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

Welcome. My name is Marshall Kay, and Avery Dennison is so thankful you're here. We're very proud of the work we do, connecting the digital world and the physical world. We're a market leader in connected products. And what makes us so excited about connected consumer goods as we know that when everything is connected, everything changes, and it unlocks a set of new possibilities and one realm within the world of retail that is tapping into these new set of possibilities is the realm that's known as loss prevention. But today, we won't simply be talking about loss prevention. Let's face it. It would be wonderful if we're able to apprehend the thief before they even leave the store with an item. We're also going to be talking about loss detection and loss visibility. Think about it this way, if only the thief were kind enough to leave a note of all the items that they've taken before they leave the store, that would be a huge win for retailers. So I'm thrilled to be joined on stage by 3 friends of mine, who are each legends in their own rights. I'm going to ask each of you to make a brief introduction, and if you're too humble, I might need to supplement.

Okay. Read Hayes, University of Florida, and the LPRC or Loss Prevention Research Council.

I am Joe Coll. I lead Asset Production for Macy's department stores, and I have the privilege of sitting between 2 doctors on a very special day as we pay respect to Dr. Martin Luther King.

Good afternoon. Bill Hardgrave. I've been in the RFID space for 20-plus years, started working with Walmart when they made the big announcement back in 2003 and been in it since then. And in my spare time, I am the President of the University of Memphis.

Okay. Now I'm going to supplement a little bit. When big national media outlets need to talk to an expert about loss prevention and loss detection, they come down to Florida to visit Read. Now with Joe, in terms of the world of retail asset protection, in terms of asset protection professionals who work for retailers, in terms of experts on the use of RFID in the many ways that can be put to great use, Joe is amongst the top 3 in the world, maybe even the first, but that's not what we're here to talk about right now in terms of knowing how to use RFID and put it to effective use for his organization. And then with -- our friend, Bill, when it comes to inventory accuracy in retail, if you were to look in the dictionary under that term, you would probably find Bill's picture. You put that issue on the map and the flexibility of that problem. So now I'm going to say a few things before asking some questions. I think it's important if you work for a retailer or a brand, and you're in loss prevention or asset protection, and you're thinking, this topic sounds interesting. But I don't know if it really applies to what I sell. I suggest you think again, and here's why. When it comes to the price point of merchandise that is today getting the benefit of smart labels, we're seeing lots of merchandise under $5, under $4. I have experienced something that sells for $0.99. So that's the reason number one. Reason number two is the nature of the merchandise. There's been a misperception that RFID perhaps is most relevant for soft goods, like apparel and towels, linen, things of that nature. Today, we're tagging so many other goods. We're getting to a point where if you sell it, we can tag it. Things with liquids and metals, fragrances, lipsticks, you can tag a frying pan. So from that perspective, too, this is more relevant to you than you probably think. And then the third thing I'll quickly mention is there are many different ways to connect a smart label, smart sensor to a consumer good. A very common way is with the paper ticket and that generates a lot of value. But there are many other thoughtful ways, including integrating into the product or with the adhesive method as well. So there are many, many ways to keep that smart sensor connected to your item.

So with that being said, let's get into it. I'd like to start with you, Bill. Like I said, inventory accuracy is something that is so, so important. So why don't you tell us a little bit about that issue, and why it's so important to beginning to solve the problem?

So for several years, we've been talking about really making -- getting inventory accuracy as high as possible, right, because without high inventory accuracy, good store and retail execution is near impossible. It certainly makes it more difficult. Essentially, if you don't know what you have or where you have it, how can you execute properly. And one of the biggest factors in the deterioration of inventory accuracy is shrink, right? The loss of that product as it goes along with supply chain from a variety of reasons. We did a study. This was several years ago and a couple of different retailers when they would do their annual inventory, and we would get the inventory accuracy set at that point, and then we would track the deterioration and as few as 6 weeks after taking that annual inventory it had deteriorated back to its previous level, much of that due to shrink.

Bill, why don't you pick up on that and talk about the value that can be created just by having an accurate picture more often during the course of the year.

Yes, I think it's a good point as Dr. Hardgrave just talked about that 6-week deterioration. Think about it from a loss prevention, and Marshall, you touched on this about loss prevention and loss detection, for us in Macy's, we've been on the surety of RFID now for nearly 14 years. And we've gotten a heavy penetration of RFID inside of our stores. What that has really done for us is completely changed our visibility into loss inside of our stores. So the point of an annual inventory, when you think about an annual inventory, you have a onetime a year, and you have to then determine where throughout the course of the year you lost that product in the building. Now if it's seasonal goods, you can nail it down to 3, 4 months when you would have had that product inside your building. But when you start to get RFID penetration on your product inside your buildings and you start to introduce monthly cycle counts, you now take a 12-month window of great unknowns and compress that down to 30 days. And that's where we began probably back in 2014 and '15 in Macy's, where we began to leverage RFID from a shrink visibility and to operate smarter because every 30 days, we got a report card on what we were missing inside of our stores, we could apply strategies towards those issues in the building and then 30 days later, measure whether or not those strategies were effective or not, either reintroduce new strategies or identify what is the new emerging vendor that is being stolen out of the building and adapt to every 30 days. Without RFID, that was not going to be possible for us.

Thank you. Now Read, A few months ago, you stated that RFID gives retail loss prevention and asset protection and loss detection professionals, capabilities they have wanted for decades. So why don't we start getting a little bit into that who, what, when, where, how as well, why don't we talk a little bit about that together?

Sure. I think a little bit about what Joe just talked about and the capabilities and the gaps that Bill mentioned. And that is, I think, on the left, of [ Bang ] where there's maybe a loss event whatever for whatever reason, now you start having that information, that intelligence to make better decisions about what, where, how are you going to display, and what specifically you're going to protect, and how are you going to protect it? There's a lot of integration opportunities. Joe is going to talk a lot about that. So we see left of the problem. It's a huge strategic play, and it's an operational way to get out the problem. I think during the event, again, I'm going to defer to Joe on this, but by integrating technologies, other sensors, thin cameras and so on, you're going to have a much more complete picture not in the -- just in the aggregate, but in individual situations to understand by product, by area in the store, [ by that ] store. If there's employee involvement, that type of thing as well. And then I think right of the event, after the event as a forensic tool locating, identifying and positively identifying because you've got some provenance, right? You've got a license plate, hey, this actually was never sold. This belongs here. That's not yours. And I think those are all game changers.

And for those who may be newer to RFID, we're talking about essentially a serialized barcode. So the combination of serialization and automated data capture unlocks these possibilities. So why don't we talk a little bit, Joe, about some of the ways that this has helped you in terms of these new capabilities. And this might be a good time to talk about smart exits.

Yes. And I introduced it as kind of like compressing it to 30 days. What's interesting about RFID, just like really any other technology, as you unlock more data points, you ultimately get more questions. And now you get 30 days of recycled cycle counts in your store, and you say, what's happening in the 30 days? How could I get even smarter to that? And that's where we began introducing in 2016 smart exits in our stores, which is, in essence, just RFID readers at our entrances for both our customers and our employees in our retail stores. And that unlocked for us a level of data that we had never thought was, a, either possible; or b, our teams could consume and make actionable strategies based on the data there. So you go from 12 months to 30 days, to every single day, getting loss events and Read had mentioned about when you start to combine it with other technologies, you're not just getting an Excel file that says, "Here's all the serialized data that left you're building." You're getting video time stamped of every individual that took product out of your building without paying for it. And what that ultimately did for us is take us focused away from the low-hanging fruit in our stores to looking for those individuals that are causing the biggest distortion and biggest loss events inside of our stores. And I can tell you, in the past 7, 8 years, it is definitively, and in my 26 years of doing this, the biggest innovation change that we've had inside of Macy's is the ability to have RFID reads and to operate in a smarter environment in our stores and take the biases out of what our teams are doing inside of our buildings, because we're leveraging the data to direct us on what we need to focus on day in and day out inside of the stores. Ultimately to Dr. Hardgrave's comment about shrink. For anybody that has been listening to the media, there's been a lot of conversation around shrink. And this unknown of do retailers really know what is actually being lost out of their buildings? I would challenge, and I probably not going to really do this, but I'm going to challenge if there's any media in the room to come see me afterwards because the amount of data that I can provide, I can tell you the amount of employees that are stealing out of my buildings, I can tell you how often customers are stealing out of my building, I can tell you the items they're taking out of the building. And then that unlocks for us, the ability to take it outside the 4 walls, and how we can leverage this term of organized retail crime, how we then unlock from that point, we continue to grow and learn what other use cases we can use from RFID. As we learn more and got more data, we got smarter. And again, we answered more questions or created more questions and then we continue to leverage the technology to get more answers.

Got it. In terms of packaging up cases for law enforcement, maybe, Read, you could comment a little bit about that.

Sure. And I think go back to what Joe was saying, and you can even amplify what exit they left, what time, date stamp, all that sort of things. So now you've got this case that's incredible. And then right with serial offenders, and there are a whole lot of them. That's a large percentage. What other stores has this person been taking from? Who else are they associated with. And now with law enforcement to get their attention, they can put together more complete case packets with much better evidence than they've ever had. And then again, with the prosecutors, that's so critical, right, Joe, to get their attention. Look, I can show you this time they victimize this, but also this, this and this and at this place, in that place. And eventually, we'd like to pull together a retail data right to tell the story without individual is hitting these other places as well.

That's great. Early in November, I had the privilege of attending an important event in Sanibel in Florida put on by the Loss Prevention Foundation. And the Attorney General of the State of Illinois was there, and it became very, very clear that in order for this to fully get on the radar of the political element that and prosecutors, there needs to be more data, there needs to be the ability to connect dots that in the past haven't been connectable. And it's very encouraging to see that great progress is being made on that front. It's because of things like this. Now Joe, I've heard you say before that because you've used exits or smart readers at the exits that employees must use when they exit the building and enter the building, you've been able to identify people that you never would have expected to be involved in any dishonest activity. Could you maybe expand on that a little?

Yes. I tell you I mentioned before about it kind of removes the biases in just how you operate asset protection, loss prevention inside of a retail environment. For us, from an internal perspective, our colleagues inside of the building and hopefully, we will have previously investigated those individuals, but there comes a point where they become trusted colleagues inside of your building and based on turnover, you end up focusing on that new hire. And individually you don't know that you haven't done surveillance on them. What was really interesting is when we started putting smart exists inside of our buildings, those individuals that have been with us 15, 20, 30 years, we're starting to hit on our exits, and there's an individual Ted McCaffrey in the room that has heard me say this before. Smart exits for us is like TSA. It is unbiased. Every single person is going to walk through it. We're then just going to take the output of what reads through those exits, and it's going to tell us who we have to focus on inside of our buildings. We started to realize that we have long service colleagues that we trusted. What were actually hitting us from merchants out of the building, and there was even one colleague, cannot believe this is true, but it is that have been with us for 62 years, that hit off on our smart exits in our building that was taken merchandise out of the building. I'd like to think they were not stealing for 62 years. But they were stealing from us, and they've been working for us for 62 years. And this is an unbiased system. So you take the data that outputs from it, you conduct your investigations, and it was a real unlock for us from an internal perspective as well as we talk about all things from an organized retail crime, the professional shop lifters that are targeting retailers.

Yes. So if I've heard that right in terms of removing bias, it's not just on the internal side, it even allows you to get more value out of your investment in security guards and personnel, because you have a better idea of exactly who's doing this stealing, going out the front door as well.

Yes. The complexity for us, we're a retailer that has 5, 7, 10 entrances in any of our buildings. So when you've got merchandise on multiple floors and it's moving vertically, it's a great unknown without this type of technology to understand while it's leaving the building, how is it leaving? What exit are they taking it out of, and it really starts to unlock where you believe your gut tells you if Polo merchandises on the lower level that they're taking it at the lower level mall door. When I'm going to know it's you based on this data, you start to unlock that they're actually moving vertically in the building, and they're taking it out the third floor mall door and the drive to that might be because we don't have guards at that door. That's not a door based on the type of product that's up there that is in high value, high risk product, so we don't staff that door. But based on this, we can then shift our staffing of our teams, not only times a day, day a week, but even the doors within the store based on the reads of the RFID tags.

So it's interesting when determining whether or not to give your merchandise the benefit of smart labels, which is really giving your customers and your frontline employees as well the benefit of smart labels. You need to look at the benefits from an enterprise view. Now some of that benefit comes from loss detection and loss prevention. But it also comes from other areas as well. And Bill, I'd like you to talk a little bit about the combination of use cases and sources of ROI that together make the case, and how to make that case internally with leadership? And I know you, Joe, have a lot of expertise in that area too. You've lived that -- you've locked that road. Bill, why don't we start with you?

Yes. It's interesting that even 20 years ago, we identified loss prevention as 1 of the 4 major use cases for RFID back then. Although it's one of those that, as a stand-alone use case, it's hard to make that case, although we've made great advances. It's really when you combine those use cases together, right? And you get that visibility from point of manufacturer all the way through to the consumer, right, where we really start to unlock that. And it's not just -- we talk about loss prevention, and we're getting there. But right now, we're really talking more about loss detection, right? But as we get smarter, we get more data, we really move toward loss prevention. But we also then have to think about the full use case there of also fraudulent returns. There was -- I think there was an article in the Wall Street recently about fraudulent returns, right? And especially for chain stores, right? They steal from one store, and they return it to another store. That with RFID, right, you capture that when you've got full visibility through point of sale. So there's a lot of the use cases that are there. And I want to go back to the inventory piece for just a second to think about the importance, as Joe was talking about of getting that regular inventory and whether it's once a month or once a week or once a day in some of these areas, one of the things that we see, I mean, it certainly varies by the product category, right? I mean if you have a skew depth of 2, a loss of 1 thing makes a huge difference, right? If you've got a skew depth of 24, loss of 1 may not make a big difference. And certainly, if there's substitutions. There's a lot of things that go into that. But one of the things that we saw early on that still happens today without adequate visibility is something that we call frozen out of stocks, right? And it may be a term to explain some of you are familiar with this. It's like this, if your reorder point is 3, right, and your system says, you have 5, but really, you only have 1, then you'll never sell enough to get below that reorder point. So you're out of stock and that skew is frozen, right, because you'll sell 1, and it won't hit the reorder point. And so until there's some manual intervention or something building the system that says, hey, after so many days, go put eyes on this. But with regular inventory, we unlock that, right? And so that we are replenishing and -- reordering and replenishing the way we should.

Perfect. It makes perfect sense. So there are really 2 types of retailers out there right now. Those who have RFID tagged product in their stores, really 3 types: 1A and 1B. 1A is have-tag product in their store and are using those tags mainly for back-to-front replenishment and getting 4-wall inventory accuracy, but perhaps not using it for asset protection. Then you have those, who have tagged merchandise in their store because brands are tagging all of their production because other retailers have asked for tag product, but that retailer hasn't. So they're sitting on a lot of tagged inventory, but aren't doing anything at all for loss detection or for back-to-front replenishment or replenishment of the store. So in terms of guidance, Joe, and in terms of guidance, Read, to companies like that, how to start capturing some of the goodness and some of the value? What suggestions might you have?

Yes. I'll kind of piggyback on Dr. Hardgrave talking about like loss prevention being 1 of the 4. I think the lesson for us, as I described it to you about how we matured from cycle counts to the smart exits, it was a growth spectrum of learning like what use cases we can use from RFID. If I were to reflect back and be able to tell myself in 2013, what we know now, we would have hurdled much faster from an RFID standpoint because it's not solving one thing, it's how you start to solve 3, 4 different things inside of a retailer. My second point would be for retailers that have penetration of RFID that maybe they don't have the in-depth infrastructure, start with handhelds. It's a low-cost option to be able to start scanning inside of your building, to be able to just capture and understand what level of product is coming inside of your store that is RFID tag. So I'll turn it over to you, Read.

No, I think to add to that, we've talked about this before that getting way ahead, leaning out your inventory anyway, and I can remember a retail I worked for 30 years ago, huge spike. The loss prevention team was under the microscope. The Executive VP, the head merchant was all over my boss at the time, they loss the VP, let's say, Joe's counterpart back then, we did a deep dive. Basically, the head merchant, they had way over bought in those categories, and there was merchandise everywhere in trucks and trailers and places we had never even mapped on our supply chain to be honest with you. I think we see stock rooms are shrinking fewer employees, less committed employees sometimes associates. So again, knowing where everything is when you need it and just getting -- just enough in there like you're saying stocking to that rate of sale, but -- and not stocking beyond that, RFID has got to help, and that's going to reduce losses right there. No other loss, shrink or theft detection needs to even come into play yet. So I think that, from our standpoint, that's the biggest part of this.

Okay, tack on to that. What was like an aha moment for us as well was the ability to have smart exits gives us shrink visibility inside of our stores. But then we came full circle in how we took that shrink visibility in the data to then buy back into that product. So as I described before about doing a 30-day cycle count, let's say we take a cycle count on the first Monday of a month. And on Tuesday, the day after that cycle count, we have somebody come in and take 40, 50 outerwear coats out of our building, and they trigger on our smart exits as they exit the building. We can now leverage that data. That's output from the smart exits to not only inform our asset production teams on how to work smarter, what we can then buy back into that product because we don't have to wait 29, 30 days to take another cycle count, we already have the loss of that. And we can now buy back into that product, so you talk about that frozen out of stock. That really compresses that down to every single day, and it's a handhold of we're leveraging the shrink visibility to get merchandise visibility and to get back in stock on the product for the customer that wants...

And they're taking your most desirable stuff, too, right, Joe, I mean they're not taking your junk and doing you a favor, and you can't afford to be out of stock on those items, right?

Well, and I'm going to attribute 10-plus years ago, the former CIO of Dillard's, Bill Holder, and talking about this, said that look, at least if you can see it go out the door, you can replenish it, so somebody else can't steal the next day.

Back to, if only the thief were kind enough to leave a list of all the items that they were taking.

Exactly. They do. It's the next best thing.

Why don't we talk about recovering stolen merchandise or identifying in places like flea markets, bodegas, other fence locations and demonstrating that the items belong to you and not somebody else.

Yes. And Dr. Hayes talked about kind of the collaboration with law enforcement, and how RFID comes into play there. From an organized retail crime standpoint, especially with what we sell inside of Macy's, most of our product is sold in other retailers. We've got private brands, but we've got what are called market brands that are in every other retailer. And I said, I've been doing this for a long time. I've gotten those phone calls 10, 15 years ago, where it's like quickly get down to this fence location. If you could be the first one here, and you can claim that your Nike product or your Polo product, it's yours to have. Those days are gone because of RFID because we can go down there and not only scan the entire fence location, but we can also have the ability if we can get some unlocks of what some RFID tags or other retailers are to call other retailers and say to DICK'S Sporting Goods, "Hey, we found 3,500 NIKE items that are part of DICK'S Sporting Goods because we've got a consortium of this data to inform on that." But furthermore, and we've had a lot of support lately from federal law enforcement, the likes of like Department Homeland Security, their homeland security investigations group has been incredible partners for retailers in combating organized retail crime. But areas like the FBI has stalled, and they have struggled to understand where they need to get into in the world of retail crime, and how they can support us. One area where they didn't know they could help was they said, if we could only prove the movement of stolen property across state lines, then the FBI would be all in. When we have RFID, not only can I prove that the products were stolen out of Chicago, moved to Queens in New York, but I can then tie it back to the smart exit, give them the video of the fence operator in Queens that's actually seen in the Chicago store, taking the product out of the building. You talk about gift wrapping a case for federal law enforcement, they're like just bring it to me, and we'll get it in front of a judge, and we'll start processing charges on the individual. So it's our goal to bring them as much data and as diffract as possible, not to give them half complete investigations to say, you now spend all your time investigating it. We'll investigate it completely, and we'll leverage the technology of RFID to do that.

I'll ask this question of all 3 of you. Is it fair to call RFID a game changer for the worlds of loss detection and loss prevention?

I would say yes, and I would call it essential.

Feel like I don't have to answer that, but I will just to go on the record and say it is a game changer for us. It's definitively unlocked so much insight into what's happening inside of our stores.