Macy's Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 22, 2023

There are 15 speakers on the call.

Operator

Greetings and welcome to the Macy's Inc. 2nd 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. As a reminder, this call is being recorded.

Operator

I will now turn the call over to Pamela Quintiliano, Vice

Speaker 1

Our Chairman and CEO Tony Spring, President, Macy's Inc. And CEO Elect and Adrian Mitchell, our COO and CFO. Along with our Q2 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.

Speaker 1

All references to our prior expectations, outlook or guidance refer to information provided on our June 1 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.

Speaker 1

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 2 hours after the conclusion of this call. With that, I am going to hand it over to Jeff.

Speaker 2

Good morning, everyone, and thank you for joining us. I'm going to begin today's call with a review of our 2nd 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 5 growth factors And the merchandising strategy. From there, Adrian will provide additional detail on the 2nd quarter and our 3rd quarter and full year outlooks. He will also discuss opportunities under his expanded role as COO.

Speaker 2

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 Q2 results. We achieved net sales of $5,130,000,000 a gross margin rate of 38.1 percent and an SG and A rate 37.5 percent.

Speaker 2

Adjusted diluted EPS of $0.26 primarily benefited from better than expected sales, gross margin And SG and 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 Q1 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 2nd quarter with inventories down 10% to last year and down 18% to 2019. We were disciplined with our approach to inventory commitments and flexed the cadence and depth of promotions and markdowns, utilizing our data driven tools to reduce the length of seasonal Thanks to our cross functional teams for being nimble, flexible and embracing new ways of working.

Speaker 2

Entering the 3rd Store floors and online are less cluttered and easier to navigate. Content is fresh and seasonally appropriate With open to buy and the ability to chase into areas of strength, all of which improves the omni channel shopping experience. At Macy's, net sales declined 9.3% and comparable sales declined 8.2% on an owned plus license basis. Aged inventories were roughly 20% below last year's levels and warm weather inventories were about 40% lower. Top performing categories include beauty, particularly fragrances and prestige cosmetics, women's career sportswear and men's tailored clothing.

Speaker 2

We also continue to realize improvements in the soft home categories, including textiles and housewares. Active, casual and sleepwear remain challenged. We are working on solutions to improve trends in these categories. In the near term, Active should benefit from production of Nike men's, women's and kids online and in 75 doors in October and the rollout to more than 200 doors this spring. This morning, we are also pleased to announce that select Under Armour men's product will be available in 150 stores and online beginning in February.

Speaker 2

The return of Nike and Under Armour speaks to the strength and reach of Macy's and our ability to attract sought after wholesale partners. Looking ahead, we're working with both brands as well as potential new partners on how to expand further. Comparable owned sales per store within stores in our Macy's off price concept Backstage outperformed Macy's full line stores in which they operate by roughly 2 At Bloomingdale's, net sales declined 3.6% and comparable sales were down 2.6% On an owned plus license basis, beauty, women's contemporary and designer apparel and shoes were our best performing categories, While handbags, men's and dresses were challenged. Bloomingdale's focus remains on being the winning option for multi branded upscale retail. During the quarter, we introduced HOKA, a leading active shoe brand that is highly relevant to our consumer and it has been selling out.

Speaker 2

Bloomingdale's outlet outperformed full line Bloomingdale's locations by about 800 basis points. Later this month, we will be opening our 21st outlet, which will be located in Christiana, Delaware. At Blue Mercury, net sales rose 5.6% and comparable sales increased 5.8%. Customers continue to respond well to our skincare and color cosmetic brands. While second quarter results largely exceeded our They were promotional and markdown driven, which makes it difficult to decipher any potential shifts in consumer health.

Speaker 2

As we plan the remainder of the year and we think about 2024, we remain cautious on the pressures impacting our customer, Especially at Macy's, where roughly 50% of the identified customers have an average household income of $75,000 or under. Over the last several quarters, we have seen the Macy's customer more aggressively pull back on spend in our discretionary categories. They are not converting as easily and becoming more intentional on the allocation of their disposable income with an ongoing shift to services We cannot predict when macro pressures will ease and are focused on controlling what we can control. However, we believe our strong balance sheet, continued disciplined approach to inventories and fortification of fundamentals position us well. Today, we are reading and reacting to shifting consumer preferences in real time.

Speaker 2

We have remixed category and brand level receipts, Pulled back on what's not working and chased into areas of strength. As we look to the remainder of the year, we are confident in the thoughtful and Strategic promotional calendar and offerings we have planned and our ability to pivot to the right inventory at the right time and right value. We will continue to leverage our data science tools to refine inventory composition, breadth and depth on a weekly basis And a further streamlined decision making to efficiently find and execute compelling opportunities that had a positive impact both near and longer term. At Macy's, for back to school, we have a compelling mix of relevant national brands, including Jordan Kids, Levi's and Ralph Lauren, And are also offering a better selection of everyday basics, including uniforms. For holiday, we are further amplifying Our strength is a gift giving destination.

Speaker 2

We have elevated the quality of our products. We have built strong value across our categories from top market to Private Brands. And Beauty and Gifting are a more significant piece of our 4th quarter strategy, accounting for over 40% of Macy's brand sales versus mid-30s during the rest of the year. We anticipate a strong holiday for toys and we will be offering a Disney 1 100th anniversary collaboration In store and online, this is the start of a longer term strategic partnership with Disney and Toys R Us that will have elevated differentiated across categories brought to life through engaging retail experiences. At Bloomingdale's, this holiday season, we are partnering with many of our luxury brands To introduce high touch, unique experiences, events and pop ups curated around the interests and shopping patterns of our best customers.

Speaker 2

These activations have been designed to create animation and inspiration in our stores and strengthen our client relationships. And at Blue Mercury, we have an expanded fragrance offering for holiday and we will launch our newest proprietary brand, which is focused on body and back products. We are excited for the back half in all the ways we will serve our customer. Adrian will discuss our full year guidance in detail shortly. But it is important to note that Despite elevated headwinds for credit card revenue and asset sales relative to prior outlook, we are reiterating our full year adjusted diluted EPS guidance.

Speaker 2

Before turning it over to Tony, I want to congratulate our teams on several milestones. At Macy's, we recently introduced our newest private brand, On 34th, its target demographic is the 30 to 50 year old woman on the go. Commentary has been very positive with approximately 80% of product receiving 4 stars or above. At Bloomingdale's, we soft launched Marketplace in July. Customers have been discovering and responding well to the new categories and brands offer.

Speaker 2

And at Blue Mercury, we moved our headquarters from Washington DC To New York City, the team is energized by this important step in its growth trajectory, which places them in one of the major beauty centers of the world, brings cost efficiencies and allows them to further benefit from the existing infrastructure of Macy's Inc. Looking ahead, we believe that our improving underlying Fundamentals, 5 growth vectors and elevated customer experience are key components to relevancy and success as a modern department store. With that, Tony is going to discuss our 5 growth vectors and his approach to merchandising.

Speaker 3

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've always believed the 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 Monge, our Chief Customer and Digital Officer.

Speaker 3

Max has over 20 years of experience at McKinsey, most recently as a senior partner co leading their next gen 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 5 growth vectors. These vectors are intertwined with the overarching strategy of keeping the customer at the center of everything we do.

Speaker 3

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 3 key pillars: 1st, brand stewardship 2nd, design with intention and execute with attention and third, provide a meaningful value equation.

Speaker 3

From sourcing to marketing to merchandising, the teams have worked together to reflect our customers' wants and needs. They have life stages to create product and brands that authentically resonate with and capture the hearts of current and prospective customers. With the reinvigoration of our proprietary portfolio, we expect to further drive customer loyalty by complementing our national brand matrix with differentiated products, which should ultimately benefit sales and gross margin. Through 2025, we will be refreshing or replacing All existing brands in our portfolio and plan to introduce 4 new ones, including on 34. As part of our updated private brand strategy, last year we successfully refreshed women's INC.

Speaker 3

In the second quarter, momentum for this Popular brand continued as sales once again outperformed its broader apparel segment. In September, we'll be introducing the next phase of INC's refresh. Our second growth vector is small store format. We are pleased with the performance of our 10 small format locations, which include 8 Macy's and 2 Blumys. Macy's and Blumys doors that have been opened over a year had a positive comparable owned plus license sales growth.

Speaker 3

Last weekend, we opened our 9th small format Macy's just outside Chicagoland area in Indiana, and in September, we'll open 2 more. One will be in Las Vegas and the other will be in Boston, which is our 1st smaller format in the Northeast. In November, we will open a location in San Diego. Bloomingdale's is also adding to its small format portfolio with plans to open a 3rd location in November. The We'll be located in Seattle, which is a new brick and mortar market for the brand.

Speaker 3

Our 3rd growth vector is digital marketplace, The 1 year anniversary of our marketplace launch. We now offer approximately 13.50 brands on the platform, Up from 500 last fiscal year end, and we grew gross merchandise value by over 116% from the Q1. At Macy's Marketplace, we continue to see significant cross shopping, higher average order value and higher units per order. As Jeff mentioned earlier, we recently introduced Bloomingdale's marketplace and are pleased with the early results. Our 4th growth vector is luxury, which spans Bloomingdale's, Blue Mercury and Macy's Beauty.

Speaker 3

At Bloomingdale's, we continue to optimize With our customers and elevate our luxury shopping experience. On a trailing 12 month basis, our top of the list loyalty customer base grew in both count And spend. We know this customer loves the Bloomingdale shopping experience, and we have remodeled the Bloomingdale stores with larger concentration of luxury brands and products. Improvements have focused on areas with higher luxury goods penetration, including beauty, fragrances, shoes, handbags and fine jewelry. Thus far, we have remodeled 5 locations and believe there is opportunity for more.

Speaker 3

At our smallest nameplate, Blue Mercury, we realized the 10th consecutive quarter of comparable sales growth. Active customer count on a trailing 12 month basis rose 20%, driven primarily by new customers. Glen Mercury's consistently strong performance is a testament to the work the team is doing to evolve the brand and product mix to stay ahead of trends and offer a more exclusive experience To the luxury skincare and beauty customer. At Macy's Beauty, we're expanding our luxury offering with an emphasis on newness, Freshness in our core market brands and in store service. As we prepare for the holiday, we will lean into our leading fragrance position across our omni channel shopping experiences and we'll introduce 6 additional beauty remodels bringing the total to 39 locations.

Speaker 3

Our 5th growth vector is personalized offers and communications. It amplifies strategies across our business to increase customer lifetime value and loyalty by We recently launched several new tools that will allow us to speak even more consistently to our customers across touch points, Personalized conversations and increase the amount of behaviorally driven marketing. I am confident that our 5 growth Should drive incremental sales growth beginning next year, and I look forward to continuing to update you on our progress. Before turning the call over to Adrian, I want to provide a few Thoughts on our overarching merchandise strategy. Over the last several months, I've been spending time with the Macy's team discussing the right balance of private Market Brands and the importance of duration.

Speaker 3

We're working together to combine their ideas and my experiences at Bloomingdale's. Currently, we are targeting 2 major opportunities. 1st, going after the right categories, brands and products that excite our customers and second, Maximizing sales and market share opportunity in underpenetrated categories where customers have signaled demand. In addition, We're exploring how we can further establish ourselves as a compelling wholesale partner for current and potential top market brands. The upcoming additions of Nike and Under Armour are 2 great examples.

Speaker 3

We are a business committed to transforming even in an environment that's unpredictable. Despite the macro conditions and challenges, we remain focused on satisfying our customers' desire to shop off price to luxury, digitally, On mall or off mall and from private brands to up and coming and established national brands. Within that framework, our multi channel, multi generational and Multi category platform is an advantage to address changing demand. I have confidence in our strategy and the team's ability to execute, which sets us up for success even in this uncertain environment. With that, let me turn it over to Adrian.

Speaker 4

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 3 fundamental areas of opportunity that we identified to build a faster, more flexible and more efficient operating model. 1st, improving the end to end omni channel shopping experience.

Speaker 4

2nd, 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 2nd quarter performance for our 5 value creation levers.

Speaker 4

First, omni channel sales. Net sales of $5,130,000,000 declined 8.4% versus the prior year, slightly above the high end of our outlook. Comparable sales on an owned plus license basis decreased 7.3%. Owned AUR rose 4 point 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.

Speaker 4

Other revenue of $150,000,000 were 2.9 percent of net sales. Macy's Media Network revenue was flat to last year at $30,000,000 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 $84,000,000 year over year to $120,000,000 and represented 2.3% of net sales. We experienced an increased rate of delinquencies within the credit card portfolio across all stages of aged balances. While we had expected delinquencies to rise as part of our normalizing credit environment, the speed at which the increase for us and the broader credit card industry since our Q1 earnings call was faster than planned.

Speaker 4

This negatively impacted second quarter results and And led to an increase in the portfolio's bad debt outlook. As a reminder, credit card revenues for the quarter include the pro rata recognition of the updated annual bad debt assumption. We will discuss our annual outlook inclusive of the updated bad debt assumptions within the credit card The second value creation lever is gross margin. Our gross margin rate was 38.1%, 80 basis points below prior year, but above our outlook. Merchandise margin was 130 basis points lower than last year.

Speaker 4

During the quarter, we leveraged our data driven processes And tools to maximize margins and sell throughs of excess spring seasonal receipts. We surgically implemented clearance markdowns and promotions, which While above last year's levels were lower than forecasted in our prior outlook. Merchandise margin also impacted by unfavorable category mix shifts And a shift in the timing of shortage recognition, partially offset by better inbound freight charges from our cost savings efforts. In relation to shortage, we added a June physical inventory count in certain categories with low RFID penetration. This helped us better understand shortage trends and informed our outlook and approach to receipt planning for the remainder of the year.

Speaker 4

The count did not materially change our annual assumption, but it did provide actuals for the categories counted in the second quarter. As a result, we adjusted our shortage accrual, shipping a portion of the recognition out of the 4th quarter and into the second and third quarters. Lastly, delivery expense decreased 50 basis points from the prior year, primarily due to improved carrier rates from contract renegotiations, As well as lower fuel costs and lower vendor direct volume. Now let's turn to our 3rd value creation lever, inventory productivity. End of quarter inventory was down 10% year over year and down 18% to 2019, which should represent a low point for the fiscal year.

Speaker 4

Trailing 12 month inventory turnover was roughly flat for last year. Inventory management is a key tenant to further improve the omni channel customer experience. We're committed to having current and compelling product at the appropriate receipt levels based on expected sales demand. Expense discipline is the 4th value creation lever. SG and A expenses of $1,980,000,000 were better than our expectations, Declining $31,000,000 or 1.5 percent from prior year.

Speaker 4

SG and A as a percent of total revenue Was 37.5%, 300 basis points higher than last year reflecting the decline in year over year sales. 2nd quarter adjusted diluted EPS was $0.26 versus $1 in 20.22. Better than expected sales, Gross margin and SG and A were offset by credit card revenues and shortage, which negatively impacted EPS by $0.11 And $0.04 respectively relative to the midpoint of our prior outlook. Combined, this was roughly a $0.15 impact Lastly, the 5th value creation lever, capital allocation. During the first half, we generated $271,000,000 of operating cash flow versus $303,000,000 last year.

Speaker 4

The change was primarily due to lower earnings, partially offset by lower merchandise inventories and merchandise accounts payable. We had $564,000,000 of capital expenditures. Free cash flow inclusive of proceeds from real estate With an outflow of $261,000,000 and year to date, we paid $90,000,000 in dividends. Regarding capital deployment, in times of uncertainty, liquidity and a healthy balance sheet remain top priorities. They provide us the flexibility to respond to changing consumer and competitive trends, while continuing to invest in our core business and growth factors.

Speaker 4

Now let's discuss the full year and Q3 outlook. To level set, we continue to have a cautious view on the consumer. In addition to the headwinds discussed on prior earnings calls, the expiration of student loan forgiveness beginning in October, Higher interest rate levels and lower new job creation are all new pressures on the consumer. While we had contemplated these factors when providing an annual outlook on our last earnings call, it is still unknown how consumers will respond to them, Especially after so many months of increased pressures. As such, we believe it is prudent to maintain our cautious view on the consumer and their capacity to Spend on the discretionary categories we sell.

Speaker 4

Even with this backdrop, there is much that remains in our control. Entering the Q3, inventories are clean, current and fresh with an improved fashion and seasonless composition at compelling that we believe appropriately reflects demand. Quarter to date sales results are in line with our expectations on reduced year over year promotions And clearance activity. Now that I've provided the framework on how we are thinking about the back half, let's walk through our updated full year expectations. Our full year outlook now contemplates reduced credit card revenues and asset sale gains, both of which are fully offset by better than expected 2nd quarter results and favorable changes in interest expense and share count.

Speaker 4

Our outlook continues to include approximately $200,000,000 Cost savings discussed on our last earnings call. For fiscal 2023, we now assume net sales of 22,800,000,000 to $23,200,000,000 Comparable sales on a 52 week Own Plus license basis to be down about 7.5% to down 6% to last year. As a reminder, compares ease in the 3rd and 4th quarters. Are the revenue to be about 3.2 percent of net sales with credit card revenues accounting for roughly 80% to 81% of that? The increased bad debt expectation for the credit card portfolio has resulted in a reduction in our annual forecast of roughly $80,000,000 Relative to our prior expectation.

Speaker 4

Given the magnitude of the credit card revenue impact, I want to take a moment to provide additional color. Credit card revenues are predominantly driven by the level and health of sales and receivables generated From our proprietary and co brand credit cards. While we have seen an increase in revenues as interest rates have risen, that has been more than offset by higher bad debt These bad debt assumptions and write offs are the result of rising delinquencies, which leads to higher net credit losses over time And contributes to increased bad debt within the portfolio. We are working closely with our bank partner, Citibank, to mitigate the rising bad debt By adjusting underwriting strategies, we also remain focused on acquiring new customers and retaining our active customer base as we communicate future personalized value to our customers, but we are not assuming any benefit in the near term. Additionally, Potential regulatory changes regarding late fees are still pending.

Speaker 4

We'll keep you updated as we learn more. Returning to the remaining line items, we are anticipating a gross margin rate of 38.3% to 38 6%, which is slightly better than our prior expectations of 38% to 38.5%. Our assumption for shortage, which impacts gross margin, remains materially unchanged. Shortage continues to be a headwind and we are focused on a Variety of mitigation strategies including testing the use of advanced technology, reporting and tools, Moving high theft product away from entrances in our stores, optimizing asset protection staffing to target high risk areas And collaborating with external parties to advocate for legislative change. Now let's turn to SG and A.

Speaker 4

SG and A as a percent of total revenue is expected to be 35.6% to 35.2% Or 36.7 percent to 36.4 percent as a percent of net sales, reflecting ongoing expense efforts with additional risk on the low end given the importance of protecting the customer experience. Asset sale gains are now expected to $50,000,000 with nearly all the remaining gains anticipated in the Q4. While the real estate market has become more challenging in light of Higher interest rates, there is no change to our asset monetization strategies. We are confident in the value of our assets, Have seen these cycles before and will be patient to ensure we receive the appropriate valuations for our properties. Fortunately, we have the balance sheet to do so.

Speaker 4

We expect to achieve adjusted EBITDA as percent of total revenue of roughly 8.7 percent to 9.4 percent or 9% to 9.7% as a percent of net sales. Interest expense is now expected to be approximately $160,000,000 After interest and taxes, We are maintaining our annual adjusted diluted EPS of $2.70 to $3.20 which reflects an updated annual diluted There are lots of moving parts to our annual EPS outlook. To summarize, relative to our prior expectations, gross margin, SG and A and shares are the primary benefits. When looking at the low and high end of our current outlook compared to what we discussed on our Q1 call, gross margin inclusive of volume and mix It's positively contributing an incremental $0.14 to the low end and $0.06 to the high end of our prior outlook. SG and A is contributing an incremental 0

Speaker 2

point

Speaker 4

These factors reflect solid execution in our core business and represents a $0.24 to $0.29 benefit Relative to our prior outlook. On the flip side, reduced credit card revenues are a $0.21 to $0.22 drag on the low end and high end of our prior outlook, while lower asset sale gains are a $0.03 to 0 point 0 $7 negative impact. Combined, this also represents $0.24 to $0.29 essentially canceling each other out. Our adjusted diluted EPS guidance does not assume potential share repurchases. For the Q3, we expect net sales of $4,750,000,000 to $4,850,000,000 Gross margin rate to be at least 140 basis points better than the Q3 of 2022.

Speaker 4

As a reminder, last Dear, Macy's had elevated promotions and markdowns to clear excess receipts in warm weather seasonal goods and slower moving related categories including casual apparel and soft home. Adjusted diluted EPS down $0.03 To up $0.02 inclusive of our updated credit card revenues outlook and the timing shift in the recognition of shortage. End of quarter inventories to be down low to mid single digits to last year on a percentage basis as we begin to introduce Nike and further Looking ahead, we remain committed to achieving low single digit sales growth beginning next year and believe that improved underlying fundamentals And the early contributions of our 5 growth vectors will provide an offset to ongoing macro pressures impacting our consumer. However, we do have additional external factors that are more difficult to combat. If recent trends in credit card revenues, Shortage and asset sale gains continue and late fee regulatory changes are passed, the ability to achieve low Full digit EBITDA margin in 2024 becomes more challenging.

Speaker 4

Now to be clear, there have been no changes to the underlying assumptions and opportunities Regarding the rest of our business, we're actively working to offset headwinds, prioritize growth and we'll share more as the year progresses. I'll now turn the call back over to Jeff for some closing remarks.

Speaker 2

Thank you, Adrian and Tony. It has been exciting to watch you 2

Operator

Floor is now open for Today's first question is coming from Oliver Chen of TD Cowen. Please go ahead.

Speaker 5

Hi, Jeff, Tony, Adrienne. Good morning. 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.

Speaker 5

AURs were also encouragingly up. What was the offset to that? We assume it could have been traffic. A follow-up, as you think about longer term, the small format opportunity, How are you dimensionalizing the addressable market there? Thank you.

Speaker 4

All right. So, Oliver, good morning to you. It's great to be with you. So look, despite the timing shift that we recognize We achieved the gross margin rate in the 2nd quarter ahead of our expectations. So we were actually quite pleased with that.

Speaker 4

Now while the second quarter was More promotional than last year, as we work to clear a lot of the seasonal product that we talked about, it was less promotional than we had anticipated. We lean into a lot of our strategic and personalized promotions. We lean into our pricing science as we've talked about prior. 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.

Speaker 4

So we're continuing to take these behaviors into the back half of the year.

Speaker 2

The other thing I'd add on that, Oliver, would be just our inventory is in a great position. So, exiting the Q3 down 10%. We've 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 3rd quarter has started at expectation. We're looking at the back to school Reiss as well as really all new fall fashion and how that's performing, and we have confidence as we go into the Q4 on our

Speaker 4

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 For our customers, we continue to see positive signals in terms of the financial performance and the customer experience within these stores.

Speaker 4

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.

Speaker 5

That's correct. Thanks.

Speaker 6

Thank you.

Operator

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

Speaker 7

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 top line by income cohort that you're seeing today Maybe relative to 3 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?

Speaker 3

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 And other senior leaders the last few months. And I remain bullish on the opportunities for the entire portfolio. Remember, Macy's Inc.

Speaker 3

Is a portfolio company with obviously power in the Macy's brand, Bloomingdale's brand and Blue Mercury brands. I believe that our opportunity remains in going off price to luxury, multi brand, multi category. And these 5 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, just 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.

Speaker 3

It's also making sure that our portfolio has the right number of stores in the right locations. That includes 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 Very strongly about it, underscores the importance of Bloomingdale's and Blue Mercury, 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.

Speaker 3

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 seamless and easier omnichannel experience.

Speaker 4

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.

Speaker 4

The reality is in the macro environment, we continue to remain cautious as we spoke about earlier in our opening We do believe that there continues to be pressure within the macro environment. So we will continue to remain cautious. To your 3rd 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 It's 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 5 growth vectors remain on track.

Speaker 4

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 worse 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 So look, as we think about credit card revenues, we've experienced higher age balances across all delinquency levels, which has 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 will have to quantify the potential impacts of If that ruling comes to fruition. Shortage, as you know, has been an industry wide opportunity.

Speaker 4

It has been at elevated levels for multiple years. Shortage for us for the 2nd year in a row will be at record levels. Now we continue to put mitigation strategies in place to address it, 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.

Speaker 4

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.

Speaker 7

Great color. Best of luck.

Speaker 6

Thank you.

Operator

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

Speaker 8

Good morning and thank you for taking our question. Adrienne, 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 and A expense beyond what you've already identified?

Speaker 4

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 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.

Speaker 4

The one thing I would call out as Think about gross margin for the balance of the year as we've done something a little bit different this year with shortage. So this year we actually had a mid year shortage Mid year 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 4th 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.

Speaker 4

We're excited about all the initiatives that Jeff and Tony 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 and A, we continue to We feel good about the $200,000,000 that we spoke about in cost savings earlier in the year. We spoke about it in our June 1 call. We've been working on For a number of months, we're seeing those come through and a larger portion of those benefits both on the SG and A expense and the gross margin expense It's expected to materialize in the back portion of the year with the biggest being in the Q4. 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.

Speaker 8

Great. Thank you so much.

Speaker 6

Thank you, Brent.

Operator

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

Speaker 9

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 Bloom's 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.

Speaker 9

I I was just curious, is this accurate? I was wanting to get more color on the healthy consumer, either by what you're seeing in terms Performance by store banner or what you're seeing when you dig into the credit card data? Thank you.

Speaker 4

So why don't I start with the credit Our 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 that credit card revenues is an indication of some of the pressures that we're We're seeing on the consumer. So as you know, we've 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 age balances actually accelerated After Q1 and that occurred primarily in June July.

Speaker 4

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 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're working with our credit card partner, Citibank to target higher risk segments to surgically reduce exposure, we're also maintaining spend in places We can for customers that have the capacity, we're acquiring new customers, we're retaining active customers, 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.

Speaker 4

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 2, 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.

Speaker 2

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 was about an 800 point difference. That really is just our when you think about being in most cases Small base 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.

Speaker 2

It's just building stickier relationships with customers. They're They're building up their spend with us. They're shopping more frequently. We certainly saw that in the Q2. And then to your question about kind of how different income levels is being affected, We'll talk about the Macy's brand.

Speaker 2

Certainly, the Macy's brand is more under pressure and it really is the stat of the 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 So we feel good about our 4th quarter strategy and we feel good about where our inventories are right now with this consumer.

Speaker 9

Great. Thank you.

Operator

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

Speaker 10

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 and maybe back to school and then just higher level, talk about your confidence In the comp guide and 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

Speaker 2

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 Q3. 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 and experiencing right now in the Q3. 3rd 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 signs 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 4th growth vectors is really kind of the state that we are walking into the fall season with. So as we talk about the Q4, we have confidence in our strategies.

Speaker 2

So the trending businesses like beauty and some of the gifting businesses Or a higher penetration of the 4th quarter business than it is the other 3 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 Q4. 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 Shopping earlier and they're shopping all the way through Black Friday, Cyber Monday, taking the low last 10 days.

Speaker 2

We're ready for all that. We 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 4th In addition to the gifting strategies and the penetration of trending businesses, it's also the ad 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 Never.

Speaker 2

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.

Operator

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

Speaker 11

Hi, good morning, everyone. As you think about the bad debt expense and credit cards, have you looked at it versus 2,008? What could be similar and what's different in the 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 Q3 and back to School, anything on tourism that we should note?

Speaker 11

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.

Speaker 4

Good morning, Dana. I'll start with regards to 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 2,005 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.

Speaker 4

But from Our perspective is 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 U. S, 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 it a little bit earlier credit cards, I referenced student loans, auto loans, mortgage, All those in a higher interest rate environment creates real challenges.

Speaker 4

Now coming into the year, we did project bad debt levels to normalize, But they just normalize 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 increased usage on our proprietary credit card, acquiring new customers and really leaning into the loyalty aspects, we're working very diligently to find the

Speaker 2

best Dana, 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. As I mentioned in my Conversation earlier to the question from Blake. We're not disclosing our monthly performance and that it was heavily marked down and promotional driven. So that is on the Q2. 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.

Speaker 2

So just to remind you, our international tourism It's 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.

Speaker 2

But know that when you look at the 2nd quarter tourism business The Q1, it was pretty similar. It was pretty comparable from where we are versus the 2019 level.

Speaker 3

I'll turn it over to Tony. Thanks, Dana. I think the introduction to 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.

Speaker 3

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 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.

Speaker 3

And

Speaker 11

Thank you.

Operator

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

Speaker 12

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?

Speaker 12

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.

Speaker 3

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 Mani, who we mentioned, who joins us after a distinguished 20 plus year Career at Mackenzie 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 Bloomer Care are omnichannel businesses.

Speaker 3

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 at Bloomingdale's, our most important mall doors, because that's where people go to shop. As 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 dot com. So we really do manage between the channels, but we ultimately are focused on satisfying the customer.

Speaker 12

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

Speaker 4

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 media versus marketplace, which not only improves our 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.

Speaker 12

Thank you.

Speaker 4

No problem.

Operator

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

Speaker 6

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 mitigation efforts not have an immediate effect.

Speaker 6

You didn't reduce any 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 top line that you would incorporate into your guidance? Thanks.

Speaker 4

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 As a percent of net sales, we've looked at it as far back as 2,005 and understanding the puts and takes that actually impact that performance.

Speaker 4

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 It's really around the pressure on the consumer.

Speaker 4

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 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.

Speaker 6

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

Speaker 4

So within our loyalty program, there are 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 40

Speaker 6

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

Speaker 4

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 over a longer period of And so we do not lean aggressively into subprime.

Speaker 6

Okay. Thank you. Good luck. No problem.

Operator

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

Speaker 13

Great. Hey, everybody. Thanks for taking the question. Just 2 from me. The first is just on SG and A.

Speaker 13

I wanted to dig in there a little bit more. It seems like the guidance contemplates higher SG and A than prior, I know you reiterated the $200,000,000 in savings that you've identified. So can you just hash out further what's changed there seemingly worsened versus 3 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.

Speaker 4

All right. So thanks so much for the question, Let me start with SG and A and then I'll hand it over to Tony and Jeff. So look, our outlook includes a portion of the $200,000,000 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 and 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 Q2, SG and A was Better than our expectations due to these disciplines and these initiatives that I've referenced.

Speaker 4

And we continue to be very focused on 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 quarters ahead of us, which is Q4, 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.

Speaker 2

And then Alex, let me talk about the second part of your question. We have based on the liquidity that we have always built in, 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 as 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.

Speaker 2

So we have confidence that to your question about Beauty, we can chase into Beauty. We've 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

Speaker 3

And Alex, let me add that we have strength in beauty across Macy's, Bloomingdale's and Blue Mercury. So that's 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.

Speaker 13

Thanks a lot.

Operator

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

Speaker 13

Thank you. Good morning. I wanted to focus for a minute on your cost savings programs. You have spoken about a $300,000,000 to 3 $50,000,000 run rate of savings in fiscal 2024, but it seems that you're outperforming that early. How much of these savings are

Speaker 4

It's a good question, Lorraine. So as we referenced, the $200,000,000 this year is a combination of both gross margin and SG and A expense. What we spoke to on the last call was that there is an annualized benefit of about $300,000,000 to $350,000,000 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.

Speaker 4

And as an organization, we're continuing to lean 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 But we'll definitely keep you posted and give you much greater clarity on those puts and takes as we get into 2024.

Speaker 13

And then I just wanted to follow-up on credit. It sounds like the second quarter numbers include a 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?

Speaker 4

Yes, absolutely. So the leading indicator on bad debt write offs are the delinquency rates. So So we're looking at 30 days, 60 days, 90 days 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 age band 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

Speaker 13

Thank you.

Speaker 6

No problem.

Operator

Thank you. Our last question For today, we'll be coming from Jay Sole of UBS. Please go ahead.

Speaker 14

Great. Thank you so much. I just have two questions for me. 1, On the delinquency rate that you cited for June July, was the delinquency rate higher in July than what you saw in June? Where is June the peak and then it slowed in July?

Speaker 14

And then secondly, Just on the small stores, can you just elaborate a little bit on the proof points that you're seeing to give you confidence to open up more small stores? And how many small stores do you see the company opening up over the next, I'd say 6 to 12 to 18 months. Thank you.

Speaker 4

Thanks so much for your question. So on delinquencies, the thing to keep in mind is that we did plan for higher delinquencies 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 July 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.

Speaker 4

As we think about small format stores, there are kind of 3 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, this 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 It's the financial trends of the business. And so for stores that are comp, we're seeing healthy year over year growth in this portfolio and we're getting better.

Speaker 4

We see lots of 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 portfolio of healthy big box stores, we will 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 and the timeframe that you described, but we'll be able to share more specifics on that

Speaker 3

Yes. And Jay, I would add that we're excited in the Macy's Mall 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.

Speaker 6

Got it. Thank you so much. Thank you.

Operator

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

Speaker 2

So thanks, operator, and for all of you who are still on the call, hope that you enjoy the last days of summer, and we look forward Updating you on our results on the Q3 and on our November call. Thanks, everybody.

Operator

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.

Remove Ads
Powered by Quartr
Earnings Conference Call
Macy's Q2 2024
00:00 / 00:00
Remove Ads