Greetings and welcome to the Macy's, Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. I will now 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. With me on the call today are Jeff Gennette, our Chairman and CEO; Tony Spring, President, Macy's, Inc. and CEO-Elect; and Adrian Mitchell, our COO and CFO. Along with our second quarter 2023 press release, a presentation has been posted on the Investors section of our website at macysinc.com. Unless otherwise noted, the comparisons discussed today are versus 2022. Comparisons to 2019 are provided, where appropriate, to best benchmark performance. All references to our prior expectations, outlook or guidance refer to information provided on our June 1st earnings call unless otherwise noted. All forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used on the Investors section of our website. Today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call. With that, I'm going to hand it over to Jeff.

Good morning, everyone, and thank you for joining us. I'm going to begin today's call with a review of our second quarter results, followed by a discussion on the macro environment and how that is informing our approach to the remainder of the year. Tony will then give an update on our five growth vectors and the merchandising strategy. From there, Adrian will provide additional detail on the second quarter and our third quarter and full year outlooks. He will also discuss opportunities under his expanded role as COO. Before we dig into the results, I want to acknowledge the devastating wildfires on Maui. We have accounted for all our colleagues on the island, but a few have been directly impacted by the destruction and loss caused by the wildfires. We're supporting those colleagues via our North Star Relief Fund and are engaged with the American Red Cross through our annual financial commitment and customer roundup campaigns across our Hawaii and Guam stores to support Maui residents. Turning to second quarter results. We achieved net sales of $5.13 billion, a gross margin rate of 38.1%, and an SG&A rate of 37.5%. Adjusted diluted EPS of $0.26 primarily benefited from better-than-expected sales, gross margin and SG&A. These factors more than offset lower-than-anticipated credit card revenues and a timing shift in the recognition of shortage. Taking a step back, we exited the first quarter with excess spring seasonal receipts at Macy's due to lower-than-anticipated demand trends in the back half of the quarter. On our earnings call, we committed to entering fall in a clean inventory position. Ultimately, we ended the second quarter with inventories down 10% to last year and down 18% to 2019. We were disciplined with our approach to inventory commitments and flex the cadence and depth of promotions…

Thank you, Jeff, and good morning, everyone. I want to begin by recognizing our teams for their dedication and the innovative work they are leading. I have always believed that balance of tenured and newer colleagues working together brings the most thoughtful and fresh perspectives, and I see that coming to life across Macy's, Inc. organization. Last week, we announced the arrival of Max Magni, our Chief Customer and Digital Officer. Max has over 20 years of experience at McKinsey, most recently as a senior partner, co-leading their NextGen Commerce and Consumer Growth Practices. We're excited to have Max join us and look forward to his contributions. Over the last several years, Jeff and Adrian have improved the operational efficiencies and financial health of the company. This has been a key enabler of our transformation and the advancement of our five growth vectors. These factors are intertwined with the overarching strategy of keeping the customer at the center of everything we do. Our first growth vector is Macy's private brand reimagination. As Jeff mentioned, we recently launched On 34th, which has been informed by direct consumer research. Results are encouraging, with sales exceeding expectations, and we believe On 34th has the potential to become one of our biggest private brands. Our team has been thoughtful in both the development and planned rollout of our updated private brand strategy. The reimagination work has been built on three key pillars. First, brand stewardship; second, design with intention and execute with attention; and third, provide a meaningful value equation. From sourcing to marketing to merchandising, the teams have worked together to reflect our customers' wants and needs. They have considered life stages to create products and brands that authentically resonate with and capture the hearts of current and prospective customers. With the reinvigoration…

Thanks, Tony, and good morning, everyone. I want to start this morning by thanking my finance and real estate teams for their ongoing dedication and hard work. And to my colleagues in stores, technology, and supply chain, I am grateful to partner with you more closely. In our last call, I shared the three fundamental areas of opportunity that we identified to build a faster, more flexible and more efficient operating model. First, improving the end-to-end omnichannel shopping experience; second, optimizing our physical store footprint, while enhancing inventory flow, merchandise planning, and localized assortment capabilities; and third, further modernizing our supply chain and technology infrastructure. Over the last few months, I have continued to align with our teams on how to simplify our processes, while providing more consistent shopping experiences that engage and inspire our customers. I look forward to sharing more on this effort in the future. Now, let's talk through the second quarter performance for our five value creation levers. First, omnichannel sales. Net sales of $5.13 billion declined 8.4% versus the prior year, slightly above the high end of our outlook. Comparable sales on an owned-plus-licensed basis decreased 7.3%. Owned AUR rose 4.7%, driven by ticket increases and category mix. For the remainder of the year, we expect continued AUR improvement on ticket increases, lower markdowns and category mix. Other revenue of $150 million were 2.9% of net sales. Macy's Media Network revenue was flat to last year at $30 million. Our long-term confidence in Macy's Media Network is tempered by near-term caution in light of broader industry trends. During the quarter, credit card revenues declined 130 basis points or $84 million year-over-year to $120 million and represented 2.3% of net sales. We experienced an increased rate of delinquencies within the credit card portfolio across all stages…

Thank you, Adrian and Tony. It has been exciting to watch you two collaborate on innovative ways of opportunity that reflect your unique lenses and backgrounds, and I am confident that you will lead Macy's, Inc. to sustainable long-term profitable growth. Now, operator, we will now open it up for Q&A.

Thank you. The floor is now open for questions. [Operator Instructions] Today's first question is coming from Oliver Chen of TD Cowen. Please go ahead.

Hi, Jeff, Tony, Adrian, good morning. 2Qs were -- 2Q revenue and margins were encouragingly better. What was the driver behind that? And as we look at 3Q guidance being below Street, I assume it's primarily the credit card delinquency, bad debt expense. AURs were also encouragingly up. What was the offset to that? We assume it could have been traffic. And a follow-up, as you think about longer term, the small-format opportunity, how are you dimensionalizing the addressable market there? Thank you.

All right. So, Oliver, good morning to you. It's great to be with you. So look, despite the timing shift that we recognized with shortage, we achieved the gross margin rate in the second quarter ahead of our expectation. So, we were actually quite pleased with that. Now, while the second quarter was more promotional than last year as we worked to clear a lot of the seasonal product that we talked about, it was less promotional than we had anticipated. We leaned into a lot of our strategic and personalized promotions. We've been into our pricing science, as we've talked about prior. But look, leveraging the data-driven processes that we've had in place and been using for the last couple of years allowed us to really maximize our margins and sell-throughs as we actually exited the spring season. Now, as we did in previous seasons, we're actually able to clear through a lot of the seasonal product that we've spoken about several weeks ahead of schedule. So, we're continuing to take these behaviors into the back half of the year.

The other thing I'd add on that, Oliver, would be just our inventory is in a great position. So, exiting the third quarter, down 10%, we have been able to retain a lot of liquidity that will respond to customer interest. But our stock-to-sales ratios are good by category. The third quarter has started at expectation. We're looking at the back-to-school read, as well as really all new fall fashion and how that's performing. And we have confidence as we go into the fourth quarter on our strategies.

If I could just answer your last question, Oliver, with regards to small-format stores, we're very excited about the growing impact of our small-format stores. As you know, we remain in the early stages of continuing to scale this opportunity, but we did announce that we're opening up a number of stores this fall. Chicagoland, Boston, Las Vegas, San Diego are several locations where we'll be opening up our small-format Macy's stores. And in the Seattle market, we'll be opening up a small format Bloomingdale's. Last week, we did open up a store in Chicagoland. But as we think about the quality of experience for our customers, we continue to see positive signals in terms of the financial performance and the customer experience within these stores. So, we're actively evaluating potential locations across the country that will enable us to accelerate growth at the appropriate time. So more to come on this topic.

Best regards. Thanks.

Thank you.

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

Great. Thanks. So, Tony, could you just elaborate on the key strategic initiatives that you believe best positions Macy's for a return to revenue growth next year? And then Adrian, any notable differences in topline by income cohort that you're seeing today, maybe relative to three months ago? Any change in macro that you're embedding for the back half of the year? And then just given the potential external changes that you mentioned, how best to think about a range of EBITDA margin outcomes for next year relative to the low double-digit target that you've laid out?

Thanks for the question, Matt. Let me begin with the opportunities for growth. Just as a reminder, I've been a part of the Macy's executive leadership team for the last few years and working closely with Adrian and Jeff and other senior leaders the last few months. And I remain bullish on the opportunities for the entire portfolio. And remember, Macy's, Inc. is a portfolio company with, obviously, power in the Macy's brand, Bloomingdale's brand and Bluemercury brands. I believe that our opportunity remains in going off-price to luxury, multi-brand, multi-category. And these five growth vectors are designed to help us to amplify our business. They are designed around merchandise, which includes private brand and making sure that we are bringing the most important market brands to all of our portfolio. The reintroduction of Nike and the announcement of Under Armour is a good example of that. It's strengthening our marketing, but on a more personalized basis, with specific offers that are right for that customer, at the level of modernization in our marketing, it's also making sure that our portfolio has the right number of stores in the right locations that include the quality malls that we're in today as well as, as Adrian described, the right small-format locations that densify, replace existing stores that may not be as productive or allow us to enter new markets. The luxury business is a piece of the puzzle that we feel very strongly about. It underscores the importance of Bloomingdale's and Bluemercury, but also gives us the opportunity to expand the Macy's beauty business. And as we mentioned, beauty is a category that's grown across every single nameplate. So, we feel strongly about all of our growth vectors. But in answering fully your question, I think the growth opportunity for the Macy's brand requires us to dig deeper into the assortments and making sure that we eliminate redundancy and we improve variety, making sure that people find the brands they're looking for, as well as the level of exclusivity that comes from our private brand assortment. And the final piece I would say is the team is highly focused on improving the customer experience, physically and digitally, doing those things that are necessary to create a more seamless and easier omnichannel experience.

Matt, good morning. Just going through a few points that you raised. The first is, we have a discerning customer across all income tiers. They're being quite choiceful about how they think about experiences versus discretionary goods. And so, we continue to be thoughtful about focusing on the things that we can control to deliver a positive experience for our customers. The reality is, in the macro environment, we continue to remain cautious, as we spoke about earlier in our opening remarks. We do believe that there continues to be pressure within the macro environment. So, we will continue to remain cautious. To your third dimension around EBITDA margins as we think about next year, the first thing that we would emphasize is what Tony spoke to, which is our top priority is profitable growth. And that profitable growth is about low-single digit growth beginning next year, and we remain confident in that. The kinds of things that we're controlling is our balance sheet, the operating disciplines that you've seen from us around inventory management and expense management, the quality of execution on our fundamentals within our core business, and we continue to see that our five growth vectors remain on track. Now, as it relates to low-double digit EBITDA, it remains our aspiration longer term. Now, as we look on the horizon in the near term, we see several factors worsening and difficult to offset, again, in the near term. And as we spoke about earlier in the call, credit card revenues, shortage, and asset gains are all the type of things that are at the top of our list. So, look, as we think about credit card revenues, we've experienced higher aged balances across all delinquency levels, which just lead to increased bad debt impact in our credit card. And as you know, there's still an open question about the legislative ruling on limiting late fees, which is something that we'll have to quantify the potential impacts of if that ruling comes to fruition. Shortage, as you know, has been an industry-wide opportunity. It has been at elevated levels for multiple years. Shortage, for us, for the second year in a row will be at record levels. Now, we continue to put mitigation strategies in place to address that, but these mitigation strategies will likely take time to effectuate. And then obviously, with regards to real estate, the industry is really challenged right now with higher interest rates, higher cap rates, and higher hurdle rates. We do have confidence in our real estate, but we will be patient on our ability to monetize those assets. So, when you look at the confluence of all these different factors, our ability to achieve low-double digit EBITDA in the near term may be more challenging. But as we progress through the year and we focus on our expense management initiatives and the growth initiatives that Tony referenced, we'll share more in the near future.

Great color and best of luck.

Thank you.

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

Good morning and thank you for taking our question. Adrian, I was hoping you could help us understand the potential levers that you have for additional improvement in margin rate should the consumer dynamic backdrop worsen into the back half of the year. How are you thinking about merchandise margins and promotional backdrops, and what are the incremental opportunities in SG&A expense beyond what you've already identified?

Absolutely. Thanks very much for raising the question, Brooke, and good morning to you. As we think about gross margin, the disciplines that you've seen from us are pretty key, and that's really around strong execution on the customer experience and healthy inventory management. Now, we've talked a lot about inventory management from the perspective of the volume of inventory, which allows us to limit our markdowns, the composition of inventory that allows us to support full price sell-through, as well as the freshness of inventory to have the relevant content for our customers to shop from us versus the competition. We'll continue to be very thoughtful about executing on those, but you've seen us pretty consistently execute on the gross margin side over time. The one thing I would call out as we think about gross margin for the balance of the year is we've done something a little bit different this year with shortage. So, this year, we actually had a midyear shortage -- midyear inventory count, which gave us greater confidence and visibility into shortage trends for the year. So, we did recognize some shortage in Q2. We will recognize some shortage in Q3 and Q4, which is different from what we've done in prior years, which is to recognize it all in the fourth quarter. So, we are very thoughtful about how we're thinking about the margin rate going through the balance of the year. We're excited about the composition of inventory. We're excited about all the initiatives that Jeff and Tony spoke to, but we also are cautious in terms of making sure that we have the capacity to respond to growth opportunities and to absorb any potential promotions that we may need to do to move through the business in the fall season. As it relates to SG&A, we continue to feel good about the $200 million that we spoke about in cost savings earlier in the year. We spoke about it in our June 1st call. We've been working on it for a number of months. We're seeing those come through, and a larger portion of those benefits, both on the SG&A expense and the gross margin expense, is expected to materialize in the back portion of the year, with the biggest being in the fourth quarter. But we continue to be very focused on expense discipline, and that's something that you'll continue to see us focus on for quite some time.

Great. Thank you so much.

Thank you, Brooke.

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

Hi. This is Greg Sommer on for Chuck. I just wanted to dig into the health of the consumer a little more, looking at the outperformance of Bloomies outlet and then also Backstage and then also higher credit card delinquencies. It would suggest that the health of the consumer has deteriorated and even at the high end. I was just curious, is this accurate? I wanted to get more color on the health of the consumer, either by what you're seeing in terms of performance by store banner or what you're seeing when you dig into the credit card data. Thank you.

So, why don't I start with the credit card data, and then we'll talk a little bit about the consumer a bit more broadly. So with regards to the credit card data, the one thing I would say that -- is that we're managing our credit card revenues to the best extent we can. And I think the credit card revenues is an indication of some of the pressures that we're actually seeing on the consumer. So, as you know, we have actually planned out higher delinquencies based on the expectation of a normalizing credit environment. But what we did see is that the speed of those delinquencies across all age balances -- or aged balances actually accelerated after Q1, and that occurred primarily in June and July. So, we've made a number of adjustments there. Now, what's interesting about this is that there are things that we can control and things that we cannot control. The things that we're controlling is that we're working actively to mitigate a lot of the headwinds that we see. So, for example, we are working with our credit card partner, Citibank, to target higher risk segments to surgically reduce exposure. We're also maintaining spend in places where we can for customers that have the capacity. We're acquiring new customers, we're retaining active customers, and we're focusing on the spend on their -- at Macy's on their prop card. But there are things that we cannot control, which I think gets very much into what you're describing around the health of the consumer, and that's the macro environment. So, the macro environment really is having the lion's share of the impact on credit and is a real indicator of where we think the health of the consumer is and supporting our cautious approach. The one metric we find quite interesting is the debt/service ratio, which we leverage as a proxy for the consumer's ability to pay debt using their disposable income, personal income. So, this is about credit card balances. This is about student loans, which we know is going to come into focus in the next month or two; auto loans; mortgage. So, we just believe that the customer is coming under pressure, because these are new realities that they have to continue to deal with as we get through the back half of this year and move into next year.

Chuck, what I'd add is your question about off-price. So, just know that when -- we've always been quoting what's going on with our off-price business between Bloomingdale's and Macy's. You heard that off-price at Macy's outperformed the balance by almost 300 basis points at outlet Bloomingdale's versus the Bloomingdale's brand. It was about an 800-point difference. That really is just our -- when you think about being, in most cases, mall based to have an off-price option has been a potent part of our discovery with off-price. And so, what we have seen over time is that there is no cannibalization that's going on between the full price and the off-price side. It's just building stickier relationships with customers. They're building up their spend with us. They're shopping more frequently. We certainly saw that in the second quarter. And then to your question about kind of how different income levels has been affected, we'll talk about the Macy's brand. Certainly, the Macy's brand is more under pressure, and it really is the stat of that 50% of the Macy's customers are making $75,000 or less. So, they've been under pressure. I think there are some headwinds coming, particularly with student loan, that expiration of the loan forgiveness. And what we're really looking to do is controlling what we can control and ensuring that we've got the right stock-to-sales ratio in all of our categories and that we've got receipt reserve to chase into demand. So we feel good about our fourth quarter strategy, and we feel good about where our inventories are right now with this consumer.

Great. Thank you.

Thank you. The next question is coming from Blake Anderson of Jefferies. Please go ahead.

Hi, good morning. I was wondering if you could talk a little -- or give a little bit more color on the monthly trends you're seeing in maybe back to school? And then just higher level, talk about your confidence in the comp guide in kind of reiterating the comp guide for the rest of the year. I know you've talked about some pressures on the consumer, but you're being conservative. Just give a little bit more commentary on your decision to reiterate the previous comp guide for the year. And then second question was, on the promotional environment, wondering if you can talk about your expectations for the holiday in terms of promotions, and then how you're planning inventory for the holiday?

Okay. Hi, Blake. So, first off, let's just talk about the second quarter. So, we're not disclosing our monthly performance. But as we talked about on the first quarter call, we did expect the second quarter to be promotional, based on the spring seasonal inventory overhang, and we successfully liquidated any sort of liability that we had coming into the third quarter. So, we don't want to get ahead of ourselves in looking at that trend since that is more clearance-driven than what we are planning are -- and experiencing right now in the third quarter. Third quarter started at our expectation, really a mix between our back-to-school performance, as well as new fall fashion. And just to kind of reiterate, having those fundamentals in place of the stock-to-sales ratio, being in stock on all the most important items, having discipline with our pricing science and getting great traction on that, having inventory be as healthy as it is with a strong balance sheet, and then really green shoots in our four growth factors is really kind of the state that we're walking into the fall season with. So, as we talk about the fourth quarter, we have confidence in our strategies. So, the trending businesses, like beauty and some of the gifting businesses, are a higher penetration of the fourth quarter business than it is the other three quarters. We should draft off of that. When you look at the amount of newness that we have in gifting, so high quality, great value -- and that great value is built into our gross margin expectation for the fourth quarter. So, we're going to be sharp on our values. We're going to be competitive. As we've seen over the past couple of years, the customer is shopping earlier and they're shopping all the way through Black Friday, Cyber Monday, taking the lull last 10 days. We're ready for all that. We've built the promotional calendar so that we thought through all of where -- the customer, where we expect them to shop in each of our brands. I think specifically, when you look at the fourth quarter, in addition to the gifting strategies and the penetration of trending businesses, it's also the add of Nike, it's the Toys R Us and the Disney collaboration. Very importantly, just the liquidity to be able to respond to inventory that's always in the system and this agile team that is responding in real time faster than ever. So that's what -- is what is built into our guide when we think about the back half of the year and the status of what we are -- of where we're at going into it.

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 bad debt expense and credit cards, have you looked at it versus 2008, what could be similar and what's different in the trajectory? And then as you think about this current second quarter, how did -- what was the cadence of the quarter? How did you exit? I know, Jeff, you mentioned just about third quarter and back to school. Anything on tourism that we should note? And then Tony, just on other brands, it's nice to see Nike and Under Armour. Are there other categories that you want to enhance the brand assortments that we should be looking to? Thank you.

Good morning, Dana. I'll start with regards to the -- your question around credit card, and then I'll have Jeff and Tony speak to the quarter cadence. So, look, we've looked at our credit card revenues and bad debt levels as far back as 2005 in our recent conversations. So, we have a good understanding of the puts and takes. We recognize that there have been evolutions in terms of our agreement with Citibank. But from our perspective, it's continuing to control the controllables and continuing to navigate beyond controllables, as I mentioned a little bit earlier. Again, as I shared, so much of this is really around the health of the consumer and so much is also around what we consider to be the debt/service ratio. As you think about the average household income in the US, you think about the average household income of our customers, particularly in the Macy's brand, that consumer is experiencing a number of headwinds as they think about servicing their responsibilities and their liabilities. I referenced a little bit earlier credit cards, I referenced student loans, auto loans, mortgage. All those in a higher interest rate environment creates real challenges. Now, coming into the year, we did project bad debt levels to normalize, but they just normalized a little bit faster than expected. But as we continue to look at ways to mitigate by giving more personalized offers to customers, as well as increase usage on our proprietary credit card, acquiring new customers, and really leaning into the loyalty aspects, we're working very diligently to find the best offsets we can.

Dana, I'm going to -- I'll take on the cadence by month and the tourism, and I'll hand it over to Tony on new brands and new categories. On the -- as I mentioned in my conversation earlier, to the question from Blake, we're not disclosing our monthly performance in that it was heavily markdown and promotional-driven. So, that is on the second quarter. As it relates to tourism, this is one that we still have not seen the return of the depth of the international tourists that we typically have at Macy's and Bloomingdale's. So, just to remind, our international tourism is generally 3% to 4%. That's what it was in pre-pandemic sales. It's now south of 2% of our overall business. So, that tailwind is coming in the future. We're not predicting yet when that's going to be, but know that when you look at the second quarter tourism business versus the first quarter, it was pretty similar. It was pretty comparable from where we are versus the 2019 level. I'll turn it over to Tony.

Thanks, Dana. I think the introduction of Nike is just a good example of what's possible as we go forward. It's an important brand, the number one brand in the active category, and I think we obviously have built into our expectations the opportunity in Nike. The other benefit you have is, people who come to Macy's for Nike don't just buy Nike, they're going to buy other things. So, I'll tell you what I shared with the team last week as they took me through the spring merchandise assortments. First, I was excited to hear the level of newness and discovery and the interest in variety and the desire to bring more interest to our assortments. And I think that that level of curiosity, that level of newness is an important ingredient in our success going forward. I think the other thing that's important is looking at these categories that are adjacent. So, we have Marketplace, which allows us to test quickly, introduce brands and ideas that we haven't had at Macy's or Bloomingdale's before. And then we can move quickly, whether we add those things to our stores or whether we keep them just as a part of the Marketplace. But I think the team is very focused on bringing more newness and more interest and more excitement to our assortments.

Thank you.

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

Hi, good morning, and Tony great to talk with you. Best of luck with this undertaking. Two questions for you. I guess, the first one is, when you think about sort of the trend of digital versus the in-store, how are you thinking about that for the back half of the year? And then on the digital marketplace, is the sort of the ramp on the brands on the platform, especially at Macy's, is that where you want it to be or will you be adding more brands sort of into holiday and into next year? Thanks.

Thanks, Bob. I think we are excited about the growth of the brand assortment on Macy's Marketplace and, as we mentioned, the early read on Bloomingdale's Marketplace. We have Max Magni, who we mentioned, who joins us after a distinguished 20-plus year career at McKinsey, focused on the digital business, and he will be very helpful, I think, to accelerating our performance in the digital space, as well as in our overall marketplace business. I also want to just remind everyone that Macy's and Bloomingdale's and Bluemercury are omnichannel businesses. And while we will always have these accelerations and movements based on cycles between the channels, our focus is making sure that we satisfy the customer, no matter where they choose to shop. So that's a part of our small-format expansion, because customers are going off-mall. That's a part of renovating in beauty at Macy's and on main floor Bloomingdale's, our most important mall doors, because that's where people go to shop. That's a part of our investment into new experiences online, because we want to make sure that we are both a place of transaction, as well as a place of experience on Macy's, Bloomingdale's, and bluemercury.com. So, we really do manage between the channels, but we ultimately are focused on satisfying the customer.

Got it. And the other question I have is just on delivery expense. I think it was down this quarter. But I guess, how are you planning that for the remainder of the year?

Well, delivery expense has been a part of some of the cost savings initiatives that we've thought about, which impacts the combination of the placement of our goods within our system and also how we think about the processing of our delivery. So, look, it continues to be an opportunity for us. We continue to benefit from some of the renegotiated terms with regards to our carrier expenses. We're continuing to look at opportunities to truly optimize how we think about owned versus VDF versus Marketplace, which not only improves our expense profile, but also improves our margin profile. And so there's just a number of ongoing efforts that we have as it relates to inventory and as it relates to delivery expense.

Thank you.

No problem.

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

Hey, thanks, guys. Can you remind us what percent of your sales are done on credit? How that looks versus last year? And you also mentioned mitigating exposure to higher-risk customers. What percent of your credit card portfolio is made up of those customers, and those -- do those mitigation efforts not have an immediate effect? You didn't reduce in second half sales guidance, I don't think at all. And I'm curious, how long it might take those efforts to have an impact potentially on the topline that you would incorporate into your guidance? Thanks.

Absolutely. Paul, great to be with you. So, on your first question, in recent history, we've typically been at around 2.9% to 3% of net sales. But if you look further back in history, it's actually been lower than that. So, the question that was raised earlier about looking at our credit card revenues as a percent of net sales, we've looked at it as far back as 2005 and understanding the puts and takes that actually impact that performance. As it relates to the health of our credit card portfolio, we have a healthy portfolio. As I've mentioned before, we look at a number of factors beyond FICO scores to understand the health of the consumer, their capacity to spend, make thoughtful decisions about their line of credit, who we approve on the card versus not. So there -- we do have a healthy portfolio. We look at our return on assets and we'll continue to do that. I think the reality of what we've seen in the credit card shift is really around the pressure on the consumer. And again, that's the lion's share of the impact that does impact our credit card revenues. But look, we've seen these cycles before. We've been through these cycles before, and we will continue to work to find mitigation strategies within the context that we're given to increase credit card revenues to the appropriate levels, leveraging our personalized capabilities, continuing to expand our customer base across all nameplates. So it's just another dimension of our business that we have to manage actively as we go forward.

Adrian, what percent of your sales are done on credit, the proprietary credit card?

So, within our loyalty program, they're about 70%. I think about 72% of sales are done across our loyalty program, but our bronze tier is a non-tender tier. So, when you look at our gold, silver, and platinum our penetration rate today is about 43%.

Got it. And what percent of the higher-risk customers that you mentioned?

Look, Paul, we have a healthy portfolio. We are not in -- deep into subprime, if that's the nature of your question. We are not approving high-risk customers. We want to have healthy customers using our card for a longer period of time. And so, we do not lean aggressively into subprime.

Okay. Thank you. Good luck.

No problem.

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

Great. Hey, everybody. Thanks for taking the question. Just two from me. The first is just on SG&A. I wanted to dig in there a little bit more. It seems like the guidance contemplates higher SG&A than prior, but I know you reiterated the $200 million in savings that you've identified. So, can you just hash out further what's changed there or seemingly worsened versus three months ago?And then secondly, strength in select categories like beauty, are you all mixing further into those categories as a result, or how nimble can you be as you see strength or weakness in certain categories? Thanks a lot.

All right. So, thanks so much for the question, Alex. Let me start with SG&A, and then I'll hand it over to Tony and Jeff. So, look, our outlook includes a portion of the $200 million in annual cost savings that we identified and spoke to on the June 1st call. We spoke to the fact that 70% of that is SG&A, related to simplifying a lot of our processes and driving efficiencies across the business. The remaining 30% is really around things like delivery expense and inbound freight that was raised earlier in the conversation. Now, as we demonstrated in the second quarter, SG&A was better than our expectations due to these disciplines and these initiatives that I've referenced. And we continue to be very focused on expense management. We think there's lots of opportunities and, especially, in this environment, with so much volatility that we're responding to, we're very focused on expense management and discipline as best as we can. As we think about the back half of the year, we'll continue to be focused on expense management, but what's really important as well is making sure we have the appropriate level of investment in the customer experience. Our biggest quarter is ahead of us, which is the fourth quarter. That's where we tend to win as a gifting destination. And so, we want to make sure that the customer has options, that we don't compromise the shopping experience, and we take advantage of the biggest opportunity we can to have a solid year.

And then, Alex, let me talk about the second part of your question. We -- based on the liquidity that we have always built in -- and that's a new discipline that we've had over the past year and a half. We always have receipts that can chase into signals that are positive. And just as rigorous is what we do on a weekly basis is cutting back on signals that we expected that didn't materialize. So, the opportunity to always be going where the customer is, this has not been an issue of not having brands or inventory available in the system to react to. So, this is -- we've, obviously, as we've discussed in the past, have changed our relationship with our key vendors, really buying more to net cost, not buying into markdown allowances, giving us full flexibility to respond to the customer in the moment. So, we have confidence that, to your question about beauty, we can chase into beauty. We have obviously built very aggressive strategies for the fall season, based on our trends and our merchandising teams and the strength of those brands, and where our customer expects us to be. So, some we plan and some, we're going to react to and chase into.

And Alex, let me add that we have strength and beauty across Macy's, Bloomingdale's and Bluemercury. So that's digitally and physically on-mall and off-mall. And fragrance is an important category for us and trending well in all three nameplates. So we're bullish in the business for the fall.

Thanks a lot.

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

Thank you. Good morning. I wanted to focus for a minute on your cost savings programs. You have spoken about a $300 million to $350 million run rate of savings in fiscal '24, but it seems that you're outperforming that early. How much of these savings are included in the 2023 guidance versus how much will be incremental in 2024?

Thank you for your question. It's a good question, Lorraine. So, as we referenced, the $200 million this year is a combination of both gross margin and SG&A expense. What we spoke to on the last call was that there is an annualized benefit of about $300 million to $350 million. Now, the reality is that we're continuing to benefit from those opportunities and those initiatives this year. So, we're pretty excited about what we're seeing here. The key thing I would say is that the initiatives are real. And as an organization, we're continuing to lead into these expense opportunities. We have not given specifics on how this will materialize as we get into next year. We're still working through kind of how we think about our growth profile and margin profile for next year. But we'll definitely keep you posted and give you much greater clarity on those puts and takes as we get into 2024.

And then I just wanted to follow up on credit. It sounds like the second quarter numbers included pro-rata recognition for the updated annual bad debt outlook. But it looks like you're guiding second half down to a similar decline. Can you talk about the dynamics of this revenue stream going forward?

Yep, absolutely. So, the leading indicator on bad debt write-offs are the delinquency rates. So, we look at it at 30 days, 60 days, 90 days, and 30-day increments, all the way up to 180 days, which is when the write-off actually happens. So from our perspective as we think about past purchases and we see the level of delinquencies that has been increasing across all aged balances, we're actually projecting what we believe to be the bad debt levels, given the trends that we see. So given those leading indicators and what we see with other factors in and around the consumer, that gives us a perspective and a greater level of confidence around what we believe our credit card revenues will be based on our bad debt levels.

Thank you.

No problem.

Thank you. Our last question for today will be coming from Jay Sole of UBS. Please go ahead.

Great. Thank you so much. Just two questions from me. One, on the delinquency rate that you cited for June and July, was the delinquency rate higher in July than what you saw in June or was June the peak and then it slowed in July? And then secondly, just on the small stores, can you just elaborate a little bit on the proof points that you're seeing that give you confidence to open up more small stores? And how many small stores you see the company opening up over the next, say, six months to 12 months to 18 months? Thank you.

Thanks so much for your question. So, on delinquencies, the thing to keep in mind is that we did plan for higher delinquencies this year. We have spoken a number of times over the last 18 months about the credit environment really normalizing. But this was the first time in the second quarter where we actually saw that our projections were more conservative than the actuals. So what we've done with the acceleration, particularly that we saw in June and July, is that we've adjusted our trajectory per Lorraine's question that I spoke to a few moments ago. But effectively, what we've been doing is looking at that on a regular basis and making the appropriate adjustments for the trajectory of the return to a more normalized environment. As we think about small-format stores, there are kind of three key things that we think about. The first is the quality of the customer experience. And as we look at a number of factors, including the availability of product, the quality of the experience, there's quality of service, all these different factors what we're seeing are very healthy numbers as we think about the performance of these stores and the quality of the experience for the customer. The second thing that we look at is the financial trends of the business. And so, for stores that are comped, we're seeing healthy year-over-year growth in this portfolio, and we're getting better. We see lots of opportunity around product, around how we engage customers in the local market. But even in spite of our learning experience, we continue to see growth in stores that are actually comping. The third thing that we're excited about is the potential that's ahead. And so when we think about where customers are, where we can invest, we see a portfolio of healthy big box stores, where we'll continue to invest, complemented by a large number of small-format stores. We do believe that there is an opportunity to accelerate over the next several months in the time frame that you described, but we'll be able to share more specifics on that, hopefully, in the coming months and quarters.

Yeah. And, Jay, I would add that we're excited in the Macy's small-format that we now have Polo and Levi's and Finish Line and Sunglass Hut and now Nike added to those stores. And as Adrian mentioned, looking very carefully at traffic, conversion and a whole host of other metrics to make sure that we are seeing the proof points necessary to expand the portfolio of small doors.

Got it. Thank you so much.

Thank you.

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

So, thanks, operator, and for all of you who's still on the call, I hope that you enjoy the last days of summer, and we look forward to updating you on our results on the third quarter on our November call. Thanks, everybody.

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