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

[Audio Gap] in person finally, after 2 years in Boston. It's great to see all the smiling faces, and welcome to everybody who's logged in to listen to the webcast online. I'm Jay Sole, UBS' retailing department stores and specialty softlines analyst, and welcome to our fireside chat with Macy's. Now before I go any further, I want to give the disclosure statement. As a research analyst, I am required to provide certain disclosures relating to the nature of my own relationship and that of UBS -- I'd like to go through this part fast. With any company on which I express a view at this event today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the events. Now I am very pleased to introduce our special guest, Adrian Mitchell, Chief Financial Officer of Macy's. Adrian, thank you so much for doing this today.

It's great to be here with you, Jay.

Well, the goal for today is to really dig into what Macy's is doing today versus pre-pandemic to really to allow it to become a share gainer and really beat off price and grow the business overall.

So I want to start off by framing the conversation for people because I think people are hungry to know how your strategy will help Macy's take share. So maybe to start off, let's just take a step back and maybe, Adrian, please talk about what Macy's mission is.

Yes. When I think about our strategy at Macy's, Inc., it's a strategy that has to be grounded in data and insights about what's happening with the consumer across all of retail and understanding how consumers shop retail today but also how they're expected to shop retail into the future. The thing that we believe very strongly is that with this insight and reacting and responding to this insight, we can be in a much more competitive position relative to our peers, and we can be much more relevant to consumers who are actually shopping our categories. One of the things that's really interesting when you look at the overarching research is even with the pace of change and even with the level of disruption we've seen in retail over the last 10 to 20 years, the fundamentals of retail still remain. Great product at great value delivered to consumers in the most convenient and easy ways of shopping. So let's break that apart. When you think about great product, Macy's is the place where you can get great national brands, whether it's Michael Kors, Levi's, Ralph Lauren, Estée Lauder. But it's also a place where you can get private brands as well, whether it's our INC, And Now This or even Oak. And what we're excited about in 2022 is with the expansion of our digital marketplace, we can introduce more products, more great brands in our existing and our expanding categories that customers will love and really want to engage with. So that's great product. But you have to deliver that with great value. Now great value isn't always lowest price. It's really about great value, about the combination of quality and price. And a big part of what we're focused on with data science in this particular area around value is just being very thoughtful about our competitive pricing and our markdown cadence that allows us to deliver that value to consumers while, at the same time, being able to have healthy margins within our business. And this was a real breakthrough in 2021 for us. Now the third piece is really important, which is around delivering that great product and value in the most convenient and seamless shopping experience. And this is where when you look back the last 10 to 20 years, where we've seen the greatest change. And we expect that trend to continue over the next 10 years, which is why we're repositioning our business and transforming our business. But what we see there is that a very healthy level of digital growth will continue. We see that malls, particularly the best malls, remain relevant but to a lesser degree than what we saw over the last 10 years. And we do believe that off-mall formats will continue to have resiliency with a modest level of growth over time. But the data seems to show that those off-mall locations that are very convenient to where customers live and shop and work are actually quite relevant and an important part of how we think about our strategy. So when you think about you're living in a neighborhood, you're living in a market, a big part of what we're doing is really thinking about our business at a very local level. We operate one of the most scaled digital businesses in retail. But that business is supported by a physical footprint of on-mall and soon to be a larger volume and a growing volume of off-mall stores. So look, we're excited about the momentum. We feel that we have the fundamentals in place. We've created the capacity to continue to invest. So we feel really good about where we are and where we're going.

All right. So that's a great start. So Adrian, I want to maybe just dig in a little bit to the omnichannel ecosystem that you're touching on because you're touching on stores, you're touching on digital. You're talking about convenience and being close to consumer. Can you just talk at a high level about how the stores fit into the strategy, particularly since you expect store sales to decline over the next 3 years and how Macy's omnichannel system is differentiated from what others are doing?

Yes, absolutely. I think I would start by saying we are an omnichannel business that's serving the needs of an omnichannel customer. And I will say very clearly that repositioning and optimizing the physical footprint is a must-win initiative for Macy's to be relevant over the next 10 years. So as we think about winning the omnichannel customer, we recognize that the omnichannel customer is the most profitable and the most productive. Our data, even in a heavy mall-based environment, demonstrates that the omnichannel customer spends more, 2.5 to 3.5x more than a single-channel customer; shops more frequently with us, 3 to 3.5x more than a single-channel customer; and that, that omnipresence really supports digital growth. So digital sales per capita in markets where we have stores, even mall-based stores, are 3x more productive than markets that don't have it. So the notion of winning in omnichannel is also recognizing the critical importance of stores. But as I mentioned a little bit earlier, we feel that we have to place our stores in more convenient locations. We believe that a portion of our mall-based stores are quite relevant, and we're investing in those best malls that will remain relevant over the next 10 years. But we also recognize to access an additional customer, we really do need to lean into this off-mall format. And so we're really excited about the progress we're making there. We opened up in the third quarter a number of off-mall stores. And we very much believe that our Market by Macy's, serving our Macy's brand, and our Bloomie's small store format, serving our Bloomingdale's brand, is critical to the growth of our stores channel and critical to the growth of our omnichannel business. And just to put in perspective, when you think about the stores that we've opened in the fourth quarter, in the fourth quarter, those stores, those Market by Macy's stores, as an example, are seeing sales beyond our expectations, beyond our model. So getting that location right is really important, and we're seeing those convenient high-traffic locations really produce. But what's also exciting is the customer experience scores, which are meaningfully different and meaningfully higher in these off-mall stores than in our mall-based stores. For example, quick and easy checkout. For example, easy shopping. For example, the availability of our colleagues to be able to help the customer when they're in the store. It's a fundamentally different experience, but it's a relevant experience. And the one I'm really excited about is the number of new customers shopping these stores are materially higher than mall based. So the rate of new customer acquisition and opening these convenient, off-mall locations is also an acquisition vehicle, a new customer acquisition vehicle for us as well. So as we think about the store footprint, it's about convenience by leveraging the digital platform, our app and our website, and repositioning in a more optimal way where those stores are located to support that experience, especially with the fulfillment capabilities we're putting in stores as well.

Got it. Okay. So I want to get back to the small stores in a second. You just touched on some of the digital capabilities. So I want to focus on digital for a moment. The company is targeting digital penetration to move into the low to mid-40s as a percent of sales by 2024. And that's up from 35% last year and just 25% in fiscal '19. So I want to ask you about some of the company's digital initiatives and how they fit into the goal. And the first one is Macy's mobile app and sitelets. What are sitelets?

Yes. I think of sitelets as a piece of our website, where you can immerse yourself in an experience. It could be a sustainability experience. It could be a particular brand. It could be a particular category. But what you described is an important evolution. We believe that Macy's, Inc. is on an evolution that is much more digitally led, which will result in greater digital penetration because that's where the customer is growing -- is going. So let me give you a few examples. In the third quarter of last year, we redesigned our mobile apps for Macy's and for Bloomingdale's. And what resulted was higher usage. So in the fourth quarter, we saw 81% more downloads than we did in the third quarter and higher conversion, 8% higher conversion on the new experience post October when we launched it versus pre-October. So that's a good thing. Last year, we also introduced live stream shopping. Much lower scale than our broader digital platform but a high-growth channel in terms of how consumers are engaging with brands. So with live shopping, we're seeing 6% conversion for people who participate in the live shopping experience, which is significantly higher than our broader digital platform conversion rate. This year, we're doing a couple of things that are really important. One is around replatforming -- I'm sorry, redesigning our macys.com and our Bloomingdales.com experience. This is about easier navigation, better shopping experience, all those sorts of things. But we're also leaning into digital marketplace. And the digital marketplace will offer consumers more products, more brands, more categories, greater depth in the categories that we're currently operating in. And so that's yet another extension of our digital platform to drive profitable growth in the business. And what's underpinning all of this is personalization, right? We do recognize that personalization. We had lots of success in 2021 with our use case tests. We're scaling a lot of those capabilities in 2022. We will really see the momentum of our personalization initiatives in '23 and beyond. But these are things like churn prevention campaigns for customers that are at risk of exiting the file. This is campaigns like win-back campaigns for lap customers. How do we get them back transacting with us? This is increasing the level of engagement with more relevant content, leveraging the data in our Star Rewards program and also leveraging the data that we see in terms of purchase patterns. So we're pretty excited about the momentum with digital. There's a lot to do, but it's a critical part of how we think about our digitally-led strategy.

All right. So there's a lot going on with digital, for sure. I want to just keep transitioning. I want to talk about merchandising because you mentioned that -- one of the very first things you said is that some things about retail haven't changed. And one of those is great products still matters a lot. So maybe, Adrian, tell us how Macy's product assortment is differentiated from what others are doing and how you've evolved it.

Yes. It definitely starts with what we talked about a bit earlier, Jay, which is great products, but they have to be at great value. So we operate from off-price to luxury. And whether you're operating in the luxury tier or you're operating in the off-price tier or in-between, value and great products is really critical to us. Now there are really 2 things that are critical for our differentiation. The first piece is it starts with offering the best brands in retail, whether those are national brands or whether those are private brands. But retailer -- consumers come to us for these great brands, these great styles. And so we have to make sure that we're continuing to invest in those relationships and nurture those relationships in a way that actually grows. So let me give you a couple of examples of why this is important. We entered into a Toys"R"Us relationship back in August of last year. In the fourth quarter, our toy sales was 3x the sales in Q4 of 2021 than it was in Q4 of 2019. And Toys"R"Us was a core part of that. This year, we'll be putting in-store Toys"R"Us experiences in all of our stores. This year, not last year, where we actually increased toy sales 3x. So those are the kinds of things that help nurture these brands. And customers respond where we actually present those brands well in our distribution platform. Another example is the Pandora relationship. So we introduced Pandora to 5 stores in November of last year. Sales in the jewelry category in those 5 stores incredibly [indiscernible] clearly driven by the strength of the Pandora brand. We're scaling that to 25 stores this year. So those are the kinds of things that we have to do. It's great brands for our consumers with great value. The second piece is we have to present those brands in a way that's personal for the customer. And what you'll see later this month is the introduction of what we call Own Your Style. And Own Your style is about helping consumers express and own their own style, whether they're decorating their home for an event or whether they're getting dressed up for work, and really leveraging that through our in-store colleagues by providing experts that can help you develop your style in any part of your life to personalized content, driven on the digital platform through our data science recommendations. So we're excited about that, but that's how we're going to differentiate ourselves. If we can do those 2 things well with value from off-price luxury, we'll continue to improve our competitive position and we'll continue to be very relevant over the course of the next decade.

Got it. Understood. It's interesting how you apply those things to a category like jewelry. And it's been such a great story for Macy's. Now Pandora coming in, even more differentiation. Interesting. Now talking about jewelry makes me think about luxury. And Bloomingdale's comped 13% in the fourth quarter, and that's versus 2019. Is the market overlooking Bloomingdale's?

We certainly hope not. Bloomingdale's is our upscale brand. It serves our affluent customer. It retains our affluent customer. It attracts more affluent customers across multiple generations. And we're excited about the momentum. As we mentioned before, we operate from off-price to luxury. Luxury is a material part of our business. Bloomingdale's is on fire. We're really serving that segment, and we're serving that segment well. And to your point around the performance, we want to continue with that momentum.

Now I want -- you just -- you mentioned really Macy's has a lot of -- from luxury to off-price. I do want to ask about Backstage because Backstage has been an important initiative for the company over the last couple of years, continuing to open up stores. Tell us where Backstage is right now. What's the plan for Backstage going forward?

Well, we're continuing to expand our store-in-store concepts. So we have 30 to 40 stores that are going to be expanded into next year. It's a value dimension that's really helped the overall Macy's experience. We have a number of freestanding Backstage that we've expanded over the course of the last several years. We have a couple more that's being expanded in 2022. It's an important dimension for us to operate across all 3 of those value tiers, the luxury tier, the off-price tier and all the stuff in the middle. So it's been really well received. It continues to have very healthy growth profile. And it's certainly tapping into a younger, more diverse customer that's a bit more value-oriented than our full-line box. So we're excited about the opportunities there.

Got it. All right. Now a huge topic is inventory discipline. Obviously, we're lapping a year where, obviously, the margins were high and a lot of full-price selling took place. How are you thinking about managing the assortment and the inventory as return to work probably starts up?

Yes. The inventory discipline that we executed in 2021, I think, was really core to our success. It allowed us to achieve a healthy level of margins and expand our margin profile. We were able to manage the working capital dimension very well. So we're able to generate a lot of cash from operations. So we're really pleased with the disciplines that we demonstrated for ourselves in 2021. We can extend those in 2022. Some of those pieces are disciplined upfront buys. We don't want to overbuy. We'd rather chase sales. So discipline is really important. Adding data science to make sure that we are understanding the kind of products that we -- that our customers want, whether it be a fashion product or replenishment product, and just really making sure we're working with our supply chain partners, our vendors to make sure we have inventory actually available for our customers at the right time. And at the right time is a really important dimension. Once we get that inventory, the thing that we also do a lot of now is really using that data science to get it into the right place. What's the right channel? What's the right market? What's the right store in that market? So that we can better match where we see demand with where we actually place our receipts. So those are the kinds of things that we're doing. We've exercised that muscle in 2021, and we will continue to do that in 2022. We do believe the supply chain is easing, but we're still going to be very vigilant with our inventory management actions.

Got it. Okay. How do you build on the inventory buying discipline and maintain the margin gains that were made in fiscal '21?

It's really this discipline around buying right, using data science to maintain our margin profile and making sure that we're really being vigilant with our projections around working capital needs. As you think about our 2022 projections and our guidance, we're just being very measured. It's important for us to be very measured so that we don't get over our skis because as soon as we get over our skis, what happens is you have excess inventory. You got to market down, margins compress, cash flow diminishes. You got to add labor in the store to price markdowns to price Last Act. You got to reverse logistics, excess inventory out, you got to write some of it off. That's not a place we want to be again. So we want to be very disciplined, work with our vendor partners closely to understand what demand patterns they're seeing, use our data science to understand what demand patterns we're seeing, take a measured approach to our commitments and keep positioning ourselves in a chasing position, not an overstock position.

Interesting. Okay. A key topic that came up on the fourth quarter call was customer acquisition versus attrition. And I think probably more robust discussion around that topic than in previous calls. The company said that it's accelerated its rate of customer acquisition, which far outweighs attrition. So maybe help us understand what's changed. What's the company doing different to accomplish this?

Well, to win in retail, you have to grow the active customer file, full stop. And we feel that we have momentum on the acquisition side. And we feel that we have a path on the retention side. And that's what we were able to accomplish in 2021. So on the acquisition side, it's really about more brands; great brands; leveraging our digital platform, which is capturing about half of our new customer acquisition; off-mall, which we're seeing is actually acquiring more customers at a higher rate; and just really continuing to drive these introductions of categories, brands and offers and platforms in a way that attracts new customers. And that's a key part of our competitive position. And I would say in 2021, the acceleration in acquisition, we see it's working. Let's fuel that fire. There's more that we can do. On the retention side, it's all about personalization. And so when we think about using the data science to be able to support, how do we interact with the customer? How do we offer up relevant content unique to Jay, which may be different than Adrian? So how do we really leverage that data science and offer relevant content to influence purchase patterns and avoid lapses? As I mentioned a little bit earlier, one of the things that we've been excited about are these different campaigns that we're using against different customer segments. We're doing a better job now of really stitching together more granular customer segments where we can have specific actions around churn risk opportunities, around win-back opportunities, around further engagement opportunities and extending customers who may be focused on apparel into home and other categories that will be available on marketplace. So how do we become more of a destination for the customer because we have the relevant content for him or her and being able to engage on that content actively, that's where the retention piece, we think, really comes in. But at the end of the day, full stop, to win, we have to continue to grow the active customer file.

Got it. Now growing that active customer file, and you mentioned, obviously, retention, personalization is key you mentioned. Maybe tell us, how does the updated loyalty program tie into what you're talking about? And what benefits have you seen from changing the loyalty program?

Yes. The biggest benefit is access to data. So if you think about our Star Rewards program, 66% of our owned plus licensed sales in the fourth quarter came through members of that program. There are very few loyalty programs in all of retail that can have a number so high. So understanding their purchase patterns, understanding their frequency, understanding categories they're active in versus not, understanding if this is family versus a single, like there's all this data that allows us to be able to really elevate the strength and the capabilities within personalization. And it's growing. So our broad segment continues to grow at a very, very healthy clip. And so the bronze tier, the silver tier, the gold tier, the platinum tier, we can really understand the data around that customer to be able to offer up that relevant content. So that Star Rewards program is a great asset for us.

Okay. Understood. All right. So we talked a lot about your strategy. Adrian, how are you thinking about growth in the context of the current macroeconomic environment?

Yes. Jay, the macroeconomic environment will continue to be challenging. That's our perspective right now. And the 3 things that we looked at pretty actively as we thought about our 3-year outlook and we thought about our 2022 guidance was around consumer demand, promotional intensity and supply chain. So let's kind of talk about each one of those individually. We do believe that from a consumer demand standpoint that we still have a healthy consumer. So we recognize that many consumers benefited from the stimulus in 2021. We see that savings levels remain elevated entering into 2022. A little bit of a downtick on savings rate in January but still elevated relative to prepandemic levels. And as we see here today, we all want to get out. And if you want to get out, you're going to be spending on apparel and back to work and things like that. So we do believe that there's a healthy consumer that's also under pressure. Inflation is elevated with the geopolitical instability that we're seeing with Ukraine and Russia. You're seeing oil prices escalate, which will only elevate the expenses around essential goods. So there's still pressure there, but we think that there is demand to be had, but there's a level of uncertainty. On the promotional intensity piece, I think it goes back to what we spoke about before, which is you got to get the right stuff at the right time. There is likelihood that some players in the space may have gotten holiday inventory after holiday, which increases the promotional intensity. There is a risk that if folks are seeing softness in 2022, that, that increases the need for promotional intensity because they own the inventory. For us, we're focused on the content, the engagement and the right buys, the right product to the customer so that we can get through those headwinds. So we feel good about our position to maintain elevated levels of merchandise margin and gross margin, which we committed to in our outlook, because of the disciplined approach and the data science capabilities that we didn't have before, pre-pandemic. Part of our tool kit as we think about pricing and promotions is looking at the competitive context for like products and same products in the market. How is the market pricing it? And how do we respond? So we're doing a lot more real time. The third piece around supply chain is the supply chain will continue to be challenged. We really do believe that, that will continue to be a challenge through 2022 and likely into the early part of 2023. Now the supply chain challenges are easing. Preholiday, you had easily over 100 vessels off the coast of California. Today, it's probably about half of that. So it's definitely easing, but there's still pressure. There's pressure on the domestic side around the availability of drivers, the availability of workers at the ports, the availability of rail, the dislocation of equipment across the supply chain. But we also have to recognize overseas where there is a much lower level of vaccinations and zero tolerance policy on COVID that there could be more shutdowns in factories and also in ports we're actually getting products from. So look, we'll continue to diversify across countries. We'll continue to be thoughtful about what works in '21 and lean into that in '22. But we're just very vigilant as it relates to the supply chain.

Okay. Got it. All right. So I want to ask you a little bit about some of the actions you've taken over the last couple of weeks with being a healthier company. Some of the actions have strengthened the company's financial hold further. Maybe, Adrian, can you expand on how you're thinking about capital allocation?

Yes. What's exciting about capital allocation is that it's really the core of translating our corporate strategy into actual tactics, actual actions. And we believe that the capital allocation approach that we've taken over the last year has really positioned us to be more agile, much healthier and really creating a runway to invest in the business going forward. The first piece of this is maintaining a healthy balance sheet. And the way that we thought about it coming into 2021 is we need to get our adjusted debt-to-adjusted EBITDAR ratio, our leverage ratio below 2.5x. And so we ended 2021 at 1.8x. We exceeded our target, which was at 2.5x. And when we were investment grade coming out of 2019, we're at 2.9x relative to where we exited the year. This past year, at 1.8x. So we feel really good about that. There are a number of other things that we've been doing that we think are really important. We started the execution of a refinancing transaction. We had $1.1 billion of debt maturity tariffs in '23 and '24. What the refinancing allows us to do is to create a runway of 5 years with no material debt maturity towers. There's a $6 million noncallable tower in 2025, but effectively, that's it for 5 years. So we are working to close that transaction. And we're able to do that on an 8-year and a 10-year tenor, so maturities in 2030 and 2032. So effectively, we have a 5-year runway with no material maturities, fundamentally derisking the business but also giving us the capacity to invest in the growth and return capital to shareholders. The other thing that we've done is we -- as of yesterday, all of our debt towers are unsecured. So we made a tender offer to decollateralize the second-lien bonds that were out there. And as of yesterday, they're now all unsecured. So at that point in time, we had 3 flagships, 35 stores, 10 distribution centers that we're serving as fixed asset capital -- fixed asset collateral. That's no longer the case. And then we also extended the term of our ABL. We now have a $3 billion ABL that expires in March of 2027. So the health of the business, #1 priority. We feel really good about where we are. Now we can focus on the remaining 2 pieces of our strategy. One is investing in the business. We have momentum. We see the growth ahead of us. As I started our conversation, we've looked at what will it take for us to be relevant for the next decade. We understand what it means in terms of digital. We understand what it means in terms of stores and repositioning that footprint. Now we have a runway of minimum 5 years to be able to really invest in the business. We're investing $3 billion in CapEx over the next 3 years, very elevated levels of $1 billion-plus this year and $1 billion likely over the next 3 years per year. So that's all about investing in what's working and continuing to follow the data and to be able to achieve that. At the same time, we want to return value to shareholders. We've committed to a modest dividend, but it's a predictable dividend that we expect to increase about 5% every year. But we're really meaningfully going after share repurchases. And so we feel that's an important part of it. And just to put in perspective the capital allocation piece, if you look at our debt structure, we have $3 billion of book debt now given the material paydowns that we've done. On a net basis, about $1.5 billion. We have an average maturity now that's more than 11 years at coupon rates comfortably below 6%. So just a very different financial health profile this year going into the next several years. And that's what gives us a lot of confidence around where we are.

Got it. Okay. Very interesting. I'm going to ask one more question. I'm going to open up to the audience. So if you guys have questions, get them ready because I'm going to turn it to you guys after this next question. But Adrian, I want to follow up on stock repurchases. The company has a $2 billion authorization available. A lot of investors wonder why not do an ASR. What's your view on that?

Very simple. We like to -- we want to maintain flexibility because the market is pretty volatile. So we just want to be able to maintain our own flexibility.

Got it. Okay. Straightforward enough. All right. So I'm going to open -- if you have a question, maybe raise your hand, say your question. I'll repeat it so everybody online can hear it. So maybe we'll start over here.

Adrian, you talked about chasing inventory. How does -- how do you sort of think about that [indiscernible] supply chain problems and just the cost of transportation? And how do you sort of weigh the balance of both of those?

Yes. So with regards to change -- to chasing inventory, it's really about anticipation. And so if you think about how we thought about this in the early part of 2021, we had our orders kind of set coming into 2021. But we saw pretty elevated levels of demand as we got through the -- particularly the end of the first quarter. And we saw that momentum continuing. So we had to make a bet that inventory availability was going to be key for us to be successful in 2021. And that was a bet that really paid off for us. So a lot of it is anticipation. The second piece of it is really staying close to our partners. Staying close to our vendor partners on what they're seeing in the marketplace, staying close to our carriers and having good negotiations around getting containers locked in, getting good prices locked in. And that served us well in terms of maintaining very healthy margins. And what we'll do is we'll continue those practices into 2022. But we also have to be vigilant about new practices we may need to be thinking about given unexpected or unforeseen challenges in the supply chain as well.

You've been super successful in terms of acquiring customers. Can you talk a little bit, both digitally and on brick-and-mortar side, how you've been able to do that, either different types of ad targeting digitally, particularly [indiscernible]? Or brick-and-mortar side, is it more about specific brands, specific locations. Where are you finding these new customers?

Yes. It's a great question. So when we think about new customers, as I mentioned earlier, the active customer, meaning a transacting customer with us in any given period, is really paramount to sustaining real growth. And as we think about how we're targeting customers digitally, it's all through digital marketing investments that really tap into customers that are shopping on many different digital platforms. It's tapping into our social programs that we're actually doing. But it's also making sure that when the customer shows up, that we have great content and great value to share with them so they can come back organically. And so we do a lot of e-mail campaigns. We do a lot of retargeting campaigns to kind of keep that engagement with the customer. The store side is what I'm pretty excited about. Half of our new customer acquisition comes through our stores. We recognize that we have a mall-based store structure. But we also recognize we have to reposition that footprint to the best malls but also off-mall. And as I was sharing with Jay earlier, we're committed to continuing to grow this off-mall format to a material level of volume for the business over time. And the reason why this is important is because of the economics that we're seeing with this asset. But as I shared with Jay earlier, what I'm really excited about is just the pace of new customers that are shopping these off-mall, high-traffic locations relative to our on-mall format. So it's just pretty exciting. So we're looking at very different ways of doing that. And then the last example is you pointed out, great brands. Customers come to us for great brands. I think the Toys"R"Us example and the Pandora example are 2 -- that's a subset of many, but you got to have great brands. You got to get customers excited about engaging with us, and having the right content for the customer is going to be a key part of that.

How do you think about the curation of brands in the smaller format stores? Are you buying [indiscernible] for specific brands? Are you [indiscernible] different brands [indiscernible] mall stores? What's the strategy there?

Yes. It's a great question. The way to think about it is we have our best brands and our best content localized for that neighborhood in those locations. And what we're seeing from an inventory churn standpoint is that the churn is just incredibly healthy. So we're actually moving through that pretty quickly. Now in all fairness, we're still learning. We're still learning about kind of what's the pace of sell-through. How do we continue to tweak the assortment for the customer in that neighborhood? We're just learning this as we go through it because it's a bit of a different muscle. We've been a mall-based retailer for generations, and now we're leaning into this off-mall piece. And the good news is we've been at this for a number of years. We've had a number of stores that were less successful. We've had learnings from that. But we think the big unlock is around location, location, location, the data science that we've added there. So we're still learning, to your question. But it's really a reflection of the breadth of assortment around fragrances, around home, around toys, around ready-to-wear, around kids. It's the best reflection of the brand in a smaller footprint. Thank you.

Are we planning for the next 2, 3 months in the context of what you said that consumers are healthy but March is [indiscernible] when it comes to stimulus, savings are coming down [indiscernible] [ and always ] anticipating that the end consumer actually gets hit a little bit. How is that impacting the way you're planning in terms of inventory, the way you're planning in terms of promos more in the short term, given that March and April are the big question [ mark months ] [indiscernible]

Yes. It's a good question. So we knew that the first quarter would be a quarter where relative to last year would be a higher growth profile than what we would expect in the back portion of the year. Now the key thing as we think about 2022, including the first quarter, including the next couple of months is we were very measured. The inflation pressure on consumer demand existed even before the geopolitical challenges that we're seeing with the Ukraine and with Russia. And so we saw that as we're planning into the first part of this year. But at the same time, we still see a pretty healthy consumer coming out of the fourth quarter. The luxury consumer, as Jay spoke to, is still pretty healthy. The off-price consumer is still pretty healthy. Our content in the middle of that with our Macy's brand is still pretty healthy. I think what we have to continue to watch, to your point, is the inflation. I think inflation is the biggest unknown in 2022 and also the biggest unknown over the next couple of months. Oil prices continue to surge, especially with the ban from Russian oil. So that's going to pinch the consumer. Gas prices are elevated across the country. Grocery prices are elevated across the country. People are noticing their ticket. So there's certainly a segment of customers that are going to be more impacted than not. I think as we're looking at it, we're really trying to understand which segment is going to be most impacted. Obviously, your lower-class segments in terms of income levels is going to have a larger portion of their income spent towards these essential goods. How do we think about communicating value to that customer differently than, let's say, a luxury customer that has more capacity to spend? So this is where the data science becomes really important because, clearly, value is going to matter. But it's going to mean something different depending on the tier and the different segments.

And have you seen [indiscernible] trending down as a result of that? Normal people see how the energy deal is going up. They don't really have as much money for these [indiscernible] items. Have you seen any need to move lower when it comes to their ticket size? Or...

We have not, and it may be because what we're seeing as a transformation in our business. So the interesting thing for us is it's really important to land value. That's a really important thing. And what we're seeing is a consumer that's still spending. We're also seeing a consumer that is really excited to just get out of the house, get back to some level of normalcy. And that implies a level of spending. So we're seeing real health in different parts of our business that we're pretty excited about. But so far, I think from our perspective, we feel that we've planned right and we're going to continue to kind of weather the storm. But again, it's a moving target this year. Inflation, demand, interest rates, there's a lot of moving variables that we still have to navigate through.

Maybe now, if I can, I'll join -- jump in on one point, and then I'll turn it back to the audience. But Adrian, you mentioned something very interesting when you talked about the balance sheet and really the transformation of the balance sheet, if we look at the balance sheet today and the actions you've taken over the last few weeks versus 3, 5 and 7 years ago. You mentioned that the debt is now unsecured. All of the debt is unsecured. And you mentioned that the company owns a lot of stores, DCs. There's a lot of assets, a lot of flagship properties that are highly valuable. Is there something that we should be mindful of? Because, obviously, the company has been using assets to drive earnings, I think about $100 million of profit every year from selling assets that have -- the company has been able to do that without it really impacting the core business very much. Is there some opportunity there that maybe is different from what people are expecting? Because I think people expect just what we've seen over the last few years just continues going forward. But it sounds like maybe something has changed.

Yes. So a few things on this. To your point, we're very pleased with the financial health. You can't invest in growth if you're not healthy, and that's been our mindset. So getting to this level of health is really critical. As we think about the transactions that we've done, we shared in our guidance that we'd expect about $190 million of interest expense this year. And that guidance really contemplates a lot of the refinancing that we talked about as well. So just wanted to create that transparency around very manageable level of interest expense as we think about 2022 and beyond. On the monetization piece, there is a shift, to your point. So historically, if you look at the monetization activity that we've done, and there've been years to your point where it's been very elevated, it was really around we had a lot of store closures. We're selling and exiting. In some cases, we are selling, doing a leaseback for 1 to 3 years than exiting. But effectively, we're disposing of these assets. There's a strategic shift around monetization that we've taken in the back portion of the last year that we're leaning into pretty aggressively over the next 18 to 24 months. And that is this next level of monetization, which we call outparcels as well as mixed use. So the whole idea is how do we get private approvals to monetize the assets, whether it be for residential development, medical campus development, office space development, other development? How do we get those private approvals working with our landlords and co-tenants and then get the public approvals? Those approvals elevate the value of those assets. So then we can actually monetize that asset at a higher value than just disposing of the asset outright. That's a different dimension. And what we've been able to do is now have 10 development partners, which is 2x the number we had before we actually structured this next evolution of monetization, to be able to really actively monetize assets where it makes sense. And to our earlier point, malls will be relevant going forward but to a lesser degree than what we saw in the last decade. Off-mall is really important. So the monetization work that we're doing is consistent and aligned with how we're transforming and repositioning the physical footprint to drive growth and drive market share in these different markets. So that's really what we're doing on the monetization side but very consistent with the different elements of the Polaris strategy.

All right. So I want to just -- let me take a look at the audience. I'm going to jump in with one more. I mean just because we mentioned these small stores so many times this morning. I don't know -- I think it'd be great just to take a step back on the small stores and just explain to people, what does a small Macy's store look like? Is it 25,000 square feet? Like where is it located? Like tell us just a little bit about the nuts and bolts of these stores because I think there's only like 6 or so right now, as far as I know. Tell us about where this is going and what these stores are really like.

Yes. So the stores I would encourage everyone to visit are Flower Mound in Dallas, Texas. There are 2 in the Atlanta market, which are Presidential and South Point. Those 2 are the current version of the Market by Macy's that you'll see us really lean into from a volume and a scaling standpoint going forward. What you see when you walk into the stores, depending on what store you go into, is about 30,000 to 50,000 square feet. You walk into the store -- actually, let's start in the parking lot. In the parking lot, pretty high-traffic location. You may see a Ross store nearby. You may see a grocery store nearby. You maybe see a TJX nearby. But it's a center that's busy, that's hectic. And we are positioned in that location, in a visible location. When you walk into the store, you look from left to right or right to left, you can see the entire store. So you have very good sight lines into seeing beauty, into seeing home, into seeing ready-to-wear. And at the very center of that store is the fitting room, which is staffed with a stylist to help you make your choices. And there's animation in the store. So there's animation in the fitting room, and there's animation at the At Your Service desk, which is typically to your right. One checkout in the entire store, one At Your Service. So you think about ease of checkout and how high -- materially higher those scores are. It's that convenience and simplicity of At Your Service, which is also animated with content about style and product on these animated screens. When you walk into the store, it's very well lit. It's spacious enough to shop easily but cozy enough to really reach and touch the product. The displays are very accessible, whether it's jewelry and accessories, whether it's our fragrances. And as you're walking around the racetrack, you can very easily access different items. The shoe display is very accessible. The brands really stand out. It's just a different experience. And as we continue to lean into better content and elevate different parts of that experience and tailor that assortment to that local market, we believe that we can continue to grow that business. And that's on the backdrop of what the data sets in broader retail that these off-mall locations in high-traffic locations will be relevant and will be productive go forward. And so as we think about repositioning and getting the optimal balance of off-mall that complement a subset of our mall-based stores, we think we have a format that will really work for the next decade.

Got it. All right. Well, that's super interesting. So why don't we stop there? I think that's a great stopping point. Adrian, thank you so much for doing this today. This is great.

My pleasure. My pleasure.

Great. Well, I just want to also thank everybody in the audience for attending. It's great to see everybody in person in everybody's beautiful suits. Now we have another reason to go out to shop at Macy's, right? We're back in -- back wearing our suits again in person. Definitely, if anybody wants to chat in more detail, definitely come up and reach out. And with that, have a great conference. Have a great rest of the day, and so long until next time.

Thank you.