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Macy’s (NYSE: M)
Q3 2024 Earnings Call
Dec 11, 2024, 8:00 a.m. ET
Content:
– Prepared Remarks
– Questions and Answers
– Call Participants
Operator:
Greetings and welcome to the Macy’s, Inc. third quarter 2024 earnings conference call. All participants are currently in a listen-only mode. A question-and-answer session will follow the presentation. Operator instructions are in place for the call, which is being recorded. Now, I will hand over the call to Pamela Quintiliano, VP of investor relations. Pamela, you may begin.
Pamela Quintiliano — Vice President, Investor Relations
Good morning, everyone, and thank you for joining us. Tony Spring, our chairman and CEO, and Adrian Mitchell, our COO and CFO, are also present on this call. Our third quarter 2024 press release, along with a Form 8-K and a presentation posted on our website, macysinc.com, will be referenced in today’s webcast. The Form 8-K includes revisions to historical financial statements impacted by previously disclosed immaterial misstatements. Our comparisons will refer to 2023 unless stated otherwise. Please note that all references to prior expectations and guidance pertain to information shared on our August 21st earnings call. Additionally, comp sales mentioned represent comparable owned plus licensed, plus marketplace sales for store locations unless specified otherwise.
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All forward-looking statements are protected under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Risks and uncertainties may lead to results differing from today’s expectations. Detailed discussions on these factors are available in our SEC filings. Non-GAAP financial measures will be used in today’s discussion, and further information on these measures can be found on our website. The call is being webcast, with a replay available approximately two hours post-call conclusion. I will now pass it over to Tony.
Tony Spring — Chairman and Chief Executive Officer
Thank you, Pam, and good
Good morning, everyone. As previously mentioned, Macy’s First 50 locations, Bloomingdale’s, and Bluemercury all showed positive results in the third quarter. We maintained effective cost controls, exceeded planned gains from asset sales, and are encouraged by the ongoing growth in comparable sales, which are higher than in the third quarter. Year to date, we have progressed with our Bold New Chapter strategy and are on track to achieve sustainable profitable growth.
Before delving into our financial performance for the third quarter, I would like to address the independent investigation regarding a small package delivery expense issue within one of our accrual accounts. The investigation has been completed, revealing that an individual deliberately made incorrect accounting entries starting in Q4 2021, acting alone and without personal benefit. These entries had a negligible impact on our financial results and did not affect our cash position, as all vendors were paid in full. Adjusted figures for fiscal years 2021, 2022, and 2023, as well as quarterly periods for 2023, can be found in today’s Form 8-K filing. Adrian will provide further details on the financial implications in his remarks.
Integrity is fundamental at Macy’s, Inc., and we uphold a culture of ethical behavior. Upon discovery, swift action was taken to investigate and rectify the situation. The individual responsible is no longer with the company, and additional controls have been implemented to prevent such incidents in the future. Moving on to the third quarter results, net sales of $4.7 billion aligned with our expectations. While there was positive momentum in First 50 locations and Bluemercury, there were challenges in other areas. Adjusted third quarter EPS of $0.04, inclusive of the delivery expense impact, benefited from accelerated asset sale gains.
We are pleased with our third quarter performance, attributing it to our teams’ proactive response to challenges such as unusual weather conditions and a busy hurricane season. By adjusting strategies and priorities, we successfully catered to our customers’ needs. Our Bold New Chapter strategy continues to progress, supported by data-driven initiatives and a solid financial position that allows us to invest in our long-term goals.
Under the first pillar of our strategy, focusing on strengthening the Macy’s brand, our First 50 locations have shown positive results.
The company achieved a positive 1.9% comparable sales growth, marking the third consecutive quarter of such growth and a 410 basis points outperformance compared to Macy’s overall sales. This success is attributed to favorable customer response to investments in staffing, merchandising, visual presentation, and events, resulting in a 400-basis-point increase in net promoter scores compared to the previous year. The implementation of dedicated staff for women’s shoes and handbags in approximately 100 locations has proven beneficial, with sales outperforming by around 600 and 700 basis points respectively year over year compared to other locations. These results emphasize the significance of providing dedicated customer assistance in high-touchpoint categories.
These insights, gathered from previous initiatives like the First 50 locations, are shaping our plans to expand similar strategies to more locations in 2025, to be further discussed during the fourth quarter earnings call. The focus on enhancing the customer experience extends beyond the test locations to all Macy’s stores, where efforts are being made to train colleagues in utilizing digital tools for improved customer service.
Additionally, efforts to revitalize the merchandise assortment are yielding positive results, with a shift towards more relevant brands and expanded offerings in customer-favored brands like en saison, Donna Karan, Steve Madden, Avec Les Filles, and Dolce Vita. The focus on providing appealing fashion and value extends to private label brands like Charter Club and Style & Co. Fragrances remain popular, and there have been improvements in men’s non-active apparel, handbags, and home sales.
The overall customer experience has been positively impacted, as reflected in the increase of the net promoter scores across all Macy’s stores. The closure of approximately 65 non-go-forward locations is expected to take place after the holiday season.
In line with the Bold New Chapter strategy, the company is also focusing on accelerating luxury growth, with both Bloomingdale’s and Bluemercury reporting positive third-quarter comps. Customers are responding well to the range of products, price points, and brands offered by these entities. Bloomingdale’s continues to excel in the luxury sector, with notable growth in women’s advanced contemporary apparel and beauty categories. New brands like SKIMS and Jenni Kayne have been well-received, and there are positive signs of improvement in the handbags segment.
Despite challenges in certain areas of the home store, the company remains optimistic about the momentum and economic prospects of its non-go-forward store deals. The luxury segment, with its aspirational positioning and unique price points, remains a key focus for growth and differentiation.
The From Italy with Love campaign was a successful initiative that drove traffic and enhanced the brand’s visibility. It showcased the best of Italy in the U.S. across various categories like fashion, design, cuisine, and culture through exclusive products from renowned partners and new brands, generating approximately 2 billion media impressions. This campaign exemplifies Bloomingdale’s commitment to connecting with customers through unique products and experiences, solidifying its position as a local leader in its markets. Bloomingdale’s recently launched its fourth Bloomie’s store in Shrewsbury, New Jersey after conducting extensive customer and market research. This women’s-only store offers a carefully curated selection of products and has been well-received.
Bluemercury achieved positive comparable sales growth for the 15th consecutive quarter, with a 3.3% increase. During the quarter, popular brands like Sisley Paris, SkinMedica, and Augustinus Bader were expanded, and Victoria Beckham Beauty was introduced. The celebration of Bluemercury’s 25th anniversary included the launch of an enhanced website, a modernized store aesthetic, and the remodeling and opening of several locations.
Looking ahead, Bloomingdale’s is focused on simplifying and modernizing its operations to enhance the customer experience. Efforts to phase out legacy technology, improve search platforms, and optimize the supply chain have led to improvements in delivery speed and fulfillment. The company plans to open more stores and remodel existing ones in the coming quarter.
Overall, the company remains optimistic about its performance, with quarter-to-date sales trends exceeding expectations. Strategic holiday plans, including leveraging the Macy’s Thanksgiving Day Parade and engaging with customers through various touchpoints, are in place to drive sales during the festive season. The company’s marketing efforts, supported by high-profile collaborations and engaging content, aim to provide customers with compelling reasons to choose their brands for holiday shopping.
We are thrilled to announce the Macy’s gift influencers. The excitement is not just limited to Macy’s; Bloomingdale’s holiday campaign and iconic windows draw inspiration from its collaboration with Universal Pictures’ Wicked. The Wicked Good Holiday campaign features 100 exclusive products, 150 participating brands, and our largest Aqua collection to date. At Bluemercury, we are focusing on the gift of self-care with a range of unique skincare and beauty products, including new perfumes and gift sets from Parfums de Marly, Creed, Manucurist, and Flamingo Estate. Looking ahead, we are well-prepared to capture attention through carefully curated assortments, relevant messaging, exceptional customer service, attractive value offerings, and promotions, all backed by improved operations. Now, let me introduce Adrian.
Adrian Mitchell, Chief Financial Officer and Chief Operating Officer, will now provide an overview of our third-quarter performance. Our team’s dedication and adaptability in a dynamic environment, positive response to customer experience investments, and ongoing productivity initiatives have contributed to our performance. The adjustments to our financial statements have been reviewed independently and found to have an immaterial impact on our financial results. There were erroneous entries totaling $151 million from the fourth quarter of 2021 through November 2nd of this year, alongside delivery expenses of $4.36 billion during the same period. Despite these adjustments, there was no impact on revenues, cash, or inventories as all vendors were paid in full. Revised financial information is available in today’s press release and 8-K. Our third-quarter results show a 2.4% decrease in total net sales to $4.7 billion compared to last year. Owned AUR increased by 3.7%, driven by category and product mix. The total enterprise comps were down 1.3%. Macy’s go-forward business comps, including Macy’s, Bloomingdale’s, and Bluemercury locations plus digital, declined by 0.9%. Macy’s net sales decreased by 3.1% with comps down by 2.2%. Unseasonably mild temperatures impacted fall product sales by approximately 1 point of comp sales. Macy’s go-forward business comps, including around 350 locations and digital, were down by 1.8%.
In the latest report, Macy’s showed positive signs for future growth. The comp sales increased by 1.9%, with Bloomingdale’s and Bluemercury also performing well in the third quarter. Bloomingdale’s saw a 1.4% rise in net sales and a 3.2% increase in comps, while Bluemercury experienced a 3.2% growth in net sales and a 3.3% rise in comps. However, other revenues declined by 9.6% to $161 million.
Net credit card revenues reached $120 million, with profit share surpassing expectations and net credit losses remaining consistent. Macy’s Media Network revenues stood at $41 million, benefiting from higher advertiser and campaign counts.
The gross margin rate for the current and previous quarters was adjusted for delivery expenses, resulting in a 39.6% rate, down 60 basis points from the previous year. Merchandise margin declined by 70 basis points, partly due to the change to cost accounting and product mix.
Efforts were made to manage inventory effectively, with end-of-quarter inventories up by 3.9% compared to the previous year. SG&A expenses amounted to $2.1 billion, representing 42.1% of total revenue. The company focused on controlling costs and making strategic investments to enhance customer experience.
Real estate activities yielded gains of $66 million from asset sales, with plans to close about 65 locations by the end of the year. Adjusted third quarter EPS was $0.04, driven by higher asset sale gains and offset by delivery expense adjustments.
Cash flow from operating activities was $30 million, impacted by lower earnings. Capital expenditures totaled $649 million, resulting in a free cash flow outflow of $492 million. The company paid $144 million in cash dividends and conducted a $220 million tender offer to reduce liabilities and support growth initiatives. The board continues to assess capital allocation strategies to support future growth.
In order to align with our priorities of maintaining a healthy balance sheet, investing in profitable growth initiatives, and returning capital to shareholders, we need to review our outlook for the fourth quarter and full year. Here are some important points to keep in mind. Firstly, adjustments have been made to account for historical delivery expenses and updated expectations for the fourth quarter and fiscal year due to inaccuracies in the forecasting of small package delivery expenses. Secondly, we anticipate continued consumer spending constraints and expect consumers to be selective in their discretionary purchases. Lastly, it’s important to note that the fourth quarter of 2024 will be a 13-week period, unlike the 14-week period in the fourth quarter of 2023.
The additional week in fiscal 2023 contributed $252 million to net sales. For the upcoming fourth quarter, we anticipate net sales to range from $7.8 billion to $8 billion. On a 13-week basis, we expect net sales to decrease by approximately 1% to increase by around 1.5%. While there has been improvement in comparable sales trends compared to the third quarter, there are still significant volume weeks ahead. Although we are encouraged by recent trends, we do not anticipate a complete recovery of lost sales in cold weather products, particularly due to this year’s shorter holiday season. Other revenues, including credit card revenues, are projected to be approximately $206 million to $216 million. The gross margin rate is expected to be approximately 35.3% to 35.7%, factoring in an adjustment for delivery expenses.
Looking ahead to fiscal 2025, we anticipate a challenging promotional environment and are focused on managing inventory risks, especially for seasonal goods. Our end-of-quarter inventories are expected to remain relatively flat compared to last year. Adjusting for accounting changes, inventories are projected to decline slightly. Asset sale gains are predicted to be around $32 million, primarily due to accelerated asset monetizations. Adjusted diluted earnings per share (EPS) for the quarter are expected to be between $1.40 to $1.65.
For the full year 2024, our net sales are estimated to be approximately $22.3 billion to $22.5 billion. Macy’s, Inc. comps, including non-go-forward locations and digital channels, are anticipated to decline by 1% to stay flat, with improvements from the third quarter levels. Macy’s nameplate go-forward locations and digital are expected to show a similar trend, while our luxury nameplates are projected to see growth of 2% to 2.5%. Other revenue, including credit card revenues, is forecasted to be $680 million to $690 million. Gross margin as a percentage of net sales is expected to range from 38.2% to 38.3%. This updated outlook reflects adjustments for delivery expenses and changes in the promotional landscape.
Adjusted full-year gross margin outlook remains relatively consistent with last year’s adjusted rate, with SG&A as a percentage of total revenue expected to decrease slightly. Asset sales gains and proceeds are higher than previously anticipated. Adjusted EBITDA is forecasted to be slightly lower compared to the prior outlook, including an adjustment for delivery expenses. Annual adjusted diluted EPS outlook has been revised, reflecting a lower range due to the adjustment for delivery expenses. Capital spend is expected to be lower compared to the previous year, reflecting a commitment to efficient capital allocation.
As we approach fiscal 2025, we are focused on balancing consumer value with profitable growth. Recent results have been positive, with growth in sales and improved customer satisfaction scores across our brands. We are implementing strategic initiatives to drive growth and efficiency, including operational improvements and inventory management enhancements. Our ongoing efforts, such as the closure of non-go-forward locations, aim to position Macy’s for profitability in the future.
During the question-and-answer session, Tony discussed the drivers behind the improved sales performance in the second half of the year and highlighted initiatives contributing to sustainable growth. The company’s positive fourth-quarter comp guidance indicates progress towards achieving positive comps for the first time in three years. Discussions also touched upon the sustainability of gross margins and potential areas for future growth.
Yes, we are very pleased with the positive developments we are observing in our top-line performance. The initial 50 locations, showing a 1.9% growth for the quarter, are a strong indicator of Macy’s brand potential. We are excited about expanding our First 50 program in 2025, which we will discuss further during the fourth quarter earnings call. Progress is evident across various categories such as tailored clothing, dresses, fragrances, and mattresses, signaling sustainable growth opportunities for the upcoming fiscal year. Bloomingdale’s and Bluemercury are also showing continued strength, with Bloomingdale’s team effectively capitalizing on recent successes to position the brand for further expansion. The private brand reinvention is nearly complete, and we anticipate the home store to provide a positive impact moving forward. Despite challenges faced this quarter, we believe our strategic focus on merchandise assortment, category mix, brand positioning, and pricing strategies positions us well for future improvement.
Adrian Mitchell, the Chief Financial Officer and Chief Operating Officer, expressed optimism about the future trajectory and commitment to the Bold New Chapter initiative, emphasizing a laser focus on core business fundamentals. Encouraging top-line momentum is evident in various store segments, indicating a positive outlook. While navigating a competitive market environment, improvements in gross margins are anticipated through a strategic blend of factors. Although challenges like weather impacts and customer preferences for value-oriented offerings exist, efforts are being made to enhance inventory control, meet customer demands, and deliver exceptional experiences. Continued investments in business fundamentals aim to drive profitable sales growth, with a notable focus on operational execution and customer satisfaction. The quality of execution, highlighted by improved in-stock levels, faster delivery, and record-high NPS scores for Bloomingdale’s and Macy’s, underscores the positive outcomes resulting from ongoing transitions and investments.
Great! Best of luck, Adrian Mitchell, Chief Financial Officer and Chief Operating Officer. Thank you, Matt. Operator, the next question is from Brooke Roach of Goldman Sachs. Please go ahead.
Brooke Roach, Analyst: Good morning, and thank you for taking our question. Tony, as you invest in customer experience and staffing in First 50 and select shoe and handbag initiatives, what gives you confidence that these test locations are transferable to a broader swath of the fleet? Do you expect these to be accretive to profitability as we move into 2025 given the additional SG&A investments? And for Adrian, could you elaborate on your updated outlook for gross margins for the fourth quarter and what you are seeing in the promotional environment? What changes have you made to your promotional calendar versus 90 days ago, and how should we think about the opportunity to recapture that pressure into 2025?
Tony Spring, Chairman and Chief Executive Officer: Good morning, Brooke, and thanks for the question. The investments we’ve made in our First 50 locations and the 100 other pilot shoe and handbag doors give us confidence that the customer is responding positively to the changes we’re implementing. We’ve seen three consecutive quarters of comp store sales growth and an acceleration of comp growth in the First 50 stores. Additionally, the Net Promoter Score has increased over 400 basis points for a third consecutive quarter, the highest scores on record for the Macy’s brand. These indicators show that the changes we’re making are resonating with customers and improving their shopping experience. Regarding the affordability of these investments, we are making strategic choices to ensure they are accretive to overall profitability through adjustments in other areas of the business. Our priority this year is to enhance the Macy’s experience, initially focusing on 50 stores, with plans to expand in the future.
Adrian Mitchell, Chief Financial Officer and Chief Operating Officer: Good morning, Brooke. Regarding the gross margin outlook, our teams are executing well despite various factors we are navigating. For the fourth quarter, there is an 85 basis point adjustment for delivery expenses, and we have provided adjusted numbers for comparison in our press release and Form 8-K. Our outlook reflects the competitive and promotional landscape we are facing, with consumers remaining cautious in discretionary spending. We are focused on offering value while maintaining profitability in light of these challenges.
In order to increase market share, we are facing various challenges such as weather, competition, and promotions in the marketplace. However, we are confident in our marketing calendar, the new holiday season content, the quality of our merchandise, and the execution across all our operations, markets, and channels. We are pleased with the sales improvement compared to the previous quarter, but we are also focusing on balancing profitability, inventory management, and sell-through quality as we navigate through the rest of the season.
Brooke Roach — Analyst: Thank you for the information.
Tony Spring — Chairman and Chief Executive Officer: Thank you, Brooke.
Operator: Next question is from Ashley Helgans of Jefferies. Please go ahead.
Unknown speaker — Jefferies — Analyst: Hi, it’s Blake on behalf of Ashley. Thank you for taking our question. Regarding the First 50 stores, could you provide insights on average unit retail (AUR) versus traffic and conversion rates? Additionally, are you attracting new customers to the First 50 stores who may not have previously shopped at Macy’s? How does this new customer differ from the traditional Macy’s shopper?
Tony Spring — Chairman and Chief Executive Officer: Thanks for the question, Blake. We have observed consistent performance metrics in the First 50 stores, particularly in terms of AUR, IPT, average order value, customer numbers, and conversion rates. The growth in AUR and average order value has been the main driver of this performance. Existing customers are spending more and visiting more frequently, while we are also starting to see some new customers. It’s worth noting that most new customers tend to come through our digital channels, presenting an opportunity for us to convert them into omni-channel consumers. Our learnings from a variety of store types in different locations will inform our expansion plans for the First 50 stores in the future.
Adrian Mitchell — Chief Financial Officer and Chief Operating Officer: I agree with Tony. We have seen improvements in NPS for both Macy’s and the First 50 stores, with the latter showing even more significant progress. Our investments in categories like ready-to-wear, women’s shoes, and handbags have resulted in notable growth. Despite the challenges faced in 2024, we are focused on leveraging these proof points to guide our strategies for 2025.
Blake: Thank you for the detailed insights.
In the past few quarters, we have seen consistent year-over-year growth, with a significant lead of over 400 basis points compared to stores that did not undergo changes. The 100-store test was pivotal for us to showcase the impact of implementing key changes in these stores, proving that these changes can indeed make a difference and be replicated on a larger scale. We are highly encouraged by the results and have gained valuable insights. We have identified further opportunities that we plan to implement in 2025, and we are optimistic about our progress so far.
Thank you for the well wishes, and we appreciate your support during the holiday season.
Regarding the increase in store closures from 55 to 66, this decision was driven by our strategy to optimize profitability and productivity by monetizing less profitable locations promptly. Our target remains at around 150 closures in total over the next three years, with updates to be provided in 2025. The focus is on creating a fleet of stores that can sustain profitable growth for the company.
We have expanded our Macy’s small format stores to 24 locations, with positive learnings from the initial phase. Bloomingdale’s also opened its fourth small format store in Shrewsbury, New Jersey, with a promising response from customers. As for margins, we have seen a decrease of 70 basis points, following a 210-point increase last quarter. We are actively managing delivery expenses and are constantly evaluating strategies to improve margins moving forward.
Thank you for your questions, and now I’ll pass it over to Adrian to provide more insights on the financial aspects.
Rewarding enterprise and capital return to our shareholders is a top priority for us. In terms of margins, the adjusted financials show some decline in merchandise margin due to factors like product mix and competitive environment. However, we are making improvements in managing delivery expenses and execution quality. Our focus remains on managing profitability and achieving profitable growth in the future.
Tony Spring, Chairman and CEO, added that the conversion to cost accounting affected gross margin in the second and third quarters. Looking forward to 2025, we aim to complete these conversions for a clearer view of the company’s natural margin.
Analyst Dana Telsey thanked the speakers before Oliver Chen from TD Cowen asked about guidance assumptions and private brand development. CFO and COO Adrian Mitchell explained that the guidance range indicates year-over-year growth on the high end and a slight decline on the low end. Progress has been seen in performance trends, with optimism for revenue improvement. Private brands play a key role in meeting consumer demands for value and choice, with successful responses seen in programs like Cashmere and Charter Club.
We have strengths in different areas of our private brand business within the men’s segment, broken down into specific categories. 85% of our business comprises market brands, which are equally important for offering a wide range of products at various price points. This ensures that customers can find value across our brands. Analyst Oliver Chen recognized the progress made with the First 50 initiative and inquired about the implementation timeline. Chairman and CEO Tony Spring highlighted the asset-light strategy of the First 50, emphasizing the focus on operational efficiency and merchandising. He discussed the ease of replicating certain aspects such as floor layout and visual enhancements, as well as the variable staffing strategy based on store size. CFO and COO Adrian Mitchell joined the discussion, addressing questions about fourth-quarter guidance and the potential impact of store closures on margins in 2025. They noted the positive trends in sales and the plans to improve performance across various store segments. Additionally, they discussed the timeline to bridge the performance gap between the First 50 stores and others, aiming for a more uniform growth trajectory.
Our business is showing improvement across various aspects. We are observing positive trends in digital sales, stores, Macy’s nameplate, luxury brands including Bloomingdale’s and Bluemercury, as well as in other stores that have not yet received investments. Our approach is focused on lifting all aspects of our business as part of a Bold New Chapter. We have made strategic investments in initiatives like First 50 and digital, which are now starting to yield positive results. The momentum we are seeing is encouraging, especially as these efforts work together synergistically.
Looking ahead, we aim to replicate successful changes from the First 50 stores to a larger scale, efficiently and effectively. We are committed to managing a healthy balance sheet, optimizing our store portfolio, and streamlining our supply chain network to further capitalize on monetization opportunities. These strategies will be elaborated upon in our upcoming fourth quarter earnings call.
We remain focused on the fundamentals of our business, including top-line growth, bottom-line performance, and margin optimization. In a competitive market, we are mindful of attracting customer spending while navigating challenges. Despite the road ahead, we are optimistic about the progress we have made this year through investments, learning, and experimentation.
Regarding the penetration of top-performing categories in the fourth quarter, we anticipate positive trends which will impact our guidance and margin forecasts. We continue to evaluate our assortment of brands in shoe and handbag categories, ensuring we have the right mix to meet customer demands and drive growth. Our inventory levels are expected to remain stable by the end of the year, with adjustments made to optimize order books for future success.
Hello. How far ahead are you making adjustments to your order book? In preparation for 2025, where do you foresee the need for adjustments? Thank you. — Tony Spring, Chairman and Chief Executive Officer
I will address a couple of questions, and Adrian can provide additional insights. The adjustments in our 100 stores, particularly between shoes and handbags, primarily revolve around staffing. We are streamlining assortments by reducing duplication to enhance the shopping experience for customers.
The key impact we are observing is the improvement in customer service, with staff readily available to assist in retrieving items and unlocking handbags for customers. This has given us some cautious optimism regarding further enhancements we can make to our stores’ offerings. Regarding inventory levels, we have already made significant adjustments to our order books for 2025 based on a forecast of flat to slightly decreased figures. Inventory management does not appear to be a concern heading into 2025. Our focus is on sustaining the positive revenue trends we are witnessing, expanding initiatives such as First 50, advancing our private brand reinvention, expanding brand presence across more locations, and ensuring consistency in store performance.
— Tony Spring, Chairman and Chief Executive Officer
Thank you. — Robert Drbul, Analyst
Operator: The next question is from Paul Lejuez of Citi. Please proceed. — Paul Lejuez, Analyst
Hi, thank you all. Have promotions been more prevalent in the current quarter compared to previous periods? How much do you attribute the increased sales to heightened promotional activities year over year? Additionally, with the planned closure of 55 stores by year-end, how does this impact your e-commerce business in those markets? Will it pose a drag on comparable sales going into the next year, or could it potentially drive comps due to sales shifting online? Thank you. — Paul Lejuez, Analyst
Hi, Paul. Thanks for your question. I will address the first part, and Adrian will cover the latter. The current quarter’s promotions are approximately consistent with last year. Interestingly, our discount rates year over year remain stable. The margin impact is influenced by the sales mix and any necessary liquidations of aged inventory. While a small portion of aged inventory may exist, it is more significant within our current sales mix. Additionally, weather conditions affecting cold-weather product sales could impact margins positively if colder temperatures drive demand later in the quarter. Despite the promotional landscape, we are encouraged by regular-priced items’ performance and overall discount rates. Macy’s inherently operates as a promotional department store, making it challenging to introduce substantial additional value during peak shopping seasons. This positioning often draws customers to Macy’s for gift-giving occasions.
— Tony Spring, Chairman and Chief Executive Officer
In order to provide our guidance for the quarter and set ourselves up for improvement in 2025, Adrian Mitchell, the Chief Financial Officer and Chief Operating Officer, discussed the closures during a conversation with Paul. It was emphasized that the closed stores were underperforming and faced unfavorable economics due to shifting customer preferences and operational challenges. The focus was on maintaining a strong omni-channel presence, which has shown to yield the best sales performance.
The closure impact on comparable sales was expected to be limited, especially considering the majority of closures were in markets with other Macy’s locations. Efforts were underway to retain customers through a targeted strategy involving digital, omni, and store-only customers. The goal was to cultivate a healthy fleet to support profitable growth in the future.
In response to a question from Alex Straton of Morgan Stanley, Adrian elaborated on the digital challenges faced in the third quarter and outlined improvements made in the digital experience, such as SEO enhancements and faster upload speeds. These initiatives have shown positive results in metrics like conversion rates, website traffic, and customer satisfaction scores.
Looking ahead to 2025, Tony Spring, the Chairman and CEO, did not provide formal guidance but highlighted the strategic focus on enhancing the digital experience and driving omni-channel growth. This shift towards a better shopping experience was seen as crucial for long-term success.
Our focus has been on enhancing the customer experience by improving various aspects of our strategy. About a year to a year and a half ago, Tony, the team, and I conducted research that led to rebuilding our strategy. We identified areas such as search result quality and speed of delivery where we were underperforming. Over the past year, we have made significant improvements in these areas, resulting in positive feedback from customers and increased spending.
Tony Spring, our Chairman and CEO, emphasized that the collaboration between our digital, merchant, and marketing teams has been particularly strong. Looking ahead to 2025, Tony expressed confidence in the progress we have made, highlighting the completion of key initiatives such as reducing delivery expenses, completing cost accounting conversions, and reinventing private brands.
Adrian Mitchell, our CFO and COO, added that our capital allocation strategy has shifted towards harvesting investments, with a focus on scaling for the future. He noted the decreasing capital expenditures over the years while emphasizing the returns generated from our past investments.
In response to an analyst’s question, Tony discussed the performance of our furniture and handbag businesses, mentioning improvements in handbags and addressing challenges in furniture. He also provided insights into post-Cyber Monday trends and expectations for the holiday season and beyond.
Overall, we are optimistic about the future growth opportunities, including the introduction of new brands, expansion of Bloomingdale’s and Bluemercury, and the continued focus on enhancing the overall customer experience.
After the peak season, trends in the furniture and mattress businesses tend to develop differently. The big-ticket business is stable overall, with mattresses showing a better trend compared to furniture. Until interest rates decrease slightly, the big-ticket sector may continue to face pressure. Our new big-ticket team is diligently working on our assortment, with progress being made, particularly in mattresses. We anticipate opportunities in the latter part of 2025 for the furniture segment due to longer lead times.
Regarding handbags, Bloomingdale’s business is experiencing strength in sales driven by newness and renowned brands like Coach, Tory Burch, and Longchamp. Post-holidays, consumer behavior remains uncertain due to factors like inflation, but there is a noticeable interest in shopping across various categories. We are optimistic about the outlook for all our brand names.
As we transition from the third quarter to the fourth quarter, we are encouraged by the positive trend and are committed to delivering strong results for the remainder of 2024 and beyond into 2025. Wishing you and your families a joyful holiday season. Thank you for your time and questions.
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