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

Good morning, everyone. My name is Kimberly Greenberger, and I'm the specialty softline, department store and branded apparel analyst here at Morgan Stanley. We're very pleased that you were able to join us today to kick off Morgan Stanley's Global Consumer & Retail Conference, and we're equally delighted to welcome Macy's management with us today. Macy's is the largest U.S. department store, generating nearly $25 billion in revenue in 2019 across over 770 store locations. The company operates the Macy's and Bloomingdale's banners as well as the luxury beauty retailer Bluemercury. Today, we are joined by CEO, Jeff Gennette; and newly appointed Chief Financial Officer, Adrian Mitchell. Jeff was elected CEO in March of 2017, having been with the company for nearly 40 years. Most recently, he held the role of President for Macy's, Inc. and previously served as Chief Merchandising Officer. Adrian joined Macy's in November, bringing a vast and varied retail experience, strategic perspective and operational track record to Macy's senior leadership team. He previously served as Managing Director and Partner at Boston Consulting Group, Chief Executive Officer of Arhaus and CFO and Interim CEO of Crate and Barrel. Welcome to you both, and thank you both for being here today.

Thank you, Kimberly.

Thank you, Kimberly, and thank you for hosting us. So I have a couple of opening remarks, and then Adrian and I will be happy to take your questions.

Fantastic.

Sitting here in December, so 2020 has been a year full of challenges that we never imagined. And when I look back on the year, I couldn't be more proud of the team at Macy's, Bloomingdale's and Bluemercury and what they've done to first save and then recover our business. So looking back, 3 main themes. First, when the crisis hit in March, all of our efforts were around cash preservation. So we moved quickly. We pulled every lever, many of which were very painful decisions. But this did allow us to keep the business stable while we completed all of our refinancing, and we head into the fourth quarter in a strong liquidity position. Second, we had to respond to a rapid and extreme channel shift. So our stores had large amounts of trapped inventory. So we pivoted, and our stores became fulfillment centers to support our dot-com customers. So we ran these on skeleton crews. Our store teams were handling fulfillment for more than half of the digital business during the peak of our store closures. In our July restructuring, we rewired the cost structure of the organization to support a more digitally focused business. And you saw the continued benefit of that in our third quarter SG&A results. Fortunately, we're in the early stages of the supply chain redesign that we shared with everybody in February as part of our Polaris strategy. We were able to rework that plan to better support a channel shift. And the third thing we did was the need to innovate and launch solutions to unanticipated challenges. We learned to be fast and scrappy. A good example of this was our curbside pickup. In March, we didn't have curbside in any form. In April, we had curbside up and running. And in May, it was rolled out in every store. And the first version of this was really a hack. It worked but it was missing some of the conveniences that customers expect. So we ran the initial curbside program while the team developed a more robust solution, and we rolled that out right prior to holiday. We're also moving quickly to bring new partners into our brand to improve the customer experience. Those include Klarna and DoorDash to name 2. So while 2020 was an unprecedented year with major disruption, the team has risen to the challenge, and we've pivoted and proved with -- the resiliency and flexibility of our business model. So as a true omnichannel retailer, we will give our customers a great experience however and whenever they want to shop: our sites, our apps or our stores. When demand in one category shrinks, we can offset by expanding into categories that our customer wanted. And you've seen that in the mix shift towards home. When value becomes more important, we will -- we can and we'll dial up off-price. And while the best malls will survive and thrive with our participation, we know that we can find new avenues of growth off mall. So while we know that our continued challenges are ahead, we're confident in our ability and the future to invest to become a healthier business based on how customers are shopping now and into the future. So Kimberly?

Fantastic. That was a great introduction. We're going to spend the rest of the session today in a fireside chat question-and-answer style format, where we'll explore some of the investor questions that we've heard most recently. We also have reserved time to answer your questions. [Operator Instructions] And lastly, before we begin, I need to remind you for important disclosures, you can please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures.

So Jeff, with all that out of the way, back to you. As you mentioned in your intro, this has been a really unprecedented year for both the world and for the retail sector. Can you just talk to the audience today about your key learnings or insights that you've gleaned from all of the events this year?

Yes. I think the number one is that the plan A becomes plan B which becomes plan C. It's just -- it's constantly changing as the customer pivots and our opportunity to make sure that we are doing really 2 things. The first one is how we're remapping the customer journey and how we think about that. Clearly, there's been a big channel shift and really going much more to digital, and making sure that we are ready for that and then making sure that when they did feel comfortable coming back to stores, that we were ready through all health and safety requirements. So the first thing we did was really listen to the customer. We followed the data. We pivoted quickly. So in response to those -- to the customer journey, the first one was really on content and what did -- what were they responding to, what were the categories that we're missing what were failed searches and making sure that the home categories got built out. We already had a strong soft home business and textiles and housewares and tabletop. We had a strong business in big ticket. But there were home office categories, there was game categories that customers wanted. So we really were able to expand that, either in owned inventory or in vendor direct. The next thing was really making sure that we met the customers' high expectations with health and safety. So we were initially kind of designated as one of those nonessential retailers. And we have fought hard to prove the case that we're a safe retailer and that no matter where the pandemic goes, that we can stay open by adhering to all CDC standards. And so the team have worked very hard at that. They've become expert at all the municipal -- all the citywide ordinances or statewide ordinances and making sure that we're fully compliant. The third thing I'd say is just this notion about what goes on with fulfillment in your supply chain, knowing that 50% of your digital demand is being satisfied by your store inventory. And as that -- that certainly has lessened as the stores have reopened, but just the opportunity to make sure that curbside, same-day delivery was all really well wired. And I mentioned that in my opening comments. But the fulfillment options, making sure that customers get things fast, convenient, safely, we needed to respond to that. So we did that with all kind of remapping the customer journey. The next thing we did is remapping the colleague journey. Our employees we call them colleagues. So for us, in the stores and distribution centers, that was, again, adhering to all safety standards, making sure that our colleagues were safe and they felt safe and that they can convey that to customers when they hit the buildings. The second one was call centers. And this was a tough one because we had a lot of -- we have a lot of call centers that are international and so ensuring that wherever the pandemic was, if it was in the Philippines or if it was in parts of South America, that we had options to be able to serve customers. And so we went to a work-from-home perspective and basically had the technology where our colleagues could work from home, either in the States or internationally. That dramatically changed our ability to serve customers as those calls went up as the digital business increased. So what we needed to do in our call centers. And thirdly, as I think every corporation is dealing with right now, is what do you do with your corporate employees as they go from a fully virtual world to one that is more hybrid and as -- and really mapping that out. I mean we want this to be part of our employment brand, that we offer options for our colleagues, but where work needs to be virtual, where it's mostly execution mode versus where you're strategizing, you're brainstorming, you want to bring people back together, thinking through all that for the future as the vaccine takes hold. So that's kind of how we're looking at it. I think when you look at where we are long term, I'm looking at we're ready, we are very agile and flexible to deal with whatever the pandemic throws our way.

Fantastic. You held a great Investor Day in February this year, and I wanted to just talk for a second about the Polaris strategy, which you first introduced. And obviously, you had an opportunity to refine the Polaris strategy post COVID or as we went through this pandemic. You've accelerated digital strategies, and you talked a lot about rightsizing your store fleet while pausing on your store investments. Could you start with an overview of what you hope to accomplish under the Polaris strategy long term?

So as mentioned, Kimberly, we rewired the cost base of the company in February, and then we did it again in July based on being a smaller, more leveraged retail company. And so there were things in the Polaris strategy we amplified; as you mentioned, the digital strategy. And there were things that we stepped back, that we paused, which was like our off-mall strategy, which we're going back to in 2021. I'd just say that our overall vision remains the same, that we communicated during the Polaris strategy, which is to be the leading multi-branded fashion retailer and then the opportunity to serve customers kind of off-price to luxury. When you think about the banner brands of Bloomingdale's and Bluemercury, that definitely serves a better customer. And you've got the off-price formats for both Bloomingdale's Outlet as well as Backstage on the Macy's brand. So we have the opportunity to kind of go from those values depending on where the customer is going. Certainly, online to offline, we've clearly seen the advantages of being -- we're certainly going to have a higher penetration of our business in digital, but we definitely are advantaged by having the amplification of what stores can do to the overall customer omni journey. A store business helps digital. Digital helps stores. That really is this reinforcing loop. And then the third thing would be just this opportunity to go off mall to -- from on mall. So right now, we have -- most of our brick-and-mortar is on mall. We definitely have a vision that there's a lot of customers that would consider our brand more robustly for their spend if we have locations that were off mall. So we are experimenting with that, as we mentioned in February, in 3 test markets. And all of that work will commence starting in January of '21, which we paused as a result of the pandemic but we're getting right back on to it. So when you think about the 5 components of Polaris, they really stand -- they will stand the test of time. Just to reemphasize them, it's really strengthening the customer relationships through our loyalty programs, our customer lifetime value initiatives, personalization, curating for quality fashion, and that's in the best brands in the world as well as our own stable of private brands. As mentioned, accelerating digital growth. It was 25% of the business. It's going to be in the high 30s to 40s in the near term and growing from there. Optimizing -- what we had in Polaris was optimizing the store experience. It's now optimizing the omni experience, which is really taking the friction out of the function of all of our digital assets as well as the experience. And then the last is really resetting the cost base and making sure that we are draconian in how we go after cost and SG&A, recognizing that you've got the margin pressures of an increasing digital business on gross margin and making sure we've got to get our SG&A stack down on anything that is not customer wanted so that the profitability of the company can grow in the same rate that we expect to grow top line. So all these details and then the adjustments that we're going to make, we will announce in February. So this is a pretty flexible strategy. It has different initiatives and tactics that we take into each year. And so we will be announcing that on our February 23 earnings call.

Fantastic. Jeff, one more for you, and then I want to turn to Adrian. As you talked about in -- actually, already throughout the session, your e-commerce business has been absolutely on fire this year. It grew 53% and 27% in the second and third quarters, respectively. Long term, you talked about that you expect the company's e-commerce penetration as a percentage of sales to remain at 40% or higher. How has the pandemic impacted your view of Macy's e-commerce opportunity? And do you think about managing the balance between e-commerce growth? And how should investors think about managing the balance between e-commerce growth and overall company profitability?

Okay. Great. So what I'll do is I'll kind of talk about kind of the functions and what we're doing with digital. And I'm going to throw it to Adrian to talk about our profitability initiatives, having a higher penetrated digital business. So as mentioned, we were at about 25% of our business in digital in 2019. That's growing. It's going to be in the mid-40s in 2020. It will modulate in '21 just based on having our stores closed, that 3-month window, that as that comes back online in '21, the penetration will drop from the mid-40s but it's still going to be -- as you mentioned, it's probably going to be in the 40% range. So we expect that growth. Clearly, the customer has gotten very comfortable. When you look at our core customer, they're very comfortable now. Whereas before, you started to map all of their behavior where they were a stores-only customer, those people have definitely shifted to omnichannel. And many of them actually have not returned to stores. They're just very comfortable transacting digitally. So recognizing that we needed to make all of the improvements on site. And so we have really 3 big initiatives in terms of -- if we're going to have a more developed digital business, let's continue to amplify it. So we really looked at 3 big initiatives accelerating digital growth and what we needed to do with that. So we enhanced our product pages. It was all about better browse and filter features. It was the opportunity to replatform to Google search, which really improved our search relevancy. That was very important. As well as we had consistent call-outs, particularly from younger customers, about installment pay, and that's why we launched Klarna. The second big thing was really how we want to strengthen our customer relationships doing that digitally. And so the first thing was really looking at -- was making sure that we were scaling product recommendations to really be specific to a customer. So we are in the early innings of personalization, but we're really getting very strong bites from that. And the conversion rates of those messaging is really improving. We went through and we increased monetization, which is -- can be a profit stream for us. But most importantly with customer relationships was really the site experience. And so it was much more experiential, there's more storytelling. And so when you look at that, if you look at like our gift guide -- holiday gift guide as an example versus what it was last year, it's much more easy to navigate, it really shows the range of prices and categories, it's daily optimized. And then the third element of what we've been after in digital is really what we talked about in terms of how do you maximize the overall convenience of it and what do you want to do with the experience. So launching curbside, I've mentioned that a couple of times, the DoorDash, same-day delivery. We were -- with the previous provider of same-day delivery, it really limited the amount of customers that we could reach. We're now, through DoorDash, in every Bloomingdale's market, every major Macy's market, virtually all of our stores, and we're putting that as a more prominent view on our site. That's going to be important as you -- as customers are -- they've got those hard deadlines. The holiday is very important on that. And then, really improving our holiday delivery messaging. We used to be much more opaque about when a package will be delivered. We're much more specific now. We will continue to improve that. But those are all the things that we did to kind of improve the focus on digital, our tactics to deliver a better experience. And -- but as you mentioned, doing all that, that's great. You're going to go to mid-40s. You're going to be at 40 and above on digital. You've got all these shipping charges because one of the kind of table stakes for all of our loyal customers is free shipping. And so how do we counteract that free shipping and its impingement on gross margin? So just throw it to Adrian to kind of take you through how we're thinking about that.

Thank you, Jeff. As it relates to improving digital profitability, it's absolutely, Kimberly, a clear focus for us. But let me start by saying that increased digital penetration is actually good for our customers and good for our business. Now at the same time, we're pursuing a number of actions that are just necessary to address these gross margin headwinds. The offset of those headwinds will come from things like optimizing our POS promotions, our coupons, our markdown cadence, some of which we've benefited from over the last quarter, just to name a few. And all of these are actually contemplated in the Polaris strategy that Jeff referenced a bit earlier. One of the initiatives of the Polaris strategy relates to location-level pricing, which would actually allow us to be much more flexible and strategic in our markdown decisions. And what's nice is that we've successfully launched a new pricing tool earlier in the year, in October where we're actually able to see this play out at 5 departments, which is enabling us to take markdowns by location and will enable us to actually do some additional planning for 2021. Another initiative that we're focused on is optimizing POS promotions, which we're currently testing and iterating. And there's a lot of learnings that we'll gain from those tests that will inform not only our promotional pricing today, but how we actually think about finalizing our plans in the spring. The final thing I'd point to is that our continued focus on improving our stock-to-sales ratio. As I mentioned earlier, we're really benefiting from leaner inventories and higher sell-throughs this year with stronger margins than we anticipated. And so those are some of the kinds of initiatives that we'll be focused on as we increase the digital penetration in our business.

Fantastic, Adrian. And I do want to say we're very excited to get to spend some time with you today. I think this is your premiere event with Macy's, if I'm not mistaken. And we wanted to just ask a question to get a sense for your approach to the business over the coming quarters. Maybe you can just start with what it was that really excited you about the CFO role at Macy's, both in terms of the company's position in an evolving retail landscape and what you could bring to the table.

Yes, absolutely. I would say that the first reason I joined the company is because Macy's is just an incredibly iconic brand, and our brand has a long history of providing delightful and innovative experiences for our customers. And I believe that Macy's will continue to do this for many years to come. Now what really excites me about this opportunity that we now have is that I have the opportunity to be a part of the reinvention of this iconic brand. The reality is many retailers have been impacted by digital sales. They've been impacted by shifting customer expectations. And particularly among our younger customers, this is just the reality of how our customers are shopping today. When I think about joining Macy's, I joined at a time when the company is really reinvigorating its focus on innovation. And in order to address the evolving marketplace and really strengthen our business, it's just a really unique opportunity for us at this point to transform the business and to really emerge as a future-facing omnichannel retailer.

Jeff (sic) [ Adrian ], you've got a great extensive retail and consulting experience. And I'm wondering if you can talk about what you see as the sort of key short- and long-term opportunities at Macy's and how you size potential long-term risks as well.

Yes, yes. It's a great question, Kimberly. There's just a number of factors from my experience and my perspective that's really working in our favor. As an industry, we're just facing a velocity of change in retail that's never been seen before in retail. And as a result, we now have new ways of working, for example, the conference that we're on right now, which is virtual. But we also have new ways of serving our customers, which for us just opens up great potential. Now in striving for that potential, we are focused on just really strengthening our building blocks. Those building blocks include excellence in merchandising, how do we think about managing our inventory levels, managing our POS promotions, providing product that customers love. But we also recognize, in today's reality, we need a fast and efficient supply chain. Historically, an efficient supply chain was more than sufficient. But now we also have to be fast with the demands of same day and next day. We have to invest in a robust technology infrastructure because every dimension of our business will be digitized and will be dependent on technology. And then the last thing that is a real passion of mine is the use of advanced analytics to make better decision making. So we have proven the resiliency of our core business. You look at the strength of the digital business. As Jeff described earlier, our stores are recovering well, especially given our tilt much more towards the stronger quality malls. And even our credit business continues to perform very well through this pandemic. But while I'm in my early days at Macy's, I have to say that I sincerely believe that the company has the right strategy. And I see that we have an opportunity to accelerate progress in certain areas but also expand on our ambitions as well. The last thing I'll add, Kimberly, is the reason I joined Macy's was also because of the strength of our team. Our team is incredibly talented and focused. But as you think about the transformation that's ahead of us, they're also incredibly excited about that journey and that transformation. So we're all very, very committed to this iconic brand. And my experience tells me that we have a tremendous amount of opportunities to tap into the historical equities of Macy's and become that thriving retailer -- omnichannel retailer in the 2020s.

Excellent. Can you talk about the areas of the -- sorry, what strategy or area of focus do you plan to tackle first after ramping in your new role? And where do your priorities sit? Are there a few things that you can share with us that are kind of top of mind to tackle first?

Yes. It's such a great question, especially for Macy's. I would say that our ability to pivot and remain relevant to our customers is one of the main focus areas for me. Through the pandemic, this focus on customer relevance has really enabled us to progress by acquiring new customers, particularly on Mcom, and also retaining our existing customers. And what's really interesting is that there's a lot of evidence here that we're making progress. For example, we've observed solid retention rates among customers that we acquired in recent quarters. We've had very good conversion of those customers into our loyalty program, both in the second and third quarters. And we continue to target those customers through personalized messages through the holiday season. The other thing I would mention, Kimberly, is our total loyalty penetration improved to more than 56%. If you take the Bronze program as an example, we have 9 million members today, but we acquired over 1 million new Bronze members as part of this program in recent quarters. The last point I'd make here is that there's nearly 7 million new Mcom customers who shopped with Macy's in Q2 and Q3. So there's just really clear evidence here that we're on the right track and that we're making progress. Now as it relates to just this really important thesis of customer relevance, what it necessitates for us is that we will continue to improve our shopping experiences, both online as well as in stores, to really continue to build momentum there. At the same time, we have to continue to expand our omnichannel fulfillment offerings. Same day with DoorDash has been very positive for us. Our customers are responding well. We've upgraded our curbside experience, as Jeff described earlier. So the investments in the omni experience is very critical, but we also need to make sure that we're continuing to offer good value at all price tiers. We have the benefit and the flexibility to have off-price to luxury, and both businesses are actually doing well. Our luxury business continues to perform well as we believe a lot of our customers are shifting their experience spending into products. But even our Backstage store-in-store is performing well, and we continue to innovate and turn the assortment in a way that really keeps that energy with regards to Backstage. So even though we are on the right track into meeting our customers' expectations, you know this very well, Kimberly, the work is just never done. There's a lot of work to be done, a lot of work ahead of us. And as we continue to evolve and pivot in the marketplace, so do our competitors. So we'll continue to focus on the customer, gain insights from the data and really respond in ways that just makes us more and more competitive in the marketplace in the years to come.

Excellent. That is great. Jeff, I wanted to step back and just talk about the department store landscape for a second. Can you talk about how you think the U.S. department store landscape is evolving? Does Macy's see market share opportunities just given the broad number of competitor closures that you see?

Yes. So we definitely see market share opportunities based on -- and this has been in play for just kind of the consolidation of the department store retail over the years. And clearly, we had a number of Chapter 11s or Chapter 7s or just store closures in brands that are otherwise healthy. And so we look at it at a broad level in terms of are there categories that we could be going after that is being exited. That could be specialty as well. That could be pure-play exits as well. Are there opportunities for us? And then we look at it at a local level. That -- I just was in Manhattan on Friday, and looking at the opportunity in that particular store with the Lord & Taylor closing right up the road. Huge when you look at some of the swaths of business. I mean that was a $35 million building. And so how much of that can we capture? So you look at the beauty business. You look at some of the dress-up businesses which will come back eventually. Those are core strengths of ours. Those are customers that -- frankly, from Lord & Taylor that we want to get into our building. So we look at their management team, opportunities for us to pick up key colleagues, looking at working with our vendors about what business they did. So we do that on every single store in the company across where JCPenney might be closing or a Nordstrom might be closing or a Century 21 may be closing, opportunities for us to look at from -- again, from off-price to luxury depending on what the banner brand is. Huge opportunities at Bloomingdale's and on the Macy's brand. So as the department store industry continues to consolidate, we will take advantage of that.

Excellent. And that sort of dovetails -- or let's say, a good follow-on to that is a question we're getting from the audience here. Jeff, we hear from some brands that they're trying to minimize their exposure to wholesale. Can you talk about your relationships with brands, particularly brands that have brand heat in your view?

Yes. So on that one, I'm very confident in our relationships with our brands. We do share the same customer. And I think when you look at -- you take a brand like -- there are brands that have wider distribution. They're with us, they're in the mass channel, they're in the luxury channel. There is a lot in their assortment breadth that we can tailor that is right for our customers. And I'm not concerned about their distribution decisions or their direct-to-consumer strategies. It is our option -- our mandate really to make sure that we've got the best curated content from all of these great brands. And so we work very hard on exclusivity, on content that our customers want that is unique to our stores or the collection that is unique to our stores. And then we also want to supplement that by a growing private brand business. So as you heard from us in the Polaris strategy. That was 20% of our business. We're growing that to be 25% of our business. And that can be the gamut. We've got opening-price private brands all the way to luxury price points. So if you look at our hotel brand of textiles in the Macy's brand, it's our top -- it's our highest price points, but it is a thriving brand. So we look at where the landscape is going and with national brands, where the customer is going, what do we need to fill in with our private brands, where do we want to lead with private brands. I think that the mixture of that cocktail between national and private and working with our best brands, knowing what their distribution looks like, where -- what is the unique role we could play for our shared customers, and so we work very hard at that with them. And we're closer than -- I mean when you think about being the brand that we are, we have daily conversations with all these great brands, and that continues.

Great. Fantastic. Addressing one of the things you talked about in that answer, Jeff. A lot of these national brands are -- they have their own digital strategies, for example. And how -- what makes a customer think about coming to macys.com for a national brand as opposed to going to the brand.com website? How do you see the role of Macy's? Is it complementary? Or is there some degree of competition from some of the digital efforts of the national brands that you also sell?

Yes. So I think the first thing is that we need to be able to offer a curated assortment for the customers because every one of our customers, even our most confident alpha shoppers, need help with style. And so our opportunity to curate their brands and make sure that we've got the key basics but then we also had a curated fashion content in these brands is important. But it's the multi-brand aspect of Macy's. It's the loyalty programs. It's the one-stop shop opportunities that they get in fashion that they can't necessarily get from a direct-to-consumer website. So if they're going on -- and our opportunity to now kind of personalize our offerings. If they're buying a casual outfit, what's the footwear that goes with that? What's the cosmetics that they might wear with it? Those are the opportunities that we have through personalization that expands our value. So it's our opportunity to look at that full customer holistically. What are they doing in their life right now? Is there -- have they already left us digital clues about things that we pick up on when we personalize our content for them? Or are there look-alikes in our portfolio that might respond -- that they might respond like? So that's our competitive moat.

Excellent. We're getting a question from an investor on the 40% of your business in digital. The question is, if digital is going to be 40% of your business, can you talk about the tech and digital marketing teams and how you plan to stay ahead of e-commerce and technology-first type retailer, so digital-native retailers who have -- who may have a head start or a deep talent bench?

So this is a -- first time I would say that Macy's was one of the first of the omnichannel retailers to jump on digital. So when you looked at that, it's 10 years that we had double-digit growth in every single quarter. This, we invested early. And to be at 25%, to have one of the top websites in our categories in the country, we're operating from a position of strength. As you heard from us in February, we made changes to our digital team. So we basically -- in the middle of COVID, basically moved on a team that was based in San Francisco and moved it to New York City. And we couldn't be happier with the amount of talent that we've been able to get, that we've been able to launch. With all the strategies I've talked about, I don't think we've missed a beat with that. So the digital team is alive and well. The center of excellence for advanced analytics that Adrian mentioned earlier is what this team now runs. And then in Atlanta is where we basically have the balance of our tech team, and that is a very robust campus there. As you know, Atlanta is one of the hotbeds for digital talent with all the universities there that are feeding great engineers. We've been able to pick up on that. And so very happy with kind of the one-two of the team in New York, the team that is in Atlanta. And then as we found through COVID, our opportunity to fill openings from talent from around the nation has been -- I mean we can do that. We all work on kind of the Eastern time zone. But I'd tell you how many players that are just great talent that are now bolting into this apparatus because we're not constrained by geography in terms of where talent lives and where they work. And so I'm -- as Adrian mentioned, the building blocks, we have a fundamental -- as we think about a digital business that is growing to 40% or higher of our overall strategy and is getting, as you can imagine, the compounding CAGR that, that might look like over the years, having a very strong team in both the tech underpinnings of that in the digital team, very important, and we've really focused on it. So I like where we are right now. We've got certainly work to do, but we've got the talent to do it.

Okay. Fantastic. Adrian, a couple of finance questions for you, and we're getting one through the webcast as well. So let me try to put both of these together, if I can. In response to COVID-related disruption, Macy's announced a $630 million annualized cost savings on top of the $1.5 billion gross savings that you announced at the February Analyst Day. You've also been managing your costs extremely well this year, with SG&A down over 22% or down about 22% in the third quarter. How should we think about the permanence of these savings beyond 2020? And how does this fit into Macy's long-term cost saving opportunity?

Yes. It's a great question. We're very pleased with the level of savings we generated in Q3, Kimberly, particularly compared to the quarter of last year. And much of that was driven by a combination of initiatives that we believe are more permanent in nature. So just to reflect back, through both February and July restructurings, we reduced not only store-level and DC-level payroll, but we also reduced corporate payroll. So this included our campus consolidations as well as some of the progress we made in our productivity efforts. In stores in particular, we used digital tools in our stores to reduce head count. So we feel that we took the right actions across our business to really drive productivity improvements. We've also been able to flex down on marketing spend and a number of other spend due to the pandemic. Things like travel is certainly something we benefited from. But even on marketing, just being much more efficient in how we're thinking about the use of our marketing spend in a much more digitally-oriented world has been a benefit for us. Of the $475 million in year-over-year SG&A savings reduction in Q3, I would think about $225 million of that is more permanent as a result of the restructurings. And while the rest is really kind of a mix of permanent savings resulting from a number of initiatives related to Polaris as well as cost flex back as sales recovers, we do believe that as sales recover, that there will be better productivity and better efficiencies in the investments we make in SG&A. So we do expect to continue to see those efficiencies there. The pandemic has really allowed us to just operate much leaner and much more efficient, and we believe that, that will absolutely continue because it's a priority for us. Now the reality is, as we head into the fourth quarter, we do expect to see sales increase. We're very pleased with the expectations and the results that we're seeing. But from a payroll and marketing standpoint, we'll make investments as appropriate for the holiday season because it's certainly a very competitive holiday season. And we have seen a little bit of inflation in seasonal employees as well as there's tremendous demand for those workers. But more to come in 2021, in February when we speak again.

Excellent. That all makes a ton of sense. And just to wrap up on that, the investor question we're getting through particularly is can you keep the $1.5 billion of SG&A cuts out of the P&L? Or are those -- do you expect to be reinvesting all or part of that $1.5 billion into other items? And so they're asking would you expect total SG&A will head back toward that $9 billion number?

Yes. So our big focus is to bank as much of those savings as possible. But at the same time, we're very opportunistic because we do recognize that what's important for us is to get back to growth and growth that is actually profitable. So if we find opportunities that have high return to invest in the business that just gives us better cash generation, better profitability, better growth, we just feel that's going to be good for our investors. So we're just going to be very thoughtful about focus on banking as much of those savings as possible. But if there are opportunities to have a better return by making investments with a portion of those savings, we'll definitely take advantage of those opportunities.

Okay. Great. Adrian, I'm going to stick with you for one more, and then I'm going to go back to Jeff. Many retailers, including Macy's, suspended its dividend at the onset of the [ pandemic ]. We're starting, obviously, to see cash flow return to the business, which is great to see. Can you remind us of Macy's capital allocation priorities and where you plan to invest?

Yes. Of course, of course. Our goal is really to return to an optimal capital structure that enables us to return to investment-grade. So if I think about our capital priorities, let me kind of break it down into near-, medium- and long-term priorities, which I think will be a helpful framing on this question. And for the near term, we're very focused on liquidity and financial flexibility in response to just the uncertainty in the marketplace. We continue to see surges in COVID. Jurisdictions are responding. But as we think about liquidity and financial flexibility, we ended the third quarter with $1.6 billion in cash. We have not used our asset-based credit facility, and quite frankly, we don't anticipate to use that facility in the immediate term. As we think about the near to medium term, we're just simply going to focus on investing in growth initiatives that generate high returns while, in parallel, working to delever our balance sheet. So one of the things we shared earlier is that we'll continue to invest in our omnichannel business in ways that will generate more cash, generate improved margins and generate growth because that's just going to be very good for our business, for our customers and for our investors. As we think about the near to medium term as well, our goal here on deleveraging the balance sheet is really focused on paying off debt as it matures. So we've already communicated that, next month, we'll be paying the $530 million of maturing debts. And 13 months from now, in January of 2022, we'll be paying down the $450 million. Now when I think about the long term, we're super committed to getting back to reissuing the dividend and repurchasing shares when it's appropriate. But to do that, we have to be laser-focused on achieving consistently positive performance. And so that's really the orientation. So we'll continue to monitor our cash position as we enter that journey, and we'll address our dividend and share repurchase decisions with Board approval at the appropriate time.

Okay. Excellent. We have another question coming through the webcast, Jeff, for you. Can you please ask Jeff about his view on holiday so far?

We don't comment on how the quarter is performing within the quarter. But what I would say is that the month of November was at our expectations. So as you know, we elongated the calendar, basically trying to take some of that Black Friday demand and pulling it earlier to November and into the month of October. We talked about that on our third quarter call. What I'd tell you is that having been in stores, very happy with the way that we're showing up. And you look at the inventory position on our websites, you look at how we're fulfilling, all of it is going at expectation. So we exited November as we expected, and we're looking forward to serving customers as we get to the critical gift time in December.

Okay. Fantastic. I am getting the 2-minute warning. So let's see. Maybe I will just pause there and ask each of you if you'd like to wrap up today with a minute of your kind of key message as we look to close out the year and head into 2021.

So what I'd say is that we're laser-focused on where the customer is going and where they're going in content, where they want to go in value, where they want to go on experience and convenience. And so our brand is more flexible than ever to be able to respond to those needs. And we're very clear-eyed about where we're making progress and very clear-eyed about where we need to make a lot more. So we have the advantage of having an omnichannel ecosystem, a great app, a great digital site, great store locations, the opportunity to smooth out all the friction that's in that journey because customer is transacting in so many different ways for so many different categories, and we are very committed to improving on that over time.

Jeff really summed it up incredibly well. Just to amplify a few points. Number one, it's all about the customer. And being responsive and flexible to the types of products the customers want and how the customer wants to shop our stores at our digital channels depending on their occasion is really critical. The second thing that Jeff speaks a lot about which is very paramount for us is great execution. We have to be flawless in our execution as our customers engage with our brand, especially in this holiday season. And I think the last piece I would just add is there are a lot of great learnings in 2020. How do we take those forward into 2021 and years beyond? It's a very competitive space, but there's a tremendous amount of opportunity that we see ahead. And so how do we take those learnings from 2020 and translate it into our business going forward?

Wonderful. A great note to end on. And I'm so sorry, there were a ton of questions coming into the webcast, and we just did not have time to get to everything. But Jeff, Adrian, this has been a fantastic session. Thank you for kicking off our conference this morning. And I hope everyone has a very safe and happy holiday season. Thank you.

Pleasure to be with you, Kimberly. Thank you.