Q2 2022 Earnings Conference Call
August 23, 2022 8:00 AM ET
Mike McGuire – Vice President and Head-Investor Relations
Jeff Gennette – Chairman and Chief Executive Officer
Adrian Mitchell – Chief Financial Officer
Conference Call Participants
Oliver Chen – Cowen
Matt Boss – JPMorgan
William Reuter – Bank of America
Lorraine Hutchinson – Bank of America
Omar Saad – Evercore Partners
Kimberly Greenberger – Morgan Stanley
Steph Wissink – Jefferies
Gabby Carbone – Deutsche Bank
Tracy Kogan – Citi
Chuck Grom – Gordon Haskett
Jay Sole – UBS
Bob Drbul – Guggenheim
Michael Binetti – Credit Suisse
Dana Telsey – Telsey Group
Carla Casella – JPMorgan
Good morning, and welcome to Macy’s, Inc. Second Quarter 2022 Earnings Conference Call. Today’s hour-long conference is being recorded.
I would now like to turn the call over to Mike McGuire, Vice President and Head of Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and thanks for joining us to discuss our second quarter 2022 results. As always, with me on the call today are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO. Jeff and Adrian have prepared remarks that they’ll share. After which, we’ll provide time for your questions. Given the time constraints, we ask that you participants in the Q&A please limit their questions to one single part question.
Along with our press release from earlier this morning, the slide presentation has been posted on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes supplementary facts and figures to assist you in your analysis of Macy’s. Also note that unless otherwise noted, the comparisons that we’ll speak to this morning will be versus 2021. Comparisons to 2019 are provided where appropriate to best benchmark our performance given the impacts from the pandemic.
I do have one housekeeping item to share with you this morning. On Thursday, September 8, at 8:05 a.m. Eastern Daylight Time, Adrian will be participating in a fireside chat at the Goldman Sachs Global Retailing Conference. This event will be webcast live on our Investor Relations website. So please circle the date on your calendars and plan to tune in.
Keep in mind that all forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today.
A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures as well as others used in our earnings release and our presentation on the investors section of our website.
Finally, as a reminder, today’s call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call, and it will be archived on our website for one year.
With that, I’ll turn the call over to Jeff.
Thanks, Mike, and good morning, everyone. As you saw on this morning’s press release, our team put together another solid quarter on both top and bottom lines in the face of an increasingly challenging consumer environment. We generated quarterly net sales above our expectations at $5.6 billion, while comparable owned-plus-licensed sales decreased 1.6%.
We also delivered earnings above our expectations with adjusted EBITDA of $616 million and adjusted diluted EPS of $1. We benefited greatly from the steps we’ve taken to transform our business through our Polaris strategy. We are quicker and more agile and more prepared for the challenges in the current environment.
Over the past two years, as consumer demand rapidly switched between categories and channels and macroeconomic pressures intensified, our teams have taken discipline actions and made tough decisions in order to ensure stability and health of our enterprise. We have fortified our model and strengthened our balance sheet all while delivering an easier and more convenient shopping experience for our customers across channels and the value spectrum.
Before we dive into the full details, I’d like to take some time to review how the pressures of the macroeconomic environment are affecting consumer behavior and what that means for us. During the quarter, Macy’s brand customers across all income tiers slowed and shifted their spend, persistently high inflation drove higher prices and food and fuel and in turn led to higher interest rates than the softening market.
As a result, overall consumer discretionary spending and sentiment weakened compared to the prior year. Constrained consumer spend also shifted from goods to services with more consumers choosing to spend on vacations, events and dining out. Despite the weakened environment for Macy’s, we continue to see strength in occasion-based categories, which include career and tailored sportswear, fragrances, shoes, dresses, and luggage.
Sales for these categories were up 8% to second quarter of 2021 and up 21% to second quarter of 2019. Like last quarter, pandemic-related categories, which include active, casual sportswear, sleepwear, and soft home continued to decelerate during the quarter with sales down 18% compared to the second quarter of 2021 and down 12% compared to the second quarter of 2019.
Customers also exhibited more traditional pre-pandemic shopping behaviors, including more in-store shopping.
This shift contributed to a digital sales decline of 5% and conversion that was down 3% compared to 2021. However, versus 2019, digital sales were up 37% and conversion was up 14%. Spending patterns for Mother’s Day and Father’s Day were encouraging, signifying that despite inflationary pressures customers continued to shop Macy’s for celebrating life’s moments with family, friends, and coworkers.
Leading up to Mother’s Day, we saw strength in beauty, dresses, career sportswear and women’s shoes. Before Father’s Day, we saw strength in men’s fragrances, tailored clothing, furnishings, outdoor sportswear, and shoes. Combined for the two weeks leading up to both holidays, these categories were up 9% over the prior year.
Looking forward, we continue to feel confident in our position as a style source and leading gifting destination. However, spending trends fell as June progressed with Macy’s brand seen a decline in customer traffic and spending. Post Father’s Day into July, Macy’s brand year-over-year sales trended nearly 5 percentage points lower than the proceeding weeks of the quarter.
Our teams were prepared to tackle the slowdown quickly through the inventory management competencies we gained through Polaris. Our work in this area in the first quarter positioned us better compared to others and we came into the second quarter prepared to compete in an industry that was largely over inventoried.
During the quarter, we observed that all retailers were working to shed their excess inventory, setting the industry up for higher permanent markdowns and promotional levels. The industry-wide inventory levels along with the slowdown and consumer discretionary spend resulted in elevated inventory levels within certain categories. Additionally, supply chain pressures continued to ease as the quarter progressed. This resulted in receipts flowing in sooner than we experienced in the first quarter and fallout rates continue to improve with a 15% fallout rate, representing a 5 percentage point improvement from the first quarter.
To better align inventory levels with consumer demand, we slowed receipts in market brands where we have more flexibility than our private brands. We effectively pulled the appropriate levers to manage inventory productivity while flowing fresh inventory to meet our customer needs.
Over the past year and a half, I’ve spoken to the success our team has had in navigating supply chain volatility. This quarter was no different. The improved use of data analytics enabled the team to respond quickly and adjust our inventory flow accordingly. We ended the quarter with inventory levels up 7%. We acknowledge that we still have opportunities to improve our inventory balance by channel and store and mix of merchandise categories and brands. We are targeting appropriate inventory levels by the end of the year and plan to be aggressive in taking the necessary markdowns to drive faster sell-throughs in our aged inventory in seasonal goods, private brand merchandise and pandemic related categories.
Simultaneously, we’ll bring in fresh inventory and categories in which customers are signaling demand. As a leading style and gifting destination, we know that the lifeblood of a fashion retailer is its ability to bring in fresh and exciting inventory. We’re making strategic decisions to fuel the second half of the year, particularly by rebalancing our mix of market and private brands to ensure that we have the products our customers expect to see over the holidays.
Our current healthy financial position when combined with the sensible management of our inventory through data analytics and pricing science enables us to bring in the brands and products to meet demand at a rate higher than we’ve done in recent history. More than 55% of our offerings during holiday 2022 will be new, an increase of over 30 percentage points from holiday 2019 and we believe this will position us well to meet customer expectations.
Yet, we see risk in the continued deterioration of the consumer’s discretionary spending in some of our categories and the industry-wide blot [ph] a pandemic related category inventory. In light of this, we think it’s prudent to recap our fall season. Our lower outlook accounts for the pressures we see in the back half of the quarter and the excess inventory that remains in the industry. The impact of these factors is reflected in the markdowns and promotions we anticipate needing to liquidate aged inventory and further reduce the merchandise categories stock to sales and balances by the end of the year. Adrian will review this in further detail.
We’ve successfully navigated in whether these type of challenges and economic downturns before. Today, we are better positioned with our advancements in technology and data science that enable us to meet customer demand while protecting our bottom line. We continued to enhance the customer experience with investments in personalization, our digital platform and physical optimal expansion, all supported by investments in our colleagues. Our people enhance our competitive advantage and we’re retaining and attracting the talent needed to advance our strategy. Our position as a leading omni-channel retailer across the value spectrum, as well as the efficiencies we’ve built into our business through Polaris have allowed us to respond effectively to the changes in consumer shopping behaviours across income tiers, channels and categories.
Looking at each of our name plates. Comparable sales for the Macy’s brand decreased 2.8% on an owned-plus-licensed basis. Macy’s brand customer count increased 7% to 43.9 million active customers on a trailing 12 month basis. We continue to see strength in our most loyal and engaged customers. Our Star Rewards active members who totaled 29.5 million and accounted for 70% of our total owned-plus-licensed sales, which is a 5 percentage point rise year-over-year. Our highest loyalty tier platinum was particularly strong and we’re continuing to grow our active accounts primarily by new bronze accounts, our most diverse and younger customer tier.
Similar to what we experienced during the first quarter, tourism remains below 2019 levels, although we see strength from Central and South America, as well as Europe. We continue to expect international tourism in 2022 consistent with the level we saw in 2021.
At our stores and on digital, we’re seeing encouraging results from our new brand platform Own Your Style, which reaffirms our position as a style and fashion authority among our customers. After seeing our branding in the second quarter, pulled active customers were more likely to see Macy’s as a source for great value and style with perception increasing 16 and 18 percentage points, respectively.
Our off price offerings Backstage and the Bloomingdales outlet are well positioned to capture demand during an economic downturn. During the quarter Backstage store-within-store locations continued to post strong results powered by men’s, women’s and kids apparel, as well as beauty and luggage. And luxury continues to stand out as both Bloomingdales and Bluemercury outperformed in the quarter versus the prior year period.
Comparable sales on the quarter for our Bloomingdales brand increased 5.8% on an owned-plus-licensed basis, driven by strength across women’s and men’s and kid’s contemporary, dress the apparel and luggage. Bloomingdales last 12 months active customer count increased 14% compared to the prior year.
Next month Bloomingdales will kick off its 150th anniversary celebration that will run through the holiday season and feature special events and luxury designer collaborations. Building on Bloomingdales momentum, this celebration is expected to drive continued omni-channel growth and further customer engagement.
Comparable sales for our Bluemercury brand increased 7.6% driven by continued strength in color and skincare. Bluemercury’s active customer counts increase 9% compared to the prior year period. Overall, we remain focused on investing in the transformation of our operations to differentiate our business, drive market share and strengthen customer engagement all while maintaining a healthy financial profile.
We’re executing on several key initiatives to support our transformation. First, we are continuing to ramp up our digital capabilities, including personalization that increases engagement with our customers and optimizes our omni-channel experience. We are optimizing our online platforms to provide better digital experiences. Following the redesign of our mobile app in 2021, we have seen strong conversion and growth with active app customers up about 17%.
Second, Macy’s Marketplace will launch in the coming weeks and will include product in a wide range of categories, such as pets, home, kids, baby and maternity, beauty and health and toys and electronics. We have a great dedicated team in place to build out our marketplace to include hundreds of new brands over the next few months. We look forward to sharing more details in the near future.
Third, Macy’s media network is growing year-over-year across revenue, advertiser and campaign count. Recently we’ve started to test more engaging advertising experience through onsite videos on our Desktop platform, offering brands to tell their stories with engaging content.
Fourth, we’re making progress on reimagining and rethinking our private brand portfolio, which will begin to take shape in 2023 and scale over 2024 and into 2025. While we’re in the early stages of reimagining the portfolio to be differentiated, defendable and durable, we’re excited for what’s to come based on the success of our newest brand and now this and the refresh of INC. And now this which we unveiled in mid-2021 has seen strong growth compared to more established private brands. And during the quarter, we began a rollout of our revamped INC private brand that has seen encouraging sell-throughs and new products. We look forward to a robust private brand portfolio that better entices existing customers while attracting new ones.
Fifth, we’ve recently announced that by October 15, we will expand our exclusive Toys “R” Us partnership to include every Macy’s location. Just in time for the holiday and gifting season, we’re encouraged by the customer response in the current store locations and we’re seeing an improved sales trend in our kids’ business, which typically sits next to Toys “R” Us store within store. Toys is a huge opportunity for us with a fair share market opportunity of $1 billion in annual sales.
Sixth, we’re taking steps to reposition our physical store footprint to better serve our customers and support omni-channel market sales growth. We’re advancing our off-mall small format store strategy by opening additional locations for both Macy’s and Bloomingdale’s including our first replacement location in the St. Louis area. We look forward to sharing the findings in the future as they develop....