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

Okay. Great. Thanks. It's Matt Boss, retailing, department stores in JP -- and specialty softlines here at JPMorgan. Really happy to have this morning, Adrian Mitchell, CFO from Macy's. Format for this morning is a fireside chat. I have questions that I've put together from investors that I'll be moderating and then we'll open it up to Q&A in the room as well. So Adrian, first of all, thanks for joining us, and welcome.

Thank you. Great to be here with you.

So maybe to kick off, it's been a theme throughout the conference and I thought a good place to start, the health of the consumer. What are you seeing at Macy's? You have multiple concepts with Macy's and Bloomingdale's. You cover a number of different demographics. So a lot of moving parts as you've talked about in calls and we've discussed. But maybe what's the best way to characterize health of the consumer today that you're seeing?

Yes. We believe that the consumer is healthy. But we also recognize that right now, we're operating in really unprecedented times. When you think about the high levels of inflation, if you think about the level of uncertainty that we're seeing, we believe that it's going to weigh on consumer confidence over a prolonged period of time. One of the things that we're watching, we're watching a number of indicators to really help us understand what's driving favorable and unfavorable demand for the categories that we sell. And when we think about this healthy consumer, we see good indicators, indicators such as savings rates being elevated through February. We see that consumers are spending on going out to events, on travel, on entertainment, on back to work as we see kind of where we are today. But we also recognize that we're seeing some shifts in that spend. And we're also seeing that there are real challenges with inflation and the uncertainty that's happening in the marketplace. So if you just kind of go back pre-pandemic and kind of think about the journey that we've been on the last couple of years, what we saw was spending in discretionary goods actually increased. And we saw that travel and entertainment really kind of pulled back or declined. I think a little bit of what we're seeing right now coming out of the pandemic is this notion of a little bit of a shift in the mix of that spend, where, effectively, what we're seeing is more spend on entertainment, more spend on travel. You see that in the airline industry. And then what you're also seeing is pressure on discretionary spend given the increased fuel prices, food prices, housing prices. And so as we take a look at this, on the uncertainty side, what we're looking at are things like record inflation, the lack of stimulus, increasing interest rates, the instability in the stock market, just the volatility that we see there, in addition to the challenges with the war in Ukraine. So when we take a look at this, we began to look at it in terms of different income tiers because, to your point, we have a number of different brands. So when you look at the low to middle income tier customer, we think there's more pressure. And so we are watching that pretty closely and really trying to understand how the consumer is actually thinking about their purchases between discretionary and nondiscretionary. With regards to the higher-income customer, they seem to continue to be resilient. And so when you think about the pressures that they're feeling, they've been through the pandemic. They spent the last couple of years as we've seen in our business. And they seem to be continuing to spend as they're progressing through 2022. So the one thing that we think is an important factor that we're looking at is not just any one vector impacting consumer demand, but all these things are happening all at the same time, right? And so when we think about that, we're just watching discretionary spend. We're watching the performance of our specific categories. We're looking at categories that are growing a bit healthier than we expected, some of that may be a little bit softer than expected. So we're still being very vigilant, very cautious, and really navigating this recovery as best we can.

That's a great kickoff. So maybe as we think about this by category, can you speak to changes that you're seeing in behavior, maybe in the spring or post holiday, as we exit COVID? So in particular, how do you see active and home holding up? Those were 2 COVID categories, I would say, beneficiaries relative to maybe some of the new categories that have been more dormant for the past 2 years.

So what we would say, just to kind of kick off, is 2022, we think, is going to be a year of events. One of the metrics that we look at are just the number of weddings. And when you look at 2022, there's just an unprecedented number of weddings that are actually scheduled this year. And I think that will bode well for a number of our categories. That, in combination with consumers wanting to travel, wanting to get out to a social events, those things are actually going to bode well for a number of our categories. But more specifically, the categories that really bode well for events, we're actually seeing some real good health there. When you think about dresses, cosmetics, men's tailored, shoes, those categories are really trending healthy relative to what we expected coming into the year. But part of that is actually being offset by some areas where we're seeing softening demand. Active and casual apparel, we're seeing a bit more softness. When you think about [ soft home ], whether it be textiles or housewares, we're seeing a bit more softness or a deceleration there relative to what we saw as we were progressing through the peak of the pandemic. But one of the things that I think is important for us is that we are a multi-category business. And so our ability to look at these demand trends lead into areas that are growing, lean back or pivot away from those categories that are decelerating is really a key advantage that we have as Macy's. And we're really taking the time to really lean into those opportunities.

So that's a great segue into my next question, which is going to be more around the mix of the business as we think about merchandise going forward. So I guess where do you see the opportunity for expansion across categories as we think about the box? Or how would you rank top areas of market share opportunity as you think about Macy's and Bloomingdale's maybe over the next couple of years?

For us, the category expansion opportunity really centers around that work on marketplace. So in the back half of this year, we're going to be expanding marketplace for our Macy's brand as well as our Bloomingdale's brand. And this is going to give us an opportunity to lean into new categories and adjacent categories, categories we've not historically been in, but also expand our product selection in the core categories that we're in today. As we progress through the year, we'll share a bit more about the specific categories and the depth in those categories. But we're learning a lot as we're standing up this capability. We're running a lot as we're standing up this platform. But one -- some of the things that we're very much focused on right now is prioritizing the right categories to enhance the experience for the customer and making sure that once we have those categories selected and placed on the platform that we have a great shopping experience or user experience. So we're spending a lot of time thinking about search. We're spending a lot of time thinking about how the product is going to show up on the site. We're thinking about checkout. We're thinking about returns. So it's a whole new ecosystem and a whole new capability for us. And so we're just being very thoughtful about how we lean into those new categories.

One of the things that you've spoken to, and I know Jeff has really highlighted, is new customer acquisition. So I wanted to touch on that. I think you've cited 19 million new customers that you've seen shop at Macy's for the first time. What is the demographic of this new customer? How are they different? Have you been able to retain them? Any initiatives in place to retain this customer following the crisis?

What we're excited about is a lot of these new customers that we're acquiring, those 19 million that you mentioned, tend to be a younger and more diverse customer. And that's really important as we think about the continued lifelong energy of the brand and really being able to serve customers across a broad set of life stages. I think the key thing that we're focused on in 2022 is the retention of those customers and the engagement with those customers through our personalization initiatives. So we spent a lot of 2021 really thinking about the testing of these different initiatives, really thinking about the different use cases. And what we're focused on now is really scaling those opportunities in 2022 and getting the next portfolio or batch of use cases into the system. Well, I'll share with you 3 examples of the kinds of things that we're learning through those personalization efforts. The first is, as we look at the number of customers that we can engage with and have opted into our marketing programs, whether it's SMS, whether it's push notifications on the app or whether it's e-mail, we have a large body of our store rewards customers that are actually eligible to be able to communicate with. The other thing that's been really interesting is we've been looking at what are called trigger-based e-mails. So based on the category or brands that you purchase, that being the primary indicator of how we communicate to you next to get you from that first purchase as a new customer to that second purchase. And what we're finding, those are 4x more effective than the broad-based e-mails that we typically have sent in the past. And then the third piece is we have a high concentration of Star Rewards members. They tend to shop more frequently. They spend more with us. And so we're looking at churn or lapsed programs. And what we recognize is there's a pace of purchasing, a cadence of purchasing with these customers. But you missed a cadence, you see that they're 5x more likely to lapse than if we don't actually get them engaging with the brand at the appropriate time. So these are the kinds of things that we're doing. Now we've translated that into a personalization agenda. So we're looking at onboarding for those new customers. We're looking at engagement, which is really about driving retention. We're looking at churn, and we're also looking at loyalty. So on onboarding, it's really about getting to that next purchase or that second purchase. And typically, what we find is the category you enter it and/or the brand that you engage with is the best predictor of where that next purchase is going to come from. When we think about the churn -- when we think about churn or lapse, it's all about looking at your portfolio of purchases over time and really looking at these propensities for the next category and the next purchase within those categories. So sometimes, you're leaning into those adjacent categories, so really taking advantage of that. But we're also very excited about the loyalty dimension. How do we get our bronze members, which is a large and growing group, into our credit card program, into these higher tiers? And that's a very different kind of dynamic, but that's where our most profitable and most productive customers lie. So there's a lot that we're working on this year. We'll be able to transition into a lot of those opportunities next year as we scale with real momentum in 2023. But we're pretty excited about what we're finding.

That's great. And I'm wondering, does part of this tie into your decision around stores? Where one of the things that was striking to me is at brick-and-mortar, you guys have made the decision to slow the pace of store closures coming out of the crisis. Maybe just help best to think about that mindset shift. How should we think about smaller concept stores and even Backstage as we consider the fleet now multiyear going forward?

Yes. So we live in a very dynamic environment where the customer cares a lot about convenience. And so as we think about the delay in the closure of stores, it's about recognizing that the most productive customers tend to be omnichannel. We also recognize that in a dynamic environment, convenience matters a lot. So fundamentally, what you're seeing with the delay of the closure is that we are repositioning and optimizing our footprint, not just being a digital player with on-mall stores, but being a digital player with the best on-mall and a growing and scaling portfolio of off-mall, again, the convenience factor. One of the interesting things or the biggest factor for us in terms of the delay of the closure was we needed to maintain a physical presence in the market because it was really about the top line sales. So even today, what we know about our customer is, if we have a store in the market, they shop more often. They spend more with us. They have a higher propensity to be in our loyalty program and a higher propensity to actually use our credit card. So we didn't want to actually use that. So when we think about the role of our off-mall stores, it's really finding these pockets of demand where we can actually get more traffic into the brand and access new customers. And I think Atlanta is a great example of this. So if you think about the strategy that we've deployed thus far, we think about our off-mall strategy in 3 pieces: infill markets, replacement markets and new markets. So if you look at the top 40, 50 markets across the country, we're in 49 of the 50. The one market we're not in yet is Jacksonville. But when you think about the infill example, that's the Atlanta market, where we opened up Presidential and we opened up South Point. And what we saw is that we had very healthy traffic, performance in those boxes ahead of our expectations. But the rate of new customer acquisition was higher than the rate in our traditional boxes. And this is a market with 15 stores, about 11 full-line stores and 4 furniture-only stores. So that's working. There are pockets of demand in these micro markets and in these communities. When we think about the replacement markets, you look at our history of closures, we've exited a lot of markets without having a physical box in place. And you've seen the impact on the digital business when that box disappears. We want to go back to some of those markets. And the stores, to your earlier point, that we plan to close, we want to have a replacement strategy. We may not be in the best location or the best footprint in a mall-based store in a particular geography, but our ability to pivot to the right physical location is a part of our replacement strategy. And then there are just new markets. When you have a box that's 30,000 to 50,000 square feet, you can access a lot more markets. Plus, you can access a lot more markets than what we traditionally have been able to with a 200,000 square foot box.

So it's a great point because as we think about the interplay between digital and brick-and-mortar, that was going to be my next question, is now how best to think about the next leg of digital opportunity in terms of growth? And what do you think -- I get this question a lot, but what do you think differentiates macys.com from some of the brand-specific websites? What makes Macy's the destination as it -- as we think about the digital side?

Well, I'll start by saying there's an advantage that we have as a omnichannel retailer versus a pure play. So you've looked at our history. In recent history, half of our customers, new customers have come through the digital channel. The other half have actually come through the stores channel. So when you think about the synergies of bringing those customers into the brand, transitioning them from single channel to omni, that's just a real synergy that we have by having both a digital platform that scale as well as having a national footprint that we're improving on. But what I would say is, when we think about digital growth, there are 4 vectors we're pretty excited about. One, we talked about before, which is personalization. So this is this whole idea of leveraging personalization as a growth vector by driving increased engagement, driving greater retention, mitigating lapsed opportunities. There's real dollars there when you think about just the scale of our current existing customer base. Marketplace is another vector. We talked a little bit about expanding into new categories and adjacent categories. But even expanding our product selection in the categories that we're in is really, really exciting. And as we think about the optimization of inventory, whether it be owned, Vendor Direct or marketplace, we'll have a lot more flexibility and a lot more insight around how to get the right product to the customers and how do we think about what it looks like in our stores. The third vector is really the optimization of our footprint. So the one thing that we've seen very consistently is that digital sales per capita is 3x higher when there's a physical footprint versus when they're not. So when you begin to connect the dots to the off-mall concept and opening stores and communities where we don't have a physical presence, we would expect digital sales to be elevated in those markets as we build that physical presence. And then we have this Macy's Media Network as one of our profit pools. It really allows vendors to more efficiently use their marketing dollars to drive growth, accelerated growth on the digital platform, on macys.com or bloomingdales.com. And given the scaled size of our business as a digital business, that's a very efficient way for a lot of our vendor partners and soon-to-be sellers to really drive growth in their business.

Yes. That was an area that I wanted to dig a little deeper into, is the digital marketplace. So maybe is there a way to kind of walk through what exactly the changes, not just to Macy's, but also to the customer and the opportunity, maybe the time line? This seems like a really big opportunity for the company and a big change. I just wanted to take it a step deeper.

Yes. So if you think about what's attractive about our starting point is we have one of the largest digital businesses in the categories we're operating in, in the U.S. However, we don't have a broader set of assortment that we can provide. So think about all the traffic we get and think about a customer viewing us as more of a destination for a broader set of items, that's a real advantage. The other advantage with marketplace is that with -- what we're trying to create is this virtual cycle of growth. So you have core categories, great brands, great value that we're providing. We're extending that in a curated way to a broader set of items. We're actually building stores in different markets where convenience really matters. It's really this virtuous cycle. But the extension of categories, being able to shop that in a very seamless way and all the investments we're making in our supply chain infrastructure for speed of delivery in a most efficient way, all those create a bit of a cycle of virtuous growth. And the marketplace is really key to that.

Got it. So maybe to switch gears a bit. You mentioned a number of the headwinds versus tailwinds on the overall health of the consumer. One of the things that we didn't talk about that's important for Macy's is, as we think about flagship real estate, as we think about travel and tourism, what are you seeing on this front today? What have you anticipated throughout '22? And how are you thinking about that opportunity at some point?

So when we think about tourism, we think about it in 2 pieces. We think about it in terms of domestic tourism and we think about it in terms of international tourism. Domestic tourism is really healthy. People are traveling. They're going on spring break. They're going to see family. They're engaging. So we feel really good about the momentum we're seeing with regards to domestic tourism. International tourism has typically been about 3 to 4 percentage points of our sales pre-pandemic. And what we saw in the fourth quarter of last year is that half of that came back. Shoppers were coming from the U.K., from Mexico, from Canada, from Brazil. And so a number of our stores, the 30-or-so stores that tend to have a higher proportion of international shoppers, those stores actually did well in the fourth quarter. We don't expect additional momentum in 2022. Again, there's just so much uncertainty that's out there. But we do feel that there is potential upside if that were to come earlier that we'll be able to lean into and be ready for.

That's great. And then maybe just a couple of questions around the profitability side of the business. So to start out on the gross margin front. You -- again, I'll circle back to the multiple headwinds versus tailwinds that are taking place in '22. I guess, just higher level, how do you manage through this from an inventory planning perspective as we think about gross margin? Are you staying lean? Are you staying conservative? And -- or maybe just how you're thinking about navigating category by category as the year progresses?

Well, I think a big part of it is leveraging our data science and making sure we're allocating inventory in the right way. So on one dimension, really watching the indicators, the macro indicators, the competitive indicators, looking at the bets that we've made, looked at where we've been cautious, really understanding the patterns by category and how that manifests itself in local markets is really important. One of the things that we're really leaning into more this year is really this notion of predictive demand by item, by location, by channel. That's a really important dimension for us. As we're navigating this period, we're also being very thoughtful about how do we navigate the promotional intensity. The pricing science for us is actually quite important, right? So if you think about pre-2021, a lot of what we had in terms of our pricing sophistication was 5 regions, where in each region, the pricing cadence was fixed. The cadence was fixed. The depth was fixed. 25% off on first mark, 50% off on the second mark. The entire region, irregardless of sell-through rates, irregardless of inventory availability by location, it's just much less sophisticated. By the end of this year, we have a very different pricing cadence, where, in any given store location or a local market, we'll be able to change the cadence, adapt the frequency at any point in time as opposed to an entire region. It just gives us a lot more flexibility to kind of manage areas where we may have excess inventory, manage demand and margins where we have less inventory. We're really chasing the business given the events that are happening. So we just have to be very thoughtful about what we're seeing day-to-day. We have to make sure that we're not getting over our skis because we do believe that there's pressure. But we really keep our ear to the ground and really leveraging the data science to be able to navigate these times.

Yes. And to even take your point on competitive pricing and the promotional environment a step further, I guess, what are you seeing on this front? What are you anticipating on this front as we think about competitive pricing, promotions or the potential return of promotions? Or maybe how best to think about what you're anticipating and what you're seeing relative to pre-pandemic?

Yes. When we think about 2022 relative to last year, there is no question in our mind that we're likely going to be moving into a more promotional-intense environment. There's still uncertainty. There's still pressure on the consumer. Even though the consumer is healthy, we do see that inflation is elevated more so than what we expected coming into the year given all the conversations that were happening. And we also recognize that the supply chain disruptions are not solved. Even though it's better than months ago, there are still challenges, there are still delays. So as we really think about the environment in 2022, we do believe that there is going to be demand. We do believe that there's going to be a bit more promotional intensity. We do believe that we're still sorting through the supply chain challenges with just prolonged lead times on orders, which is very difficult for any fashion retailer to manage. And we just have to be very thoughtful about how to navigate that. The key fundamentals, I think, still matter. Having a good understanding of demand should influence how you buy upfront. And managing that inventory throughout the cycle is really important. Being very surgical on promotional intensity for us, it's about pivoting away from broad-based promotions and getting into much more personalized offers. We can maximize margins better. We can speak to the customer in a way that they're engaged and active and engaging on product that is relevant for them. And then it's also just continuing to look at the pricing signs and being able to be thoughtful about real-time adjustments as we go through the season. So it's still uncertain times. We're cautiously optimistic about 2022. There's still a lot that we're learning. There's still a lot of things we're building in our transformation, but we're going to have to navigate it thoughtfully.

So to that point, Adrian, as we think about 38% gross margin in '22 and high 30s go forward, I think the prior plan was more in the mid-30s. So is -- as you think about these changes that you just laid out, is it fair to believe that you see them as structural in nature? Or maybe could you walk through some of the structural changes or that bridge from mid-30s gross margin in the past to high 30s going forward in terms of your plan?

Yes. So the -- when you think about the retail, when you think about the gross margin, we really think about it in 2 pieces because we have our initiatives organized that way. The first is just around the retail margin. And a big unlock is around the pricing signs around buying more appropriately based on predictive demand and also making sure that we're pricing right with all the pricing signs that I mentioned a little bit earlier. That just gives us confidence given what we've already demonstrated, what we've already seen in our A/B testing, that we can maintain an elevated level of gross margin even with increased digital penetration. The second dimension is delivery expense. Now if you look at where we were in 2021, we're at 9 percentage points higher in digital penetration relative to 2019. And the biggest challenge or pressure on the gross margin is delivery expense. But we're doing a lot to add data science, to add capabilities, to add fulfillment for the downstream to reduce split shipments or packages per order, to reduce the distance that packages have to travel, to take out inefficiencies in our operation that really drive the delivery expense and also staying very close to our carriers. So those are the kinds of things that we're actually pursuing to have real strength in the margin line even with increased digital penetration. And so we've committed to that over the next 3 years in terms of our longer-range plan. And we're excited about the gains that we're seeing structurally within the business.

So since you opened Pandora's box on the digital side from a profitability perspective, I guess maybe, Adrian, could you walk through the profitability of a digital channel sale today relative to brick-and-mortar as we think about gross margin or at the operating margin level? And does that change with the launch of the digital marketplace?

Yes. So in February of 2021, we talked about the contribution margin, right? So when you think about the allocated expenses, we kind of put that to the side for a moment. So that will be like corporate overhead. What we saw then is that the contribution margin for our digital business was about 5 percentage points higher than what we saw for our storage business when we break up those channels. As we think about what we saw in 2021, that held. And so we continue to see a very healthy level of profitability for the digital channel. So increased digital penetration is actually quite good for the business. When you begin to think about things like marketplace where you have GMV or sales on our platform and a commission structure, we believe that we'll be able to expand margin for the digital business with that capability. So if you think about where digital is going for us, we have our own inventory that goes through our supply chain. We have our vendor direct where the shipping and handling and inventory is managed by the vendor. And then now we have the third-party marketplace where inventory liability is just quite different. That will allow us to have less risk on the inventory side, a higher-margin profile as we scale. But also as we optimize where product is in those sub-channels, 1P, VDF or 3P, we will be able to actually further optimize the margin profile of our digital business. The other dimension is when you think about the entire stack of digital, as I mentioned a bit earlier, there's a real synergy and advantage in having an omnichannel business that supports the digital business. So a lot of pure-play businesses spend a tremendous amount on acquiring customers. We have an acquisition engine that's digital, where half of our new customers come in. We have an acquisition engine that is stores, where the other half of customers come in. But we get them really transacting across both platforms, because in aggregate, for the brand, it's more productive. So we're encouraged with the initiatives we have in place to continue to expand the margin of our digital channel.

So maybe to switch gears on the margin front to the operating expense side. As we think about 2022, you've laid out some areas for reinvestment given the reopening. Maybe if you could just walk through some of the expense buckets in 2022 and then multiyear, how best to think about SG&A dollars relative to sales growth.

Yes. So when you think about our SG&A, it will be elevated over the next several years relative to 2021. But in 2022, that's really going to be the peak. And there are a few reasons for that. So one is that we've been investing in our talent. We have to invest in acquiring the talent. We have to invest in retaining talent. Last year, most of the supply chain actually moved to $15 minimum wage. A large portion of our stores network moved to $15 minimum wage. And by May 1 of this year, you'll actually see the rest of the store network actually get to $15 minimum wage. A lot of that has been annualized this year. So that's a little bit of the elevation. The other dimension is if you think about the initiatives that are going to drive accelerated sales growth and margin expansion, there are things like personalization, Macy's Media Network. There are things like marketplace. When you begin to think about these kinds of capabilities, that's a nontraditional type of talent that we would have -- and we would have hired pre-pandemic. We're making investments in that talent now to build these capabilities. But the real benefits of that is going to come in 2023 and beyond. So that's causing the elevation, but it's the right thing to do. We're in the middle of a transformation. Our business today and in the future has to look very different than where we were in 2019 and before. So we have these lead investments in SG&A and also in capital that then allows us and positions us to be more competitive, more relevant to be able to drive growth and to be able to do it with a higher margin profile.

So is there a way to think about, as we consider beyond this year and maybe beyond this peak investment, SG&A dollar growth relative to sales growth? I think you had laid out at the Analyst Day low single-digit same-store sales was the aspiration on the other side in a normalized environment. Maybe if you could just help put together same-store sales opportunity. I believe now, as we think about the stores and the new mindset, with some of the smaller store opportunity relative to expense dollar growth, what kind of same-store sales or what kind of revenue growth do you see necessary to leverage SG&A at some point in the future?

Yes. It's a good question. So we're looking at low single-digit growth in the future. When you look at the SG&A composition, it's actually changing quite a bit. So on one dimension, when you look at our supply chain expense as an example, we have a fairly manual set of operations in our supply chain network. Our supply chain network is fundamentally decades old. And what we're doing is actually automating a lot of that work. So productivity is going to increase dramatically with the introduction of automation across a number of our facilities across the network. Some of that is coming online in 2023. Some of that is coming online in 2024. So we're really transforming that. The second piece as we think about the SG&A is how are we thinking about staffing and flexibility within the stores' footprint. So we're using innovative selling models is what we call it at Macy's, where there's much more flexibility in staffing, much more agility as opposed to being staffed in just one job or one location every shift. There's more of a generous model that also increases productivity. The third dimension is we've been doing some portion of store fulfillment out of our stores. About 25% in 20 -- late part of 2020, about 28% last year. But when you think about that, we didn't automate that. We didn't add in great tools and processes. We didn't lean out that process. We didn't add Six Sigma principles and capabilities into the process. So a lot of the work that we did in terms of our testing that we did in the back portion of last year really worked well. We saw productivity really increase significantly. So in terms of SG&A and just other dimensions of cost, those kinds of principles downstream in our stores are giving us greater leverage as well. And we're constantly negotiating on the nonpayroll side, our contracts, leveraging our scale, leveraging the platform that we have. So very much vigilant on that as we're actually looking at our growth going forward.

And when you put all this together, because as we think about the gross margin and the expense profile that you just laid out, at the EBITDA margin level, what's your comfort? Or how best to think about this business multiyear? What do you aspire to? Or what do you see as the right level of EBITDA margin for Macy's?

We're a double-digit EBITDA business, right? That's what we've committed to going forward. That's what we see with all the initiatives that we're doing. And with that, with disciplined investments, we should have very, very healthy free cash flows. So when you think about the profit pools with Macy's Media Network, with marketplace, the efficiencies that we're building with regards to SG&A, and you think about us really retransforming the margin profile at the gross margin level with the delivery expense initiatives that we're doing and the pricing optimization, this is a low double-digit EBITDA business [ going great ].

One more for me and then I'll open it up to any questions in the room. As you mentioned the healthy cash flows, so as we think about the balance sheet, how best to think about priority for cash flow going forward?

Yes. So if I think about our capital allocation framework, we think about a healthy balance sheet, to your point. We think about investing in the business. And we think about returning capital to shareholders. We've done a lot of good work over the last year around the balance sheet. So you think about our EBITDA to -- our EBITDAR relative to our adjusted debt, our leverage ratio is about 1.8x coming out of last year, and we had a target of about 2.5x. We're in a pretty healthy position. In addition to that, we've done a number of things to really derisk the transformation journey that we're on. We now have all of our debt unsecured. We have an ABL that has been renewed to $3 billion ABL that expires in March of 2027. And with the refinancing that we did where the near-term $1.1 billion of debt towers are pushed out to 2030 and 2032, with some of that debt paid down, we effectively have no debt maturities, material debt maturities over the next 5 years. And in the sixth and seventh year, very modest debt towers. That creates a bit of a runway for investments and returning capital to shareholders. On the investment side, the personalization initiatives, the supply chain optimization, the automation, all these things are very much known things that are part of our $3 billion of investment over the next 3 years. But the good news is we have the capacity to invest in things that we may not see today that can [ really add ] value in the business going forward. This is contagious. And then when we think about returning capital to shareholders, we're very much focused on a modest yet growing dividend over time, growing about 5% per year. But it's got to be predictable. And then meaningful share repurchases when appropriate. So we feel we have a lot of financial flexibility at this point to really invest in the growth profile of the business. And we're excited about a lot of the innovations that we have in the pipeline. There's a lot of work to do, though, a lot of work to do.

That's great. That's great. So with that, I'll open it up to any questions in the room. [Operator Instructions] Maybe we'll start right here.

You talked about a lot of really interesting things. So I'm going to try to make this as clear as possible. So when it comes to the data science on pricing optimization, taking your markdowns in a timely manner, talk about how the data scientists are integrated into the merchandising infrastructure, right? Because culturally, this is very different than what has been done in the past. And then to what degree, as you're really advancing and bringing so much more science and sophistication to the process, are you getting either more and more collaboration with the brands, right, because they can see that your margins are likely to improve, sell-through rates are going to be higher? So what is the 1 in 1 equals 3 to that equation?

Yes. When you think about -- it's a great question, and thank you for your question. When you think about the pricing optimization, I think one of the things that's been so exciting is having the planning team effectively be restructured with data scientists on the team and our enterprise data scientist team in parallel supporting that team. So what you're having is this real interesting mesh of art and science. But we're grounding the decision-making in the science. And we're seeing value. So what we are doing in pricing as an example, as you think about what we talked about a bit earlier, we're taking these different phases to demonstrate that there's real value in that work. We're still buying products. We're still allocating it to stores. We're still putting certain elements on our website. But the ability to see healthy sell-throughs, less markdowns, less discounts, less clearance inventory by making better decisions around where you place it, how much you buy and having the insight of indicators of, hey, here's what's happening in the market. Here are the kinds of things that will influence whether casual apparel is going to have momentum or dress is going to have momentum or even home is going to have momentum. There are all these aha moments that you can translate into the operation.

[indiscernible] in the categories in the last couple of years, still [indiscernible] well established yet?

It's we'll -- it's -- there are certain dimensions that are well established. So what's well established right now is that we can do location-level pricing in our normal cadence across the country. So before, we had it structurally in 5 regions across 450 Macy's brand stores as an example. Now we have it at individual stores. That next iteration that you'll see at the end of this year is each store can have a different depth of promotion. So instead of going from 0 to 25% on the first mark, they can go 0 to 10%, 0 to 15%, which may be different from your store, which may go straight from 0 to 25%.

[indiscernible]

And -- how do you handle it digitally? Look, we have customers that go into our stores looking for value. And we're looking at the sell price, the full price sell-through. We're looking at the pace of inventory. We're looking at what's available. Our digital customers also are looking for value. I think one of the big advantages we have is that we have one pool of inventory for the customer, whether they actually operate through the digital -- or purchase through the digital channel or purchase through the stores channel. So for example, if we have excess inventory in Adrian's store and a digital order comes through, we don't have to fulfill it from the DC. We can fulfill it from that store with excess inventory.

And that's [indiscernible] who's buying that product [indiscernible] Adrian's store.

Adrian's store can fulfill that. The customer is buying it online. We have excess availability because...

At your price?

Our price, yes. So it's exciting. There's -- I think the biggest insight is the more we dig, the more we find. That's what's really interesting. So more to do there. Thank you for your question.

Great thoughtful kind of conversation as always when you're involved. A couple of questions. One would just be back to kind of your mindset, whatever, 1.5 months ago when you guided, you guys saw, frankly, a really nice inflection in the back half of last year in terms of momentum on the top line. And I'm kind of pinning it off of 2019 kind of pre-pandemic, if you will. Even with, frankly, from December 15 through January at kind of this Omicron spike in New York, kind of an important time, kind of an important market, and you still saw great momentum. So I guess, I'm just trying to understand your mindset, maybe what you were factoring in. Because if I kind of take a look at kind of the guidance, it would suggest a break in that momentum, which I would, frankly -- trying to understand why that momentum would resume given once we're -- everything you talked about, weddings, events. I mean, these are all things to drive traffic into your store. I mean, we just went to an event and my wife came out of the closet and said, "I have actually nothing to wear. So we're going shopping." So that's kind of the first question. And then the second question is a fairly obvious statement you made is that inflation, again, relative to 1.5 months ago is worse. I mean for a lot of reasons, some of them kind of a terrible reason that's happening obviously in Eastern Europe. But anyways, just wondering, is that inflation that -- just a, the pressure on the consumer that we all see with gas prices? Or is that kind of inflation -- or both, frankly, that you're seeing in terms of vendors with pricing within your supply chain? And then, obviously, the follow-up question is, how can you manage through that extra inflation, if you will, prices and things of that nature?

Yes. Yes, a couple of great questions. So our mindset coming into the year is that we had to be very thoughtful and measured in how we think about 2022. The thing that really served us well in 2021 was that we're actually chasing sales. And that results in a more appropriate level of buys. It results in higher full-price sell-throughs. It results in less markdowns, less clearance. And that margin profile is very healthy for our enterprise. If you just compare 2021 versus 2019 or any years before that, that healthy margin profile is really, really critical. When we think about 2022, as we had mentioned, there was a bit of slowing as we got to the end of the fourth quarter. And so our mindset was, let's be optimistic but cautious. Let's be very measured in how we're thinking about the year. And we just felt that there was a level of uncertainty that we just had to see kind of play out. And I think kind of a couple of months later, a few months later, we're seeing that play out. One of the key things was that inflation would remain in check. Inflation has not remained in check. And so when we think about where inflation is, there's absolutely pressure on that low and middle income consumer, which is a large portion of our customer base when we think about the Macy's brand, which is a larger brand within our portfolio. So the biggest challenge that we've had in terms of thinking about managing through the beginning of 2022 is, where is the demand going to come from? We do believe the demand is out there. We do believe that the consumer is going to be spending. But are they going to be spending on discretionary items that we sell? Or are they going to be spending on an airline ticket to Florida or air travel or going out to restaurants more? So that level of unpredictability is something we just have to be very measured around. So what you would have seen in our planning is we actually plan to a bit of deceleration in those pandemic-oriented categories, the casual categories that were very, very active when folks are working from home. As folks are going back to the office, a different mix. And so we're seeing dresses have a lot of momentum, shoes have a lot of momentum. And we're pretty excited about the momentum that we're seeing there. But we do also see the offsets as well. So I think to your question around our mindset, we just had to be measured. We didn't want to overshoot. If we missed some upside opportunity, whether it's a return of international tourism or the sustainability of the pandemic categories, so be it because we'd still have that help from a margin profile standpoint. With regards to the inflation, there's pressure. There's absolutely pressure. How the consumer will respond, we're watching that very closely. The good news is consumers came into the year with elevated levels of savings. They came into the year with a higher compensation profile. They came into the year with -- even though we have pretty low unemployment rates, folks can still lean into working more hours. And there's just a lot of help in the employment market right now that's a bit of an offset. But we do believe higher fuel prices, higher food prices, higher housing prices, the likely expiration of the student loan moratoriums that's expected this summer, what is the rest of the year going to look like if these dynamics continue to be prolonged through the rest of the year? So look, we're cautiously optimistic. There's one thing that you brought up which is I think is really important, which is value. Our conversations are constantly focused on that value still matters. Value matters with our Bloomingdale's brand. Value matters with our Macy's brand. And so when we look at the kinds of products that we sell, we recognize that with price inflation, there has to be some additional value in the good, whether it's embellishment on some of the apparel items, whether it's the texture of the good. Because if you're looking at a plain toaster or just a white T-shirt, there are lots of places you can find that. So we're also working to play with that value equation as well. We can't just increase prices. I think the customer is going to notice. And there are some categories where you can absorb those increase, but we don't think you can do that across the board. So really watching the price and the value equation quite a bit as well. Thank you.

Okay. Maybe one more question in the room, and then we'll cut it after that.

Given your operating really in a position of strength versus the past many years, how do you think you could capitalize on some of the other noncore strategic initiatives? Something like Herald Square maybe monetizing that where you can actually participate in more of the upside given the position of strength here?

Yes. So we are working with the city as best we can to kind of move forward on the monetization of our program that we're looking at, at Herald Square. We've talked a bit about this tower above the store above Herald Square. And look, we're excited to get started. We're excited to increase the pace of that opportunity. What's even exciting as well is as we look at our total portfolio, we're really focused on the monetization of our real estate, particularly those real estate stores that we don't feel have longevity for the brand going forward. And so we have doubled the number of developers we're working with. So pre-pandemic, we had 5 major developers. Now we have 10 that are actively looking at opportunities around the country. Now the mix of opportunities has shifted. So pre-pandemic, I would say a lot of what we did was just close a store and sell it. And in some cases, we did sale-leasebacks. So we had a 1-, 2- or 3-year lease before we actually exited the store. We think there's an opportunity to further increase the value of the monetization efforts through mixed use. And that's one of the reasons that we're partnering with these developers. So we're looking at properties where we can use the outparcels for restaurants. We're looking at properties that are converting to office space to medical complexes to residential, where by working with the developers, we increase the value of that asset, do private and public approvals before we monetize. That's just more value in the work that we're doing. And so that's kind of the new evolution of monetization that we're pursuing right now when we think about real estate monetization. So we're very, very excited about that sector.

[indiscernible]

Sure.

You mentioned that the supply chain is in a better place now than it was months ago. How is that going to express itself on the P&L and balance sheet?

Yes. So what we were forced to do last year in order to drive healthy performance, particularly in the fourth quarter, was we had to have inventory available. The implication was that we had longer lead times in terms of our orders. In a fashion business, that's pretty hard to pull off. That's pretty hard to do. So with regards to the easing in the supply chain, we can get back to more normal orders in terms of our lead times, which in a fashion business gives us a bit of flexibility. But we're not 100% there yet. On the balance sheet, a big part of what we're trying to manage is just what's the level of inventory, what's the level of risk. The working capital dimension is still very top of mind for us because there's still uncertainty. Which categories are going to grow faster? Which categories are going to be a little bit softer than expected? That's kind of the dance that we're doing right now because we really don't know what normal is. Do you compare to 2019? Do you compare to 2021? Are there shifts in mix relative to any one of those periods? There's just a lot of variables we're managing. But the good news is we have a healthy balance sheet. And that as a starting position gives us a lot of flexibility.

Perfect. I think that's a great place to cut it. Adrian, thank you so much for your time today, and good luck on -- with the business and continued momentum.

Thank you so much. Great to be with you.

Absolutely.

Thank you.