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Text: With me on the call are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO.
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.
Our Company delivered another strong quarter that exceeded our expectations on both top and bottom lines, outperforming 2020 and notably 2019.
With strong cash generation year-to-date, we were able to execute on our capital allocation priorities including returning capital to shareholders.
Our business has demonstrated resilience and we remain confident in our ability to deliver on Polaris strategy.
And as a result, we are raising and narrowing our full year 2021 guidance.
Our '21 results demonstrate the progress we've made with our Polaris strategy operating in a better economic environment as well as the strength of our digitally led omnichannel model.
We are poised for sustainable and profitable growth and we'll continue to build and invest in our retail ecosystem to both maximize and accelerate our opportunities.
Today, I'm pleased to announce that we are making a significant investment to launch a curated digital marketplace platform to enhance the existing Macy's, Inc. business fuel customer acquisition and drive growth across all of our channels.
We will partner with the enterprise marketplace technology company, miracle to build the platform.
Through this new digital marketplace platform which we'll launch in the second half of 2022, we will connect carefully selected third-party sellers with our customers in a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation.
Now, I'll provide some highlights from the third quarter.
Comparable, owned plus licensed sales increased 8.7%, an improvement in trend from the 5.9% increase we saw in Q2, even after adjusting for changes in our marketing calendar.
Adjusted diluted earnings per share was $1.23, up significantly from Q3 2019 and adjusted EBITDA was more than 2 times better than 2019.
Gross margin for the quarter improved by approximately 100 basis points driven by stronger regular price selling, fewer markdowns due to leaner inventories and a number of pricing and promotion initiatives and offset by increased delivery expenses.
Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions.
When they first begin the fourth quarter of 2020, our teams activated plans to mitigate bottlenecks and since then stayed agile and flexible, leveraging our strong networks and relationships with international carriers and variants and diversifying how we move product both up and downstream.
Significantly, as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season.
Total Company AUR was up more than 12% across our three nameplates.
SG&A dollars were significantly lower driven by a combination of ongoing expense discipline and unfilled open positions.
Looking at each of our nameplates, comparable sales for Macy's brand were up 8.4% on an owned plus licensed basis which represents a nearly 1 point improvement versus last quarter, when you take into consideration, the friends and family marketing shift.
Macy's brand full price sell-through improved 610 basis points while full price AURs increased by 6.9% driven by high demand and our gross margin initiatives.
Our Bloomingdale's business performed well with comp sales on an owned plus licensed basis up 11.2%, which was in line with the second quarter.
Results were driven by strong sales of luxury handbags, fine jewelry, home, men's shoes in contemporary apparel and both stores and bloomingdales.com outperformed 2019.
Bluemercury continues to recover outperforming versus 2020, but was down 2.2% compared to the third quarter of 2019.
We see strong sales performance of private brands, home fragrance and treatment.
Turning to the health of our customer base, we brought in 4.4 million new customers into the Macy's brand, a 28% increase compared to 2019.
Approximately 30% of these new customers were dormant customers over the last 12 months who have now reengaged.
In addition to growth in new customers, customer loyalty has also increased.
Star Rewards program numbers now make up nearly 70% of the total Macy's brand comparable owned plus-licensed sales, up approximately 10 percentage points compared to 2019.
During the quarter, we saw Platinum, Gold and Silver customers reengage with average customer spend in these tiers up 16% compared to the third quarter of 2019.
Bronze members who represent our youngest and most diverse loyalty tier continued to grow with the addition of 2.3 million members during the quarter and we're seeing average spend per customer increased 13%.
Bronze is one of our best customer acquisition vehicles with approximately 35% of members under the age of 40% and 57% ethnically diverse.
Our Star Rewards Loyalty customers have a more personalized and productive shopping experience with the most relevant offer presented to them, right down to the particular homepage they see.
This is leading to increased conversion, higher revenue per visit and a decreased rate of customers leading the site and through targeted personalization and pricing science, we've been able to reduce the number of raw based promotional days and increase AURs.
Having a strong integrated retail ecosystem that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers.
The growth of our omnichannel ecosystem is powered by our thriving online business, relevant full line brick and mortar stores and growing off-mall format stores, all soon to be further accelerated by the new digital marketplace platform.
Our data validates that in markets where we have a physical presence, our online business is stronger.
The interplay between traditional and physical assets is more important than ever and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth.
Turning to merchandising which we think about in three buckets.
First, our products and categories were strong during the height of the pandemic such as fragrance, watches, jewelry, sleepwear and home continue to perform well during the third quarter.
Second, occasion based categories such as dresses and men's tailored and luggage are continuing to see renewed interest from our customers.
And third, our emerging categories and new brands are expected to drive sustainable and profitable growth in the future.
These complement our core categories, while satisfying the customer shopping journey and we're seeing encouraging results.
To give you an example, since bringing the Toys "R" Us business to macys.com in August, our toys sales have more than doubled in stores and online compared to 2019 and we continue to expand on our assortment in these emerging categories.
During the quarter, we had another important new brand partner, Fanatics which offers our customers, the largest selection of licensed sports products and increases our fan apparel offering 20 fold.
This expanded assortment drove a 22% AUR increase in sports apparel and head gear compared to 2019.
Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships.
One element of this is the B2B monetization of our advertising partnerships that we realized through our in-house media agency Macy's media network which continues to generate solid results and recently expanded the scope to include Bloomingdale's.
We see a lot of potential to further strengthen our relationships with vendor partners and cultivating greater customer engagement.
Overall through Polaris, we laid a solid foundation for digital growth and we're seeing that growth come to fruition.
We are now able to focus on additional strategic investments to refresh the digital experiences to create more experiential customer engagements, enhance our stores and further empower our colleagues who drive to the success of our business on every level.
Our important digital initiatives during the quarter included a refresh of Macy's mobile app, the launch of live shopping at both Macy's and Bloomingdale's and a fragrance finder.
We also rolled out our 3D Room Planning Expansion, added PayPal and Venmo to in-store and online payments and launched a sustainability product segment.
As a result of these and other investments digital conversion for the quarter was 4.25%, up 14% compared to the third quarter of 2020 and up 27% compared to the third quarter of 2019.
Turning from digital to stores, we also continue to invest in our brick and mortar business and are seeing ongoing trend improvement in store conversion.
During the quarter, sales in our non-downtown locations continue to sequentially improve.
But due to the slow return of international tourism and office workers, our downtown doors continue to significantly lag our other doors versus 2019.
A good example of stores recovery is our backstage store within store format with sales up 24 percentage points compared to the full-line stores.
Backstage store customers are more diverse with 56% of customers ethnically diverse and have a higher spend.
Across our ecosystem, everything we do starts with and is driven by our colleagues.
They are our most significant contributors to our success and we are pleased with the strength of our performance this year has made it possible for us to double down on our investment in talent.
Last week we announced the plan to launch a best-in-class benefit program to give our colleagues access to debt free education.
We are also raising our minimum wage rate to $15 an hour which will be in effect nationally by May of 2022.
This will increase our average total pay for hourly colleagues to about $20 an hour.
Our workplace culture and colleague engagement have never been stronger and we see it as a meaningful competitive advantage in this tight labor market.
Adrian will now summarize the financial details before I make brief closing remarks.
As Jeff shared, our third quarter results demonstrate the strength and momentum of our digitally led omnichannel Polaris strategy.
Top line sales continue to grow.
Gross margin continue to expand.
SG&A continue to gain leverage.
And as a result, we delivered EBITDA and earnings per share far above our expectations.
Additionally, we continue to successfully execute on our capital allocation priorities aimed at strengthening our balance sheet and returning capital to shareholders.
Our strong results combined with our continued confidence as we move into the holiday season are leading up to narrow and waiting for our full year of 2021 guidance, which I will expand upon in a few moments.
Now, as I review each quarter and summarizing our results I'll focus on the metrics that are most important to value creation, sales, gross margin, inventory productivity, expense management and capital allocation.
First, for the second quarter in a row, we have generated top line sales above 2019 levels.
In the quarter, net sales increased by $267 million or 5.2% to $5.4 billion while we posted comparable owned plus licensed sales of 8.7%.
Keep in mind that compared to 2019, October benefited from the pull forward of some sales from the fourth quarter into the third quarter.
The early start of our friends and family sale in late October contributed to this adding about 200 basis points to owned plus licensed sales comp.
Additionally, holiday shopping began earlier as it did last year, but we won't know the full extent of the pull forward until we get further into the season.
Nevertheless, even when adjusted for friends and family, we produced solid sales growth and continued to expand our trend of sequential improvement.
Now, I want to take a moment to highlight the progress we've made as a true omnichannel retailer as we have become increasingly focused on the sustainability of omnichannel sales growth.
The true performance and potential of our omnichannel performance is hidden when sales outcomes are viewed as digital results versus brick and mortar results.
Recall that Jeff said, we see stronger digital sales in those markets where we have physical stores and we certainly saw this to be the case in the third quarter.
Moreover, while digital sales continue to grow and store sales trends continue to improve, notably more than 70% of our omnichannel market saw overall sales growth over and above 2019 levels which represented approximately 85% of Macy's brand comparable owned-plus licensed sales.
So digital isn't merely benefiting from a shift of sales from stores.
It is actually growing beyond that.
Within these markets, here is an added potential to expand our market share further with the addition of new off-mall locations.
During the quarter, we opened five new locations in the Washington DC, Dallas and Atlanta markets.
We've seen a strong sales response and solid net promoter scores from customers well above our current expectations.
We are very encouraged by the initial results and we now see a clear path to new store off-mall growth.
So, through a combination of difficult stores and the best malls, the most productive off-mall locations and a best in class e-commerce platform, our sales growth is accelerating as we meet customers whenever, wherever and however they choose to shop.
In addition, an omnichannel view has also highlighted the need for us to take a second look at the timing of when we close approximately 60 remaining stores we previously planned to close this part of Polaris.
Those markets that are performing best in aggregate include many of the stores previously slated for closure.
With this in mind, we are considering the fallen points as we approach the optimization of our store portfolio.
First, as it relates to underperforming mall-based stores, the lane [Phonetic] closure of certain stores allows us to maintain a physical presence in the market which is critical to our topline growth.
Second, these stores are cash flow positive and support the funding of investment needed to reposition our store portfolio over time.
And lastly, we're adapting our learning in the smaller off-mall formats to more quickly introduce these concepts to more markets with plans to open more of these stores next year.
Scaling our off-mall formats will allow us to reposition our brick and mortar assets within markets to more effectively support omnichannel sales growth.
As a result, we expect to announce about 10 closures in January with more details on the remaining stores to come later in 2022.
Moving on to gross margin.
We saw another quarter of rate expansion to 41%, an increase of 100 basis points compared to the third quarter of 2019.
We continue to generate very healthy merchandise margin which improved by 270 basis points to 45.3%.
The primary drivers were the consistent improvement we maintain in lower markdown and inventory productivity, which I'll expand upon shortly.
Markdown levels were the result of a combination of lower inventory levels and further scaling of pricing science including location level pricing and POS pricing work.
As Jeff noted, these efforts drove higher full price sell-throughs and full price AURs compared to 2019.
We continue to roll out additional initiatives including a new promotional effectiveness tool, given our teams access to advanced analytics to better understand the profitability of prior promotional events.
The improvement in merchandise margin was offset by a rise in delivery expense due to increased digital penetration.
Delivery expense was 4.2% of net sales, 170 basis points higher than the third quarter of 2019.
With regards to inventory productivity, inventory levels were down 15.4% compared to the third quarter of 2019, a product of ongoing market dynamics and our own Polaris initiatives.
Our sales to stock ratio remains healthy and the improved use of data science continues to enhance our inventory management practices from order placements, all the way to customer sales.
Inventory churn for the trailing 12 months improved by nearly 18%, while for the trailing six month, inventory churn improved by approximately 22%.
Additionally, given the macro challenges facing the retail industry, we're staying ahead by making further shift in our inventory management practices and implementing a number of initiatives.
As we noted on our last call, we do not anticipate improvements to many of the macro supply chain constraints until mid to late 2022.
Moving on, we again exercised strong expense management discipline, our net value creation metric.
SG&A expenses of $2 billion improved by about 10% or $229 million from the third quarter of 2019 levels.
As a percent of net sales, SG&A expenses were 36.3%, a significant improvement of 630 basis points compared to the third quarter of 2019 as we continue to benefit from permanent cost savings and reduced cost due to elevated job openings.
The impact of the labor shortages are transitory and we expect them to moderate going into the next quarter as well as into the next year.
Improved bad debt levels driven by strong customer credit health continued to contribute to the growth of credit card revenues to $213 million, up $30 million from the third quarter 2019 and ahead of what we expected.
Credit card revenues were also ahead as a percent of net sales increasing by 40 basis points to 3.9% and trending ahead of our prior annual guidance.
As it relates to our credit card program, we are close to finalizing our decision on a partner and expect to announce the decision in the upcoming weeks.
As a digitally led retailer, we must have a partner with strong digital capabilities today and a strong innovation pipeline with the prospect to further expand that pipeline in the future.
Our loyalty and personalization initiatives serve as key growth levers in our ability to obtain and retain more customers to drive omnichannel sales growth.
That said, over the next few years, we expect credit card revenue levels will be slightly lower as a percent of sales in the 3% or so that we have historically experienced.
Given our strong performance across these areas as well as the $50 million of asset sale gains recognized during the third quarter, we generated positive adjusted EBITDA of $765 million.
Notably, adjusted EBITDA margin of 14.1% exceeded the margin in the third quarter of 2019 by 780 basis points on the strength of expense management discipline and gross margin expansion.
After accounting for interest and taxes, collectively, these results helped to generate quarterly adjusted net income of $386 million and adjusted diluted earnings per share of $1.23 versus $21 million and $0.07 respectively in 2019.
Our final value creator is capital allocation and our meaningful free cash flow generation of $574 million year-to-date has served us well in this regard.
In the third quarter, we repaid approximately $1.6 billion of debt early, which brings our leverage ratio well under our year end target.
And while we drew on our credit facility to support the build of seasonal merchandise during the quarter we did so at a much lower interest rate than that of the debt we retired.
Going forward, we expect to use the facility periodically based on the needs of the business.
Now, we successfully regained an investment grade profile well ahead of schedule.
We will continue to pay down debt as debt matures with an aim to achieve a leverage ratio below 2 times in the upcoming years.
Additionally, we paid $46 million in cash dividends and announced our fourth quarter dividend earlier this month.
And we repurchased 13 million shares for more than 4% of total shares outstanding for a total share buyback of $300 million.
With $200 million of authorization remaining, we're trying to look for further opportunities to repurchase shares.
These actions underscore our confidence in our business and our commitment to our capital allocation priorities that create shareholder value in the near term and the long-term.
Turning to our outlook.
As mentioned, we are narrowing and raising our full year guidance.
We have strong momentum entering the fourth quarter, but the headwinds that we noted on the last quarter's call remain in place, the supply chain concerns, the tight labor market, elevated levels of holiday shipping surcharges and potential unforeseen impacts of COVID variants.
The low end of our guidance considers the impact of these headwinds.
But here are some of the highlights.
For the full year, we now expect net sales to be between $24.1 billion and $24.3 billion, which at the midpoint of the range is an increase of over $400 million from our prior guidance.
We now increased our adjusted earnings per share range to $4.57 to $4.76 from $3.41 to $3.75, an increase of more than a $1 compared to our prior guidance.
Now for the fourth quarter.
Comparable sales on an owned plus licensed basis versus 2019 are expected to increase between 2% and 4%.
This includes an approximately 125 basis point adverse impact due to the shift of the friends and family promotional event from the fourth quarter into the third quarter as compared to 2019.
Gross margin rate expectations are between 100 basis points and 150 basis points lower than 2019.
SG&A expense as a percent of sales is expected to improve by approximately 75 basis points compared to 2019 and adjusted diluted earnings per share is expected to be between a $1.67 and $1.87 events excluding the impact of any additional share repurchases other than those already executed in the third quarter.
Our progress to date combined with our Polaris initiatives already underway put us well on the path to profitable and sustainable sales growth.
As such, we have increased clarity on our business outlook over the next few years.
In 2022, we see several incremental tailwinds for our business beyond those from our Polaris initiatives.
The consumer mix is healthy, and we expect the strong demand to continue, particularly as people return to work.
As borders open, we anticipate an uptick in tourism, although we don't yet see tourism returning back to 2019 levels in 2022.
At the same time, we're keeping a watchful eye on headwinds.
As mentioned, we are actively managing supply chain disruptions with success.
We're continuing to navigate the labor shortages and competition for talent by investing in our current and future colleagues.
We are also focused on mitigating inflationary pressures on our customers by leveraging our pricing science while continuing to provide our customers with clear value.
In summary, our team is committed to accelerating and sustaining top and bottom line growth through the continued successful execution of our digitally led omnichannel Polaris strategy, which in turn will strengthen the health of our balance sheet and deliver strong returns to our shareholders.
Next quarter, we look forward to sharing with you further detail on our guidance for 2022 and our outlook for 2023 and beyond.
So in summary, we remain focused on executing our Polaris strategy to position Macy's Inc. for sustainable and profitable growth.
We regularly review the structure of our business and our strategy and are open to all options that are likely to create long-term shareholder value.
This past year, we conducted an analysis of our e-commerce and brick and mortar operations evaluating how each contribute to the value of the Company as well as how each benefits from being integrated and working together.
In collaboration with our Board and with assistance from our advisors, we look at multiple business models that would create long-term shareholder value, while always respecting the omnichannel behavior of the customer.
This work supported our digitally led omnichannel Polaris strategy that we are successfully executing.
That said, we also recognize the significant value of the market at this time in a pure e-commerce businesses.
And as we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to further unlock value for Macy's Inc. To help in these efforts, we have recently engaged AlixPartners to work with our Board and financial advisors.
It is too early to tell what the result of this additional analysis will be, but we plan to update everyone after the work is complete.
I am confident that we have a lot more opportunity ahead.
Our colleagues focus on both strengthening the fundamentals of our business and driving innovation, gives me great confidence that a bolder and brighter future for Macy's, Inc. lies ahead.
And operator, please begin the Q&A.

user
qtrly diluted earnings per share of $0.76 and adjusted diluted earnings per share of $1.23.
added 4.4 million new customers into macy's brand in quarter, a 28% increase over 2019.
qtrly results were driven by effective execution of polaris strategy and an improved economic environment.
qtrly in quarter, macy's brand added 4.4 million new customers.
robust omnichannel ecosystem is showing resilience in face of labor and supply chain challenges.
encouraged by momentum of our business and its strong financial health.
inventory was up 19.4% in quarter from q3 2020 but down 15.4% from q3 2019.
sees 2021 net sales $24.12bln - $24.28bln.
sees 2021 adjusted diluted earnings per share $4.57 - $4.76.
implemented several measures to mitigate supply chain disruptions and does not expect to be materially impacted during q4 2021.

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