梅西百貨 (M) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Macy's, Inc.

Fourth Quarter 2017 Earnings Conference Call.

Today's conference is being recorded.

I would now like to turn the call over to your host, Karen Hoguet.

Please go ahead, ma'am.

Thank you, and good morning.

This is Karen Hoguet, CFO of the company.

Jeff Gennette and I would like to welcome you to the Macy's call today to discuss our fourth quarter earnings and our outlook for 2018.

Any transcription or other reproduction of the statements made in this call without our consent is prohibited.

A replay of the call will be available on our website, www.macysinc.com, beginning approximately 2 hours after the call concludes.

Please refer to the Investor Relations section of our website for discussion and reconciliations of any non-GAAP financial measures discussed this morning.

Keep in mind that all forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the company's most recent Form 10-K and other SEC filings.

I'm now going to turn the call over to Jeff.

Thank you, Karen, and good morning, everybody, and welcome to the call.

So Macy's had a solid fourth quarter capped with a strong January and we finished 2017 in a good position.

We've created momentum and we are taking that momentum into the new year with a commitment to returning Macy's, Inc.

to comparable sales growth in 2018.

We're headed into 2018 with an improved base business, healthy inventories, a focused and engaged organization and a clear path to return Macy's to growth.

So this morning, I'm going to give you some perspective on our 2017 performance and then give you a sense of how we're looking at 2018.

And then, Karen will take you through the numbers in detail.

So to start.

The fourth quarter positive comp sales of 1.4%, which was owned plus licensed, was a significant trend change for us.

Looking at the quarter, consumer spending was strong and the cold weather was a benefit.

As anticipated, the initiatives that we launched earlier in 2017 kicked in during the fourth quarter and we delivered improved execution across the brand and across all 3 of the sub-brands: Macy's, Bloomingdale's and Bluemercury.

We had great merchandise in all categories.

Our holiday strategy was solid from gifting to self-purchase.

Importantly, we saw an improved trend shift in beauty driven by strong fragrance sales, gift sets and prestige skin care.

We maintained a healthy inventory position, which meant we did not need additional discounting to clear inventory.

And this sets us up well heading into the first quarter of 2018.

We were disciplined with our promotions.

We offered great values throughout the holiday shopping season while sticking to our promotional plan.

And when we hit glitches, the team pulled together.

When we saw an opportunity to fine-tune a strategy and pick up additional sales, we took it.

We saw a trend improvement in our brick-and-mortar business, particularly as we moved from third to fourth quarter, which is encouraging.

And we experienced continued double-digit growth in our digital business.

So this is all good for us.

Macy's recipe for success is a healthy brick-and-mortar business combined with robust growth in digital.

So all in all, we're pleased with the fourth quarter performance.

Looking at the full year, we exceeded our expectations for both earnings and sales guidance.

We have seen an improvement in the base business since we launched the North Star Strategy earlier in 2017.

And I'd love to take a couple of minutes to walk you through points of the North Star Strategy where we made progress in 2017 and give you some perspective on our plans for 2018.

So the first point of the strategy is the Macy's brand.

And in 2017, we began the reengineering of the Macy's marketing machine.

And this will be a multiyear effort, but we're off to a good start.

We strengthened our brand position through a greater emphasis on fashion.

We reduced complexity in our promotional calendar and we're beginning to tackle pricing simplification.

Importantly, we launched our new loyalty program, Star Rewards, and our customers are responding enthusiastically, particularly at the platinum level, which is our most valuable customer.

In 2018, we will continue to strengthen our brand.

We feel good about the next phases of our loyalty program, which will launch midyear, including a tender-neutral option.

So the second point of the strategy is about product leadership.

In 2017, we made good progress on improving merchandise assortment through our edited, elevated and exclusive strategy.

Our customers have responded well to the increased focus on fashion and enhanced quality of the merchandise and we're seeing an uptick in AUR or average unit retail of about 3%.

In 2018, we will continue to improve both merchandise assortment and experience in all doors.

We are on track on increasing exclusivity and we are putting some extra weight behind a number of merchandising initiatives.

This includes our beauty reinvent where we are transitioning from a brand-centric to a customer-centric model.

In 2017, we expanded Macy's Backstage, our on-mall off-price offering, to 45 stores.

We saw a lift in performance of almost 7 full points per store and we believe there is more upside.

We feel good about the model that we've landed on for Backstage.

And in 2018, we're planning to expand by another 100 stores, including locations in some of our premium malls.

The third point of the strategy, customer experience.

In 2017, we put a strong focus on improving customer experience through new service and delivery models, an expansion of Buy Online Pickup in Store, enhancements to our mobile experience and the use of AI to improve customer service.

In 2018, we'll further scale a number of these, including the rollout of mobile checkout and at your service centers across most of our doors.

We know that we have an opportunity to offer our customer more product selection, curated and personalized to her taste, and we will expand her options on how and when to both explore and transact.

One important step of that is going to be the expanded vendor direct fulfillment model that we will launch midyear.

And also in 2018, we have a very important initiative called the growth 50.

As we said, healthy stores mean a healthy business, so we're taking 50 stores, a mix of size and geography.

We're looking at everything that we tested last year in our Woodbridge store and we're accelerating the rollout of what best worked for us and what we learned.

This includes revenue-generating actions such as proven merchandising strategies, the expansion of Backstage and Big Ticket, more fashion and localized product and a focus on leased business like food and beverage.

We're improving fixtures and facilities.

We're expanding in-store technology.

We're developing top talent.

We're also ramping up local marketing and community engagement.

We plan to come out of 2018 with these 50 stores on an accelerated growth track and with the model to scale more broadly across our stores' portfolio in 2019.

Our fourth point is innovation.

In 2017, we began to think more broadly about what and how the Macy's brand allows us to innovate in new categories and channels.

We launched a number of pilots and new programs aimed at creating compelling experience in our stores to increase traffic.

This includes B8ta, the Samsung experience and the new Market @ Macy's.

We're particularly excited about The Market @ Macy's, which is our pop-up retail boutique within the store, which we believe will drive customer traffic and customer engagement.

We just launched in 10 stores earlier this month and the early signs are positive.

In 2018, we will continue to innovate and test ways to drive traffic, increase engagement and potentially create new revenue streams.

Our fifth and last point is cost management.

In 2017, we finished ahead of target on our cost reduction efforts, which is key to funding investment in the business.

We are operating with a mindset of continuous improvement.

And in 2018, we will look for ways to reduce cost, work smarter and move faster.

In 2017, we also had a very productive year with our real estate strategy, in total of $411 million in cash proceeds.

While the number and size of transactions may moderate over time, real estate will remain a very important part of our strategy.

So in 2018, we will continue to execute our North Star Strategy.

We'll accelerate the rollout of initiatives we tested in 2017 and we'll queue up new growth ideas for the future.

We feel good about the year ahead.

When looking at 2018 and our commitment to return to growth, several primary factors to keep in mind.

The first, we do anticipate continued good customer and consumer spending.

We know consumers are out there and it's up to us to win with them.

The second, we will continue to improve our execution.

Thirdly, we're accelerating the strategy that we tested in 2017.

And the fourth factor, which we think is a key to our success, is our people.

Our people are competitive and they want to win.

And we need every associate to be all-in to get back to growth.

That is why we announced to our teams today that all Macy's associates will be part of an incentive plan in 2018.

The plan is designed to support our growth strategy.

And this is part-time, full-time, hourly, seasonally, every associate has a role to play in our performance and a stake to win in our success.

Today's consumer is discerning and they have many choices.

We are committed to being competitive in winning her business.

The investments we will make in 2018 are focused on our customer and what she expects of us.

They are strategic and directed towards the areas where we believe we can get the best return.

We are rolling out things that work and the benefits from tax reform gave us some additional flexibility and allow us to accelerate scaling initiatives we tested in 2017.

This includes the employee incentive plan that I mentioned, which we tested in 2017.

These investments are the right thing for us to do for the company and our shareholders as we chart a path to sustainable profitable growth.

In summary, we head into 2018 with momentum, with an improved base business, healthy inventories, a more focused and engaged organization and we have a path to return Macy's, Inc.

to growth.

And with that, I'm going to turn the call back over to Karen, who will talk about our financial performance and outlook for fiscal 2018.

Thanks, Jeff.

Sales in the fourth quarter were $8,666,000,000, up 1.8% from last year, including the impact of the 53rd week.

On a comp 52-week basis, owned plus licensed sales increased 1.4%.

This is better than we had expected due to improvement in the stores' sales trend as Jeff discussed.

Digital continued very strong in the quarter as we anticipated.

Our strongest families of business were fragrances, dresses, fine jewelry, men's tailored clothing, coats, children's, shoes and home textiles.

We were also pleased with improvement to trend in beauty, handbags and housewares.

Juniors was weaker than expected.

We exceeded our expectations across the country with particularly strong sales in the hurricane-impacted areas that experienced a rebound from the third quarter.

In addition, we were very pleased with the improvement in the trend at our Herald Square store in New York, our flagship store.

Tourist sales were still below last year, but did improve versus the trend in the third quarter.

The number of transactions in the fourth quarter was flat to last year in the fourth quarter on a comp basis, much improved from the 7% drop we experienced in the third quarter.

The average unit retail was up approximately 3%, similar to the increase in the third quarter.

Units per transaction were down 1.6% in the fourth quarter.

Gross margin in the quarter was 38.2%, down 10 basis points versus last year and better than what we had expected.

And the merchandise margin was higher than last year in the quarter.

The strong sales helped and we continued to benefit from our inventory being in better shape than a year ago.

We ended the year with inventory 3.5% below last year on a comp basis.

This good inventory position should help drive sales in early 2018 due to the available open to buy and resultant ability to bring in fresh merchandise receipts.

SG&A in the fourth quarter was $2,279,000,000, down $56 million or approximately 2% below last year.

For the full year, SG&A was down $343 million below last year, which is better than the $305 million reduction we have set as an objective at the start of the year and updated for the merchant restructuring completed this fall.

SG&A in the quarter as well as in the full year benefited from the restructuring, the closed stores, lower depreciation and amortization as well as higher credit income.

It was offset in part by the 53rd week, costs associated with the growth in our digital business as well as investments to grow Backstage, Bloomingdale's Outlet and Bluemercury.

We also increased selling expense relative to plan in the fourth quarter when the trend in the store business improved.

Credit income in the quarter was $244 million, up $36 million over last year.

This was due to higher credit sales due in part to the extra week in January as well as continued good profitability of the program.

For the full year, credit income was $768 million or $32 million above last year.

Credit penetration was 46.2% for the quarter and for the year, 90 basis points below last year in both time periods.

We booked $368 million of gains associated with the real estate transactions in the fourth quarter.

This includes $234 million for the Union Square Men's building, $21 million related to Brooklyn and $113 million associated with other transactions.

And for the full year, we booked a total of $544 million in gains.

In the fourth quarter, operating income, excluding pension settlement, restructuring, impairments, store closing and other costs, was $1,397,000,000, up 32% versus last year or up 10% versus last year, excluding the gain on the Union Square Men's building.

In the quarter, we booked restructuring, impairments, store closing and other costs of $152 million, of which approximately $57 million was noncash.

We also booked in the quarter $32 million of noncash settlement charges associated with our retirement plans.

Earnings per share on a diluted basis for the quarter was $4.31.

For comparability to guidance and to prior years, we would back out the following 2 items as seen in the table in our press release: One, $1.86 benefit from the remeasurement of deferred taxes due to federal tax reform; and 2, $0.37 of after-tax impact of the settlement charges, restructuring, impairment, store closing and other costs.

Net of these 2 items, earnings per share in the fourth quarter was $2.82 versus $2.02 last year.

Remember, included in the fourth quarter is a $0.48 per share gain associated with the sale of the Men's building on Union Square.

Excluding that gain, earnings per share increased 16% over last year.

So that's a summary of our fourth quarter performance and now I'll just make a few comments about the year.

So for the full year, our comp sales on an owned plus licensed basis were down 1.9%, slightly better than the minus 2% to minus 3% guidance provided at the start of the year.

The earnings per share for the full year, excluding the deferred tax adjustment as well as the restructuring, impairment, store closing costs, pension settlement and debt premium costs, was $3.77 or 21% above last year.

And this compares to our latest guidance of $3.59 to $3.69 provided on January 4.

Cash flow in the year was also stronger than expected in 2017, some of which is related to timing.

We underspent our expected $900 million in capital spending by $140 million.

Some of this shortfall is due to underruns, but most is due to intentional delays in projects and will be spent in 2018.

This has been factored into our guidance for 2018.

In addition, the 53rd week impacts the timing of some payments favoring 2017 cash flow relative to 2018.

We utilized our excess cash to repurchase debt of approximately $950 million during the year, including $247 million in the open market, a $300 million maturity paid in July and $400 million in the tender we completed in December.

This demonstrates our continued commitment to delevering and having a strong balance sheet.

So as a result of the EBITDA improvement and debt reduction, our leverage ratio at the end of the year was 2.7x as compared to 3.2x last year.

Excluding the gain on the Union Square Men's building, the leverage ratio was 2.9x, still a significant improvement versus last year.

And remember, our target range is 2.5x to 2.8x.

So before moving on to 2018, I want to update you on our real estate strategy.

As Jeff said, we've accomplished a great deal with our real estate strategy over the past few years, bringing in close to $1.3 billion in cash in 2015 through 2017 from these transactions.

We continue to look for opportunities to create value through our real estate as we go forward.

We have 3 specific updates in particular to discuss this morning.

One, we have now signed an agreement to sell the upper 7 floors of our State Street store in Chicago to a private real estate fund sponsored by Brookfield Asset Management.

We expect to receive a total of $30 million, which includes a $3 million contribution towards our redevelopment cost.

In addition, we will receive a percentage of profit earned over and above the threshold internal rate of return.

This transaction will have a small impact on the retail square footage in the store and we're hoping that by creating great office space above our store in combination with investments that we'll make in this store, we can make this location a more vibrant shopping experience -- environment.

Number 2, we continue to work with Brookfield as part of our strategic alliance.

You will recall that we originally put approximately 50 properties into this alliance for further study.

In August, we updated you and said that we expected that roughly 2/3 of these 50 would be more serious contenders for development.

We have now agreed to certain terms on 9 of these assets, which Brookfield will redevelop once it has received the necessary approval.

Upon the completion of approval and entitlement, Macy's will either sell its interest in the individual assets to Brookfield or contribute them into individual joint ventures.

If sold, the cumulative value of these 9 properties is estimated to be approximately $50 million plus a retained participation in the upside profits of the 3 largest assets.

These 9 assets include a cross-section of projects, including one mixed use densification of a store site, 2 redevelopments of furniture stores and 6 developments of pad sites or perimeter locations of existing mall assets.

None of these assets though involve closing a location, although the 2 furniture store developments would involve consolidating furniture into the main box in those malls.

We expect that these redevelopments will add to the vibrancy and desirability of this site, thus, again, enhancing the shopping experience for our customers.

We don't expect to transact on any of these this year given the time required to receive approvals and other predevelopment work.

Hopefully, we will begin to transact on these 9 assets in 2019.

We also continue to work with Brookfield on understanding the potential opportunities from the remaining assets in the pool.

And 3, we have continued to look at how best to create value from our Union Square real estate in San Francisco while improving the retail vibrancy of the area.

For those of you familiar with San Francisco retail history, there used to be an upscale retailer called I. Magnin.

This flagship store sat on the corner of Geary and Stockton streets.

In the late 1980s, I. Magnin became part of Macy's and, in 1999, Macy's combined the building with the Macy's West flagship store.

We are now planning to separate it again and sell the space.

The building is roughly 243,000 square feet.

If this transaction is completed, the remaining Macy's store would still be approximately 700,000 square feet.

We can -- we believe we can create an even more terrific shopping experience in this very important strategic location.

There are a lot of details to be worked out, but we expect this to be a significant transaction that we hopefully can complete in 2018.

So let's talk about 2018.

Let me first remind you of the changes as a result of the new FASB guidelines regarding revenue recognition and pension accounting.

As you know, there will be changes in 2018 to our financial statements as we discussed on our conference call on January 31.

We have posted our preliminary and unaudited recast numbers for 2016 and 2017 by quarter on our website.

Our guidance for 2018 will be given relative to these recast numbers.

So as you can see on our website, the recast fiscal 2017 has $104 million higher sales, $10 million higher adjusted EBITDA and $0.02 per share higher adjusted earnings than what we reported.

In other words, the $3.77 that I just discussed for 2017 is $2 and -- sorry, $3.79 in the numbers recast for the new accounting standard.

The 2 changes impacting the annual EBITDA and earnings are: One, the accelerated recognition of breakage for gift cards associated with certain returns; and 2, the recognition of digital sales to when the merchandise is shipped.

So with $3.79 as the comparison for 2017, we are guiding 2018 earnings per share to be $3.55 to $3.75.

Included in this guidance is $300 million to $325 million for asset sale gains as compared to $544 million last year.

So excluding asset sale gains, earnings per share is expected to grow in 2018.

Let me just talk about some of the key assumptions behind this guidance.

One, comp sales on an owned plus licensed basis are assumed to be flat to plus 1%.

Our initiatives will be rolled out through the year so we expect the back half of the year to be stronger than the first half.

We do expect the first quarter sales to benefit from a partial shift in the timing of our Friends and Family event from the second quarter into the first.

Comp owned plus licensed sales for the first half of the year are assumed to be approximately flat to down slightly.

Total sales for the year are assumed to be down 0.5% to down 2%.

This has a wider range than comp sales due to the variability with delivery revenue associated with our digital sales and the new loyalty program.

And remember that in 2018, we have one less week in the total sales than we did in 2017, which impacts the total sales trend.

Three, credit revenue will now be broken out on a separate line on our P&L.

For 2018, it is assumed to be in the range of $645 million to $665 million as compared to $702 million for 2017.

Keep in mind that both this guidance and the $702 million of credit income includes costs related to proprietary card fraud and the new account origination.

In the past, these costs were not included in the credit card revenue.

Four, gross margin on retail sales is expected to be flat to up slightly as compared to the 39.1% in 2017.

Five, SG&A is expected to be flat in dollars or up slightly depending on sales.

The approximately $300 million saved from the restructuring announced in January and last fall will be reinvested in the growth initiatives that Jeff discussed earlier such as Backstage, digital and the growth 50 stores.

Asset sales.

We are expecting $340 million to $370 million in cash proceeds and, as I mentioned a few minutes ago, $300 million to $325 million in booked gains for 2018.

This does assume the successful sale of the I. Magnin building in this year, which represents a very significant portion of the guidance for both cash and the gain.

With the new pension accounting, retirement plan income will no longer be included in SG&A and will be a separate line on the P&L below operating income.

We are estimating it to be approximately $40 million to $45 million in 2018.

Interest expense is assumed to be approximately $255 million to $260 million and DA is assumed to be approximately flat with that achieved in 2017.

Our new tax rate, 23.25%.

And capital expenditures are now expected to be $1 billion per year on an ongoing basis plus an additional $50 million in 2018 related to the work being done in conjunction with the Union Square and State Street real estate transaction.

And the last key assumption relating to our excess cash and leverage, we will continue to utilize our excess cash to reduce debt in 2018.

We remain committed to keeping our leverage ratio in the targeted range.

So as I've said to you before, 2017 was a transition year for Macy's.

We accomplished a lot, particularly in our effort to test new ideas, which we now will begin to roll out in 2018.

There's a lot of work ahead of us, but we feel better about the business today than we have in a long time.

Before opening the call for questions, I want to make sure you saw in our press release that beginning with the first quarter release in May, we will be moving our regular quarterly earnings date up one day each quarter to Wednesday with our conference call on that day happening at 9:30 a.m.

Eastern Time.

And with that, Jeff and I will both take your questions.

(Operator Instructions) We'll take our first question from Bob Drbul with Guggenheim Securities.

I guess, the 2 questions that I have, the first one is on the Backstage piece.

Can you talk about new customer acquisition and marketing plans around it?

And then, the second piece is the talk about increasing exclusivity.

Where did you end 2017?

And is 40% still the right way to think about the target?

And any specific brands that you could highlight for us?

Let me start with, Bob, with Backstage.

So just to kind of back up, I think that our Backstage strategy remains rooted in that the bulk of our core customer and the bulk of the new customer that we enter shop off-price today.

And so how could Macy's take a piece of that?

And we -- some of that we learned from our Bloomingdale's experience with our Outlet strategy.

So they have the only kind of off-price, full-price location within a store was what we set out to do.

So we tested that pretty aggressively starting in 2016.

We went to 45 stores as a store-within-store concept in 2017.

And what we're seeing is that our existing customer is spending more when you have Backstage in that building.

We're getting incremental shopping trips from her.

And when we talk about what we're doing in 2018 and taking this out to 100 more stores, it's going to give us the opportunity to start to market this.

And with that, we expect to get new customers.

I think the headline on Backstage in-store is that it's lifting the entire building by 7 full points.

And what we're finding is it's very limited cannibalization.

And we're finding that with the more new categories we put, the better the experience is.

And we're finding that having the same brand in different parts of the store is actually a good thing.

So we're actually very encouraged by Backstage and we expect to continue to learn from it and continue to grow in 2018.

The other sub-point I'd make about 2018 is we're going to start to experiment putting Backstage in-store to some of our premium locations.

So we'll take cue from that on how that performs.

To your question about exclusivity, we stated as part of the North Star Strategy that we wanted to take exclusivity from about 29% of our business to 40%.

And we're on track.

And it really is rooted in having very strong Private Brands.

We continue to grow those.

We continue to put more value in them.

We're getting higher average unit retail.

Our customers are responding very well to those.

And then, we're also working with our great wholesale brands on exclusive product, either that they produce exclusively for us like Tommy Hilfiger or capsules that are -- that they produce exclusively for us that are not exclusive brands.

And I would tell you that in all of those, our merchants are working very hard with both their -- our Private Brand and our supply chain as well as with our wholesale brands and we're on track.

So exclusivity remains a very pivotal piece of our strategy and we are on the path to grow it to 40%.

And we'll take our next question from Matthew Boss with JP Morgan.

Jeff, when you dissect your fourth quarter performance, I guess, can you speak to examples of company-specific execution that you think helped drive the improvement to-date?

And as we move to 2018, I guess, what's the best way to rank incremental initiatives as the year progresses?

And specifically, what -- how in the team are focused on today if we were thinking about some of the -- some of those opportunities?

Yes.

So Matt, what I'll tell you is that the fourth quarter gives us a lot of confidence and momentum as we walk into 2018.

And I would tell you that I kind of bucketed it into 4 reasons about why we have confidence.

The first one is that the consumer is shopping and there's a high level of optimism from our consumer.

She's out there and it's our opportunity to win her business and get share.

So that's the first one.

The second factor is that -- and as Karen mentioned, the North Star Strategy, that we put a lot of new ideas in front of the customer in the beginning of the year and we were able to iterate and scale those in the back half of the year and she responded.

So this notion of testing and iterating and scaling is really working for us and we roll out things that work.

So expect us to take those learnings and roll that into 2018.

That gives us confidence.

We're also testing new things in '18 that we believe will be the spine of the growth that we're going to expect in 2019 and 2020.

The third point of this is really what you mentioned, which is we're executing better.

And I give a lot of credit to new players like Hal that are really helping lead us in new ways.

And I think where Hal is really focused is the opportunity to execute our strategy, getting everybody in the same boat, focused on the same things.

That really led to our whole strategy, which is #4, which is that we want everybody aligned.

And this new incentive program that we're creating where every part-time, full-time, seasonal associate has a piece of the growth and they'll get a reward based on our achievement of that growth was an important piece of the alignment.

So I think we're executing quite well.

So we are -- we think these 4 things are what is going to help propel the momentum that we have now and translate into getting back to growth for the full year in 2018.

That's great.

And then, just a follow-up, can you touch on any of the initiatives that Rich and his team are working on around price simplification and marketing?

And, I guess, more so, what exactly will be the change that your customer will see and -- as the price simplification rolls out?

Yes.

I think what you're going to see is -- the first thing you're going to see is you're going to see less overlap in promotions.

And we started that in 2017.

We're committed to continuing that in '18.

So you're not going to have events within events.

They're going to be much cleaner and clearer.

If you take a look at the event that we just finished, the price on the ticket is we're getting closer and closer to reducing the amount of promotional overlap that leads to confusing pricing and trying to keep our clarity of offer really clear.

We saw that at Backstage.

We see that in Last Act.

You're starting to see us do that with a lot more of our promotional content and making it much easier for the customer to understand our great values.

So what you're going to start to see from Rich is having less of a promotional agenda is making sure that we're then balancing the marketing across other things that our customer cares about, which is that Macy's is a fashion authority and being able to talk about those headquarter businesses that we do great with or those new fashion capsules that we're launching.

So that -- we're going to become much more balanced in our marketing because we're really fine-tuning our promotional strategy.

As it relates to science on pricing, it's -- we've made a big investment on analytics and pulling all of our pricing analytics together under one team, and our team is doing a great job with that.

So we're really looking at what price we need to take something to.

We look at what is weak to suppliers, what the outdate is going to be, what we have to price that out.

And so we're saving lots of markdown dollars.

It's giving us the opportunity to respond to those things that are slower moving.

And so we're using our marketing budget -- or excuse me, our markdown budget much more strategically than in times past, getting to the right price sooner, and that's helping us clear out excess inventory.

And I think one of the big headlines of our performance right now is the fact that we have less carryover inventory as last season's goods and that gives us the opportunity to really respond to what's working in season, be that a hot vendor or a hot trend, and our merchants are ready to respond with having budgets because they don't have a lot of carryover inventory.

So -- and all those interlink, but the pricing science has been a big win for us and I think we're in the early innings of that.

We're just going to keep getting better at it.

And we'll take our next question from Kimberly Greenberger with Morgan Stanley.

I wanted to just ask about the sales guidance here for 2018.

And it looks like it's a nice level of acceleration relative to the full year 2017 results.

On a same-store sales basis, I think last year it was down 2. So is it the strategies that are sort of coming through that give you confidence in the 2018 trajectory?

I'm just wondering if you could help us understand a little bit more about the step change there.

And then for Karen, just 2 small clarifications.

One, it looks like credit income is expected to be down round numbers $45 million or $50 million at the midpoint.

I assume that that's on like-for-like accounting, so perhaps a little bit more reserved there for bad debt.

And secondarily, on the AUR improvement, we are assuming that, that is contained promotions and improved full price selling on like-for-like items.

But is there any piece of that, that would be, let's say, a category mix shift that would be driving that?

So Kimberly, let me just start with the step change.

So we accomplished a lot going from what the year-to-date was at the end of the third quarter to what we accomplished as the 1.4% increase in the fourth quarter, and we expect that momentum to continue.

But it really comes down to the 4 things that I mentioned earlier.

So the consumer shopping, we expect her to continue to shop with us than our competitors.

That takes us into the new year.

The North Star Strategy is working.

The key initiatives within that, that we know are going to propel growth in the new year is the new loyalty program.

And the loyalty program, we actually add a tender neutral option to that in the middle of 2018.

We've got Backstage giving us the growth that's getting us into existing doors but going out to 100 more.

We've got the Growth 50 that we have a significant growth plan planned in 2018 based on the success that we had in the test in 2017.

We've got vendor direct, which is going to expand the amount of offerings that's going to be available to our customer.

That's going to start, really, in -- you're going to start to see that come into play starting in the third quarter, but we have significant volume planned there.

And then we also have new fulfillment options that we know is going to improve overall sales, but also brick-and-mortar traffic, which is what we call Buy Online Ship to Store.

So that's going to join its cousin, the Buy Online Pickup in Store.

So all those are, we believe, is in the strategy piece.

Then there's the execution piece, which is -- as I mentioned to Matt's question earlier, which is that we believe our team is more focused and more aligned than ever before.

We've massively simplified our organization in August by collapsing 3 merchandising organizations down to 1. And I think if you talk to our vendors out there, they would tell you that we're making decisions faster.

Fewer people are touching the decisions.

We have more -- they have more confidence behind the decisions and they have the liquidity and the inventories to be able to respond to what is working in the business.

And then the last thing is that all hands are on deck.

We're all rowing in the same direction and we now have 130,000 strong incentive plan that unites the entire fleet towards getting back to growth.

So those are why we have confidence and momentum from the fourth quarter.

We still have a lot to do and a lot to prove.

Our head is up as much as it's down.

And expect that what we'll test, we're going to iterate and we're going to roll out what works.

So on credit, part of the reason for the decline is, in fact, the bad debt, still at very low levels, but a bit higher than what we had booked this year.

And also the impact of next year being a 52-week year against a 53-week, we lose a week of credit income in that sense.

So that's really the explanation on that.

And the AUR increase, it would really be no different than the last couple of quarters.

For the full year '17, AUR was up 2%; the last 2 quarters, up 3%.

And I think it has to do with the inventory being in such great shape more so than any mix change.

And I'd say just to add to that, Kimberly, is that I think our merchants have done a nice job in putting more value into the goods and putting more make and embellishment and better fabrics.

And that's -- the customer's noticing that.

And as Karen mentioned, we don't have that inventory carryover to that degree, so what we're really focused on is regular priced sell-through.

And we're finding that the regular priced sell-through is better and that the AUR is higher in that based on the increased value that the merchants are putting into the products.

And we'll take our next question from Paul Lejuez with Citigroup.

Karen, just, I wanted to clarify, you mentioned the 9 Brookfield properties or so that might happen in 2019.

Should we assume that nothing else is happening on the other 41?

I know originally you said that 2/3 were going to be considered, but where does it stand now in terms of the other 41 and what we should expect there?

Also curious about the 23.25% tax rate.

Is that good to use in future years beyond 2018?

Is there anything impacting that on a onetime basis in 2018?

And then just last, Karen, can you quantify at all what you think the weather might have done, I mean, to the business in the fourth quarter?

I think you mentioned that coats were a good category.

Is there any quantification you can give in terms of how much the weather might have helped you, whether that be talking about regional performance or category performance?

So if you start with the Brookfield question, we have said that we thought about 2/3 of the 50 could end up being redeveloped, and I would say that's probably still a good estimate.

And as I said in my remarks, we do continue to work with Brookfield beyond the 9. So again, we've got 9 to fruition and we continue to work on the others.

So don't expect all 50 to get there as we have said in August.

But nothing's really changed in terms of the potential there.

In terms of the tax rate, there's nothing onetime in that.

So again, things could change, but I would not expect a major change in that rate going forward.

And in terms of the weather, it was a cold fourth quarter obviously.

We had snow storms throughout a big chunk of the country, which negatively hurt the business.

So on balance, I would say, weather really was not a big factor in the good performance.

Yes, coats did well, but I can't sit here today and tell you that a big chunk of the good performance had to do with weather.

And we'll take our next question from Chuck Grom with Gordon Haskett.

Just trying to connect the dots on your fourth quarter performance and clear momentum.

You talked about inventories being light.

And then comparing that to the first half guide, which I think you said is down to -- or flat to down slightly, particularly given the comparisons eased, so I just wondered if you could just help us frame it out.

Yes.

I mean, I think -- Chuck, remember that we do get benefit in the fourth quarter from the increase in the digital penetration that we've discussed.

So that will have a negative impact on the first half.

And again, could the first half be better?

Absolutely.

But sitting here looking from where we are today, we didn't want to get out ahead of ourselves.

Yes, I think, Chuck, just one-- just to add, we also expect some disruption in these Growth 50 stores, which are a pretty significant piece of our business.

As we get them ready, there's going to be capital spent on them.

There's going to be disruption in those buildings so that we are ready at the beginning of third quarter in most of them.

Okay, helpful.

And then just any help on the Friends and Family shift?

How do you think that'll play out or if you could quantify it for us?

I really can't.

I just wanted to make sure because the first quarter will look a little better than what you would've expected, and then the second quarter would be a little worse.

But I can't really give you a specific number.

Okay.

And then just on the employee incentive program that you tested last year, could you just tell us what some of the learnings were from the test last year?

So what the learning was we tested a number of things.

We tested -- do you make that incentive seasonal, do you make it quarterly, what's the amount that you play with.

It was rooted, though, in that if that store makes its sales plan, that everybody in that building that worked during that time frame is going to get some piece of a reward that is accorded by that sales plan achievement.

We also, in the stores, did it.

If they exceeded their plan by X percent, that, that sack of money that was then divvied up amongst the hours of the associates was bigger.

And that worked really well.

And what we aligned on, based on looking at the [6] districts that played in this, was that quarterly was the best measure and that it was -- it gave the associate, that frontline associate a clearer line of sight.

And so we're basically taking what worked for us.

Those districts had a nice improvement in their business versus the comparable districts, so we know that it's meaningful in terms of having all associates then have a line of sight to how, by that store doing well, how they can increase what they're going to get in their paycheck.

So it gave those store managers an opportunity and rallying cry every day to talk about how they were performing versus their plan.

So it just gets everybody going in the same direction.

So based on that, we knew that doing this in stores was going to be -- was the way to go.

We then looked at, okay, let's talk about our call centers.

Let's look at our warehouses.

Let's look at our executives that work in the corporate offices that are not on a current bonus or incentive plan.

And so we wanted to expand that so that as Macy's is on our path to growth in 2018, that everybody would have a play in that.

And it gave us the opportunity to have daily, weekly, monthly quarterly dialogue that gets everybody aligned.

And Jeff, just one quick one, that get's rolled out here in the first quarter?

Or is it...

That is.

So we're -- we announced it this morning, and the first quarter is the first quarter that we are measuring and we're going to reward people for.

So yes, we're starting out this morning with this as a great opportunity for people to have a stake in Macy's returning to growth.

And we'll take our next question from Lorraine Hutchinson with Bank of America.

I wanted to follow up on the gross margin guidance being flat to up slightly.

How you're thinking about the impact of the continued shift to e-comm, the new loyalty program and what the offsets are to those factors.

I think much like what you saw in the fourth quarter, the merchandise margin has been stronger due to the inventory being in good shape, the pricing science Jeff talked about.

And we would expect that to continue to enable us to offset the impact of the potentially lower delivery revenue.

I think the other point, Lorraine, just goes back to Kimberly's question about mix.

I think we have a good line of sight that within an existing category or vendor mix in a particular FOB that we have a way of improving our margin because of pricing science and because of the fact that we don't have a lot of residual inventory.

But as you start to think about new categories that we bring in that our customer wanted, that might have a very different margin mix, that all gets communicated in terms of the overall blend of AUR.

And so there is a mix there.

So if we wanted to go after heavily in electronics or Apple products or whatever, it might carry a lower gross margin but, at the end of the day, it drives a lot of footsteps.

And what we start to measure now is really lifetime value of a customer.

What's in their basket, what else are they buying during that trip, does it seed other visits into our store or on our site?

And so we're not just looking at the margin of a particular item with a particular customer.

We're looking at what the long-term relationship and how those mix of products affect that.

We'll take our next question from Paul Trussell with Deutsche Bank.

Just a follow-up on SG&A, just curious if you can quantify the amount of spend or overall impact to operating income from the accelerated investments that you've mentioned in stores and merchandising and digital.

And separately, Karen, if you can just touch on cash priorities in 2018, particularly how you're thinking about further debt paydown or the return of share repurchase program and the dividend.

Yes.

I mean, in terms of the investment, I think it's all taken into account in our total guidance between sales, margin as well as SG&A.

So I think all of that is factored in.

I mean, I can't really give you a specific number.

In terms of the cash priorities, they have not changed.

Our first priority always remains a ways of investing in the business to fuel profitable growth and that hasn't changed.

Secondly, we are committed to keeping within our targeted leverage ratios.

So as I mentioned earlier, excess cash this year, likely to go to debt repurchase.

And obviously, as cash continues to build and performance builds over the next couple of years, obviously, we'll have more cash to discuss returning to the share buyback program and other things.

Obviously, the one I didn't mention, which I should have, is the dividend, which obviously is very important to us as well.

And we'll take our next question from Oliver Chen with Cowen and Company.

Karen, regarding inventory, you've been in a great position.

Next year, do you think that inventory will still be at a lower rate than sales in terms of what you can do there in the speed initiatives?

And Jeff, I would love your thoughts on the topic of experiential retail at large with Growth 50.

How are you balancing?

What are the best priorities in terms of tackling this?

Are you seeing favorable demographics in terms of an average age of the Growth 50 cohort of stores?

And what should we think about as you look at different expenditures associated with experiential retail versus the traffic and check size returns?

I think, Oliver, the easiest way to think about inventory is that we do expect the turnover, inventory turn, to continue to improve as we move forward into '18 and we think beyond that.

So that'll continue to be a high priority.

And Oliver, let me take on the experiential retail.

I think when you look at these top 50, there was a number of things that we really wanted to take on.

The first one was hyper curation.

And think about it as kind of My Macy's on steroids.

And I think one of the things that we learned in the test pilot in 2017 was how much kind of stuff was in the way of a customer really seeing what she wanted in that building.

And so we did a massive SKU edit, stopped keeping unit added in those buildings.

And it was about 40%.

And it gave us the opportunity to then take the things that remained and really amplify them, really play with additional fashion, play with it to the previous conversations about getting more value in the goods.

And what we saw was, wow, she really responded.

It also gave us the opportunity by doing all that editing of bringing in new vendors, new categories, bringing in things like food and beverage, like Backstage, like Big Ticket.

And so the first step, I'd say, would be that with respect to -- with content that, that is really where our journey was.

Then when you get into it, is you get into what technology expansion you want to do.

This idea about mobile checkout, about can she find a register, if she wants to get out of that building quickly, she wants to scan everything on her mobile device and get out of the building without interacting with the sales associate, we want to make sure at these 50 doors that she can do that.

If she wants to let us know through the app that she wants to have star service and a platinum experience, then we're going to have an at-your-service MyStylist is going to be ready for her; so making sure that we have that done.

We have these at-your-service centers that we learned in a number of our buildings in '17.

We've now expanded those across all the 50 doors, and many, many of our other doors.

So that if she wants to come in, she's at the #1 door of the store, she wants to do a return, she wants to pay down her bills, she wants to pick up an item that she purchased online, a very quick and efficient way of getting through that.

So we took through all of the friction points that she experienced in her journey.

Everything that she's been telling us over the years, places where she was dissatisfied with her experience, and we made sure that we attacked that either through technology or through assortment.

And the last I'd say is what we wanted to do with the human element.

I think a lot of our customers say there's not enough people in Macy's, I want to make sure that when I do need help, that I can find them, that they're taking me through a pretty complicated assortment if I need help.

And so we've really focused on making sure that we have enough census in these buildings and that they're trained appropriately and that they're ready to go where the customer wants them to go.

So as an example, on the Beauty floor, you see us evolving from a brand-centric model to a customer-centric model, where these particular Beauty associates are cross-trained in the products at the customer may be interested in.

So they know the best mascaras beyond the brand that they're taking a paycheck with us from.

And so that has been a way of us deconstructing every single business, the way the customer's shopping and making sure that our service model is in concert with that.

And the last thing I'd say with respect to these 50 doors is what we're doing within this kind of hubs at the community.

And we have a lot we can do with special events and trunk shows and then using really community outreach as an opportunity to get footsteps into the building and, once there, take good care of them.

So that's how we're approaching it.

There's technology.

There's just the human touch and there's great assortment.

Jeff, that's really helpful.

Just one follow-up.

Your comments earlier were really helpful regarding customer centricity.

As we think about customer-based valuation models, what's on your mind in terms of balancing the customer acquisition cost versus the lifetime value?

Do you have any general thoughts about where you want to head with that metric as you get more data to really propel your thinking about acquiring new customers and fostering existing customers?

Yes, Oliver, our loyalty program, our Star Rewards program, was designed to address that exact issue.

And what we saw was that, take care of the customers that are in your tent first.

And so when you look at the way we structured the Star Rewards program of silver, gold, platinum, the intent on that was to give them different levels of rewards based on how they shopped and spent with us versus it being this kind of arithmetic progression.

And so that has worked for us.

So we've done a lot of analysis on this to say, if you're a platinum customer, you generally were always going to be a customer with Macy's in the next year.

But in many cases, you were shifting down, you were spending less.

The platinum customer, what we're finding is that we're holding those spends at those spend levels better.

And we're going to be judging that program based on how you hold a customer within that spend bucket.

You also then want to be -- serve as an aspiration for customers that are below those spend buckets that see I'll get these additional goodies if I spent higher.

So if you get a shift up, that's a real positive.

And all of that was taking care of the existing base.

What we're going to launch in 2018 is a tender neutral program because we have some customers that don't want a Macy's credit card but they want to be rewarded for having some level of allegiance to us if they like our goods and services.

So to have a tender-neutral option is what we're going to be rolling out in the beginning of -- or in the second quarter.

It all leads to this conversation about lifetime value and starting not just to look at a transaction, but to really look at what that customer's spending with us over time.

And with what we can do with data analytics and personalization and customization of how we communicate with her, we have lots of opportunities to be able to seed new ideas and new things that she might be interested in based on her data trail.

So lifetime value is really where we're going on this as well as ultimately looking at that we bring in new customers into the Macy's tent, so looking at it on both ends.

We'll take our next question from Brian Tunick with Royal Bank of Canada.

I was curious if you could talk a little about the bricks-and-mortar improvement that you and the industry, I guess, saw over holiday.

What do you think were the biggest drivers to your improvement from the third quarter?

And Karen, what are you assuming bricks-and-mortar looks like in 2018?

And then on the expense side, I guess there's been a lot of puts and takes the last couple of years, a lot of expense initiatives.

Karen, what kind of sales growth do you generally need to get expense leverage?

I'll take the first question and Karen will take the second.

I think the case for Macy's in the third and the fourth quarters was the consumer was outspending, and that was great.

I think our products that we had been working very hard on and where we had been testing, getting those leveraged into our buildings, our gift assortments for both self-purchase as well as for gift-giving were quite strong and customers, they transacted on it.

I think we've been working on experience with new loyalty programs, with having more friction-free shopping on both online and in our stores.

And while we have a long way to go, we made nice improvements.

And I also think, as I've mentioned 2 other times, we're executing better.

And I think that our team is more aligned on the fundamentals of running a good retail operation than ever before.

And I think the team is operating strongly against that.

And we look at every single day as an opportunity to make happy customers.

And that's not lip service.

We're focused on that.

So Macy's is its strongest when we have very robust digital growth and it's coupled with a healthy brick-and-mortar business.

And while we've had very strong digital business, we had opportunity in brick-and-mortar, so expect us to double down our efforts and take the momentum that we have from fourth quarter into the new year.

And the second question has actually gotten harder to answer over the years.

I think, as many of you know, we used to say originally, we needed a 2% comp.

Then it became a 1% comp.

Then we found a way of leveraging SG&A with flat.

And even in 2017, we leveraged SG&A with negative comp.

So we have been very good in finding ways of appropriately dealing with expense as we've gone forward and the world has changed.

But as you see in '18, we're frankly taking advantage of the flexibility that the tax reform enables us.

And so you really have to frankly look down at net income as you're looking at the company's profitability.

But we are investing to retain -- return to comp growth.

And over time, that payback will become bigger and bigger.

'18 is somewhat of a pivoting year, but we do think it's important to invest and utilize the tax savings to help the company accelerate its comp growth even beyond what we're talking about in '18.

And we'll take our next question from Omar Saad with Evercore ISI.

This is Shayne Arcilla calling in for Omar.

So we would like to know more about The Market @ Macy's, how big are these formats and what they're doing in terms of sales so far?

And also, what are your thoughts in terms of the pros and cons of converting current wholesale brand shop-in-shops into concession formats, whereby the brands would own the inventory and fixtures and maybe also the staff and pay concession fee to Macy's in exchange?

It's just something we've noticed many department stores in Europe doing lately.

So The Market @ Macy's today is about a little over 1,000 square feet and we have that in 10 of our stores.

And in each of these 1,000 square feet, we have 6 to 8 vendors, brands that were now showing their wares.

And this is a rental model.

This is an opportunity for these brands to get in front of a lot of traffic, a lot of our customers.

And so in effect, what we do is that these brands pay a rent to Macy's and we expose those brands.

We have a common fixture package.

We have a cross-trained associate population that is trained on all of these products that work these areas, and it's turned out to be really exciting.

I mean, you can have things like pop-up carts to a promotion on Peter Rabbit to 3D soles that go into shoes to -- I mean, there's many opportunities that you have with different businesses.

And so far, so good.

We have tremendous response from vendors that want to be a part of this or brands that want to be a part of this.

And so we have a growing queue of interest to go into this.

And these brands can be part of this for a month.

They can be there for longer.

But it gives us a flexible format to bring this kind of parade of newness for a customer that we believe will seed incremental visits that customers want to go out and check out what's going on at The Market @ Macy's.

We also then can provide back to these brands the consumer behavior.

What do they look at?

What were they interested in?

If it's iPad technology, you can actually see where they went through the queue and where they stopped.

So we're learning that with our relationship with B8ta, which is right next door to The Market @ Macy's in Herald Square.

So I think this is a -- it's a very interesting concept.

So far, it's been a great response and we'll keep you posted on that.

As for your broader question about the use of real estate in an owned versus licensed or another hybrid economic model, there's many examples of this.

And I look to our Bloomingdale's brand who is, I think, showing the way on the Macy's side to how this can be done.

And we still have a relatively small piece of our overall business that's being done in licensed products.

Bloomingdale's, it's higher; and Bloomingdale's is more developed in certain families of business versus Macy's.

I think at the end of the day, it all comes down to what's the richer customer experience, what's the opportunity to get customers just really thrilled to be back in brick-and-mortar again.

And so I think the lease model has a place in that strategy.

And so when I look at a business like Sunglass Hut or Finish Line, where we have a much broader assortment than we ever provided when it was an owned business, and we have dominance in vendors, it's a great model in that we're giving great service, there is application to take that into other pieces of the store.

The Market @ Macy's gives us, without having to make a commitment on a particular business or a particular brand for too long, it gives us this roving kind of newness that comes into these buildings.

So I think it's going to be a combination for us.

And we have space in our doors, we have the opportunity to monetize this space so it's more customer-centric and it's more profitable.

And so that's the advantage that we have.

Even in our most productive stores, we can be more productive.

So expect us to continue to push the edges on getting the right content in these buildings and play with the economic models that we're testing.

And we'll take our next question from Todd Duvick with Wells Fargo.

Karen, congratulations on reducing your leverage to within your targeted range.

There's a lot of hard work that went into that, I know.

And I guess, the question I have for you is, going forward, you indicated that excess cash continues to be deployed towards debt reduction.

Should we think about you reducing debt through a combination of open-market debt repurchases this year-end in consideration of another tender at some point?

Or can you give us any guidance along those lines?

No, I can't at this point.

Sorry, Todd.

Okay, that's fair enough.

I guess, the other thing then would be in terms of where you turn off the spigot for deploying cash towards debt reduction versus accumulating on the balance sheet.

If you get down towards the lower end of your targeted range, should you be more inclined to accumulate cash than pay down debt?

Well, I mean, the key, as we've said, we want to maintain being in that target range.

And as I gave you when we talked about 2017 results, excluding the Union Square gain, which is a big, very large somewhat onetime event.

When you exclude that, we're not quite in the range yet.

So we need to use '18 cash flow to get us into the range and then we're committed to staying there.

So I think that's really the key.

And we'll take our next question from Dana Telsey with the Telsey Advisory Group.

With some of the new initiatives that you've done on the loyalty program so far, what are the key learnings from there and how do you think it influences the business going forward?

And on private labels versus brands, given the increased fashion that you're bringing in, where do you see that penetration rate going?

You want to take loyalty?

Yes.

On loyalty, I think the key, Dana, is I think customers that are good customers like to be rewarded as such.

And I think we're finding, as Jeff mentioned for that platinum level, our highest vendors, they are really appreciating the recognition as well as the combination of benefits we're giving them, which includes a giveback component in terms of Macy's Money as well as the free shipping on macys.com every day.

So I think that's doing well.

But interestingly, the lower levels that are getting less benefits are feeling good as well.

So sometimes, I think just clear and crisp communication does a lot, and we're going to continue to fine tune what we give.

In addition to what I would call financial benefits, but also just feel good benefits that I think can be a part of sort of the Macy's experience.

So I'm excited by the further refinements that we expect for the proprietary credit card customer.

And as Jeff mentioned, we're also rolling out a tender neutral component, which we think will be terrific as well.

And then Dana, to your second question about private label, it's going to grow.

It's currently about 20% of our business.

It's going to go higher.

It's a piece of that growth of going from 29% to 40%.

I can't tell you exactly where it's going to end up, but know that we've got very developed growth strategies in many of our Private Brands.

We'll take our next question from Brian Callen with Bank of America.

Karen, just a spin-off of Todd's question.

I guess, thinking longer term and considering how quickly leverage got outside of your comfort zone in 2016, 2017, why is 2.5 to 2.8 the right long-term target?

Why not drive to 2.5 or even below to give you more cushion in the period of another point of sales weakness potentially in the future?

Look, we review these targets every year.

We do believe it's the right target range for us.

But obviously, we will look at it every year and see if we feel differently.

And I guess, just remind us, is there a credit rating target that you're trying to get to?

Or are you, I guess, comfortable at the low BBB rating?

I think the key thing is we think it's important to be investment-grade.

What exact rating we get in there, it's harder to target that because we're not really in control.

So I prefer to think of the leverage ratio target as the way we're operating the business because that is within our control.

But clearly, maintaining an investment-grade rating is very important to us.

And we'll take our next question from Wayne Hood with BMO Capital.

Jeff, you outlined the merchandising initiatives last year would incrementally contribute about $100 million, $125 million.

And then Backstage, maybe $25 million to $30 million -- $35 million.

As you think about 2018, should those numbers on the merchandising side jump to $150 million to $200 million because you get a full year impact from them?

And then it looks to us like Backstage may contribute as much as $100 million given the rollout that you have.

Can you ringfence some of that as we think about the year what the impact would be, the same you did last year?

We're not prepared to do that right now, Wayne, terms of breaking that out.

But know that logic is how we're looking at the overall plan.

Backstage is going to contribute a more significant piece of our growth than it did in 2017.

There's going to be a mix of these merchandising initiatives that you're going to see.

It's going to be a little different than what it was in 2017 because things like fine jewelry, which we were rolling out, is now fully there.

So we're not going to see the same growth in that.

You're not going to see the same growth in women's shoes that we had.

But you're going to see new growth in areas that -- where merchandising is in play.

And we're going to see growth again in handbags.

You're going to see growth -- more growth in Big Ticket.

You're going to see more aggressive growth in things like dresses.

Active, which has been on a very strong growth strategy for us, is basically planned at the same level in 2018.

So the merchandising mix change -- or mix is going to change a little bit.

But that growth expectation is similar.

What you'll see, Backstage is going to be a bigger piece.

And then the Growth 50 is -- we expect a nice increase with that.

And then the last comment would be on vendor direct because that was not part of our strategy in 2017.

We had some.

We're going to have a lot more in 2018, which is going to be a piece of our revenue walk.

And what type of products on that...

We'll start playing -- obviously, the opportunity is endless about what we could do with that.

But the bulk of our initial focus is going to be on home store.

Okay.

And I guess, my final question comes back to Backstage.

Have you been able to solve for the challenges around a seamless checkout?

Because I guess on pricing, you have to go through that, in California specifically, they have a separate checkout area, is what I may or may not understand correctly.

But how do you solve for that to make it easier?

And then in these premium malls, where do you find the space in home and footwear where you might be able to really capture share there?

So on the -- we're working on the systems opportunity within Backstage.

So we're looking at systems right now.

We're looking at supply chain right now.

So those are the 2 big fundamentals that we're looking at, at Backstage.

So we're getting to a point where it's becoming a nice sized business and making sure that we have the tech spend to make sure that, that is -- that our store systems and our supply chain systems are for that, is what we're focused on right now.

So we should have an answer to what you're questioning, Wayne, later in the year.

And then with respect to the shoes -- and some of the biggest categories for us has been the growth of shoes in Backstage; that has certainly not cannibalized anything going on in the rest of the store.

It's one of the real standouts in Backstage as is soft home.

They have been the 2 biggest standouts that we've seen.

And then what we've done with that is in your most productive doors, we're starting to test Backstage in a smaller square footage.

And that gives us the confidence that instead of Backstage being a 20,000 square feet, that we can do it really well in 10,000 square feet.

So expect us to continue to test in that.

Karen, just one final question for you.

As you contemplate the real estate with Brookfield and maybe setting up JVs, should we be thinking about in 2019 and beyond that there would be a capital contribution on Macy's part into the JV to redevelop properties?

And how are you thinking about ring fencing that, what that might or might not be?

There could be, Wayne.

But at this point, that is not something we're contemplating.

And we'll take our final question from Priya Ohri-Gupta with Barclays.

Karen, I was just wondering if you might be able to shed some light on sort of how you think about open market debt repurchase versus sort of broader-based tender?

And what are some of the benefits that one provides versus the other?

I think we're obviously trying to maximize the economics of the transaction and take advantage of situations where there might be bonds available in the open market.

And to the extent that those aren't available, then the tender makes more sense.

Is that fair?

It may, even if they are.

So again, we make this decision based on the facts at the time.

And it's an NPV economic decision, is that fair?

That's a factor, sure.

And this concludes today's question-and-answer session as well as today's call.

Thank you for your participation.

You may now disconnect.

Thanks, everybody, for your interest and support.

Thanks, everybody.