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Text: With me on the call are Jeff Gennette, our chairman and CEO, and Adrian Mitchell, our CFO.
[Operator instructions] As a reminder, today's call is scheduled for 90 minutes.
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.
As we kick off 2022, I'm proud to say that Macy's, Inc. today is a stronger, more agile and financially healthier company than we were before the pandemic.
We delivered strong results in the past quarter and year.
We continue to make good progress on the transformation of our company and build momentum.
And we are much better positioned for long-term success.
Our business has changed dramatically since 2019 when we began to lay the groundwork for our Polaris strategy.
We stayed focused on that plan, and we have delivered.
We are now more digitally led and customer-centric in our planning and execution.
We have also demonstrated the value of an integrated company, meeting customer expectations for a more seamless shopping experience across digital and store offerings.
Digital has been a particular priority for us.
Then I'll discuss the outcome of the board's recent review of our operating structure and how we are enhancing shareholder value.
From there, I'll review the specific initiatives we are accelerating to enable sustainable sales growth and strong and stable margins in the future.
Adrian will wrap up with details on our financial outlook for 2022 and beyond.
Let me start with the performance highlights.
Comparable owned plus licensed sales for the fourth quarter increased 6.1% versus 2019.
This performance reflects strong November and December holiday sales that exceeded our expectations, as well as softer sales in January.
Total company AUR was up 11.5% for the fourth quarter and for the full year, was up over 11%.
For the year, comparable owned plus licensed sales increased 3% compared to 2019.
For the year, we generated $984 million more in adjusted EBITDA than 2019, growth of 42%.
Our full year adjusted EBITDA margin was 13.6%, and a rate we have not achieved since 2014.
As a result, we achieved adjusted diluted earnings per share of $5.31 for the full year, up 82% versus 2019.
With reduced debt and ample cash, our balance sheet is healthy, and we are in a stronger financial position.
This enables us to navigate challenges that lie ahead while meeting our capital allocation goals to deliver shareholder returns through modest yet predictable dividends, strong returns on invested capital and meaningful share repurchases.
We completed our current $500 million share repurchase program during the past quarter.
And I am pleased to announce that our board has authorized a new $2 billion program.
Additionally, we have announced a 5% increase in our dividend after reinstating it during 2021.
These accomplishments are the result of our focus of our organization has placed on the Polaris strategy, efforts that I have spoken to you about frequently over the past two years.
This transformation strategy has evolved as the external environment changed and new opportunities arose, and the actions we took have led to a stronger, digitally led retail business.
Here are just a few highlights of what we've accomplished.
Number one, we have modernized our digital platform and now offer an engaging and convenient experience with the power to meet customers whenever and however they choose to shop.
In 2019, our digital team worked as a siloed organization.
Today, it is fully integrated.
We have a scaled platform, operating the No.
2 website in our categories in the nation with 39% digital penetration, an increase of nine percentage points versus fourth quarter of 2019.
2, in 2019, our store strategy was largely focused on the highest quality A and B malls, while accelerating the closure of stores in C and D malls.
Today, the consumer is increasingly more omnichannel, and we are focused on establishing a more appropriate footprint in markets to drive sustainable and profitable omnichannel growth.
Given this, as we said on our last call, we have delayed most of the remaining closures we earmarked in 2019 in order to maintain a physical presence in many markets while we scale up our off-mall format stores.
In addition to being in place for discovery and shopping, our stores are also fulfillment hubs, supporting our digital operations through buy online, pickup in store, curbside pickup, and same-day delivery.
Keeping these cash-positive stores open also helps us to fund the investments we're making to reposition our fleet over the next several years.
3, in 2019, we were over-indexed on occasion-based apparel, had less disciplined buying behavior and our approach to promotions was overly complicated for customers, all of which was driving high levels of markdowns and low inventory productivity.
Today, our pricing is simpler and clearer, allowing our customers to better understand the value they are receiving.
Today, we offer a more balanced, curated merchandise assortment that reflects our disciplined purchasing behavior with new categories, products and brands that inspire our customers' style across the value spectrum from off-price to luxury.
And today, we remain best positioned based on the health of inventory and multi-category and multichannel capabilities to pivot with greater agility in response to changing customer trends.
4, in 2019, the spread between customer acquisition levels and customer attrition levels was narrow.
In 2021, we flipped that dynamic.
While also benefiting from recovery driven demand, our initiatives have led to an accelerated rate of customer acquisition that far outweighed the rate of attrition.
5, in 2019, we had just created a new integrated team to reimagine our supply chain that previously segregated store and digital inventories and relied on a distribution network that lacked efficiency.
Today, as a result of our investments, we have a more modern supply chain network that is agile, data-driven and increasingly automated.
We've seen the results of this work pay off throughout 2021 from increased speed of delivery to operational efficiency and to better inventory utilization.
And finally, we have invested in advanced technology and data science throughout our operations, enabling us to increase productivity and profitability of the entire business.
To best realize our strategic goal of building profitable lifetime customer relationships, we successfully built a new enterprise data and analytics organization that is helping us to embed data and analytics into everything we do.
We have already seen improvements in our efforts around personalization and pricing.
today than we were in 2019, more agile, more profitable, and more relevant to our customers.
That said, as we enter 2022, we see both headwinds and tailwinds ahead that together encourages us to offer a more measured outlook for the year.
Now, I'd like to take you one level deeper into the work we've done to achieve our performance this past year across customers, merchandising, digital initiatives and stores.
Our customer focus is paying off.
44 million customers shopped with our Macy's brand in 2021, up 1% from two years ago.
They bought more and combined with higher AURs, spent more on each visit.
We are adding new customers with 7.2 million new customers in the fourth quarter, an 11% increase compared to Q4 2019, with 58% coming in through digital.
Nearly 30% of these new customers were dormant over the past 12 months who are now reengaged.
For the full year, new customers increased 26% over 2019 to 19.4 million.
This trend reversal and customer acquisition is an important marker for us and a strong indication of the increasing relevance of the brand.
We will continue pursuing our strategies to build on this momentum.
Let's turn to merchandising.
Through our data-driven merchandising approach and our team's agility and creativity, we successfully navigated supply chain challenges, ensuring we had a strong assortment for the holiday season.
We placed bets on categories like fragrances, fine jewelry, home decor, men's outerwear, toys, sleepwear and watches, which all performed well in the quarter.
Bloomingdale's, which helps us reach affluent consumers, continued to see strength in luxury throughout the quarter with strong performance from handbags, fine jewelry, men's shoes and contemporary, fragrances, and home.
In addition to enhancing the shopping experience of our core customers, we also focused on new offerings to further attract the under-40 shopper.
In the fall season, we added a curated selection of brands, products and categories to 160 Macy's stores that appeal specifically to this younger, more diverse customer.
These brands include COTTON ON, Steve Madden, Michael Kors and Levi's, as well as our new private brands, And Now This and Oak.
We are pleased with our customer response and the results we've seen to date.
This in-store strategy aligned well with the digital strategy to attract the under-40 customers that we rolled out in the spring through our contemporary sitelet.
At Bloomingdale's, brands geared toward the under-40 customer had a record year.
Our private brand AQUA and various luxury brands outperformed in both sales and margin in 2021.
This brings me to our digital initiatives.
Aided by the shift in consumer preferences, the growth of our digital business continued in 2021.
Sales remained strong, and we saw healthy levels of conversion for Macys.com at 4.2%, a 13% increase compared to 2019.
During the fourth quarter, Macy's app had the largest quarterly gain in downloads across our peer set with an 81% increase in downloads over the third quarter of 2021.
Today, our Macy's and Bloomingdale's digital teams operate more efficiently within a single back-end structure while each nameplate retains separate dedicated site merchandising and customer-facing benefits.
Compared to 2019, Bloomingdale's digital sales grew 51% during 2021 with traffic increasing 28%.
Lastly, stores, a critical part of our integrated omnichannel ecosystem.
The role of stores has evolved with customer shopping habits.
The interplay between our digital and physical assets is critical, and we remain focused on sustainable omnichannel sales growth.
During the quarter, 58% of our omnichannel markets, representing 80% of our sales, had growth above 2019 levels, and half of these grew by at least 10%.
For the year, we grew sales in 52% of our omnichannel markets versus 2019.
Now, to the macroeconomic environment that we see in 2022.
We believe the consumer demand will remain healthy as the job market improves and wages continue to rise.
We expect demand to increase, particularly as people return to the office and to social events.
International tourism remains a tailwind, particularly beyond 2022.
This past year, international tourism was down 50% from 2019 levels, with the fourth quarter strengthening before Omicron weighed on consumer sentiment.
With headwinds, we expect inflationary cost pressures, both for us and consumers, uncertainty of industry promotional behavior, supply chain disruptions, competition for talent, lapping of stimulus packages, and potential COVID variants.
But we are confident that our financial health and operational agility put us in a stronger position to navigate the dynamic environment and challenges we expect in 2022.
Let me now pass it to Adrian for additional color on our Q4 results.
We're excited about the momentum we gained through Polaris in 2021 and are focused on maintaining that momentum over the course of the coming year.
Our top priority remains driving shareholder value through a combination of strong performance and the strategic allocation of capital.
is even bolder now given a much healthier business and our increased confidence and conviction in our Polaris strategy.
With this context, I will walk through a summary of our fourth quarter performance against our five value creation metrics: sales, gross margin, inventory productivity, expense management and capital allocation.
We generated $8.7 billion in net sales during the quarter, up $328 million or 3.9% from the fourth quarter of 2019.
Comparable sales on an owned plus licensed basis increased by 6.1% despite the approximately 125 basis point headwind from the Friends and Family shift we mentioned on our last call.
Holiday sales were stronger than expected.
Yet with the emergence of the Omicron variant, tempered consumer sentiment contributed to weaker January sales than we had anticipated.
To a lesser degree, the absence of the 2021 government stimulus payouts was also a factor.
The overall softness in the month of January appeared to be industrywide and temporary in nature.
Now, on to gross margin.
Gross margin for the quarter was 36.5%, down 30 basis points from the fourth quarter of 2019.
Notably, holiday delivery surcharges, which were essentially nonexistent in 2019, reduced margin by approximately 85 basis points.
Merchandise margin increased 160 basis points from the fourth quarter of 2019.
Leaner, more productive inventories and lower markdowns were the primary drivers.
Our pricing initiatives also helped drive higher full-price sell-throughs and AURs.
Versus 2019, full-price sell-throughs improved 660 basis points and full-price AURs increased 10% for the Macy's brand.
Including holiday surcharges, delivery expense accounted for 5.9% of net sales, 190 basis points higher than the fourth quarter of 2019, but down from the fourth quarter of 2020.
Delivery expense reduction is a top priority for us.
Here, our focus is on reducing split shipments and increasing the efficiency of in-store fulfillment.
Improving order throughput per labor hour is one initiative that we're working on, and we have been pleased with the improvements we achieved in the fulfillment test stores that we deployed in November.
Based on these results, we plan to roll this initiative out to an additional 35 locations before holiday 2022.
Now, let's shift to inventory productivity.
Our gains in this area have been a vital source of our gross margin achievements, which are driven by the evolution and scaling of data science into our working teams and decision-making.
During the critical holiday period, inventory levels remained healthy.
And for the full year, the gains we made were impressive no matter which period you compare performance against.
Inventory was down 16% versus 2019, while full year sales were almost flat.
And versus 2020, inventory was up only 16% on sales growth of more than 40%.
As a result, inventory turn improved by 22% compared to 2019.
We also saw another quarter of strong expense management discipline.
SG&A expenses were $2.4 billion in the quarter, down $80 million or 3.2% versus 2019.
SG&A expenses improved as a percent of net sales to 28%, down 210 basis points from the fourth quarter of 2019.
This was driven by the expense leverage we gained as sales grew, the continued benefit of permanent Polaris cost savings and the revenue generated by Macy's media network, all of which were partially offset by increased labor costs.
Macy's media network exceeded our full year expectations, generating more than $105 million in net revenues that offset SG&A expenses.
During the quarter, we also made significant headway in filling open positions, provided premium weekend pay to our colleagues and accelerated the adoption of $15 per hour minimum wage in another 200-or-so stores.
Credit card revenues were $264 million, up $25 million from the fourth quarter of 2019.
As a percent of net sales, credit card revenues were up 10 basis points versus 2019 to 3%.
Better-than-expected bad debt levels continue to benefit credit card revenues during the quarter.
Now, for bottom line profitability.
Adjusted EBITDA margin was 14.4% or 50 basis points higher than the margin achieved in the fourth quarter of 2019 despite asset sale gains that were $65 million less in 2021.
After accounting for interest and taxes, these results generated adjusted diluted earnings per share of $2.45, up from $2.12 in 2019.
The final value creation metric is capital allocation.
We ended the year in a strong cash position.
Our full year capital expenditures of $597 million were focused largely on technology-based initiatives, including those that support our digital business, our data science initiatives and the simplification of our technology architecture.
We generated $2.3 billion of free cash in 2021, which includes the receipt of the majority of the CARES Act tax refund in January of $582 million.
Our strong free cash flow allowed us to pay off $1.6 billion of debt early.
This, coupled with our solid performance, resulted in a year-end leverage ratio of 1.8 times, well below our initial target of 2.5 times, and materially better than prepandemic levels.
At the same time, we remain committed to returning capital to shareholders.
As Jeff referenced, during the quarter, we exhausted the remaining $200 million of share repurchase authorization, repurchasing 7.5 million shares.
In total, under the full $500 million authorization, we repurchased 20.5 million shares or more than 6.5% of shares outstanding.
As we discussed on our call last quarter, our board of directors undertook a more extensive review of our e-commerce and brick-and-mortar operations to determine the best path forward for Macy's, Inc. to enhance value for our investors.
This was additional work to review business and strategy that our board and management team perform on a regular basis.
Throughout this extensive review, the board and management were focused on two core objectives.
One, ensuring we deliver for our shareholders in the near, medium, and long term.
And two, provide the most convenient and seamless shopping experience for our customer across all omnichannel touch points.
In every scenario we considered, we found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders than a separation of our digital and physical assets.
This was true at both Macy's, Inc. and brand levels.
Furthermore, after a comprehensive review, we found that the integrated omnichannel Macy's, Inc. with multiple nameplates from off-price to luxury continues to be the most appealing to our diverse and multigenerational customer base.
We conducted the review with the assistance of AlixPartners and our financial and legal advisors.
There were no constraints imposed on AlixPartners or our advisors with regard to the options analyzed.
This review included a valuation of a separation of the digital business overall, as well as the potential merits of a separation of the Macy's or Bloomingdale's digital businesses individually.
We analyze revenue growth drivers, unit economics and the financial profiles of our digital and store businesses.
We also evaluated possible benefits of a third-party investment, considering any need for capital, as well as a potential exit path for a financial partner.
And we considered whether there would be value in issuing a special equity offering that would track the financial performance of our digital business.
Key to the board's decision-making were the significant separation and ongoing costs from operating separated businesses, including potential debt separation costs, and for Bloomingdale's business, a significant loss of benefits available to Bloomingdale's through leveraging the scale of Macy's, Inc. Also, another important consideration was our view of the damage to gross margin for both the digital and store businesses due to the potential transfer costs and markdown liability.
We also found that in every alternative scenario we considered, the execution risk for the business and our customers was too high.
From that, we determined that Macy's, Inc. has a stronger future as a fully integrated business, with Macy's and Bloomingdale's together and assessing a broad range of brands, price points and customers across digital and stores.
In undertaking this review, we also asked our advisors to pressure test our Polaris strategy.
Their findings reaffirmed our confidence in the strategy and boosted clarity on several initiatives that could be accelerated over the next several years to unlock greater value for our investors.
These initiatives begin with digital.
We have a number of new capabilities in the works.
First, the marketplace we announced last quarter is expected to deliver incremental value above our $10 billion digital sales target.
In addition to our owned and vendor direct platforms, this third-party marketplace will allow our teams and partners to expand and enhance our strong digital experience.
Through the marketplace, we can dramatically expand our categories, brands and online SKU assortment to respond more quickly to the changing and diverse needs of our customers.
In addition, we continue enhancing our digital platform and launching new offerings.
These investments are paying off, and we are pleased with the active user and conversion increases we're seeing across our apps, bloomingdales.com and macys.com.
Beyond digital, we've identified several other focus areas.
First, our merchandise categories.
We have identified key categories where we will continue to build upon our already strong foundation.
Example of these categories include furniture, men's tailored clothing, women's shoes, beauty, dresses and jewelry, and watches.
Today, I'm pleased to announce our partnership with Pandora to broaden our already strong assortment in fine jewelry.
In November, we launched Pandora in five stores.
The fine jewelry business in those stores saw an incremental 23 percentage point increase in sales growth over 2019 from the new assortment.
Pandora attracts younger customers, and we will now expand to 28 additional locations in 2022.
There's new categories like toys.
And our partnership with Toys "R" Us has been instrumental in attracting new customers to the Macy's brand.
Of the customers that shop Toys "R" Us, 25% were new customers to the Macy's brand, and 93% of these toy customers cross-shopped other categories.
We doubled our toy business in 2021, and we are excited for more aggressive growth when we opened Toys "R" Us stores within store in all of our locations during the second half of this year, creating a completely new and immersive experience for our customers.
Both Bloomingdale's and Bluemercury are also working with best-in-class categories and brands.
During the quarter, Bloomingdale's saw success in its holiday Carousel collection with Giada De Laurentiis.
The partnership was a key to Bloomingdale's gifting performance in the fourth quarter.
We are excited to announce that next month, Bloomingdale's will unveil its latest Carousel collection with Netflix's Bridgerton.
Another focus area is marketing and loyalty.
Our Star Rewards loyalty membership is growing every day.
Through enhanced personalization capabilities, we can increase engagement that drives positive brand perception, additional visits and purchases.
We are testing advanced and AI-driven targeting to help determine the best communication channel, frequency, message and offer for customers.
We view personalization as a growth engine for our company in the early innings of development.
Consistent with our digital focus, we have significantly shifted our media mix toward digital marketing.
Today, 66% of our total spend is on digital versus 35%, five years ago.
Over this time, Macy's has experienced a 25% improvement in our return on advertising spend.
We see big upside in repositioning our physical store footprint by scaling up our small-format Market by Macy's and Bloomies stores.
We opened three Market by Macy's stores in 2021 and are seeing encouraging customer response.
Sales exceeded our expectations, and we found that these stores are more productive to run and staff and stock with inventory.
This new format is also bringing in new customers who are engaging with our curated under-40 brands and products.
In 2022, we will open Market by Macy's and Bloomies in additional markets as part of our omni market strategy.
Finally, the shopping experience.
One common thread across our Polaris initiatives is the need to build new capabilities to ensure the shopping experience is as convenient and compelling as possible.
This will drive growth in our active customer base and increased shopping frequency and spend per visit.
Customers shop both online and in stores, so maximizing the combined experience remains key to our success.
We look at our stores as destinations for both discovery and experience, as well as fulfillment hubs.
So we will continue to invest appropriately in our stores to create a more connected, tech-enabled omni ecosystem.
Now, I'd like to speak to one of our most valuable assets, the Macy's brand.
Starting next month, we're repositioning it with a promise to help our customers express and own their style.
Expert in-person advice and personalized data-driven recommendations that help people express their personal style will differentiate us in a cluttered marketplace.
This brand transformation is a key step within our Polaris strategy to win with fashion and style.
We will also announce details of our new social purpose platform and commitments in a few weeks.
Macy's, Inc. has been a strong partner to the local communities in which we operate.
But today, as stakeholders' expectations of corporations and of us change, we're prepared to better align how we do our work with the common good.
As we transform our business, we see the opportunity to create a social purpose platform that leverages our scale, unique strengths and culture to create more meaningful change in the world.
Now, I'll pass it on to Adrian for our outlook for 2022 and beyond.
We believe that shareholder value will be enhanced through strong performance, driven by the successful execution of our Polaris strategy, combined with the efficient allocation of capital.
We will make disciplined risk-adjusted decisions when deploying the cash we generate.
Given the ebbs and flows of consumer sentiment and the need to weather unforeseen risks, our first capital allocation priority is maintaining balance sheet strength.
By doing so, we preserve the ability to fund investments that foster profitable sales growth and deliver healthy long-term returns.
We will fund these types of investments and return excess cash to our shareholders, and we'll deliver direct returns to shareholders through a modest, yet predictable dividend and meaningful share repurchases.
With that in mind, let me walk you through our updated three-year outlook.
In light of the headwinds and tailwinds that Jeff spoke to earlier, we do believe that the macro environment will continue to offer some challenges.
Nevertheless, we remain committed to achieving low double-digit adjusted EBITDA margin annually, and in 2024, expect to be within a range of 11.5% to 12%.
For sales, we're targeting a low single-digit compound annual growth rate for net sales.
We expect our long-term sales growth to be driven three ways.
First, the scaling of our digital marketplace, including expanding the depth and breadth of our merchandise categories, as well as the replatforming of our core digital platform.
Second, improving mall-based trends, supported by our investments in omnichannel capabilities and technologies.
And third, the expansion of our off-mall stores.
As we referenced earlier, the recovery of international tourism to prepandemic levels is not anticipated for some time.
So there is potential upside should that occur within the next several years.
For gross margin, we're targeting a rate in the high 30s even as digital penetration increases to the low to mid-40s as a percent of net sales.
To do this, we're looking to maintain solid merchandise margins, aided by lean inventories, as well as additional profitability from our pricing initiatives and the growth of digital marketplace.
At the same time, we'll be closely monitoring the promotional environment within the industry, which we recognize has been at historic lows this past year.
In regard to future delivery costs, we've developed several initiatives to mitigate delivery expense while improving our customers' delivery experience.
These include optimizing fulfillment algorithms, reducing split shipments through the use of data science and enhancing inventory placement and assortment allocation.
In addition, we began rolling out initiatives aimed at increasing item-level profitability for online SKUs this past quarter.
Now, let's move on to SG&A.
We are targeting to improve SG&A leverage with increased digital sales and a more efficient staffing model in stores.
The $900 million in permanent cost savings we realized over the last two years will remain a significant benefit to our SG&A leverage.
At the same time, 2021's SG&A benefited from a number of open positions that we expect to fill.
In 2022, a portion of the savings achieved through our Polaris initiatives will be reinvested to support our colleagues' financial, educational and well-being initiatives.
Based on this and wage inflation expectations, SG&A as a percent of sales is targeted to be elevated over the next three years from 2021 levels, peaking in 2022.
Within SG&A, we also expect to continue benefiting from other profit pools, such as Macy's media network and additional opportunities that could arise when scaling our digital marketplace.
Next, credit card revenues.
In the near term, we're targeting credit card revenues as a percent of net sales to be slightly below our historic average of 3%.
This reflects our expectation that bad debt within the credit portfolio will migrate to prepandemic levels over the next few years and thus, pressure returns.
However, in the medium term, we expect proprietary credit card sales penetration to rise, which will offset the increased pressure from bad debt and help facilitate the rebound of credit card revenues to about 3% of net sales by 2024.
Now, let's turn to our long-term capital allocation plans.
We're targeting capital expenditures of approximately $3 billion over the next three years.
Our spend will be primarily allocated toward our technology architecture, data science applications across our retail operations, digital platform enhancements, fulfillment capabilities in stores and further upstream and our personalization efforts.
In 2022, we're targeting approximately $1 billion of capital expenditures.
At the same time, we also expect to continue to meaningfully monetize our real estate.
We have a robust monetization program that has reduced more than $2 billion in asset sale proceeds over the last six years.
Our plan is to continue the strategic development of our assets to maximize our real estate values while repositioning our physical footprint to provide our customers a seamless and convenient omnichannel experience.
After accounting for capital expenditures and asset sale proceeds, we're targeting to generate between $3.2 billion and $3.6 billion of free cash flow over the next three years with up to an additional $900 million of incremental debt capacity with strong financial flexibility given our leverage and EBITDA targets.
This level of cash generation and cash capacity will continue to support our capital allocation priorities, which are grounded on our commitment to enhance shareholder value.
Those priorities include: first, maintaining a healthy capital structure that is focused on best positioning Macy's, Inc. for access to bank and capital market funding under all economic scenarios; and second, maintaining investment-grade credit metrics with well-laddered debt maturities, which includes targeting an adjusted debt to adjusted EBITDAR leverage ratio of 2.0 times or below.
Next, we're committed to investing in initiatives that further strengthen our digitally led capabilities across the enterprise, including investments through our capital planning program, as well as other value-creating strategic investments.
And lastly, we will return capital to shareholders in the form of a healthy yet modest dividend that increases annually and meaningful share repurchases, absent more attractive investment alternatives.
As just mentioned, we announced the first dividend increase today and the authorization of a new open-ended $2 billion share repurchase program.
As part of our three-year outlook, I want to provide more detail on our guidance for fiscal 2022, as well as the first quarter.
We believe 2022 will be a transitional year as we move beyond the recovery and the market begins to normalize.
At the same time, we expect high levels of inflation to erode consumer discretionary income.
Our 2022 expectations reflect our strategic positioning and the associated risks in what may be a more challenging market.
Despite these challenges, we are committed to continuing the discipline we demonstrated in 2021 to drive strong margin performance through our pricing initiatives for merchandise margin, our continued focus on delivery expense mitigation and our SG&A cost discipline.
Now, let me provide the details of our full year 2022.
For Macy's, Inc., we expect net sales to be flat to up 1% with continued strong AUR performance at more modest levels than we saw during most of 2021.
For our owned plus licensed comp sales, we expect a three-year compound annual growth rate of between 1.1% and 1.4%.
That's growth from 2019 results.
Digital sales are expected to be approximately 37% of net sales.
We expect a gross margin rate between 38.1% and 38.3%, slightly down from last year, largely due to increased digital penetration and expected inflationary cost pressures.
Credit card revenue of approximately 2.9% of sales is expected.
From a rate perspective, SG&A is expected to be in the range of 33.7% to 33.9%.
Asset sale gains are expected to be between $60 million and $90 million.
Adjusted EBITDA margin is expected to be between 11% and 11.5%.
Net interest expense is expected to be approximately $190 million for the year.
Adjusted diluted earnings per share is estimated between $4.13 and $4.52 and does not include the impact of any share buyback that might occur throughout the year.
Now, a few comments on sales trend within the year.
We are targeting strong year-over-year growth in the first quarter, but we expect our quarterly net sales penetration as a percent of annual net sales to more closely align to our prepandemic quarterly cadence.
Recall that we were still early in the recovery at this point last year and that our results in the first quarter of 2021 were significantly affected by the pandemic.
Impacts from the acceleration of the recovery and stimulus payouts more significantly benefited our results in the second and third quarters of 2021.
This makes the year-over-year net sales growth in the first quarter of this year more favorable than that in the subsequent quarters.
We also expect between 55% and 60% of our annual adjusted EBITDA, excluding asset sale gains, to be generated in the fall season.
Of this, nearly 70% is expected in the fourth quarter.
Additionally, outside of the first quarter, the remainder of asset sale gains are modeled in the fourth quarter.
With those factors in mind, we expect net sales in the first quarter to be between $5.3 billion and $5.4 billion.
For adjusted earnings per share, we expect the first quarter will be between $0.77 and $0.85 compared to $0.39 in 2021.
This includes an anticipated benefit of approximately $25 million from asset sale gains and again, does not include any impact from share buybacks.
In summary, we are pleased with the results that we generated in 2021 and look forward to building upon our success not only in 2022, but over the next several years.
We have proven that we have a highly resilient business, one with further capacity to grow profitably and enhance shareholder value.
Today, Macy's, Inc. is a transformed organization.
We are well positioned to compete successfully and profitably in today's market.
We operate one of retail's largest e-commerce businesses, integrated with a nationwide footprint of stores and fulfillment centers.
We are confident in our path forward as one integrated company, continuing to execute our Polaris strategy and the accelerated initiatives we shared today, allowing us to unlock additional value, acquire new customers and grow market share.
I want to express my gratitude to the entire Macy's, Inc. team for their passion and dedication in serving our customers and delivering strong results.
We have a lot of work ahead, but I am excited to put these plans into action and deliver an even bolder and brighter future for our company, our shareholders and our customers.
And with that, let's begin the Q&A.

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macy’s, inc. fourth quarter and full-year 2021 results exceed expectations.

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