梅西百貨 (M) 2019 Q1 法說會逐字稿

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

First Quarter 2019 Earnings Conference Call.

Today's hour-long conference is being recorded.

I would now like to turn the call over to Mr. Mike McGuire, Head of Investor Relations.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone, and thanks for joining us on this conference call to discuss our first quarter 2019 results and our full year 2019 outlook.

With me on the call today are Jeff Gennette, our Chairman and CEO; and Paula Price, our CFO.

Jeff and Paula have several prepared remarks to share, after which we'll open it up for a question-and-answer session.

(Operator Instructions)

In addition to this call and our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com that summarizes the information in our prepared remarks as well as some additional facts and figures regarding our operating performance and guidance.

Our Form 10-Q will be filed in a few weeks, and that too will be available on our website at that time.

Keep in mind that all forward-looking statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that could cause actual result to differ materially from the expectations and assumptions mentioned today.

A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission.

In discussing the results of our operations, we'll be providing adjusted net income and diluted earnings per share amounts that exclude the impact of impairment and other costs.

You can find additional information regarding these non-GAAP financial measures as well as others used in our earnings release and during this call on the Investors section of our website.

As a reminder, today's call is being webcast on our website.

A replay will be available approximately 2 hours after the conclusion of this call, and it will be archived there following the call for 1 year.

Now, I would like to turn this over to Jeff.

Thank you, Mike, and good morning, everyone, and welcome to the Macy's, Inc.

First Quarter 2019 Earnings Call.

Paula and I will take you through our first quarter results and then we will open up the line for Q&A.

As you saw in our press release this morning, we delivered another quarter of comparable sales growth.

We achieved a 0.7% increase in comparable sales on an owned plus licensed basis and earnings per share of $0.44.

Our performance for the quarter was in line with our expectations.

The first quarter was a solid start to the year, and we are on track to deliver our annual top and bottom line guidance.

Before I get into the quarter's highlights, I do want to comment on the recent movement on tariffs.

This is a dynamic situation, but let me give you a high-level view.

The 3 tranches of tariffs that were enacted in 2018 have no meaningful impact on our business and were factored into our 2019 guidance.

The increase of the third tranche from 10% to 25% on May 10 does have some impact, particularly on our furniture business.

However, the team anticipates that this can be mitigated.

If the potential fourth tranche of tariffs is placed on all Chinese imports, that will have an impact on both our private and our national brands.

We would work with our manufacturing and brand partners to minimize the impact to our customers.

This potential fourth tranche of tariffs was not contemplated when we provided annual guidance.

We are hopeful that trade talks between U.S. and China will continue productively and the trade actions between the 2 countries will deescalate.

So now let me share a few of the highlights from the quarter.

All of our brands, Macy's, Bloomingdale's and Bluemercury performed to our expectation.

Bloomingdale's had a very good quarter overall, and our flagship store on 59th Street, that led the way.

Women's shoes, ready-to-wear, beauty were all strong, each benefiting from the renovations in those departments, which were completed last year.

Bloomingdale's Outlet also saw a strong performance in the quarter.

Bluemercury had a strong quarter across the board in its specialty stores, shops within Macy's and on Bluemercury.com.

Its proprietary brand, M-61 and Lune+

Aster continued to be important growth drivers and increase penetration to total sales in the quarter.

In the Macy's brand, it is encouraging to see that our investment strategy is paying off.

As an omnichannel retailer, our competitive mode is a healthy brick-and-mortar business, a robust e-commerce business and a great mobile experience that ties it all together.

We are applying a balanced investment strategy to support all 3. We are focused on providing our customers with a great experience no matter where or how they shop.

In the first quarter, we saw continued improvement in our brick-and-mortar business led by the Growth 50 stores.

The Growth 50 stores continue to outperform the rest of the fleet, which gives us confidence to expand this treatment to 100 more stores this year.

In the first quarter, we saw a significant sales contribution from Backstage, which we expanded to 120 stores in 2018 for a total of 170 Backstage locations in Macy's stores.

Our e-commerce business delivered another quarter of double-digit growth with our expanded Vendor Direct program making a meaningful contribution.

And mobile remains our fastest-growing sales channel.

We launched STORY at Macy's on April 10, opening 36 locations in 15 states on the same day.

I'm proud of the agility the team showed in taking this big bang approach to the STORY launch, and we're pleased with the early response from the customers.

As a refresher, we acquired STORY a year ago.

This is a retail concept that takes the point of view of a magazine, changes like a gallery and has a unique merchandising approach.

Each STORY at Macy's has a robust events calendar and community outreach plan that will be refreshed with a new theme and merchandise every 10 to 15 weeks.

STORY at Macy's gives new customers a reason to visit our stores and gives our current customers a reason to come back and see what's new.

The STORY launch is part of our ongoing strategy to improve customer engagement and drive store traffic through exceptional experiences.

So overall, the first quarter was a solid performance for Macy's, Inc., and we are on track for the year.

And while we are pleased with our consistent comparable sales growth, we won't be satisfied until we're taking market share, and we will get there business by business and store by store.

Our 5 strategic initiatives for 2019 will be the drivers of our comparable sales growth.

As a reminder, they are: Growth 50 becomes Growth 150 stores, and we expect a similar lift in sales.

We are expanding Backstage, the only on-mall off-price option in America to another 50 doors and we'll maintain the strong performance of the Backstage locations opened in 2016 through 2018.

We are getting better at our price every day.

We are continuing the aggressive expansion of Vendor Direct.

Our customers love the expanded brands and assortment.

We are focused on our mobile first strategy.

We know our customers use our apps to shop.

We crossed $1 billion in app sales in 2018, but it's also through highly valued assistance for interacting with the Macy's and Bloomingdale's brands, whether it's in-store, from home or anywhere in between.

We are making our app experience even better as we build out My Wallet, My Store and My Stylist.

And our fifth strategic initiative for 2019 is our destination businesses, which are 6 categories where we already have a top 3 market share.

In 4 of the 6, we're taking market share, and these categories punch above the rest of the business on return on investment and profitability.

Work is well underway on each of these 5 initiatives, and we expect that they will contribute to our sales growth as we move through the year.

Looking ahead at the rest of 2019, we are squarely focused on continuing comparable sales growth, taking market share in our key merchandising categories and growing our customer base by retaining existing customers and bringing new customers into the Macy's and Bloomingdale's brands, and I'm confident that we will continue to make progress.

Before I turn it over to Paula, I do want to leave you with 3 thoughts on how we're viewing our business.

First, Macy's is growing again, and we will continue to grow by taking full advantage of our well-established omnichannel capabilities.

Second, we are a strong company with a healthy balance sheet and the flexibility to weather a potential downturn and be opportunistic about growth.

And third, we have a clear line of sight into profitability growth.

We know we need to grow both the top line and the bottom line, and we are aggressively pursuing productivity improvements to make that happen.

Now, Paula will take you through the financials and provide more detail on the productivity improvements that we're expecting.

Thank you, Jeff, and good morning, everyone.

As Jeff mentioned, we're off to a solid start to the year as we continue to post growing comparable sales and to make significant progress on our strategic initiatives.

Additionally, we continue to improve our financial flexibility, not only to help fund these investments, but also to return cash to our shareholders, and we've maintained our operational and financial discipline by thoughtfully managing our business with an eye towards profit growth.

Turning now to our first quarter results.

Our performance was in line with the expectations we established in February.

We delivered $5.5 billion of sales, an increase of 0.7% on an owned plus licensed comparable basis.

This puts us on pace to deliver the annual sales guidance we gave you in February.

We saw strength within our destination businesses, especially dresses, fine jewelry, men's tailored, women's shoes, fragrances and skincare.

Active and kids were also strong performers while handbags continued to be a challenge.

We delivered our strongest performance in the Midwest and Northeast regions of the country, and digital continued to deliver strong growth.

Our sales with international tourists were down 3.1% in the quarter, but while international tourism remained a headwind to sales, it showed improvement versus the fall season.

Total transactions were up 5.7% in the quarter, reflecting a positive customer demand trend, particularly from our best customer.

Average units per transaction were down 2.2% as our Platinum customers continued to spend more with us in total and to buy fewer units over multiple transactions.

Our average unit retail was down 2.7%, driven by the mix impact from the strong performance of Backstage and our efforts during the first quarter to clear through the expected elevated spring receipts as well as a challenging comparison to a very strong AUR performance in the first quarter of 2018.

We generated credit revenues in the quarter of $172 million, up 9.6% from last year and saw credit card penetration up 80 basis points in the quarter to 46.3%.

Credit card revenue continued to be driven by higher finance charges related to higher balances and the momentum of our Star Rewards loyalty program.

Our gross margin rate for the quarter was 38.2% of sales, down approximately 80 basis points to last year as we expected.

The decline was primarily driven by higher delivery expense not offset by merchandise margin expansion.

As we discussed on the last earnings call, while we entered the year in a clean inventory position, our spring transition receipts are, as expected, slightly elevated.

And we worked prudently to clear this inventory during the quarter.

We remain committed to expanding our merchandise margin in the future.

We recorded $2.1 billion of SG&A expense in the quarter, an increase of $29 million or 80 basis points on a rate basis over last year.

The increase in SG&A dollars is driven primarily by investment in our Backstage rollout and other strategic initiatives that are driving our comparable sales growth.

Depreciation and amortization totaled $236 million in the quarter while interest expense benefited from lower debt levels.

Our effective tax rate benefited from the resolution of certain tax matters.

But while the resolution was beneficial to this quarter's tax rate, it is important to note that it was contemplated in our tax rate guidance for the year.

We delivered $137 million of adjusted net income in the quarter versus $149 million last year.

Included in these net income figures are asset sale gains, up $31 million and $18 million, respectively.

Adjusted EPS was $0.44 in the quarter compared to $0.48 last year, of which asset sale gains represented about $0.10 and $0.06, respectively.

Cash flow used in operating activities was $38 million compared to cash flow generated from operating activities of $322 million last year.

The difference between years reflects the timing of inventory purchases.

Capital expenditures were $264 million compared to $190 million last year.

The increase in the first quarter is due in large part to the timing of spending on our strategic investment as our 2019 plan remains approximately $1 billion.

Asset sale proceeds were $34 million compared to $23 million last year.

We paid cash dividends to our shareholders of $116 million during the quarter.

We ended the quarter with $737 million of cash, which was in line with our expectation.

Our debt repayments in the quarter were minor, and we continue to plan to use excess cash in 2019 to further reduce our debt to be within our target leverage ratio when excluding asset sale gains.

This will further strengthen our healthy balance sheet.

Before addressing our expectations for the balance of the year, let me give you a quick update on Funding Our Future, our productivity initiative that when combined with our sales growth initiative will help return Macy's to profit growth in time while also mitigating cost headwinds and supporting strategic investments.

This work is now well underway.

We have a defined road map and are continuing to lay the foundation for broader rollout.

Our cross-functional teams are confirming our multiyear savings, which, as we have said, will be significant and will be communicated in the back half of the year.

Under the leadership of Dennis Mullahy, our new Chief Supply Chain Officer, a scaling of the hold and flow approach that we discussed last quarter continues to progress nicely.

We expect it to be fully up and running by the end of the second quarter, and we are pressing forward on other opportunities within our supply chain: merchandising, private label sourcing, marketing, stores and procurement work stream.

For example, we're beginning to test location-based markdown optimization, which will allow us to better support and drive each store's business in a more targeted way.

We currently have 6 pricing zones for stores and 1 pricing zone for e-commerce, and these zones are very broad.

Demand by store varies, and when we take markdowns, the price gets reduced across the entire zone, regardless of store-specific demand.

We needed a better way to respond to store-specific customer demand as opposed to a broad response across all stores in the zone.

We piloted location-based markdown optimization and saw positive results and are now excited to roll this out on a broader scale.

So that's a very quick update on Funding Our Future.

Turning now to our 2019 guidance.

We are reaffirming our guidance for the full year, and we continue to expect 2019 earnings per share to range from $3.05 to $3.25.

Excluding asset sale gains, we expect earnings per share to range from $2.80 to $3.

I won't walk through the details here, but you can find all our guidance and related commentary in the slide presentation we posted on our website.

However, I do want to remind you of a few items as you update your models.

First, based on a solid first quarter performance combined with our conviction in the initiatives just laid out, we are confident in our ability to deliver our guided sales comp for the year.

We continue to expect our comparable sales performance to be relatively consistent throughout the year with the fall performance slightly better than the spring.

Second, we continue to expect our gross margin rate to be down moderately in the first half of the year and down slightly in the second half, which we saw begin to play out in our results for the quarter, and we expect to see slight sequential improvement in the second quarter.

And third, inventory is higher than we would like it to be, as we stated on our last earnings call due to slower sell-through on spring products during the quarter.

Importantly, though, we continue to expect levels to be consistent with our original guidance above at the end of the spring season and below last year by the end of the fall season, which is also consistent with our gross margin guidance.

In closing, we have delivered results consistent with our expectations and are on track for the year.

Our 2018 initiatives continue to resonate with our customer.

Our 2019 initiatives are beginning to contribute, and we continue to enhance our financial flexibility and durability.

I'm excited by the enthusiasm and energy of our colleagues as we work together to make this business even stronger and ultimately to enhance both customer and shareholder value.

And now, we'll open it up for Q&A.

(Operator Instructions) We will now take our first question from Matthew Boss.

Jeff, maybe to start higher level.

How best to size up the state of the U.S. consumer today maybe versus a year ago?

Any category lead indicators that you're watching here?

And just in your view, how resilient is the consumer to the potential for rising prices on apparel and furniture if that's the path that we need to take?

So just kind of where I look at the consumer right now, still healthy.

So unemployment is low.

Wages are rising.

The consumer confidence is still strong.

I think the tax rebate issue that we had in the January-February time frame has certainly passed us and now we're caught up in terms of those checks going out to our consumers.

So relatively very healthy.

When you look at the tailwinds that we had last year, perhaps not as strong as that.

So obviously, we had tax relief last year that we're now lapping, and that change, I think, buoyed a lot of consumer interest in the economy and in our categories last spring, but still overall healthy.

I think to the conversation about the recent news, let me just address -- just add a little more color to what we talked about, my opening comments on tariffs.

The first 3 tranches of tariffs that went into effect in 2018 and then the third tranche of tariffs that had an increase from 10% to 25% last week, we're working through all those.

They're not going to -- even in the furniture category, which was really touched by the 10% to 25% increase last week, we have strategies to mitigate that.

We think that those strategies will limit the customer concern and reaction to them.

The big one is really if there is a fourth tranche that's put into effect, if that goes into effect, it remains -- it's over $300 billion, so it's going to affect a lot of the apparel and accessory categories that are coming in.

And what I'd say on that is that looking at all those categories and those brands that are included, it is hard to do the math to find a path that gets you to a place where you don't have a customer impact.

And so as you would expect, we work at that with 2 buckets.

We do have about 20% of our business.

It's being done in Private Brands, our own sourcing, so we've been working hard at that for a number of months and really for a couple of years about moving production out of China.

It's still an important piece of our overall mix within China, consolidating the amount of manufacturing partners that we have to improve our scalability and our power to negotiate there.

So we're well at work on our own Private Brands.

The bigger piece is really our negotiations with our national brand partners, and we're working very closely with them on the potential impact to our shared customers.

So at Macy's, fortunately, we operate at a scale.

We feel like we're going to be able to come up with solutions that work best for us and our brand partners.

It's too early to comment on what we think that's going to mean in terms of potential price increases and what categories are going to be more affected than others.

I think we're going to be doing that all the way through the next couple of weeks, and then, obviously, we're very hopeful that talks between the U.S. and China will continue.

They'll be productive and that these trade actions will deescalate, so I think this is a stay tuned.

Great and then just a follow-up.

On inventory management in light of your larger picture thoughts, I guess how are you planning your forward receipts just in light of this uncertainty?

And more near term, where do you see the concentration of the excess inventory, maybe just by category?

And is it a reasonable goal to be realigned to sales into back to school?

Or is it more -- or should we more think about into holiday?

What I'd say is that when you look at our current inventory position, we are heavy right now in some spring content, and we work to mitigate that in the first quarter, which we'll talk about.

But when you look at our total versus our owned inventory right now, our comp inventory is up 2.4%.

Our total inventory is up 3.9%.

We do have more in-transit inventory than we had last year that anticipates trying to get earlier receipts in for key periods underneath some of the tariff conversations.

So the only thing I would add to that, Jeff and Matt, just to tie this to gross margin, is it consistent with our guidance for gross margin to be down moderately in the spring?

We will see some gross margin pressure in the second quarter as we continue to clear the excess spring receipts.

However, we do expect gross margin to see a slight sequential improvement in terms of pressure from the first quarter.

And so the teams are already working hard on this and we continue to expect our inventory position to be up in the spring and down by the end of the year.

We will now move on to our next question from Omar Saad of Evercore.

Nice quarter, especially against the more difficult comparisons.

I wanted to ask about, you mentioned omnichannel and mobile, and it's obviously areas you've been investing in significantly.

Maybe you can help us understand what you're seeing in those efforts, whether it's Buy Online Pickup in Store, Ship to Store?

Are you starting to see broader customer acceptance and usage of these technologies especially through the apps and on mobile?

I'd appreciate an update there.

So when you look at how we're spending our monies, a lot of our technology spend is going towards really making mobile best-in-class, and so our customers really voted on this, and mobile is definitely the method of choice that they're using.

It's kind of their constant shopping companion, and so improving the in-store experience, improving the navigability of that, anywhere and anyhow they want to engage through the mobile app, we are spending towards.

So we really kind of break up our mobile expenditures and technology spends on 3 buckets of mobile, we look at it as My Wallet, My Store and My Stylist.

So My Wallet is, it gets at the first part of your question, which is, wow, BOPS and BOSS is becoming a much more potent piece of an omnichannel of our strategy, and customers really like the convenience and the security of picking up in store.

So they can do it in the same day if it's a BOPS purchase or they can do it for something that we're shipping in from one of our warehouses or from Vendor Direct that takes a couple of days.

So with My Wallet, they have the opportunity to get in and get out of the store much faster.

So My Wallet is also helping us with the My Rewards function that gives app-exclusive point incentives and in-store rewards.

The second piece of our mobile spend is really on -- really improving the in-store experience, so providing store maps, product location has been piloted in the fall, in-store product recommendations.

The opportunity for scan and pay if they want to get in and get out without engaging with a sales colleague, will give them all information about personalized sales events.

The last piece where technology is helping us with improving the app is really what we call My Stylist, which is really providing virtual stylist opportunities.

We're doing that.

We're piloting that right now in the second quarter, and we're adding the ability for the customers to find and follow a stylist that they can collaborate virtually with via chat or with style board.

It also gives them the ability to follow trends from influencers.

So our overall technology spend is really to how to improve the customer experience, the navigability, but mobile is a big chunk of our emphasis.

And Jeff, are you seeing the digital piece of the business shift a little bit from traditional e-commerce, where people have it shipped to their homes with some of these new options available to consumers?

Yes.

So what you have right now is that when you look at Buy Online Pickup in Store and Buy Online, Ship to Store, it's now over 10% of all digital demand.

So that started -- when we were talking about this a year ago, it was about 3.5% of the digital demand.

It's now over 10 and a combination, and we expect that to continue to grow.

So we built out these At Your Service centers in every single one of our doors.

Our customers are loving that, we put it at the #1 entrances, they're getting in and out much more quickly and then with everything that we're doing with our fulfillment logic and our inventory placement, it's just a more viable and potent way for a customer to interact with us.

So I think us and our competitors, in-store fulfillment is very powerful.

We will now take our next question from Paul Trussell of Deutsche Bank.

I wanted to ask about the Growth 150.

For the first 50, certainly driving nice outperformance, so congratulations on that.

Curious if those doors are turning a positive comp.

And also, as we think about the next 100 doors, is there as much opportunity as the first 50 in terms of top line growth?

And then lastly, from the learnings with Growth 50, what is the potential for upgrades or staffing and service changes that can be made to the rest of the fleet?

Paul, so I think I'll just start with what you started with, which is the Growth 50 stores have been quite strong for us.

They are giving us a positive comp, and they far are outpacing the balance of the fleet.

And what we talked to you about this at the end of the fourth quarter was that they were up 3 points.

They're now up 4.5 points when you look at the first quarter of 2019.

And so very strong.

And obviously, based on how they were trending, we started to get all of these in place with the investments that we put forth.

They came on really [wide] at the end of the third quarter of 2018, so that momentum has continued into 2019.

But what we saw in '18 gave us the confidence to add another 100 stores.

So these 100 stores, we do expect to behave the same as the Growth 50 stores do.

And by the end of 2019, these 150 stores are going to represent about 50% of the brick-and-mortar business that the Macy's brand does.

So it's going to make a meaningful difference, we believe, to our overall brick-and-mortar trend.

Within the Growth 50 and now the Growth 150, we address the second part of your question, which is, this isn't just about capital.

This is about increased colleague support, quality of management, really looking at building up categories, making bigger distortions, getting better goods into these particular stores, so we do expect that they will continue to outpace the balance of the company when we get the 150 up and running.

The next tranche of growth stores we're evaluating and what we would do in 2020 and so that does take up 2 of the 3 segments that we have outlined in our store strategy, both the magnet stores and our flagship.

Those will all be part of the growth message.

And in the neighborhood stores, which is the remaining tranche of stores, we are working on what that formula looks like.

We tested 4 stores in 2018.

We're testing 8 more right now.

We expect to walk out of 2019 with a scalable strategy for the stores that we call the neighborhood stores.

And then just a quick follow-up.

You gave a few comments on the funding, our future initiatives.

Maybe you can just elaborate a little bit more on the benefits that you are expecting to see by year-end across supply chain and sourcing and the pricing initiatives.

So I'll take that.

So one of the things that we're doing with Funding Our Future is developing more and more tools to manage our inventories especially with respect to fulfillment logic, advance fulfillment logic, which we're already using, but we're developing that even further and really drilling into the supply chain.

So we're already using the fulfillment logic, as I said before, to get our customers their products in the quickest amount of time at the lowest cost for us, and we use a combination of our mega centers and our stores and vendor partners to offer customers the best experience, and we're just taking that a step further.

We're looking at our inventory position and markdown risk with -- and applying that to these decisions, all really amplified by data analytics.

We're getting ahead of the peak holiday season by allocating more of the high-volume inventory in DCs, or distribution centers, to operate at full capacity, and we have a number of other initiatives in supply chain that are focused on replenishment and getting us the product sooner, and so we're looking across how do we use all of our locations or stores or DCs, how do we use those even more smartly.

We're consolidating BOSS shipments to stores to reduce the shipping cost, and we talked about hold and flow on the last call.

So when we talk about the different work streams, there are a lot of sub-initiatives under each work stream.

So we're really excited about the potential of this program.

And as I've said before, our teams are busily at work, and we'll come back to you with more specifics on the Funding Our Future program as well as the target for the 3 to 5 years.

We do expect this target to be significant, and so you should really think about Funding Our Future as the fuel to grow our business to take market share and to expand the customer franchise and importantly, to improve profitability.

We will now move to our next question from Kimberly Greenberger of Morgan Stanley.

Jeff, you mentioned in your commentary that you've got line of sight into profit growth, and I'm wondering if you can sort of help us understand the path to get from where we are today -- I think we didn't see profit growth last year or here in Q1.

So what's the event path that gets you to profit growth?

What are the key ingredients?

So Kimberly, what we've talked about is that the first stage of that is comp store growth, so getting consistent comp store growth top line moving.

The second piece that we're focused on is really what we're doing with market share and narrowing the market share gap that we had.

We were down about 4.5 points to the overall market at the end of '17.

We narrowed that to 2 points in 2018.

We expect to narrow it further in Q1.

The third is really having a healthy customer franchise.

So with the initiative that we put in with the new loyalty program a year and a half ago, we're really taking care of our core customer.

They're spending more with us.

And when we a year ago added the Bronze tier of that of having a tender neutral portion of the loyalty program, we've been adding about 1 million customers a quarter through the Bronze tier.

We had acquisition strategies that are at play right now.

Right now, we basically have a very healthy franchise with males both under 40 and over 40.

They love us.

And so we've got good share there.

That is growing.

It's under -- females under 40 is really our opportunity, and so we're really delving into that right now.

We have her in certain categories like dresses and fragrances and handbags, but we need to drive her into more categories in the store.

We leverage our strength as a department store to do that.

We're really focused on the early career segment, this 24- to 29 -year-old, so you'll hear more about us on that.

So getting the customer franchise of getting back growth right is a real focus of ours, and then the last point is really on profit growth.

So that's our fourth stage on that.

That's really what Funding Our Future has been all about to not only fuel the top line but also the bottom line.

So one of the elements that we see of that is the ability to grow gross margin and really expand merchandise margin to cover some of the headwinds that we have with increased delivery expenses, free shipping that we offer our customers as a result of all the loyalty programs.

So Funding Our Future is really going to ultimately be the fuel that we use on all of these aspects.

And that's what you should expect to see us, to Paula's earlier point at the end of the year, for us to outline for you exactly what the 3- to 5-year window looks like when we get back to profitability growth and how we're going to exactly do that.

That's really super helpful.

And then Paula, I just wanted to follow up on the revenue guidance for the year.

It looks like the spread here in the first quarter between your comp growth and your total revenue growth, if I look at the owned comp, it looks like the spread is about 130 basis points, but the total sales guidance for the year at approximately flat with a comp of flat to plus 1. I'm just trying to understand if there was maybe a timing difference in Q1 that caused the spread to be bigger than implied in the total guidance and perhaps there's a catch-up coming in future quarter.

So Kimberly, the biggest driver of the larger-than-normal spread between total sales and comp sales is the store closings both in 2018 and at the start of 2019.

That, of course, impacts our total sales, but not our comparable sales, and we do expect that gap to narrow as we go through the year.

And we continue, as you highlighted, to expect our owned plus licensed comp sales to be flat to up positive 1 and our total sales to be about flat.

And then just as a reminder, we closed 12 stores in 2018 and 4 stores at the beginning of 2019 and also we'll be opening new stores, new Bloomingdale's stores in the fall.

We will now take our next question from Chuck Grom of Gordon Haskett.

This is actually John Parke on for Chuck.

Can you guys talk about performance of Backstage in the quarter?

A little bit about the evolution of its sourcing given the growing scale?

And then, I guess, just at a high level, how does the merch margin look for Backstage versus the rest of the business?

So Backstage is performing well, and we're on track with everything that we saw in previous years and how it's performing in 2019.

So it was a meaningful piece of our comp performance when you -- and we have 170 that we opened for 2018.

And as we mentioned on our last call, any time you add Backstage into one of our buildings, it lifts the comp of that store by about 5 full points.

What's really exciting about Backstage is that when you look at it in the second and the third year, that the momentum continues.

It's not just a 1-year episodic issue or opportunity.

We look at -- the other headline we brought up in the fourth quarter was the cross-sell that goes on for our customer.

About 15% of the customers that are in the stores that have Backstage are cross buying in both areas of the store, and their purchases are up about 40% when they do that.

So that gave us the confidence to add more Backstage.

We've added 9 so far of the 50 from 2019, but we're very excited about seeing what's happening with the comps and how the comps of Backstage are driving the comp of the entire store.

There's just a noticeable benefit when Backstage is being added, and we see that across stores that are magnets, stores that are neighborhoods and stores that are flagships.

So it really is pretty indiscriminate about the effect that it's having on all types of our store profile.

So we're going to keep it going.

The other part of your question, we have Backstage, we have the warehouse that is going to be up and running in the third quarter.

So this is our first dedicated Backstage warehouse.

It's going to be in Ohio, it's just going to help us with the logistics of this.

So we're still in the early innings of Backstage, we get better at it every day.

We’re learning every day, and it continues to become a more meaningful piece of our success every day.

Great.

And then just switching gears a little bit, can you talk a little bit about the performance of your overall business during key selling events like Easter, Friends and Family and then most recently, Mother's Day, I guess, versus the balance of the quarter?

Yes.

So what I'd say is that I'm very comfortable with the way that our cadence has been met.

We did a lot to clean up our promotional calendar in 2018.

So we've got a comparable calendar that we're working on in 2019.

I expect the promo days to be in line with what we did last year.

We're always looking at how we -- how do we look at those promo days and how will we make them more relevant for the season that we're in, but we're in good shape on all that and Friends and Family, Mother's Day really performed at expectation in the first quarter.

We will now go to next question from Oliver Chen of Cowen and Company.

A lot of what we're doing now is really looking at this metric of customer lifetime value and the acquisition cost relative to lifetime value.

What are your thoughts about how that may intersect with your loyalty program and key learnings you've been having in using loyalty to drive personalization as well as data collection and then thinking about the right kind of customer retention and repeat as well as new and existing customer analysis?

So I will start with this one, Oliver.

Our Star Rewards loyalty program continues to perform very well.

Our Platinum customers are shopping with us more frequently.

They're spending more with us.

They really love the simplicity and value of the new programs, and we've had great responses to the exclusive Platinum customer experiences that we can offer them.

And so Platinum customers make up about 30% of our sales, and their spending behavior is up 10%.

And then for 2019, we have a goal of setting -- of getting to about $7 million tender neutral Bronze customers, and that's about double the number that we would have had in 2018.

And we're just about under a million Bronze customers at the end of the first quarter.

So we're very pleased with our Star Rewards loyalty program and how it's helping us to drive customer value.

The other thing, Oliver, I'd point out is the transaction count in the first quarter, that was up almost 6%.

And what we're seeing in that is that you've got a lot of these customers that are shopping more frequently than ever based on the values and the experiences that we're offering her, so we expect that to continue.

We think that the transaction count is a good proxy for how she's feeling about us.

We see that in our surveys on that.

We look at her spend.

We just look at how often she's coming in to our brand through the app, through the store or from our site.

Okay, and the follow-up is just thinking about millennials as well as Generation Z and a more difficult category as a whole has been women's and young women's apparel.

What do you think needs to happen there?

And how would you reorientate a lot of your discussion around ensuring that you have the younger customer for the long term?

It's been difficult because the shopping habits and the patterns and the assortments really need to be different in our view.

Yes, and so I agree with you.

And so that is -- we have that as one of our biggest opportunities.

There are some areas where the under 40 female customer loves the Macy's and the Bloomingdale's brand.

So when you look at fragrances, when you look at dresses, when you look at handbags, those are all places where we get high share and in 2 of those 3, we're growing our share with that same customer type.

Our opportunity is in sportswear, so there is -- we basically recognize what we need to do with our brands.

We're working very closely with our brand partners as well as our own private brands.

We're also looking at our environment, and what does the environment need to be for this customer?

Does she want to shop in a traditional department store, are there ways to segment an area that is uniquely hers based on what she's telling us?

So we're working very closely with those customers and creating spaces in our stores that we're going to be testing through 2019.

So it's content, it's values, it's environment, it's what we do in terms of marketing, what we do with personalization, what we do with experiences that we've created like STORY that are very attractive to this customer, so we're trying to hit it from all angles because we recognize we have a big opportunity with share here, and we're not going to be satisfied until we're doing better with it.

We will now move to our next question from Bob Drbul of Guggenheim Securities.

I was just wondering if you can give us some insight into how your private brand portfolio is performing versus the national brands?

And I was wondering also if you could just maybe give us a little bit of thoughts around the monthly flows that you had and weather -- how you felt like weather impacted your business as well.

Let me start with the second part of your question, and that is that in sales, we don't think that weather had an impact on our sales.

There were -- and it's really the bifurcation between warm weather goods and cold weather goods.

So, yes, warm weather goods did not sell as well as they did last year because the weather was colder, but we made up for that with the sell-throughs of our cold weather inventories.

So that is -- I think that the -- the sales, I would say, very limited impact on our overall business, but the composite of our inventory did change.

So as we talked about in the fourth quarter, we had elevated spring receipts that were part of our inventories exiting the fourth quarter.

And with the unseasonable weather, that wasn't helpful in clearing that.

So when you look at our 2.4% positive inventory in comp locations, we've got some spring weather that we are working through.

But as Paula said, our gross margin guidance anticipates that, and so we think we're going exactly where we thought we would be at end of the second quarter inventory as well as in margin.

So we're heavy right now in spring goods based on weather and where we came in, but we're working through that prudently and we're going to be where we think we need to be going into fall season.

And national brands versus Private Brands?

So our Private Brands portfolio continues to be strong and continues to complement the overall offering that we have.

Margins continue to be strong and, yes, so they're both working together in tandem.

We will now move to our next question from Lorraine Hutchinson of Bank of America.

Paula, could you just comment on the merchandise margin performance in the first quarter?

It sounds like delivery expense was a big reason for the drop in margin.

I was also hoping to hear your outlook for delivery expense as the year progresses.

Yes.

So first of all, let me just comment that we are on track to achieve our gross margin guidance for the year.

For the quarter, again, we were 80 basis points down.

That's in line with our expectations.

And as I said on the call, that was due primarily to higher delivery expenses not being offset by merchandise margin expansion.

So let me give you some context on how we look at this.

So one of the most effective drivers of how we offset the headwind of delivery is through merchandise margin expansion, which in 2018 fully offset the delivery expense, and we do have a line of sight to get back there.

And so I've discussed Funding Our Future a few times and a few of the initiatives like localized markdown optimization, which I talked about earlier, hold and flow, updates to our fulfillment logic, all of these will improve our merchandise margin.

And as I've said, we will come back to you with our specific plans from Funding Our Future, and we'll have targets that we expect to be significant for the next 3 to 5 years.

So that's going to be key to how we mitigate this important headwind, how we invest in our strategic initiatives and ultimately, how we grow our profit in time.

And so was merchandise margin in the first quarter down in addition to higher delivery expenses?

No, merchandise margin was flat in the first quarter line.

So the degradation in gross margin was the increased delivery expense based on the robust digital business that we have and the great loyalty program where the customer gets free shipping.

And then merchandise margin, it includes the markdowns that we said we would incur to clear the excess spring transition receipts.

It would've been higher had we not have had those markdowns similar to the trend that we saw in 2018 when the merchandise margin expansion fully offset the delivery expense increase.

We will now move on to our next question from Dana Telsey of Telsey Advisory Group.

Nice to see the improvement in the top line trends.

And if you think about the Vendor Direct business and the additional SKUs being added, how are you seeing productivity there?

And how is margin progressing on the e-com business?

Is that a margin help or margin hindrance?

How are you thinking about it?

Dana, so I think -- the headline on this is I think that Vendor Direct has only upside.

So it adds sales.

It adds profit.

It increases customer consideration of Macy's.

It increases traffic to our site.

It addresses failed searches.

And the profit rate on Vendor Direct is basically -- it's accretive to our overall when you look at it because you really don't have any of the SG&A expenses that we have.

The margin pretty much hugs whatever the category is in the main box.

So if it's in home, those margins are very similar, but because of the incremental, the minimal incremental capital, the no inventory investment, it makes for a very high ROIC case.

And in Q1, it was about 10% of our online sales came from Vendor Direct, but we see that penetration increasing as we add more and more content to it.

And then as you know, Dana -- I'm sorry, go ahead.

Okay, you go on.

Yes.

So as you know, we manage our business in an omnichannel way.

So one of the things we can offer as an omnichannel retailer, as an example, is our customers can order online, they can pick it up in our store, and then when they're in our store, they buy more goods.

So we think about that as an omnichannel experience.

And overall, our e-commerce business enhances our overall business.

And so when we think about some of the headwinds with respect to the e-commerce business such as delivery expenses that I just mentioned earlier, we do have a line of sight as to how we're going to mitigate those and that is encompassed within our Funding Our Future initiatives.

And then any early reads on STORY and what makes you expand it to additional stores?

Yes, I think STORY is performing really well for what we expected.

We really had 4 goals with STORY.

The first one was how we're going to bring new customers into the brand.

And when you look at the amount of hits that we've got and the amount of media exposures on this thing, it has been very, very strongly received, and we've really gotten the message out about what STORY means.

So we've got a lot of new customers that are coming into the building.

We also wanted to -- the second piece was how we would see repeat visits from existing customers, and so I think you've got the all-store effort in making sure the customers know where STORY is in the building, making sure they go and experience it.

It's all new products and experiences and it changes, as we've discussed, every 10 to 15 weeks.

The third benefit is that the narrative about Macy's being a traditional department store is this is opening our door to new partnerships and kind of breaking that paradigm where people think of us as open to new ideas, new partnerships and so we're getting more calls from people that we wouldn't have had interest from in the past.

That's giving us an opportunity to keep our brand moving.

I mean we're a fashion retailer and to have new and exciting new partners coming in the door is really important to us and STORY has been a nice corner -- nice portal for these conversations to start.

And just the last thing I'd say about STORY is that it's just -- it's the prime rib of our stores in terms of space and location and it's fun.

And it's changing.

So, yes, we're in the early days of this, but we're really pleased with the customer response so far.

And to where your question was going, Dana, we will evaluate.

We have it in 15 states right now, 36 stores, very important doors for us.

We haven't made the decision yet about where we're -- when and where we're going to expand beyond the 36 stores it's currently in.

We will now move to our next question from Michael Binetti of Crédit Suisse.

Can I ask just about the composition of same-store sales?

And you've touched on this in a few different ways, but with the transactions much higher and the AUR lower, makes sense, initially you were highlighting Backstage as a big growth driver, so that would be intuitive, but I guess it wasn't as intuitive to me why units per transaction will be moving lower with the lower price points in the Backstage section moving up in mix.

But then I think you reminded us that -- I think it started in the fourth quarter that some of the changes to loyalty lower that barrier of free shipping, so the incentive for the customer to bundle units together till they get to a $50 or $75 bundle, I think goes away, and that they just order whatever -- one item at a time.

Is it -- I mean do you expect that to persist?

When do we -- and does that change the leverage point on the comp at all as you look forward, if this is going to be the business going forward, higher transactions and lower UPT?

So there's a lot there, but let me just say that I look at transactions average unit retail and units per transaction together to assess the dynamics of the business.

And in the first quarter, all 3 of these worked together to drive positive sales comp.

So as I mentioned earlier in the call, our first quarter transactions were really quite strong, up 5.7%, and that reflects the continuing positive trend that we're seeing in customer demand, particularly from our best customers.

And then in terms of average unit retail, that was down 2.7% in the quarter and half of that decrease reflects the strong performance of our Backstage within Macy's stores.

We have 170 of them, but 120 of them are new versus last year.

And so these are significantly helping our in-store comp but at a lower AUR.

And AUR was also impacted by our work to clear excess spring receipts as well as the tough compare against the very strong AUR performance last year.

And then to your question about average units per transaction, again those were down 2.2%, but that's mostly because our Platinum customers continue to spend more, buying fewer units over multiple transactions, and we are continuing to test and iterate in terms of what the free shipping thresholds will be, but that's sort of the dynamics that we're seeing.

If you see the current dynamics hold or the transaction growth is obviously very positive, if more of that growth does continue to come from transactions with lower AURs, does that -- I guess does that change how you thought about the leverage point on comp historically if that's how the comps are going to be built every quarter?

Well, I would say one of the biggest things that you should consider in terms of looking at our sales comp leverage is the fact that this is an investment year for us.

2019 like 2018 will be a year of investment as we continue to invest in the sales growth initiatives that are growing our positive comp and so you have to take that into consideration as you are -- as you're looking at our leverage.

Got it.

And if I could just add one on -- you didn't mention a change to the credit revenue outlook for the year.

So I'm assuming there's no change to what you tell me but it was quite a bit above the run rate in the first quarter that we thought we'd see for the year.

Is it just slower growth through the rest of the year and maybe because the comparisons get tougher or any way to help us think about how you see credit through the year?

Sure.

Our credit revenue is broadly in line with our expectations, and its performance in the quarter has been driven by strong credit sales bolstered by our Star Rewards loyalty program as well as an increase in new accounts and continuing strong balances.

And so we're maintaining our guidance for the year as it is quite early in the year, and we want to continue to be prudent in our overall guidance.

We will now move on to our next question from Paul Lejuez of Citi.

I'm curious how much overlap there is between the Growth 150 and the stores that have a Backstage.

And I think the second part of that is, if we fast-forward to the end of the year and we consider all the stores that don't have either Backstage or not part of the Growth 150, what does that number look like?

And from that point, which of those stores might get included in one of those 2 programs?

Paul, so it's really -- actually, really interesting and well balanced when you look at.

So if you look at the 173 Backstage stores that we have, really well balanced when you look at how it's split across flagships, magnets and neighborhoods.

We initially -- when we did the initial rollout, I think it was in 2016, we really focused on those doors that had the most productivity opportunity.

So we really weighted it more to the neighborhood stores.

And then as we said, look, there may be an opportunity to get Backstage into every one of our Macy's locations.

We started to play with getting into the magnet stores.

And so we're really looking at that.

When we add in the 50 stores that are being added in for 2019, all of the 3 different store segmentations will be touched by that.

What I can tell you as a great headline is that every one of the segments in every one of these scenarios is improving its trend versus the control.

So the neighborhood stores that got Backstage, doing far better than the stores that don't have it.

The same thing with magnets and the same thing with the flagship stores.

And also, those trends are improving at the more -- the longer the Backstage are in those stores and customers understand it, get used to it and we market to them.

Got you.

And then on the Vendor Direct program, I think, last year, you doubled the SKUs beginning in the second half of last year.

What's the plan for the second half of this year on Vendor Direct?

So we -- I think we said at the end of the fourth quarter was that we plan in 2019 to add another million SKUs into Vendor Direct and that we were going to also reach -- we were going to go to 1,000 vendors versus the 700 that we had as part of the program in 2018.

So we're on track.

When you look at the first quarter, we added 125 vendors, we added 265,000 SKUs to the sites, we added new brands in.

So we're on track with what we said we were going to do at the end of fourth quarter.

What does that million SKUs represent in percentage terms?

That would be on top, and I believe it's 1.5 million is what we had at the end of 2018, so it's a sizable increase.

We will now take our final question from Alexandra Walvis of Goldman Sachs.

I have a question about your destination businesses, you talked about them performing well and I believe, Jeff, in the prepared remarks you said that 4 of them were taking share.

I wonder if you could let us know which of the destination businesses those are, and what's working there that is perhaps working a little bit less well in the 2 classifications where you aren't taking share?

So what I'd say is that the commonality between -- first off, these 6 businesses, they're really leveraging the strength of being a department store.

So the opportunity that if we have a customer that's coming to us for dresses, and she's not buying shoes, "Okay, what are we going to do to make sure that she hears from us?" So there's real opportunities in terms of personalization, direct targeting on opportunities like that we see with that.

So taking advantage of these businesses being very, very strong within the Macy's portfolio.

So all these businesses have a top 3 market share, and they are, when you look at them -- and they also, these 6 businesses represent almost 40% of our total.

They're planned to double the rate of increase that we have in the balance of the store.

So we have strength in them, and we're putting strength behind them.

That's increased content moving AURs with better goods, getting great values that are planned with all of our vendor partners or what we're creating with our own, what we're doing within environment, what we're doing with sales colleagues and what we're doing with management.

So when you look at, you can see from the numbers which one.

Well, if you look at beauty, beauty is not gaining overall market share, that would be 1 of the 2. We're gaining market share in fragrances, but we're not in overall beauty.

We're really holding our own in skincare, but we're not maintaining our share and we're ceding market share in color.

So we're very focused on that right now.

The others are doing quite well.

So we're onto something with this.

It's a place that customers consider Macy's and how do we leverage them more fully and get -- once into these categories, how do we get them to shop in other parts of the store or site.

Great.

And then one more perhaps on tariff.

And just a question on the List 3 tariffs.

How much of your business does that affect predominantly, as you said, the furniture piece of the business?

How much of a headwind is that creating for gross margins?

And can you confirm that, that's contemplated within the guide?

So we don't quote what percent of our business is affected by which tranche of tariffs, but what I would say is that the third tranche going from 10% to 25%, we -- the team is mitigating whatever exposure that is.

So it is a relatively small piece of our business.

That's how we're able to mitigate it across the entire company.

What is the effect going to be in furniture specifically, we're working through that, but the overall guidance comprehends our working through that.

So it's really the -- the big point is that fourth tranche is not comprehended in the guidance, and we're working through what the implications would be if it fully goes to 25% at the end of the summer.

We will now take our final question from Jay Sole of UBS.

Great.

Jeff, I just wanted to ask you a little bit more about your comments on tariffs.

Can you just maybe talk to us at a high level about how you are just -- maybe just retailers in general would think about sharing the burden of tariffs with the branded partners?

Yes.

I think that we work very closely with our brand partners on that, and in some cases, we've done this -- so think about what happened when we had the cotton staple change and we had the apparel prices going up when that happened.

There is a model on that about where -- are there certain brands that can command a higher ticket, and are there some commodities that absolutely not, you're going to retard demand and you've got to stay at the price.

And either through the combination of you as a retailer or as your wholesale partner, you're absorbing those increased costs.

So we're working through all that right now.

We've been through this before.

This is obviously big because of the amount of imports that do still come out of China across many different categories.

So we have work to do to work through this with obviously our own sourcing, through our own Private Brands, but also our national partners.

So we've been having lots of conversations with our partners, they have with their other retail partners.

We haven't worked through it yet, but we're at work right now.

If this does go through, what we're going to do, what categories are going to hold prices because we don't believe that we can sustain an increase, what areas do we believe we can and then when we don't think we can sustain an increase, where is that burden going to be?

What side of the conversation does it play into?

Got it.

The other question, if I could is, that, obviously, goods imported from China will have a new tariff, but there's a lot of goods that are probably in the store that won't.

How do you -- because in the cotton situation, everything that's impacted by cotton has to have a price increase, how would you anticipate the interplay between a lot of goods on the floor that will be from China versus a lot of goods on the floor that won't be from China?

Yes, so stay tuned on that.

Obviously, that's the compression issue we're dealing with right now and it's also those goods that are similar in the same brand that came in a different time.

The statement still may be in the system when the new goods come in.

So we're looking at that compression in the same brand and across brands and how the consumer is going to see it.

So that's all part of the calculation that our teams are working through right now with our brand partners.

All right.

Thank you, everyone.

Thanks, everybody.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.