul. I just wanted to ask a quick follow-up on the last question on shrink. I was just wondering how much it pressured your margins this quarter? And then separately, you guys talked about changing the way you incentivize buyers. And I am wondering if you have had enough time, I am not sure if you put that in place just in 4Q or a little bit earlier, but if you had enough time to see if it’s actually changing behaviors. Thanks.

Let’s talk about shrink first. So, as we reported when we talked about it at ICR, there is we built that into our reserve. And so recognizing the trends we have RFID on virtually everything that we do. So, we are doing daily counts on our content. So, we really know what’s going on in the course of our buildings. And so we build that into our shortage reserve and whereas that went higher, we built that into our expectations when we revised our posts or our guidance in the end of January. As it relates to your conversation about our incentives, that’s been in place really since the beginning of 2020. So, when we went to the net cash cost model, we basically then looked at not only our bonuses, but also how we incent our colleagues based on what they get in their annual reviews. So, that is not a temporary and was not a recent action. It’s been in place now for over 2 years.

And has it changed buying behavior, has it – I assume if it’s continuing, it’s kind of having the effect that you want.

Yes. When you think about it, a plan is we are on the second – the new season starts because of all-in, we are making adjustments on our plans constantly based on customers. So, to be able to react in real time to where customers are signaling interest with what you do with receipts and what you do with markdowns, and how you pull that back into you might have somebody that is planning a business at a particular level, and it’s much stronger than that. You want to make sure you are giving them the receipts and according markdowns to be able to fuel that business. And somebody that is slowing down from an original plan, you want to be able to do that. If you have got those buyers that are owning those particular relationships and they are incented on the original plan, that’s going to incent bad behavior. And what you really want to do is make sure that you have got behavior that is incenting where the customer is going. So, I think it absolutely has changed the way that our teams are approaching being much more customer-centric and using the assets that we have to respond to that in real time.

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

Hi. Good morning. Just a couple of questions just around pricing and AURs, when you look at what’s happening with the consumer, a number of your vendors have worked to take prices higher and AURs higher. And I am just wondering, do you see – any reason to believe that some of the prices will need to come down, or do you feel good about some of these initiatives that have taken place. I am just wondering if you can maybe comment on that, that would be helpful. Thanks.

Hey Bob. So, let me talk a little bit about AUR and then have Adrian kind of reinforce what we are doing with pricing to support that. I think what we are expecting is when you looked at 2022, we had an increase of about 4% in overall AUR. And that was largely ticket increases. I think what you are going to see in 2023 is there is going to be an increase in ticket prices, but not near the level that it was in ‘22. And so when you look at the big change for us in terms of AUR is just having less and lower clearance markdowns that is moving through in the degradation of your overall AUR. We are going to have targeted promotions versus as broad-based as they used to be. And with a right-sized inventory that is really tied to sales demand in real time to customers, it’s never perfect, but we are getting better at allocation. We are getting much better at really understanding where the customer is going in terms of potential trends and we are getting better with pricing science, which I will turn it over to Adrian to give you some feedback on that.

Absolutely and good morning Bob. I would just reinforce the thesis that Jeff described, which is inventory health is the gift that keeps on giving. The reality is that it spills into allocation, it spills into full price sell-through. And our discipline was initially the level, then we pivoted to the level of composition and now we are into things like the appropriate allocation by market, by store, by channel, so it’s really a discipline that we continue to mine for additional benefits. The pricing science is highly linked to that. We talked a couple of years ago about location-level pricing that is fairly scaled at this point where we are able to really look at style, by location to be able to understand what is the optimal price to maximize margin. We have added the dimension of dynamic pricing, which allows us to really understand depending on a moment in time, what’s happening in the industry and how we need to respond but also, I think the next lever that we are thinking through quite a bit is this notion of personalized customer-centric offers and communication, which really allows us to begin to go after a reduced broad-based promotional platform. And that’s a tremendous opportunity. We are very excited about what we have seen in our tests. So overall, I would say there is more to come, but the pricing science capabilities continue to grow, to continue to expand and continue to get more sophisticated. And with that will come even more margin health.

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

Hi guys. Thanks for taking the question. Most of our questions have been answered. Just wanted to ask one on digital versus stores, those stores obviously had a really strong year this year. A year ago, you talked about achieving low to mid-40s digital penetration by 2024. Just was wondering if you could provide – or are you providing any update on that target, it looks like it will be around 32% to 34% this year. I know you have marketplace scaling for both Macy’s and Bloomies. So, just how focused are you on still scaling digital to that level? And then Adrian, maybe how does that digital target impact your long-term margin goals? Thank you.

Let’s talk about, so digital obviously grew significantly over 2019. And when you look at our business in 2022, it was up 31% versus 2019, with traffic up 7% and conversion up 11%, but definitely a drop off from where we were in ‘21. So, kind of going through digital penetration through the years. It was at 25% in ‘19. In the pandemic, it was – it hit the 40% level. In 2021, it abated and went to 35% 2022, it went to 33%. And into your comment, we do see it stabilizing right now at the 32% to 34% range. So, that reset has really now occurred post pandemic, and we have a new baseline for digital penetration in ‘23. But we do believe that digital will grow in the future. And you mentioned one of the big ones for us is not only getting better with functionality and experience, but also what we can do with marketplace. So, we have a lot of work for us ahead for us on that, but we are quite excited about the early learnings in that. We have done a lot on our website. We have done a lot of our mobile app. I mentioned marketplace, but we are leaving no stone unturned in terms of our opportunities in digital because part of the omnichannel flywheel is our presence there and how that basically addresses all the customer needs.

As we think about the destination for us, it’s really – as Jeff described, a digitally connected omnichannel ecosystem. The stores matter, the digital matter, but how do you really integrate that in a very seamless way that’s what the customer is looking for. When we think about our margin profile, we are focused on the low-double digit EBITDA as a percent of total revenue going forward. And that’s something that we have a lot of conviction around. When you think about the growth of the digital channel, it’s important to keep in mind that even though there may be an expense dimension, for example, parcel expense on the gross margin line, you do get a lot of SG&A leverage. So, as we think about the composition of our digital penetration versus store penetration, we are obviously very focused on the impact of the different line items, but ultimately, what is the bottom line margin profile that, that delivers for us. The other benefit as we think about digital is the expansion of capabilities that we have added. So, when you think about margin health and you think about the flexibility of selling products on the own platform versus the vendor direct platform versus the marketplace platform, that’s an additional opportunity for us to optimize our profit profile. So, we tend to look at a metric called dead net profit. So, as you can imagine, as we think about our marketplace profitability, there may be owned items that are more profitable on marketplace and so that’s an opportunity for additional margin expansion. So, those are the kinds of operational things that we are going after. But from a digital standpoint, we have many, many vectors to protect our margin expansion goals with various levels of digital penetration.

Thank you. At this time, I would like to turn the floor back over to Mr. Gennette for closing comments.

So, thank you everybody for your interest in Macy’s, Inc. brands, and we look forward to updating you on our five growth vectors on our first quarter earnings call. Everybody, have a great day.

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.