Macy's, Inc. (M) Earnings Call Transcript & Summary

Good morning. This is Alex Walvis. I cover the apparel and accessories retailers here at Goldman Sachs. Welcome to our 27th Annual GS Global Retail Conference. We're very excited about a packed agenda today. Kicking us off shortly is Macy's. But before I introduce them, I do need to read out a few disclosures. Goldman Sachs agreed to host this conference on the basis that no third-party speaker will provide confidential or material nonpublic information. In addition, by attending this conference, you provide Goldman Sachs the right to record and redistribute the conference information. The views of third-party speakers do not necessarily affect those of Goldman Sachs. We are required to make certain disclosures and public appearances about Goldman Sachs' relationships with companies that we discuss, and disclosures relate to investment banking relationships, compensation received or 1% or more ownership. We're prepared to read aloud the disclosures for any [ issuer form request policies ]. Disclosures are available on the most recent reports available to GS clients on our firm portals. Disclosures and updates to those disclosures are also available by ticker on the firm's public website at www.gs.com/research/hedge. Also, the views stated by non-Goldman Sachs personnel do not necessarily reflect those of Goldman Sachs. Disclosures applicable with -- to research with respect to issuers, if any, mentioned herein are available through your Goldman Sachs representative or at www.gs.com/research/hedge. And with that out of the way, I am very, very pleased to kick off this retail conference by welcoming the Macy's team for our first presentation of the day. Macy's is, of course, one of the U.S.' largest retailers with over 600 Macy's and Bloomingdale's stores, around 200 further specialty stores including Bloomingdale's The Outlet, Bluemercury and Macy's Backstage. And here with us to discuss the business and the opportunities ahead are Jeff Gennette, Chairman and CEO; and Felicia Williams, interim CFO. Welcome both and thank you so much for joining us. Jeff is going to kick off with a few comments, and then we'll dive into the Q&A. So Jeff, please do share your comments.

So thanks, Alex, and it's great to be with you this morning. So I'm going to give you a high-level update on Macy's, Inc.'s status, and then Felicia and I will take your questions. So last week, we have released our second quarter 2020 results. And on the call, I also provided an update on our Polaris strategy that we launched in February of this year. So I'm not going to go into that detail again. But I do want to touch on a few highlights that give us confidence that the Macy's Inc. business is stabilizing. We have secured $4.5 billion in refinancing to give us the liquidity that we need moving forward. We have completed a major organizational restructuring, resetting our cost base and resources to support our smaller size and greater emphasis on digital. We have utilized our position as a department store to quickly pivot on our merchandise category mix to reflect in-demand product across all channels. We delivered stronger-than-anticipated second quarter performance across all 3 brands, Macy's, Bloomingdale's and Bluemercury, driven largely by the sales recovery of our stores. As a reminder, we closed our stores on March 18th, began reopening in May and had almost every store reopened by the end of June. The initial stores recovery went better than we initially modeled. And I'd like to share a little color on what we're seeing in our stores today. In total, our stores business is down about 40% to last year. However, within the recovery, there have been some bright spots. While our flagships remain challenged at down 50% with the drop in international tourism, our growth stores are tracking ahead of the total fleet, benefiting from our investments over the past 2 years. The 12 states where we've seen COVID resurgence hotspots have improved since July, and these states include Florida, Texas, Arizona and California. Off-price is performing well on a comp door basis. Both Macy's and Bloomingdale's traffic has outperformed the total retail traffic tracking for 12 of the past 13 weeks. Customer experience scores, or what we call NPS, are at all-time highs with significant year-over-year increases across the board. We've seen particular strength in the question of I feel safe while shopping, which registered the highest of all scored questions. Beauty, jewelry, home store and center core accessories are our top-performing businesses across almost all stores. And this bodes well for holiday gift giving when these businesses accelerate in their penetration and importance. Now while our stores were closed, our digital business accelerated rapidly. Customers had migrated online at unprecedented rates. By some estimates, retail has seen 10 years of digital growth in just 3 months. A growing digital business is a good thing, and growing digital profitability is within our line of sight. The increased focus on digital was top of mind when we rewired the cost structure at the organization this summer. In 2019, digital accounted for 25% of our business. Today, it's over 40%. And we expect digital to remain as a higher penetration of sales moving forward. Traffic on both macys.com and bloomingdales.com is up significantly, and conversion is healthy. In mobile, both traffic and sales are growing and becoming a more significant portion of our digital business. In Q2, mobile and the app together accounted for 57% of sales and 77% of traffic. We used our sites to quickly expand our assortment to more in-demand products and have had good success using flash sales to clear spring inventory. We quickly launched curbside pickup, so customers could order online and do contactless pickup at their local store. We have a steady flow of new customers coming into our brands through the digital business, nearly 4 million new customers to the Macy's brand alone in the second quarter. These customers are younger and more diverse than our core. And when we ask this -- and when we asked them why they came to Macy's, they called out value and the great brands we carry. We are laser focused on strategies to retain and engage these new customers. Today, digital already contributes to our profitability. And we have many layers to pull in the future to continue to improve this level of profitability. Across both digital and stores in both Bloomingdale's and Macy's, luxury is also outpacing our expectations. From textiles to shoes to handbags to mattresses to diamonds to luxury beauty and fragrances, luxury has proved to be strong across almost every category of business. For instance, at Bloomingdale's, luxury represented 30% of the Q2 2020 business compared to 20% in Q2 of 2019 and is trending 23 points better than the total company trend. Now we still have a way to go. We're encouraged by our progress to date. We will continue to expect a gradual recovery. However, we've modeled both upside and downside scenarios depending on the path of COVID-19 and the trends in consumer spending. The challenges that retail -- that we face in retail are clear, but we also see opportunity. And I want to flag 3 areas in particular where we see significant growth potential, and we are going to -- that we were going after as part of the Polaris strategy. First, digital. When COVID-19 hit, we accelerated everything on our digital agenda. We focused on investing in the fundamentals of our digital platforms to improve customer end-to-end experience, including a better browsing experience, smooth checkout and confirmed delivery dates. Second, our customer franchise. As I mentioned, we had 4 million new customers coming into Macy's in the second quarter alone. We're using loyalty and personalized communications guided by advanced data analytics to drive engagement and ensure these new customers come back to Macy's and migrate up our lifetime value curve. And third, the competitive landscape. Retail today has been radically disrupted. And while that disruption creates challenges, it also holds opportunity. With many competitors closing or struggling, we have an aggressive, intentional plan to bring new customers into the brands and gain market share. So to sum it up, we've navigated well through the rapid channel shift and the tumultuous environment. Flexibility continues to be the name of the game as we know that there will be new challenges along the way. But our team has learned how to execute through uncertainty by listening to our customers, following the data, reading the signs and pivoting quickly. I'm confident that Macy's Inc. will emerge on the other side of this crisis as a strong competitor ready to serve another generation of American consumers. So Alex, I throw it to you for questions.

Jeff, thank you so much for sharing those introductory remarks and all the strategies underway at Macy's. You mentioned that retail has seen 10 years of digital growth in 3 months and Macy's has certainly been a part of that. You also mentioned that you're working to improve the profitability of the digital business. So my question is, longer term, do you think that digital penetration for the business will remain above 40%? And if so, how should we think about the associated impact on profitability for the business?

So Alex, let me start and then I'm going to kick it to Felicia for some more detail. So yes, I certainly believe that digital will remain in that 40%-or-higher range, and we were fortunate to head into the pandemic and the store closures with a strong digital business already. And I think it goes without saying that a strong digital business is a good thing, but the growing digital profitability is imperative, and that is within our line of sight. So the increased focus on digital, it was top of mind really as we rewired our cost base and making sure that we could maximize getting SG&A as low as it could be to ensure that we could be profitable as an overall company as we imagine digital growing as a piece -- as a penetration. So as mentioned, digital already contributes to our profitability, but we still have a lot more levers to pull. And Felicia, why don't you go through some of those?

Sure. Thanks, Jeff. And good morning, Alex. Thanks for having me today. Let me just start by saying that we certainly have line of sight on our historical gross margin levels, and we are committed to improving our margins. But we're thinking about our margins as an overall omnichannel retailer. And what I mean by that is we're looking at the digital business and the stores business together. And so we do have opportunities and strategies for margin improvement in our brick-and-mortar business, which you know is roughly 60% of the business. On the digital side, we are committed to a digital business that, as Jeff has said, has become far more important to our customers. And we are very mindful, with this lean into the digital business, of the increased shipping costs that comes with that as well as transparent pricing that the consumer will have and continue to have. So just to be clear, we will continue to lean heavily into the digital business going forward. And this will, as you said, Alex, require us to offset the impact of that lean-in on our gross margin. So a couple of things. For sure, we have to drive higher contribution from the digital business. We have to really begin to implement those Polaris initiatives that will help mitigate the full impact of the margin profitability. A couple of those. First would be location-level pricing. We talked about that and the ability to get real clear visibility of our pricing and our value to our customers. Second, optimizing our POS strategy. Third, centralized fulfillment, which we previously talked about as Hold & Flow will be a huge component to ensuring that we have the right inventory in the right channel and really in the right location to meet the customer demand. And then fourth is around strategic sourcing, particularly in our private brands business. We are working on a new sourcing model for private brands to grow our gross margins which you guys know private brands is a huge chunk of our inventory. And lastly, we integrated our planning functions under supply chain. This allowed us to create one business team to partner with the merchandising organization. And this has allowed us to better consolidate responsibilities. It reduces handoffs. We've expedited decision-making. It is really about getting the product much closer to the customer demand. And I think we're seeing the early benefits of this integration through our second quarter results, where we ended the second quarter with much leaner inventory. We were down 29% to last year, and higher sell-throughs. And those higher sell-throughs were not only on our clearance business, but we also began to see higher sell-throughs on our regular-price merchandise as well. So we believe that long term, these actions should support improved margins of the overall omni business.

It's clear that a number of your initiatives are omnichannel rather than specific digital focused. And you did indeed mention in the prepared remarks that the growth stores were performing well. I wanted to move for a moment to discuss those growth stores. You have paused additional investments in growth stores and instead refocused capital spend on just going on the omni initiatives. Can you discuss how your thinking has changed on necessary in-store reinvestments or in-store customer experience? And is that area of spend something you'll be looking to restart quickly into 2021?

Sure, Jeff -- I'll take that one, Alex. You're right, while we are pausing our investment in our additional growth stores, our prior investments over the past 2 years are paying off, and we are going to be continuing to draw on them. And just as a reminder, our investments that we made in stores over the past few years, particularly in our growth stores, represented about 50% of our brick-and-mortar business for both Macy's and Bloomingdale's. So while we have shifted investment from the physical building, we are leaning really heavily into technology, particularly the technology that is required to ensure our omnichannel capabilities and to continue to satisfy the customer demand, which is really a priority for our customers. Much of our investment in digital growth will also drive sales fulfillment through the stores network. So for example, we are investing in extra service. We are targeting investments that speak -- there are targeted investments for specific product and service opportunities, particularly those opportunities to ensure our customers' experience are more frictionless experience, a more frictionless shopping environment. We're investing to simplify returns, and that's returns around transactional returns, the speed of returns and how we communicate with the customers regarding their returns. And we're working to create an expanded service menu. Alex, over time, we will have a lower CapEx in the medium term, but our capital spending will really be targeted to those areas of the business that align with our strategic priorities. So first, we can't say it enough, digital. Digital is driving our revenue growth, and so we'll continue to lean and focus that as a priority with respect to our capital dollars and resources. Our next will be our supply chain, where we're driving margins and EBIT growth through lower delivery costs and improved efficiency. And third, our technology, really focused on improving the customer's overall omnichannel experience with handheld and self-checkout and also through big ticket, where we're really looking to streamline our delivery communications and look at the end-to-end delivery experience for our big-ticket customers and really working to simplify that whole process. And then finally, and as important, our capital investments will be in new avenues of growth like Backstage and freestanding smaller-format stores. We talked a little bit about this on a call. But if you remember, specifically by the end of 2021, we will open several smaller-format, off-mall Macy's, and we will test a smaller-format, off-mall Bloomingdale's. In every off-mall store, we'll have full service for pickups and returns. And so we are keenly focused on these core priorities, digital, supply chain, technology and growth in the freestanding, smaller formats and Backstage. So it is a mix.

That's really clear. I had one more question on the store fleet, one of the questions, in fact, at this conference. We often have a list of questions that we ask of all companies, and one of them this year is the question of whether you expect to have more or fewer stores in calendar 2021 versus 2019. I wonder if we could talk around that question a little bit. You at Macy's have targeted a 125-store closure program over a 3-year time horizon. And on the second quarter call, you indicated that the time line for neighborhood store closures was fluid. Can you discuss what you mean by that fluidity and how we should be thinking about that program here?

Sure. 100% you are right, the number of stores we intend to close, that has not changed. We are modeling different scenarios with respect to the timing, as you said. Just to take a step back, I just want to remind that we are still generating cash in our leased locations, even with the early reopening trends. And so in general, there's a lot of uncertainty over the next 6 to 12 months, and so we're prioritizing how we think about store closures and the timing. So one of our priorities will clearly be to preserve cash with maintaining our market coverage in the areas where we could potentially close a store. We want to be able to offer our customers less crowded options where they feel more comfortable. And we are using our current footprint really to support our digital business, particularly with BOPS, Buy Online, Pick Up In Store and Buy Online, Ship to Store. But we are also modeling to take advantage of our competitor closings, which you know is happening at an unusually accelerated pace. And as important, we really need the real estate environment to stabilize. So those are some of the factors we're looking at. So let me just give you some specific examples with respect to the store fleet. So our neighborhood doors are currently outperforming our magnet stores during this pandemic mainly probably because they are often smaller or in centers with less traffic, which may be making our customers feel more comfortable while shopping during this -- during the pandemic. Our flagships are -- and our large urban magnet doors are under more pressure due to the decline in domestic and international tourism and just fewer people coming into those downtown urban areas to work and to come to their offices. So some doors will benefit from competitor closings in the short term. But in some cases, the departure of multiple competitors in a mall could reduce traffic and could have a long-term impact on the overall status of the mall. So our intention is to change the composition of our store base as we close mall-based stores over time and open smaller-format, off-mall stores, as I said, in both an off-price format and a mini-Macy's or mini-Bloomingdale's concept. So at the -- and so while you said we did have, and I agree, we did have to pause our plans on our stores that close, but we are ramping up back to the strategies we talked about in Polaris. We are maintaining our store presence, market coverage, particularly in markets that are needed to support the digital business. We don't want to fire the customer. We don't want to create a dead zone. So at the end of the day, we are a true omnichannel retailer, and the key here is flexibility, flexibility particularly as the pandemic runs its course.

That's very clear. I want to take a moment here to talk about your outlook for the holiday season. Jeff, you shared in your introductory remarks much color on how the business is performing today. On a call recently, you called out an anticipated shift earlier in holiday demand. I was wondering if you could comment on the omnichannel fulfillment initiatives you're implementing holiday, how you're thinking about balancing sales and margins in an environment where store traffic may be limited, particularly around those critical shopping days.

Okay, Alex. So just to give some broader context on holiday, and then I'll cover your points specifically. So one thing we know is that holiday is when our brands are the most penetrated. When you look at our overall calendar and the percent we do of our -- of full TSR base, it's highest in the months of November and December. And America comes to Macy's and Bloomingdale's for gifting. So in Q4, we always see an influx of new and occasional customers in addition to our regular customers. And so this -- in this year, we also expect that traffic mix will include customers from brands that have closed or, as Felicia talked about, just the entire competitive landscape and the tumult of that, that those customers are up for grabs. And we've been clear as well as some of our competitors about what the amount of that business looks like. And so we're looking at that at a door level and building our assortments on our digital platforms to ensure that we have the products that, that customer is looking for. So first comment is really that we're ready for Holiday of 2020. We have a -- because America comes to us for gifts, we have a strong gifting plan with about 50% of our content that will be brand new. And we really made sure that we expanded the value bands of this. So we included now gifts under $15. But based on what we're also seeing in luxury at both Macy's and Bloomingdale's, we're now including luxury categories and price points. That said, I think the dynamics of the shopping season this year are certainly not predictable. We've done lots of preparation. We've looked at lots of contingency planning for both upside as well as downside challenges. And to date, what we know is that the customer does expect to spend about the same amount as last year. So it may be an elongated season, but that's good news. So as it relates to your question about channel shift and fulfillment, so we're prepared to serve our customers any place where they want to go. So we've reset our inventory planning so that we really have adequate supply for both dot-com and our stores, as Felicia talked about. And we will continue to support this shift with store fulfillment as well as expanded options. Now we said on the call that about 30% of our digital demand is fulfilled through stores, and that's not just through BOPS. It's now through curbside, ship to store. We just -- we're proud to say we now have a same-day delivery, a new partnership that has been made with DoorDash, which gives us national same-day coverage. And we certainly have -- we know that, that important last week before Christmas, that we have to have all fulfillment options on the table, knowing that our carriers, there may be supply issues or there may be cutoff issues that we want to make sure that the Macy's customer and Bloomingdale's customers have their gifts before Christmas or Hanukkah. We also have improved our customer communications on delivery options and expectations of delivery. As it relates to your question on balancing sales and margin, we feel good about the assortment and the availability of content for the holiday season. We have in-demand products that we know we're going to get strong sell-through at regular price, and we expect that to continue into holiday. With respect to promotionality, we expect about the same as last year. And we will be more effective with our promotion with targeted offers and values to specific customers through personalization, which, as I mentioned in my comments, will be driven through our data analytics and geo targeting. But again, the cadence of the season, we do expect an elongated season. But that really all depends on the customer, and we are going to adjust our promotional strategies based on how we learn about how they shop.

You mentioned within that making sure that you're providing value gifting to customers during the holiday period. We've also talked already in this call about your Backstage strategy and indeed broader value strategy. I wonder if we could talk about the value strategy a little bit more broadly and perhaps juxtapose that against the sharp growth you're seeing in your luxury businesses.