Macy's, Inc. (M) Presents at Goldman Sachs 29th Annual Global Retailing Conference (Transcript)

Macy's, Inc. (M)

Goldman Sachs 29th Annual Global Retailing Conference

September 08, 2022, 08:05 AM ET

Company Participants

Adrian Mitchell - Chief Financial Officer

Conference Call Participants

Brooke Roach - Goldman Sachs

Presentation

Brooke Roach

Good morning, everyone. My name is Brooke Roach, and I cover the apparel accessories and the brand sector here at Goldman Sachs Research. I am very pleased to introduce Macy's. We'll be kicking off our first session of day two of our 29th Annual Global Retailing Conference. Here with me today is Adrian Mitchell, CFO. Welcome Adrian.

Adrian Mitchell

Thank you, Brooke. It's great to be with you.

Brooke Roach

Adrian, perhaps we could kick it off with a macro question. There's a lot of macroeconomic uncertainty right now. And is there a lot of focus on what's happening with the consumer. How is Macy's focused on navigating this time period?

Adrian Mitchell

Yeah. You know, we're continuing to be very focused on the long term. And for us, we have a major transformation that we're currently going through. So our three priorities are very simple.

Number one is execution. We want to focus on really strong execution that's consistent with our outlook. We want to be transparent about the performance of our transformation initiatives, and we want to be consistent in our performance over time. So execution is very, very key for us.

The second thing that's really important for us is balance sheet health. And you've seen a number of really strategic actions that we've taken, very aggressive actions we've taken over the last year to really make sure that we have a healthy balance sheet. That's around inventory efficiencies, that's around really taking down our debt, pushing out our debt maturities, collateralizing our security bonds. And so those things are really critical for us to have financial flexibility. So that's kind of the second thing.

But the third thing that's really important is really investing in capabilities. And so this is a long game for us. We're navigating the short term as best we can. We know it's a challenging environment. But our financial health and our operational efficiency, gives us really a lot of confidence and give you the capability and capacity to navigate the short term. But we're committed to our $3 billion of capital investments in the business over the next few years, and we're seeing the benefits of those investments. So investing in the business is really the third thing that we're focused on.

Brooke Roach

That's really great commentary. Thank you so much for sharing. How would you characterize the health of the consumer today? Are you seeing any new shifts or demographic trends emerging? And any call-outs to highlight as you started to navigate the back to school period?

Adrian Mitchell

Yeah. So as we think about the consumer today, we think the consumer is still relatively healthy, especially going into a slowdown. But what we saw in the second quarter was a situation where all income tiers for our Macy's brand actually saw a slowdown, particularly in the back half of the second quarter.

And so as we think about kind of what we came into the year planning, we really planned a lot of our, for example, pandemic categories down. But surprisingly, some of those categories actually slid down faster than we had expected. At the same time, our luxury customers, we look at the Bloomingdale's brand, looking at the Bluemercury brand, brand, very resilient. And so what we continue to see is strong momentum that's outperforming last year.

So you know, look, as we think about the consumer, we're very much focused as we get into the fall season on continuing to be very relevant. And the kinds of things that we're focused on as we think about the fall season, it's having inventory available for that customer so that they can transact on the right side.

And so we recognized that last year, when we invested in getting inventory, it was a real differentiator for us. This year, we want to make sure that we have that inventory early enough to be available for the customer as we lean into the holiday season.

The second thing for us is really the right composition of inventory. So they are parts of our business that are really on fire. Those occasion base categories, the dressing categories, the shoes categories, the fragrances categories, those are really on fire. So there's a composition element that we think is actually quite important right now. So we'll continue to lean into freshness as we get into the back half of the year.

And then the third piece is we're going to continue to be disciplined on managing inventory. That's just really critical for us. So even though we're going to move into freshness, and get a better balance between our private brand products and our market products, we're going to be disciplined on our box. And that requires really looking at the item level SKU velocity, really understanding the demand, really being thoughtful about the inventory we have on hand and in transit, and just being super disciplined.

And as we look at the third quarter so far, the good news is we're still on track with the outlook and guidance we provided in our Q2 earnings. So coming out of Labor Day holiday, the first month was certainly what we expected. So we're pretty pleased with that.

Brooke Roach

Adrian, you mentioned that dresses and occasion wear were on fire. And that conflicts with some of the trends that we're seeing in pandemic winter categories.

Adrian Mitchell

Yeah.

Brooke Roach

Let's dive a little deeper into some of those pandemic winter categories. You bucketed them all together on your 2Q call. Any specific trends you're seeing within the subcategories of the pandemic winner? And any outlook on when those trend - will those trends might stabilize or normalize?

Adrian Mitchell

Yeah. So you know, as I mentioned a little bit earlier, we actually planned a lot of the casual wear, casual sportswear. A lot of those really soft home categories, things that were really peaking the last couple of years in the pandemic, we planned that. But to our surprise, the trajectory of the decline in the first half of the year was much deeper than we expected. So we're very focused on moving through those pandemic categories, moving through the seasonal portion of those categories from the spring so that we are in a much healthier position going into holiday and going into next year.

We do believe that we're in a position where we should be able to get out of a lot of that inventory this year. We're focused on the third quarter, so that we're really fresh and clean for holiday. But what we've seen, for example, in the second quarter, these categories were down about 18% versus last year. So there's really a pullback on that demand as the consumer is kind of shifting their spend.

But you know, from our perspective, from a consumer standpoint, unless there's a material shift in the dynamics we're seeing with inflation, with wage growth, we believe that the pressure is going to continue into next year. And so we're very cautious about next year. We're very deliberate about the fall season. But we do believe that there will be pockets of spending, and we want to lean into that.

Brooke Roach

So no material differences in that pandemic category between soft home or apparel or anything else that you want to call out…

Adrian Mitchell

Depends on the category, but clearly down.

Brooke Roach

Okay…

Adrian Mitchell

Clearly down. I think a lot of the consumers have bought a lot of that stuff already.

Brooke Roach

Make sense. You mentioned inventory several times, in your opening - in the first couple of comments. Can you dive a little deeper into that. Macy's inventory at the end of the quarter was only up 7% year on year? And from the outside looking in, that looks better than a lot of peers in the retail environment broadly? Can you talk to the composition of your inventory and your comfort level with it? So on a unit and category basis?

Adrian Mitchell

Yeah. So there are three priorities that we're very focused on. The first is the right level of inventory by category, by nameplate [ph] The second is the composition of that inventory. So we think about pandemic and occasion based in this environment in a different environment can be different. But also making sure that that inventory is distributed in the right channel and the right geographies in the most efficient way, that helps our margin profile that helps our sell through.

And when we think about those three variables, we're still very much focused on doing that in a way, that's the mentality of chasing sales. We're willing to leave the man on the table in order to have healthier margin profile because we recognize the risks o over buying that inventory.

Now, this year, we're very much focused on the rebalancing. So we're rebalancing by channel and by category. And so what we saw in the first quarter was early signals of slowing demand. And so we started cutting back on inventory, primarily a lot of the market brands, quite frankly, because that's where we have a lot of flexibility in terms of the timing of ownership, We did not want to get over our skis. We had inventory turn target.

So it was very important for us to protect the business and to protect our liquidity position as we're entering a slowdown, But the fall season is going to be different. We've been very deliberate in our pricing science and moving through and taking the markdowns necessary to really move through those – that slow inventory where we see some of those blips in those specific categories to your point. But we're going to be leaning into more freshness. We're going to be leaning into those market brands because we believe that's what the customers are looking for, we believe the customer is going to be active this holiday season.

Brooke Roach

Hand in hand in some of those inventories and clearing through that is the promotional cadence and that's certainly been a focus for investors. How should we be thinking about the cadence of promotions for Macy's and for the industry in the second half of 2022?

Do you think that the promotions are largely going to be constrained to the COVID-winning category? Or do you think it will be across the business overall. And into the 2023, if we start to see inventories get a little bit better. Do you think the promotions versus '19 will remain better?

Adrian Mitchell

Well, a couple of things. The first thing I would say is that our gross margin guidance reflects what we perceive as the intensity of promotions this fall season. We do believe it's going to be intense. We do believe it's going to be centered on those casual categories, those home categories where there's excess inventory. And we do believe that it's going to be contained within those categories.

We're seeing very healthy sell-throughs, very healthy AURs, for example, in those occasion-based categories. So our dress up categories, our shoe categories, we're seeing AUR as high as 12.5% over the last year. So where there is demand, there's health and the consumer is able to absorb those prices.

But from our standpoint, given some of the floods that we are working through, we will take the necessary markdowns, and we price that into our gross margin forecast. We will also be competitive through our pricing science on those slower moving items where there's a lot of casual in the marketplace. There's a lot of Qualcomm [ph] in the marketplace. So we have that pretty much priced in....

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