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

Good morning, and welcome to this next session of the global -- the Goldman Sachs Global Consumer and Retail Conference. My name is Brook Roche, and I cover the apparel Softlines on brand sector here at GS. And I'm thrilled to introduce our next session. with Macy's. Here with me today is Tony Spring, Chairman and CEO; and Tom Edwards, COO and CFO. Welcome, Tony and Tom.

Good morning. Thank you -- great to be here.

Thank you for joining us. Tony, it's been over 2 years since launching the bold new chapter strategy. Where has Macy's made the most progress? What has changed versus your expectation when the strategy launched? And what opportunities are still in earlier stages of execution?

Thanks for the question. First of all, great to be with all of you. The bolder chapter is working. So we're 2.5 years into the strategy. When we began, we talked to 60,000 customers and really had a good understanding of what we needed to do to improve the quality of the business. It was make sure that we had compelling stores. So we closed underproductive stores -- we started our reimagined program. We started with 50 to make sure that we could get it right and learn, added another 75 the result 2.5 years later, 9 of 10 quarters, those reimagined stores have grown. We've now had 5 consecutive quarters of growth at Macy's, 6 quarters of beating our guidance on -- the Street, 2 quarters of net sales growth. We obviously accelerated and differentiated further Bloomingdale's and Bluemercury. Both those brands continue to grow. We're on 2 straight quarters of double-digit growth at Bloomingdale's and continuous growth at Bluemercury. We're still in the early innings of our strategy and work, which to me is more opportunity for the brands in the business. We have the opportunity to continue to refine our assortments. We have the opportunity to continue to create a better experience, both physically and digitally for the customer. Since the start of the strategy, our Net Promoter Score at the Macy's store all points. So the experience for the customer is significantly better than it was at the start of the strategy. So I step back and say, the bold new chapter was intended to grow the company. We're growing the company. The bolder chapter was intended to improve the quality of the customer experience. The customer experience is far better today. The strategy was intended to accelerate the growth of our Luxury brands. The luxury brands are growing and have unique positions in the marketplace. And the intent of the strategy was to improve our end-to-end operations. We're delivering packages faster, less expensively. We closed underproductive supply chain centers open to state-of-the-art center in China Grove. So all in all, a lot of progress, but a lot of opportunity still in front of us.

Great to hear. You mentioned the reimagined 200 stores, look at a little bit deeper into that. What changes have proven most impactful? And how much opportunity remains within those stores -- and Tom, how should investors be thinking about the profitability trajectory of those stores relative to the broader fleet?

So going back to the beginning of the Reimagine program, we picked the first 50 stores. And we now have 3 cohorts of stores, 50, 75, 75 or the reimagine 200, all cohorts are growing. And as I said, 8 of 9 quarters, we've had growth in those stores. But the reimagined program was like a recipe. It was the ingredients that have to kind of all be done at the same time. We needed better merchandising. We need a better merchandise presentation, storytelling. We needed to improve the fitting room experience. We needed more colleagues in our store. We added people to handbags, people to shoes, people to work in the fitting room. We needed to make sure that our density on the floor was reflective of how we wanted the customer to shop within the stores. We need to make sure that we had the right proportion of best better good -- so we're a department store. We obviously want to have a range of price points. I would say more variety, less redundancy. But we had way too much of the same thing floorafter4r department after department -- so when you ask me kind of break apart what is the most important ingredient in the strategy, it's like asking me which is my favorite child. I like all of it. And when it all works together, you get the kind of Net Promoter Score improvement, you get the kind of continuous sales improvement. You get the kind of response where the vendors in the vendor community want to work with us and want to be a part of these stores. So I think the reimagine program is a great case in point for the future of what Macy's stores can be. 60% of our store base now, 75% of our Macy's store business is in the reimagine program.

And I'd add, when we look at the returns on investment, we're pleased first with the performance and investment returns start from growth. The reimagined stores are growing. As Tony noted, for 9 out of the last 10 quarters. And when we look at our investment, it's capital light. So we're investing in people. We're investing in fitting room and making sure that the flow is correct as well as events and marketing. And importantly, we've been learning and iterating as we moved from the first 50 to the next 75 and adding up to 200. So we're getting more effective and more efficient in what we invest in and make sure it's appropriate for the local market and what that store stands for in that market. So over that time, we've seen improvements -- initial sales growth immediately continued year-over-year for the different cohorts and then profitability following that after the initial investments. So we're very pleased with the returns. And we're looking to expand our reimagine fleet, where as a matter of fact, we're testing or bringing forward some pilots into this year to get a head start into the following year for 2027. And look forward to continue to build it out as a key part of the strategy for the bold new chapter.

Great to hear. Let's turn to Bloomingdale's, which has been a very successful area of the business recently -- as you think about the outsized growth of the Bloomingdale's banner, what proportion of this is due to your own execution versus a function of broader competitive dynamics? Where do you see the greatest opportunity ahead? And can you deliver this even as competitors begin to strengthen?

First of all, I love Bloomingdale's. I grew up medals, 35 years of my career at Bloomingdale's. It is a special brand. If we didn't own Blooming deals, I'd want to buy it. It's that good. They've had double-digit growth 2 quarters -- the last 2 quarters of 25, up over 9%. So really on 4 straight quarters of outstanding growth and performance. It starts first with the right strategy. So they have the right strategy. They cater to an advanced contemporary, it's a luxury consumer. Obviously, great merchandising skill in the company, great leadership, strong execution and a long culture of growth and imagination and innovation. And then disruption in the marketplace certainly helps to fuel the growth that Bloomingdale's is having. But without the right leadership and strategy and structure and culture and execution, they wouldn't be able to capitalize on any level of disruption. Now we just launched this past week, our hotel Bloomingdale's campaign for the fall season. That's a partnership with the Ritz-Carlton and lots of exclusive product. If you haven't been to 59th Street, or online. It's a great experience. It's a lot of fun. I think the 1 thing that Bloomingdale's brings to retail is a level of fun and imagination and curiosity that I think in that segment, tends to be more serious. And so they distinctly stand out in their competitive set, the range of brands that they offer, the amount of discovery that's a part of the shopping experience. And they're hungry. So even with the level of growth that we've had at Bloomingdale's, we continue to see Bloomingdale's as a growth engine for Macy's, Inc. That's organic growth, more points of distribution, more Bloomy's stores, more blooming dose the outlet stores, more opportunity digitally, more opportunity physically. And when I look back now at the Bloomingdale's growth, sometimes you could say, wow, you've had a good performance in 1 category of business. It's been broad-based. It's been in apparel. It's been in accessories. It's been in men's. It's been in home. It's been in physical retail. It's been in digital retail. It's been during the fashion season. It's been during the gifting time period. It's been an off-price. It's been in full price. It's been in marketplace, licensed business and owned business. So there isn't an element of their business right now that isn't growing, which is very exciting to see.

So when I take a step back and look at Bloomingdale's as a percent of the whole company or it's in the high teens, we recently provided more information on our nameplate breakouts, and Lending Dale is a really important and growing part of the business. But we don't provide profitability. It is nicely profitable. and it's a key part of the bold new chapter algorithm for growing the top line and ultimately growing the bottom line. .

That's great to hear. Let's discuss 1 of the debates that's coming out of earnings, which is traffic, conversion and -- you've discussed healthy traffic trends and AUR growth, but conversion trends have been somewhat muted. What are you seeing in conversion today? And what initiatives do you believe can drive further improvement from here?

Let me take it first, then I'll hand it over to Tom. We'll always talk over each other -- it's a sign of a healthy marriage. First, I have to step back and say the golden equation, right? We all know it in retail units AR, obviously, conversion and then whatever returns or cancellations come out. So it's hard sometimes to get all elements of the equation to go up at the same time, and there tends to be a reverse impact of -- as AUR goes up, conversion tends to go down. And it makes sense, the more expensive to purchase, the more consideration that may go into it. So I'd say we're on a learning journey. -- on our golden equation. And we have the benefit of having Blooming dose and Bluemercury, which has a slightly lower conversion rate than Macy's does and has a higher AUR. We're also trying to become better students of the business. So you would say conversion should always be high. And then I'd say, except if you're advertising prom dresses in January. And you want to highlight prom dresses in January, so people buy prime dresses in March and April. And you probably want to have a very high conversion rate on something that you're trying to sell through in a day or 2. and your expectation is very different for that conversion than maybe for the more deliberate purchase, big ticket, fine jewelry, things that maybe are going to require a few visits for you to inspect and understand better. So we're pleased with our level of traffic. -- traffic in aggregate is growing. It's flat in the stores. We're seeing the conversion rate be the single biggest challenge that we have as the AUR goes up. But we feel like we understand exactly how to work with the client and understand the differences that we're describing in conversion. And ultimately, we can deliver a better growth pattern because the customer is happier with their purchases.

And I'd add, when we look at AUR, it is up because of the -- really the foundations of our business model. We're adding better brands, the best brands and laddering up and improving the customer experience. So it's not as much a pricing discussion as a brand matrix and fashion authority discussion. The other piece I'd just emphasize that Tony talked about is that this is all part of our healthy model. the higher AR driven by our base strategy, a slightly lower expected conversion but a higher basket size. And we've been seeing this dynamic over a year. So it is not a new phenomenon. It is 1 from the initial part of it. And the last point I'd make is around AUR. That higher AUR is not a direct translation to higher gross margin. It supports it over the long term as it drives sell-through and engagement but it also comes with some higher costs. So as we move through the business, we look to drive top line growth, drive overall margin dollars along with it and manage our overall system moving forward.

Let's round out the discussion on AR with a question that we're asking all companies at our conference, which is on AUR. Do you expect your prices in AUR to be higher, lower or the same in the second half of this year versus the rate delivered in the first half?

The AUR has grown really since the inception of our Boldneapter strategy at all 3 brands. It's again, as Tom said, a reflection of the quality of the assortment. I think the 9% growth we had in the second quarter will start to moderate as we kind of come around the back half of the year and up against the impact of some of the tariff inflation that's in pricing. But as a department store, we have the benefit of being able to have best better good and be able to be appropriately sharp on pricing and at the same time, make sure that we have a wide aperture of offerings for the consumer because someone's indulgence might be someone else's desire to save. .

Very clear. Let's shift to the credit business. How are you thinking about the near-term drivers and long-term growth opportunity within that credit and loyalty ecosystem?

We feel good about our credit business, but it needs to be put in a broader context. It's part of the Macy's overall ecosystem. We serve over 40 million customers -- we have visibility to over 70% of transactions for those customers that are in our loyalty program. The majority of our loyalty program also have a credit card. So it is an intimate and an integral part of the overall system. -- and we see it growing with the business. We've seen very strong performance over the past year and then into Q1 and Q2 continued growth, and it's really a reflection of a couple of different things. The credit portfolio health within the credit card is strong. We have low net credit losses, and we've seen that improve even in the current economic environment. That was a driver of Q1 results. And then we have just a base engagement with our stores and with digital, bringing on new accounts and encouraging usage as part of the overall system. So as we look forward, we look to grow the credit business as part of the overall growth of the company because it's connected directly.

Rounding out some of the discussion on the strategy, let's talk a little bit about your stores. You've made substantial progress repositioning that store fleet through closures, reimagine investments and selective growth initiatives. How are you thinking about the long-term role of stores within the Macy's ecosystem? And what does the store base look like 2 to 3 years from now?

We've talked about at the beginning of the strategy approximately 350 go-forward stores would make sense for the Macy's brand. And I think we're sticking with that approximate number. We've closed about 85 stores through the first 2 years of the strategy. Our closure announcements happened at the end of the fiscal year. the improvement in the store is the improvement in the business. So I think as we all kind of came out of that post-pandemic period, we realized the importance again of omnichannel of the customer not being 1 channel or another channel. People will choose what they think is appropriate for their life in that moment. And there are times when you're going to want to be in stores and you're going to want to meet with your girl friends and have lunch and shop the store. There are other times you need something quickly, and you're going to use same-day delivery and you're going to go on the app and you're going to buy it. And hopefully, we're going to get it to you in time. But that omni-customer is so valuable to us. that we're highly focused on people that are both physically and digitally engaged that we understand their life patterns and are able to better through the use of information, browse behavior, better support their shopping experience at all 3 of our brands.

Topical discussion question here. Last week, you reported 2Q results. And you noted that consumers remain resilient and engaged. What are you seeing in the consumer and promotional environment today how is back to school trending? And how do you expect the backdrop to evolve throughout -- through the second half of 2026? And maybe within this question, we can ask a question that we're asking all companies which is do you expect to help the consumer to be better, the same or worse in the back half than the front half. And similar, do you expect the consumer to be similar, better or worse? -- in 27 versus [indiscernible]?

It's never good at multiple choice questions. So I would simply say the consumer remains resilient. I never thought I would use that word as often as I've used that word. They're definitely choiceful. When you say the consumer, what consumer you're talking about, our most loyal and frequent consumer is highly engaged to shopping as you would expect with great consistency and passion. I've said the interest really remains around fashion and newness. The good news is -- there's a lot of new fashion for fall. Everybody needs to go out and start shopping because if you don't own leather, if you don't own wait, if you don't own a structured bag, if you don't own animal, -- if you don't have something -- there's just, I think, newness across the entire store. The variation, I think, within boots is fun. So we're excited about the fall season. That being said, it's going to be choppy. I think there is no straight line unless you could tell me there won't be an inflation increase in the remainder of the year. We won't have a rate increase tomorrow. We won't have oil prices where they are today. So there's way too much uncertainty. Macroeconomic, geopolitical, where there are things we can't control. Our team, though, is solely focused on the quality of our assortment, taking care of the customer, making sure we're determined to try to continue to bring in newness, let the inventory continue to flow and make sure that as the customer votes on product, which they do every single day, we take the appropriate steps, whether it's marking down the things that don't work or reordering the things that do work. I love being a department store in this environment. We are able to hedge against everything. If the structure business is soft, we can buy into the casual business. The casual business is soft, we could buy into the suiting business. The suiting business is off, we can lean into the men's business. We've come through a cycle of where the big ticket business based on interest rates has been a little softer. All of a sudden, business has kind of gotten a little bit better. We went back to pre-tariff pricing. So we're seeing a customer lean right back in and buy furniture, mattresses, other accessories for the home. So this is a great business environment where you don't have a straight line where you don't have a clear understanding of what categories are going to be strong and what categories are going to be a little softer. Our multi-category business is well positioned for an environment like this.

In Idaho, we're entering the fall with a very good inventory position. In Q2, we're up 2.5%, in line with our sales growth. And as Tony noted, we're coming in the fall with newness in fashion and really ready to deliver for the customer and be there for them in their more resilient mode.

Tony, you mentioned several drivers of fall fashion. And on the call, you also talked about a couple of other structural drivers of fashion, whether that's GLP-1s or just fashion shifts that continue to be a cycle. Do you think that those tailwinds are going to build as we move into 2027? Or do you think that this is a fall 26 phenomenon?

I think it builds, -- look at how well dressed the room is. I mean we have kind of all gone back to the office people realized they couldn't wear their sweats and their company close to the office 3, 4, 5 days a week, whatever day is a week, they're in the office. Then you add to the kind of dress-up environment component. And I don't care whether you put a blazer with a pair of jeans or you're wearing suit separates, you're wearing the full suite or wearing a dress. It's an opportunity for a multi-category business that really owns the classification categories to be well positioned. Now you throw on top of that the beginning early impact of GLP-1s and don't ask me the specifics because I can't tell you. All I can see is that the plus size business is very soft. -- and that most other areas of apparel are healthy. And I think you're seeing people as they go through a period of time on GLP-1s, losing enough weight what happens? People want to get a new wardrobe. And you don't get a new wardrobe just for the summer. Then you need a new wardrobe for the fall, then you need a new wardrobe for the winter, then you need a new code. -- then you need a new swim suit. So we see this as a -- we're in the early cycle of GLP-1s. It's only affecting so far the top tier, maybe the coast and Miami. So the opportunity is meaningful, I think, as we go forward.

Only the top tier. Are you seeing more of that in Bloomingdale's than it [indiscernible]?