梅西百貨 (M) 2019 Q4 法說會逐字稿

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

Fourth Quarter 2019 Earnings Conference Call.

Today's hour-long conference is being recorded.

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

Please go ahead, sir.

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

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 host 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.

The presentation summarizes the information in our prepared remarks as well as some additional facts and figures regarding our operating performance and guidance.

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 results to differ materially from the expectations and assumptions mentioned today.

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

In discussing the results of our operations, we will be providing certain non-GAAP financial measures.

You can find additional information regarding these non-GAAP financial measures as well as others used in our earnings release and our presentation located 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 on our website for 1 year.

Now I'd like to turn the call over to Jeff.

Thank you, Mike.

Good morning, everyone, and thanks for joining us.

As you saw in our press release, our fourth quarter comparable sales were down 0.5% on an owned plus licensed basis, and we delivered adjusted earnings per share of $2.12.

For the year, comparable sales were down 0.7% on an owned plus licensed basis, and we delivered adjusted earnings per share of $2.91.

Looking at the fourth quarter, we saw a strong trend improvement in sales from the third quarter, and we were able to deliver nearly flat comparable sales within our expected margin range.

And we closed the quarter in a clean inventory position.

We had a solid holiday season, led by our Destination Businesses, Growth Stores and Backstage.

Our digital performance also accelerated in the quarter.

Importantly, our customers responded well to our gifting assortment and marketing strategies, especially in the 10 days before Christmas, when we saw a significant uptick in sales.

Our teams executed well this holiday season in our stores, distribution centers and customer contact centers.

I'm proud of each colleague's commitment to strong execution during this important time of year.

As I said at Investor Day, taken as a whole, 2019 did not play out as we intended.

However, there are areas of the business that are working, and we will continue to focus our resources there.

The 5 2019 strategic initiatives all performed well in the fourth quarter.

Let me give you some context on how each initiative contributed to our 2019 results.

Growth 150.

In 2019, we expanded the Growth treatment to an additional 100 stores.

Comparable store sales at the original 50 Growth stores outperformed the Macy's fleet by approximately 3.5% in 2019 and Growth 150 by approximately 3% in the fourth quarter once the additional 100 stores were completed.

Backstage.

In 2019, we expanded Backstage, Macy's off-price offering, to another 50 locations within Macy's stores.

Backstage locations open for more than 12 months continued to achieve mid-single-digit comparable sales growth and have improved both gross margin and inventory turn.

Vendor Direct.

In 2019, we grew the Vendor Direct program and added more than 1 million SKUs and 1,000 new vendors.

This drove a nearly 60% increase in Vendor Direct sales, which now comprise approximately 13% of digital sales for the Macy's brand.

Mobile.

In 2019, we improved the omnichannel experience for customers through the enhancement of app features such as My Wallet, My Store and My Stylist.

We exceeded our expectations and saw a more than 55% increase in sales.

The Macy's mobile app now contributes approximately 20% of the Macy's brand digital sales.

And lastly, Destination Businesses: We invested in 6 areas of the business that account for nearly 40% of total Macy's sales: Dresses, fine jewelry, big ticket, men's tailored, women's shoes and beauty.

These investments were aimed at driving growth through great products, top-performing colleagues, improved environments and enhanced marketing.

All 6 areas continued to outperform the balance of the business on market share, return on investment and profitability.

And we capture approximately 9% of the market in these categories.

In the fourth quarter, Destination Businesses grew 4.3% and for the full year grew 2.9%.

Each of these strategic initiatives plays an important role in our go-forward growth plans and have been incorporated into the Polaris strategy.

I'm now going to turn it over to Paula for a more detailed review of the fourth quarter and annual performance as well as our outlook for 2020.

Thank you, Jeff.

Good morning, everyone.

As we previewed at our Investor Day on February 5, we delivered net sales in the fourth quarter of $8.3 billion, which brought our full year sales to $24.6 billion.

And as Jeff said, owned plus licensed comps were down 0.5% in the quarter and down 0.7% for the year, which surpassed our latest guidance.

As we look at our category performance across the broader business, we delivered a strong performance during the quarter across our Destination Businesses - and in fine jewelry, dresses and fragrances we saw a particular outperformance versus both our expectations and last year.

Men's tailored, mattresses and women's shoes also turned in good results.

Our holiday gifting strategy was strong, with our Gifts Under strategy resonating well with our customers.

In particular, our beauty gifting strategy performed very well.

For the quarter, the weaker businesses included fashion watches and housewares, and in the future, these will be planned down consistent with the merchandise category work we shared on Investor Day.

Bloomingdale's and Bluemercury each performed within expectations in the fourth quarter.

With regard to our quarterly company sales metrics, overall transactions fell 0.5% versus last year.

Items per transaction were down 1% and in line with trend.

And we saw a positive increase in average unit retail during the quarter, which rose 1.1% on the strength of several of our high-AUR Destination Businesses.

The increase in AUR occurred even while Backstage, which trades lower AUR to higher units and transactions, grew comps mid-single digits.

Turning to credit revenue, we generated $239 million in the quarter, nearly flat to a year ago.

Credit card penetration was 46.4% in the quarter, 60 basis points below last year.

On the year, credit revenue was $771 million, up slightly to a year ago.

Credit card penetration was 46.9% for the year, flat to a year ago.

Despite our initial expectations for credit to be down year-over-year, we posted a slight improvement.

This was primarily driven by strong co-brand sales growth from transactions on the card outside of the Macy's family of brands.

Offsetting these were the decline in our own top line sales and an uptick in delinquency and bad debt trends to more normal levels.

Gross margin in the quarter was 36.8%, down 70 basis points versus last year.

We ended the year with a gross margin rate of 38.2%, down 90 basis points from a year ago.

Of this decline, about 50 basis points were due to delivery expense.

And as we stated in our Investor Day, while we continue to foresee pressure on margin rate from the growth of lower-margin businesses, in 2020, we will be working to offset this mix impact with $100 million of Polaris cost savings that will help stabilize our margin rates.

As a reminder, these gross margin improvements derive from initiatives within supply chain, merchandising mix and pricing, marketing and private brand sourcing.

Comparable inventory in 2019 was down 1.4% to last year, underscoring our commitment to a more productive use of inventory.

Within SG&A, we recorded $2.5 billion of expense in the quarter, $29 million less than year-ago, but up 10 basis points on a rate basis due to sales deleverage.

The SG&A dollar reduction reflects lower variable expenses due to lower sales as well as some benefits from various miscellaneous items which we do not expect to carry forward into 2020.

For the total year, SG&A expense was $9 billion, $41 million below last year but 40 basis points higher on a rate basis.

As we discussed at our Investor Day, we are committing to resetting the cost base and a more stable SG&A rate as we move forward while still investing in our growth initiatives.

In the fourth quarter, we realized gains on the sale of assets of $95 million versus $278 million last year.

For the full year, we realized gains of $162 million, down from $389 million last year.

Keep in mind that our fourth quarter and full year 2018 asset sale gains included the $178 million gain on the sale of the I. Magnin building at Union Square.

Accordingly, adjusted net income in the quarter was $661 million versus $850 million last year, while on an annual basis adjusted net income was $906 million versus $1.3 billion last year.

The decrease in asset sale gains represents about 70% and more than 40% of the decline in adjusted net income in the quarter and the year, respectively.

Nonetheless, we are not pleased with the net income decline.

As we communicated at Investor Day, while 2020 will be a year of transition for us, our Polaris strategy will help to establish a base from which we can grow profitably.

While there is work ahead to improve our overall profitability, we are committed to stabilization and growth as targeted within our 3-year plan.

For 2020, we expect to achieve gross savings of approximately $600 million from Polaris, some of which will flow to the bottom line in order to stabilize operating margin.

Adjusted diluted EPS was $2.12 in the quarter compared to $2.73 last year, of which asset sale gains represented about $0.23 and $0.65, respectively.

And for the year, adjusted diluted EPS was $2.91 versus last year's $4.18, of which asset sale gains represented approximately $0.38 and $0.92, respectively.

Year-to-date, cash flow from operating activities was $1.6 billion compared to $1.7 billion last year.

The variance was driven primarily by lower earnings and a decrease in non-merchandise accounts payables, which were partially offset by lower tax payments and a net improvement in merchandise inventory and payables.

Capital expenditures were $1.16 billion compared to $932 million last year, above our full year guidance of approximately $1 billion.

This was due mainly to the timing of certain projects, however, we continue to expect to spend approximately $1 billion in 2020.

Cash used by financing activities was $1.1 billion this year versus $1.5 billion last year.

We repaid $597 million of debt in 2019 compared to the repayment of $1.15 billion in 2018, which drove the decline.

In both years, the debt repayment was predominantly voluntary.

During 2019, we executed very consistently against our capital allocation strategy through continued investment in the business, continued debt reductions and the continued payment of a dividend.

As we highlighted at our Investor Day, we remain committed to that strategy.

We will continue to be disciplined with our financial policy in order to maximize value creation while also maintaining a balance sheet that is both flexible and durable.

We are focused on executing our Polaris strategy, which will stabilize our profitability in the near term and position the business for growth in the long term.

Our company has a strong, consistent track record of prudent financial policy and of effectively managing our balance sheet, including paying down approximately $3.5 billion of debt over the past 4 years.

And as we said on Investor Day, we plan to continue to use excess free cash flow to further reduce our debt in 2020.

As we have said, a fundamental cornerstone of our capital allocation strategy is a commitment to maintaining balance sheet strength and as such, we continue to target an adjusted debt-to-EBITDA multiple of 2.5 to 2.8x that we believe is commensurate with an investment-grade credit profile.

We are confirming our guidance for 2020 presented on February 5 at our Investor Day.

In addition, I do want to provide more color on a few items.

You will note that we expect credit revenue to decline year-over-year.

This will result from the combination of our projected decline in top line sales and our expectations that the slight uptick in delinquency and bad debt continue in line with market trends.

Partially offsetting these are our projections for continued growth in co-brand sales.

With respect to the possible impact of the coronavirus, we are strictly monitoring the situation to assess implications to our colleagues, tourism sales and supply chain.

While still too early to estimate, we anticipate that there could be a small impact on first quarter sales from international tourism.

With respect to the supply chain, we are working with our vendor partners to minimize any possible disruption.

As we've said before, less than 50% of our private brand goods come out of China.

Our vendor partners source a sizable amount from there, too.

As with tourism, it's too early to size any possible impact, but we'll keep you aware of any changes that could materially impact our business.

At this time, we have not factored in any potential negative impact from the coronavirus into our 2020 guidance.

With regard to the quarterly cadence of our 2020 results, we expect growth to be most challenged in the first quarter from a top and bottom line perspective, due primarily to the anticipated disruption from our corporate restructuring and campus consolidations.

Additionally, Polaris savings within both gross margin and SG&A are not expected to immediately impact the first quarter as those benefits will develop more fully in the second quarter and build from there.

Keep in mind that we are cycling off a relatively strong first quarter last year and that our full year 2020 sales guidance is negative, with our best sales comp coming in the back half of the year.

For the first quarter, we expect our owned plus licensed comp sales to be outside the range of our full year guidance.

Our complete guidance is in the slide presentation we posted on our website earlier this morning.

But in closing:

We enter 2020 with confidence in our future.

We are very clear-eyed about the challenges before us.

And we believe we have the firepower to take them head on.

Digital, the Growth treatment to our magnet locations, Loyalty 3.0 and Backstage all serve as growth conduits for our future.

Our savings and profit stabilization programs are in process.

We are focused on execution and on what will be a long and bright future for Macy's.

And with that, I'll turn it back over to Jeff.

Thank you, Paula.

So let me share some additional perspective on the business.

As I mentioned on Investor Day, Bloomingdale's and Bluemercury are important to Macy's, Inc.

And today, I'm going to provide some detail on Bloomingdale's, and I will share thoughts on Bluemercury on a future call.

Bloomingdale's plays an important role in the Macy's, Inc.

portfolio as it gives us a meaningful play in the growing luxury market.

As a standalone business, Bloomingdale's generates revenue of more than $3 billion and contributes to Macy's, Inc.

profitability.

Bloomingdale's has 34 full-line stores, with the 35th store opening in Silicon Valley next month, as well as 2 international stores we operate under licensed agreements in Dubai and Kuwait.

The Bloomingdale's customer is affluent and highly loyal to the brand.

And importantly, the 19 freestanding Bloomingdale's outlet stores have shown sales growth for the past 3 years and have provided valuable learnings on freestanding off-price.

Bloomingdale's also benefits the Macy's brand as Bloomingdale's tends to be further ahead on the fashion curve and gives us an early line of sight on trends.

Bloomingdale's also gives Macy's, Inc.

a multichannel platform to test and learn before scaling programs enterprise-wide.

For instance, we piloted My List, a rental service, at Bloomingdale's in 2019.

We currently have 80 vendors and over 1,500 styles live on My List, and we are launching another 20 vendors in the first quarter of 2020.

At our Investor Day on February 5, we shared our Polaris strategy and 3-year plan.

Let me take you through this at a very high level.

We are focusing our resources on the healthy parts of our business, and investing in the opportunity to grow where retail is growing today and in the future.

This includes growing customer segments, new profitable categories and off-mall formats.

We are accelerating what is working in the business: Loyalty, Backstage, Destination Businesses, our Growth store treatment and mobile.

Importantly, we are addressing what is not working in the business and taking actions to stabilize profitability in the face of continued headwinds.

Over the next 3 years, our financial targets include rightsizing costs and expanding gross margin with accelerated savings totaling $1.5 billion by the end of 2022, $600 million of which is gross margin improvement and $900 million of which is SG&A savings.

I am confident that the Polaris strategy will change the trajectory of Macy's, Inc.

performance.

And the team is fully focused on executing our plans.

I want to quickly remind you of the 5 points of the Polaris strategy before we open the line to take your questions.

Number one: Strengthen customer relationships.

We will build customer lifetime value, expand our loyalty program and accelerate personalization and monetization.

Earlier this month, we expanded our Star Rewards loyalty program that we introduced in 2017.

Loyalty 3.0 now allows every Star Rewards member to earn on every purchase regardless of how they pay.

Customers will be auto-enrolled based on their annual spend.

And all customers now have the opportunity to enjoy special benefits, including Star Money bonus days and the perks and offers such as extra savings and access to exclusive events.

Loyalty 3.0 is off to a great start, and we've exceeded our Bronze enrollment goals so far.

Two: Curate quality fashion.

Our customers come to Macy's for fashion, value and high-quality products.

So we will curate an assortment of the latest trends and exclusive products at the best values from the best brands.

We will drive disciplined merchandise category rolls to be the best destination for the best brands while balancing sales and margin.

A key component of this is our commitment to build 4 $1 billion private brands.

Three: Accelerate digital growth.

We know that our omnichannel customer is our most engaged and valuable customer.

Our digital business generates $6 billion in revenue across all 3 brands, and contributes to our profitability, and we see digital as a key engine of growth moving forward.

We will improve the digital experience by enhancing features across both dot-com and the app.

We will grow our customer franchise with a strong focus on personalization and continued innovation to deliver the best digital fashion experience to our customers.

And we will continue to strengthen the profitability of our dot-com business by growing store pickup and ad monetization.

Four: Optimize our store portfolio.

We will continue the Growth treatment for our stores in the best malls, including another 100 stores in 2020.

We will focus on improving productivity in our neighborhood stores.

We will find ways to profitably expand off-mall, including freestanding Backstage stores.

And we will test and prove a market ecosystem which we are piloting in 3 markets in 2020.

This ecosystem approach will test, within a given market, the right mix of format and location of our stores to drive maximum sales growth across both our stores and digital business.

And five: Reset our cost base.

We're rightsizing our organization, streamlining our store fleet and addressing the inefficiencies in our fixed cost base.

And we're focused on improving the productivity of our working capital.

We took a big step towards this earlier this month with the restructuring that we announced.

And we will pursue the remainder of our cost-reduction goals with discipline.

2020 will be a year of transition as we make significant structural changes to the business.

We have spent the past 3 weeks aligning our colleagues around the new structure and strategy, and the teams are beginning to settle in.

We all have an eye towards execution.

I'm confident that our colleagues have a clear understanding of the Polaris strategy and share my commitment to delivering our plans in 2020 and beyond.

And with that, we will open up the line to your questions.

(Operator Instructions) We'll now take our first question from Omar Saad of Evercore ISI.

Jeff, you mentioned the private brand strategy.

You came up at the Investor Day as well, big targets there.

It's obviously been part of the Macy's ecosystem for a long time.

Maybe you could help us understand, what's different?

What are the company's capabilities now?

Just thinking the landscape that has changed, that I think would allow you to really build those into big, sustainable, consistent brands versus prior history.

Thanks, Omar.

So the first thing I'd say is that we're much further along in global sourcing than we were even a year ago.

And we have a huge opportunity, basically, to transition from a brand-based global sourcing to category-based.

So our sourcing structure is really going into that.

Our vendor decisions now are -- used to be kind of relationship-based, they're now going to a more data-driven and strategic base.

Our sourcing organization is more centralized, whereas it used to be done more within each brand.

Big, big change on what we're doing with materials and speed to market.

So we used to have kind of more informal and ad-hoc decisions on materials.

As an example, we used to have 12,000 different fabrics with a lower-than-acceptable adoption rate.

We're now much more focused on getting fabrics that cut across different genders and across different brands.

Our costing basis, we're going much more aggressive, and we shared some of this in the investor meeting, about what we're doing with garment and the SKU level costing and really getting more into that.

We're seeing big changes in the overall costing by garment in our tests.

We're now expanding that out into more of our brands.

And then our planning is much more involved in how we're doing this across the business.

So we talked about the 4 $1 billion brands.

We looked at -- we have 38 different categories.

There are some businesses that some of these brands aren't in.

So as an example of that would be like the INC brand, which is our biggest, and I think our most potent private brand.

So as an example of that was, where 3 years ago, we weren't in the shoe business with INC.

That's now a $100-million-plus business.

It's now our #2 vendor in all of women's shoes.

We talked in Investor Day about what we were doing with fashion jewelry with all of the 4 $1 billion brands, and we've gone from 0 to 60 in that very quickly.

So we're looking at all of our opportunities, what customers we serve, what lifestyles we need to be in.

We were clear on investor meeting about where we saw underserved customers, particularly the customers that are under 40, and the new brands that we'll be announcing later that will serve them.

So I think our capabilities have come up measurably in how we're addressing the private brand opportunity in the future, and will get us to our goal of 25% of total business by the year 2025.

Got you.

That's really helpful.

And then one quick follow-up on the coronavirus.

Are you seeing any impact on the international tourism at all from what's been happening abroad around that?

Or is it too early to tell?

It's too early to tell.

What I'd say is that -- let me just kind of give a broader -- because we expected this question with respect to the coronavirus.

It's certainly an evolving topic, one that we're watching really closely.

So to kind of put into the 3 buckets, starting first with colleagues.

We have a Hong Kong office.

That has reopened after the extended lunar new year.

We -- were put all the processes in place, really the protocol that we developed under the SARS epidemic, to -- with the coronavirus to protect our workers, make sure we've got flexible schedules.

So we are in good stead for now with our colleagues.

With respect, Omar, to your question about customers.

So Macy's and Bloomingdale's, we have about 70 stores that have a strong Asian customer base.

So that's either local, like a store like Flushing; or tourist-based, which would be a store like Union Square.

And we've seen some slowdown in sales in these stores this month.

Nothing to be concerned about yet.

But we believe that this is unfolding, so we will see how that goes.

And then the third bucket is really the product piece, which is what's going on with our supply chain.

We expect a slowdown.

We have seen a slowdown of product that's flowing out of China, nothing concerning yet.

And we're watching this one very, very carefully.

This is an example of where the tariff situation, actually over the last 18 months, really gave us a very clear line of sight into our product flow from China for both our national and our private brands.

So for our private brands, we're working really closely with our suppliers there.

Our team that is in Hong Kong is working with all of our suppliers.

We've got -- those teams that have come back after lunar new year will know exactly what the production of factories are, goods that have been finished, goods that are in process, fabric that's been allocated to current and future deliveries.

So we're looking at all of that.

We're managing that receipt flow.

And for our national brands, we're working with our partners very closely on the impact on product availability.

So that's all factored right now, but we're watching this.

It's an evolving situation.

And as Paula mentioned in her remarks, any effect of this in our sales and earnings has not been factored in our 2020 guidance.

And just to give you some numbers on the international tourism.

What we saw in the fourth quarter was about a 10 basis point impact on our comp.

International tourism so far was down 7.5%, and we attribute that to the strength of the dollar.

We'll now take our next question from Oliver Chen of Cowen & Company.

Our question is about digital margins versus in-store and how you're thinking about the opportunity there and what will happen with shipping over time.

A follow-up we had is related to the need for speed and speed across the organization.

If you could help us understand some of the major needle-movers with speed as well as how you're embracing the younger customer, that would be helpful for thinking about long-term growth.

So I'll start, Oliver.

So with respect to digital margins, the digital business contributes to our profitability.

But with respect to the shipping headwind, we do expect that to continue in around the 50 basis points type of range.

And so one way that we're mitigating that is sort of encouraging more buy online, pick up in store transactions, which is our most profitable online transactions, where customers order online, pick up in store and then by about 25% more.

And then the other way I would think about that long term is that we're using our Polaris savings, those that impact our gross margin, to stabilize gross margin.

And remember that those include initiatives like centralized fulfillment, location-level pricing and markdown optimization.

So I would expect us to stabilize margins long term.

And Oliver, let me take your second question about just kind of speed.

And one of the things that, even though we said goodbye to a lot of colleagues and with the campus consolidation that we just went through, we do believe that once we are fully stable with the new teams all together, that we're going to move at a significantly faster pace.

So when I look at the culture and I look at all digital now being consolidated to New York and all technology being consolidated to Atlanta, I think the metabolism of the company is going to pick up dramatically on that.

We're getting all of our new colleagues set up.

We're ahead of our hiring plans.

We actually had a higher percentage of colleagues from San Francisco that have elected to move into either New York or Atlanta.

And we're very happy with the caliber of talent that we have available in both New York and Atlanta.

So that piece is moving at or ahead of schedule.

So I'm pretty pleased with that.

When you look at the -- what we're doing to kind of attract the under 40 customer, just remember that in our -- we have many businesses in which we already get a very good share of the under 40 customer.

So I look at fine jewelry, I look at handbags, I look at men's clothing.

Those businesses are all getting good share there, and we're growing that customer base.

So Oliver, our opportunity, as we've said on previous calls, is really in the women's ready-to-wear area.

And so that's what we're really focused on, what we've talked about in terms of what we're doing with our private brands, what we're doing with our market brands.

We have a clear line of sight on that.

As we talked about previously, we've got a new environment that we tested in 6 stores in the third and fourth quarters.

We're now rolling that out to another, I believe, it's 60 doors in 2020, that brings all these products together for a consumer that really doesn't want to wade through 60,000 square feet and wants to go to one area where her needs are being addressed.

We're also doing that online.

So I believe that we've got a path ahead on that.

But just to remind everybody that we have parts of our business that are quite strong with this under 40 customer: The ones I mentioned plus the entire men's area.

So women's ready-to-wear is the one that we're really very focused on in 2020.

We'll now take our next question from Kimberly Greenberger of Morgan Stanley.

Great.

Inventory coming out of Q4, I think you said, Paula, is down 1.4%.

Given the sales guidance here for Q1, the inventory in absolute looks pretty clean but still running a little bit above your sales plan.

So I'm wondering if you expect inventory to get even cleaner as we work our way through the year.

And do you think there is a more medium to long-term opportunity to manage inventory at a lower level?

Kimberly, so I'll just start by saying that as a fashion retailer, we want to make sure that we're always giving our customers fresh fashion.

And so we need to maintain appropriate receipt liquidity.

And so we've been very focused on our stock-to-sales parity, and so we've guided next year to be down significantly.

And as you heard on Investor Day, we're targeting to reduce inventory by $200 million at cost over the next 3 years, and we'll do that through Polaris.

And for this year as well -- at least -- as well as 2020, we expect our comp inventory to be -- this year, we're down 1.4%, so consistent with our sales performance.

And next year, we're expecting it to be down even more than our annual comp sales guidance.

And so we're looking at a number of initiatives, as you've heard, including Hold & Flow, location-level pricing, both of which will impact inventories and just bringing more rigor to how we approach our buys.

So we're very much focused on stock-to-sales parity as it relates to inventory.

Okay.

Great.

So it sounds like we'll see even more progress in 2021.

That's terrific.

And then I just wanted to follow up on the delivery expense number.

I think it was a 50 basis point headwind in Q4.

Paula, it sounded like you said you expect that expense to continue.

Can you just remind us what the full year 2019 headwind was?

And I know you've got some Polaris cost savings that should offset delivery expense pressure here in 2020.

I would imagine this expense pressure continues into 2021 and beyond.

And so I'm wondering if you've got a pipeline of savings in 2021 and 2022 to offset this ongoing headwind.

Yes.

Sure, Kimberly.

So in 2019, in the spring, we saw about 70 basis points of pressure related to delivery.

In the fall, it was about 50 basis points.

So annual would be about 50 basis points of gross margin pressure.

And so again, we expect to mitigate the delivery expense headwinds through our Polaris savings.

We have $600 million of savings targeted over the next 3 years with very specific initiatives attached to it, including, as we've discussed at Investor Day, centralized fulfillment, pricing, private label sourcing, location-level pricing, all the things we've been talking about.

And we have a very robust governance model with very specific initiatives tied to each of these programs.

And so we would expect to be able to stabilize this particular headwind as well as others in our gross margin.

We'll now take our next question from Matthew Boss of JPMorgan.

Great.

Jeff, maybe to break down comps.

So your Destination Businesses are up 4% to 5% at 40% of sales in the fourth quarter.

So what's driving the continued negative comps?

And as we think about the cadence for 2020, what are you seeing quarter-to-date that's driving that first quarter outlook for comps down worse than the 2.5%?

And just your level of confidence in stabilizing the trend as the year progresses.

Yes.

So Matt, I would say that when you look at the -- there's 40% of the business that, in 2019, was up 2.9%, which was the Destination Businesses.

So when you look at the balance of the businesses, depending on what category you're in, they -- obviously, many of them were negative.

So we talked about a couple.

We talked about housewares, we talked about fashion watches, were 2 categories, as an example.

Overall, ready-to-wear outside of dresses was challenged to last year.

Pieces and parts of the balance of home store outside of housewares were negative.

So the composite of that, as you saw, was down 0.5% on a comp basis for the fourth quarter and down 0.7% for the full year.

So as we look at going into 2020, we just -- there is a level of disruption that we've gone in, with about 11% of the executive population that we basically are not going forward with in 2020.

So that's a level of disruption that we're anticipating in the first quarter.

I would tell you, though, that the month of February is progressing as we expected.

So it is not worse than we expected.

It's right where we expected it would be.

And when you look at going forward into the second, through the back half of the year, we do expect that our business will improve.

So when we guided the down 1.5% to down 2.5%, we did expect that the first quarter would be the one that was most affected by it, getting better as we got into the second quarter and that the second half will be better than the first half.

So that will be both in savings as well as where we expect sales.

The other comment I'd make about one of the big initiatives in sales, that it gets -- starts to get traction in the first quarter and starts to pay big -- deeper dividends in the second through the back half, is the Loyalty program.

And so what we launched on that, which was earlier this month, that starts -- that's something that builds.

So it's a point system, so as a customer builds points for all tender types.

And it's tiered depending on whether or not they're a proprietary member and their spend level.

As those points start to build, customers then start to redeem and then they buy other things as they do.

So that's a period of building that, which is really going to be for the first, going into the second quarter.

You start to see benefits of that in the second quarter going into the back half of the year.

Great.

And just a follow-up on gross margin, Paula.

What's the best way to break down the flat growth (sic) [gross] margin forecast for 2020?

Meaning, what's the best way to think about the underlying merchandise margins outside of the 50 basis point digital headwind?

And just any color on the magnitude of 1Q's gross margin decline relative to the year at flat, I think, would be helpful.

The best way to think about it is, again, as you've mentioned, we're guiding gross margin to be flat on the year.

And so the biggest headwind there would be the digital delivery expenses of 50 basis points.

And so all of the improvements that we've talked about with respect to Polaris, again, whether they're coming from the supply chain or the merchandising strategies, all of that will go right into merchandise margin.

And so we expect merchandise margin to improve and to be able to fully mitigate the headwinds.

So I would think about it in those terms.

And in terms of quarterly cadence, I would just think about the first quarter being the most impacted by sales disruption, both from a top line perspective and from a bottom line perspective, and then to see improvement in the quarters sequentially thereafter.

Because we expect our $600 million of productivity from both gross margin and SG&A to start to materialize, I would say, in the beginning of the second quarter and then to build from there.

Our next question from Chuck Grom of Gordon Haskett Research Advisors.

[Weeks ago,] you guys outlined a lot of initiatives.

And Jeff, you went through them today.

I was wondering if you could maybe force-rank for us where you think the biggest opportunities are, mainly as you move into 2021 as you expect comps to turn back into the positive territory.

So Chuck, just to repeat what I said at Investor Day, I would put the them -- I'd put top 4 in the following rank.

The first one would be digital sales in terms of contributing to comp.

The second would be the new Loyalty program, Loyalty 3.0.

The third would be Backstage and what we're doing with that, those comps that we're getting on all locations that have been opened more than a year still comping mid-single digits, and this is like 3 years running on that.

And the last would be, to the previous -- to Matt's question about Destination Businesses.

So those are the 4 that are going to contribute to growth.

And when you look at it, digital, obviously, for us, is a big strength, $6 billion business, and is one that we fight above our weight in the digital business across all 3 of our brands.

So we have about 6 million customers coming into our digital platforms every day.

So lots of opportunity to take advantage of that traffic, where we have very strong natural traffic.

We obviously pay for some traffic, but that's a big strength of ours.

And we were candid about some of the mishaps that we had in the third quarter with respect to digital.

We're very focused on, and we made improvements on that, and saw that in our trends in the fourth quarter.

So we have a robust strategy in digital for all of 2020.

When I look at Loyalty, we mentioned we feel very good about that.

The headline there on Loyalty is how many tender-neutral customers, which we call the Bronze tier, have joined us, or were way ahead of our expectations since we launched the program about 2 weeks ago.

And these are customers we now are able to track.

And so we wanted to expand our known customer base significantly in the Bronze program, with what we just did in Loyalty 3.0, was giving effect to us.

Backstage, as we've mentioned, we're going to add 50 more stores, in store within stores, in 2020, as well as we're going to be expanding to off-mall in 7 freestanding stores in those 3 markets that we mentioned at Investor Day.

And then last but not least, when I look at Destination Businesses, this is going to be -- again, when you look at our 38 FOBs, to have 6 of them comprising 6% of the -- or 40% of the company's total business, these are businesses that customers think about Macy's either first, second or third.

And we're growing these businesses.

They fight above their weight in ROIC and in profit.

So we see continued growth in all 6 of them.

So we're very focused on those.

That's great.

And obviously, Backstage is an important component of all this.

So I was wondering if you guys could just remind us what the average basket looks like for someone that solely shops at a Backstage versus Macy's?

And then, I guess, what a combined basket looks like across both, both in terms of dollar size and also merchandise margins.

Yes.

So what's interesting about it is the difference between freestanding and store-within-store for us.

So we have had freestanding stores that we've been operating since the beginning of 2000 -- really, the end of 2015, as well as what Paula mentioned in her comments about -- or I mentioned, in terms of the outlets at Bloomingdale's.

We have 19 of those.

So they are -- they perform differently.

The margins there are actually at the overall company's margins, a couple of stores actually slightly above.

When you look at store within store, margins are fairly comparable.

And when you look at the customer behavior of Backstage purchases, the customer gets more loyal and more profitable when they're buying both in Backstage as well as the regular brand or the full-price brand.

We've seen that both in-store as well as purchases they might do online.

So we've got lots of personalization strategies to seed behavior in between the channels.

And when we do that, we get a much stickier, loyal customer that is more profitable for us.

So that's why we've been really talking about this ecosystem and testing it out in 3 markets to see what the interplay between Backstage, mall-based, full-price as well as digital, what that does for our overall customer journey and the profitability or the customer lifetime value of our customers.

Our omnichannel customers are our most profitable customers.

And the more we increase touch points, digital, Backstage, full price, the better those customers are.

So as we have talked about on many calls, we have seen limited cannibalization going on between full price and Backstage.

We're just adding to the customer's basket when we're able to see that behavior.

We'll now take our next question from Alex Walvis of Goldman Sachs.

I had a question on the AUR growth, positive here in the quarter.

Can you dig into that a little bit more?

I believe you mentioned growth in those higher-ticket destination categories, but I wonder if there's anything else going on there.

And if you can comment on AUR growth in like-for-like categories.

Sure, Alex.

So we look at the sales metrics together, AUR, UPT and transactions.

But from an AUR perspective, if you look at the 2-year trend, we saw slightly favorable performance year-over-year, but in line with the third quarter.

But when we look sequentially, higher AURs was the biggest driver of our trend improvement in our overall sales comp when we look at the 3 metrics.

And Q4 versus year-ago and sequentially, we sold more products, as you mentioned, in our AUR -- in our Destination Businesses.

And in particular, fine jewelry was up quite significantly, about 11%; dresses about 8%.

And that performance was balanced by fewer transactions in total, though our units per transaction showed a bit of a trend improvement.

The other mix component to be mindful of is that our growing off-price business averages down AUR, as Jeff just talked about, but it boosts transactions and units per transaction to drive the comp sales improvement.

And so the end result was that, sequentially, we improved our owned plus licensed sales comps in Q4 versus Q3.

Understood.

And then just to follow up on that.

You mentioned the off-price boosts units per transaction.

I believe that also the effect of the digital business, but perhaps you could also comment on that.

And then I suppose the question I'm getting at here is units per transaction has now been down over the last couple of quarters.

What's driving that?

And should we expect that to recover as digital and off-price remain strong drivers of the business?

So units per transaction is relatively consistent, the trend is relatively consistent.

Part of that would be the effect of the digital business.

And I would say that we would expect that trend to stay consistent, and then we would expect to see offsets in either the transactions or the AUR so that those 3 things interplay as we move forward into 2020.

We don't necessarily forecast those 3 metrics, but we would expect the 3 of them to work together to get to our guidance.

We'll now take our next question from Michael Binetti of Crédit Suisse.

You commented that February was going, Jeff, exactly the way you planned it, but I think that the language was a lot more specific here today.

You mentioned very clearly you expect a meaningful impact from disruption in the stores to be somewhat focused in first quarter.

And then you did mention corona, but you said that, that wasn't affecting your numbers yet.

I know you said it was too early to put any size to corona.

I'm wondering if you're -- I think you might have answered Omar earlier that you might -- you're not really seeing anything in the stores yet today.

It was just a common-sense comment that you expect that to show up in some of the tourist stores.

I'm just -- I'm kind of curious about -- it sounds a little -- it sounds like you've taken a little bit more of a cautious approach to 1Q, but your commentary earlier said that it was about in line with what you were thinking about 3 weeks ago.

Did I hear those 2 things correctly?

Yes, Michael, I think what -- because of the disruption, we -- because of the disruption that we had planned as -- with all the changes in Polaris, we planned the first quarter was going to be the worst of our 4 quarters.

So independent of the coronavirus, that's what we expected.

And when you also look at the performance of the first quarter in 2019, it was our strongest-performing quarter.

So we're lapping that, plus we'll be just taking a prudent approach based on all the structural changes that we went through as well as the benefits come later as a result of the Polaris changes in gross margin, in SG&A as well as the benefits of the Loyalty program that all come in the second through the back half of the year.

So we took a prudent approach to how we planned the quarter versus the other 3 quarters of the year.

That all went into our guidance that we delivered at the Investor Day and we reiterated today.

As it relates to coronavirus and to my previous comments, we haven't seen a huge impact on that as of yet.

Obviously, the biggest question is going to be about supply chain and what are the effects of supply chain with respect to either a shortage of labor, inability to basically react to the materials in the factories that we have or that we've negotiated and then the transit of that when those logjams start to break up and what the ports look like and the costs of all that.

So those are unknowns right now.

It would be too early for us to comment on those.

But those -- that's where we're looking carefully in the future with respect to the coronavirus.

But just to reiterate, we have not seen a big impact as of now.

Okay.

Good.

And then, Paula, I just wanted to ask a follow-up on the credit rating update from last week.

It sounds like, from your comments, you disagree with the change.

How much do you think that could impact refinance rates?

And does that change the interest expense outlook that you had in the 2020 EPS of $2.25 to $2.75?

Just looking at the longer term there.

And then I think for -- I think also within your guidance for $1 billion of free cash flow by 2022, that, that assumes some net working capital improvement, maybe $200 million.

Is there any immediate impact that we should think about from receivables or payables and all that might in fact -- that might impact that net working capital?

And changes to the rates that factors charge on receivables?

Anything like that, that would -- that we should think about as far as new news baking into the 2022 guidance you gave us.

So I'll just kind of go into the first of your questions, Michael.

I would say that, for free cash flow, we've given targets around that.

So I would reference those.

We expect $1 billion of free cash flow by 2022.

And we've also given specific working capital targets, $200 million by 2022 as well.

And so with respect to the S&P decision, clearly, we were disappointed in their decision to revise our credit rating.

But that said, it has no effect on the targets that we've given out, and it has no effect in our commitment to executing Polaris, which we know will stabilize our performance and set us up for long-term growth.

And the credit ratings are not something that we can control, but what we can control is our focus on executing Polaris and also our approach to strong financial fiscal policy in managing our balance sheet.

And just to remind, we've paid down $3.5 billion of debt over the past 4 years, most of which was voluntary.

And we'll continue to use excess free cash flow in 2020 to pay down debt, as we've discussed.

And we'll continue to target our leverage ratio of 2.5 to 2.8x EBITDA, which we believe is commensurate with investment grade.

So we're focusing on the things that we can control.

(Operator Instructions) We'll now take our next question from Bob Drbul of Guggenheim Securities.

Just a couple of questions for me.

First, on the supply chain, have you seen any delays from vendors missing delivery windows on product?

And are you willing to sort of open the delivery windows?

Given some uncertainty that exists out there with the supply chains, widen them a bit?

So Bob, obviously, very active conversation right now.

And as a fashion retailer, there is a shelf life of products.

So we're working very closely with our vendors as well as our private brands, and particularly, when we look at kind of the early second quarter receipts and making sure that, that is fashion-appropriate for the timing of when our customers expect it.

So we're looking at every one of those, every order, and making decisions about are we going to take all of it, will we take part of it, depending on what factors come up.

So if there's a delay in manufacturing or delay in delivery, we have options on all of those that we're working with our own suppliers as well as our national brands.

So there is a -- we're also looking at contingencies, that if we weren't able to get it here, where can we get it elsewhere?

And are there other options that we have for other businesses that would -- help for our businesses.

Got it.

Okay.

And then just a second question.

On the rental business and like the e-commerce side generally, what categories are you seeing the most response -- the best response on the My List piece?

And I guess, just on the threadUP relationship, is it bringing in sort of newer customers, younger customers?

Like any early learnings on -- I think you have like 40 stores, if my memory serves me, on that business.

Any comment would be helpful.

Yes, your memory is right.

40 doors on threadUP.

And obviously, that's been a big focus of ours on, particularly this under 40 new customer acquisition.

So we've been testing in these 40 doors, in different locations throughout the store.

They're -- we've put it next to Last Act.

We've put it in women's apparel.

We've put it adjacent to juniors.

And as we expected, the area that's adjacent to juniors is the ones that are doing the best.

It's definitely resonating with this millennial/Gen Z customer.

We have been able to track many new customers that are coming into our brand that are as a result of threadUP.

We have extended our pilot program for spring of 2020, and we're working with James and his whole team at threadUP about what we've learned, built the brand priority list is, brands that are aspirational or recognizable for the under 40 customer.

We're looking focused on the best classes.

We're looking at, like as an example, jackets happen to be a particularly strong classification within threadUP.

So all the learnings that we've got.

We've made adjustments in the 40 doors about its placement based on what we've learned.

And we've got a very active partner in threadUP helping us acquire the right goods for these customers in these stores.

So much to learn on that.

The other big test that we've got is really in subscription, which is My List, which we're doing through Castle at Bloomingdale's.

And we're learning a lot there.

And what's interesting here is that same aspiration, really, which was how do you get under 40 customers into our brand?

And so when you look at other subscription so far at Bloomingdale's, 50% of the subscribers are millennial and 30% are brand new to Bloomingdale's.

So that gives us a lot of encouragement about how it's working.

So as Paula mentioned, the vendor matrix is growing.

We are -- we've got 80 vendors so far, 1,500 styles that are live, another 20 vendors that are coming into the first quarter.

So I -- and we do these surveys at the end of each of the -- of our interactions with these new customers.

And 2 big things come up about why they like it.

And one is that they trust Bloomingdale's, and one is that they really are enjoying the quality of the service.

So those are things that we're amplifying.

And -- but we're going to continue to learn from both My List at Castle and threadUP or e-commerce at Macy's.

We'll now take our next question from Bernard Sosnick of Madison Global Partners.

I have a question on the presentation of ready-to-wear in the 6 stores that have been reset and the 60 that are scheduled for this year.

Is there more presentation by category rather than brand?

Could you give us a little color on where you're heading?

Yes.

So that's exactly it.

There is -- it's kind of a hybrid.

What we have found is that customers definitely shop by category, but they also want the option of doing it by brand.

So depending on what store it is, what we're doing is we've got some brands around the perimeter; and then in the center, about 50% of the space, it's all done on -- by category and trend within.

So you've got multi-brands that are being merchandised in the center area, and then you've got big brands like Guess or Nike that would be on the perimeter.

So that's what we found is the best way.

We tried it where you had everything done by category, that didn't work as well, so we did a hybrid of brand and category as a mix.

And depending on the store.

So if you go into like Cross County, which is here in the metro area, what you find there is there are certain brands that really resonate with that customer, different from 1 of the other 6 stores that we mentioned.

So like Guess is one of the biggest brands in ready-to-wear.

So making sure that, that was separate was very important to that customer.

Not as important in some of the other stores that we've experimented with, where Guess was part of the trend statement that was in the middle.

So we're looking at this very carefully.

And all of our merchants, basically, have to coordinate what they're doing with promotion and receipt flow in order to support this.

But the customers are voting strongly.

They like it this way.

That's how they shop online.

So how we have a physical environment that kind of matches their experience was important for us to get at.

We'll now take our next question from Jay Sole of UBS.

I just want to follow up on the potential for supply chain disruption.

Jeff, how do you think about -- some decision points.

At what point would you decide, if you had not seen production ramp back up in China, would you decide to cancel orders there?

Or any -- at what point would you decide to try to move to manufacturers in other countries?

Can you just give us maybe some framework of how you're thinking about those things and the timeline for that, it would be great.

Yes, Jay, there's -- I'm not going to add much to what we've talked about.

What -- this is obviously a very open, fluid conversation for us right now.

So we're watching it.

But they're -- I would just put it into kind of a couple of constructs.

The first one is, is the product in the point of manufacturing in these factories?

And so that's the first one.

So we're going to want to take that.

We're going to want to honor our agreements.

Is the fabric in the factories that is needed?

And what we might do on those particular cases is we might move off of the current content and move towards future content that we need.

So -- and that -- when I talked earlier about the whole notion about our improvement in sourcing, we have fabrics that cut between seasons.

So that gives us a lot of flexibility where we need to go.

To the first part of your question about when do we make decisions about when we're going to cut or what percent we would take or when we make the decision and move it on to another delivery?

Those are all very fluid conversations right now.

Just know that our whole new sourcing apparatus as well as every merchant is focused on this, with both private brands as well as our market brands.

And I believe we're going to make all the right decisions as a fashion retailer for our future.

Got it.

Okay.

Then maybe just switching gears for a second.

And you talked about Backstage and inventory turns are improving.

Can you just give us a big-picture sort of framework about how much inventory turns have improved?

How much more opportunity there is that for that metric?

And maybe what the drivers are to get you to where you want to be long term with inventory turns at Backstage.

Yes, Backstage, obviously, the fresher the inventory, the better off it performs.

So what we're looking at right now, we have a number of units in which the sell-through is double what we're getting in the full-price side of the business.

And so this idea that you're getting fashion that's arriving daily, where you've got limited quantities, that juices sell-through.

And this is nothing that this group doesn't know about in covering the off-price industry, but that's something that certainly plays out by developing an off-price business here at Bloomingdale's and Macy's.

So that's very important for us.

What we're finding is that the turns are faster, the dollars per square feet are better when you're in freestanding.

They're very strong in Macy's stores in stores because recognize that they're displacing content in an area of the store that was underperforming.

Now Backstage is overperforming, but we do expect those metrics to go up considerably as we start to go into off-mall formats, as we've seen in Bloomingdale's and as we've seen in the freestanding units that have been up and running since 2015 at Macy's.

In order to deal with this need for faster and fresher deliveries is the reason that we went into Columbus with the distribution center.

So again, we're building our competency.

We're getting better at off-price every day.

And our ambition now is to be off-mall as well as on-mall.

So we'll continue to build out the Macy's mall network by adding more units there.

I don't think that there is a store in the Macy's network that doesn't want Backstage, that isn't accretive to the overall sales of those stores.

It's us finding the right spaces in every one of our most productive stores to do that.

But now starting in these 3 markets to start expanding it off-mall, we do expect it to behave much like the stores that are already freestanding.

So we also know that -- we believe that the Backstage that was in a store versus one that is off-mall, that those opportunities amplify each other.

And just to remind everybody that every Backstage store will now have fulfillment capabilities of anything within the Macy's network.

So we think that the opportunity to make any return from any Macy's purchase or buy online, ship to a store, that, that capability is up and running.

We'll now take our next question from Dana Telsey of Telsey Advisory Group.

As you think about the Growth formula being added to the additional 100 stores in 2020, what is the sales lift you're anticipating from this next tranche of stores and how it differs from last year?

And then Jeff, the neighborhood stores, you mentioned some new plans.

How do you think about plans for the new neighborhood stores?

Yes.

So Dana, I think we're certainly anticipating that the growth rate that we're get -- we'll get in the next 100 of our Growth stores will be similar to what we got in the first 50, which we then expand to 150, which is basically about a 2-point improvement.

We do have this, I believe, down to as much of a science as we can have, where we basically are spending about $2.5 million to $2.7 million in each of these Growth stores.

About 50% of that spend goes to customer amenities and 50% goes to sales-getting initiatives.

The entire building lifts by 2 points.

What's very interesting about it is that all of the digital business done in the ZIP codes that, that store serves also go up 2 points.

So when you look at the omnichannel behavior, you're getting that amplifying effect, which is great.

So that has given us a nice return on investment for the -- of what we're doing in these Growth stores.

So we have ambition to take on the extra 100, which would bring us to 250 by the end of 2020.

And then we'll have about 150 left in the portfolio that we'll be investing in, in future years.

To your question about neighborhood stores, this is one we're not putting a lot of investment into.

Basically, we'll make sure that the facilities are clean, they're well operated.

But obviously, when we made the decision to close 125 additional stores, it was knowing that we needed to take care of these customers in the time that they remained open.

We need to figure out strategies to migrate them to online or to another store in the market.

We need to start to experiment with square footage that would be off-mall to see other places where this customer might enjoy Macy's products.

Those were all our objectives there.

Because we know that on-mall, we have to have a fleet that is brand-right and moving forward.

And the number that we used to have 5 years ago, just to remind everybody, that when you look at the number of stores, not boxes, but stores, we had about 707 -- or 670 total stores.

We're now down to about 4 -- just under 400, just at 400 when you take out the neighborhood stores for the closures we just announced.

So we've shed about 40% of our total stores over the last 5 years or our plans that we just announced.

And we believe this is the portfolio that are mostly in A and A+ malls that deserve a level of investment because we believe these malls are going to be vital destinations for generations to come.

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

Paula, just a -- about the cadence of cash flows and funding needs this year.

Can you provide a little bit of color around the cadence of asset sales?

And then separately, the year-end cash balance was the lowest, I think, I've seen since 2007.

So should we anticipate a plan to rebuild that cash balance?

Or is this kind of a new, comfortable cash run rate given improving productivity?

So in terms of the cadence of asset sale gains, we don't typically provide the cadence on those, but we have guided the year.

And in terms of our year-end cash balance, you're right, it was lower this year, and that's because we anticipated that we would have less of a tax payable this year as a result of the tax reform, so we were comfortable with the year-end cash balance.

Should we think that, that goes up?

Or is that a good run rate to use for year-end going forward?

I would say that we would expect that to come back up.

We've given you the cash flow target for the future, which is about $1 billion by 2022.

We'll now take our next question from Paul Lejuez of Citi.

I'm curious.

Paula, how should we think about SG&A per store for the stores that are closing?

I just want to understand what the base level of expenses are from which you're targeting the future SG&A cuts as part of the Polaris strategy.

And also, if you could maybe just be a little bit more specific in terms of the timing of the store closings that we should expect of this group that you most recently announced.

Yes.

So in terms of timing, we've announced the first tranche, which is the 29 stores that we just announced.

And then 125, which includes that 29, will take place over the 3-year period.

And I don't think we've been more specific than that.

And in terms of the SG&A for stores that are closing, I would just think about the neighborhood stores that we're closing as we are really managing those to be very efficient and we're managing them for profit.

And in terms of our SG&A overall, I'd just remind that we're targeting $900 million of savings over the next 3 years.

We've broken those out into a few buckets.

The corporate bucket is about $500 million.

That's coming from a number of places, corporate restructuring, including the campus consolidation and headcount reductions.

Technology efficiency, that's the system modernization, leveraging the cloud more, consolidating our systems, call center optimization.

Another $300 million from marketing in stores, which is optimizing media and production spend, enhancing the productivity in our stores with self-checkout and new handhelds.

And of course, supply chain that we've been talking about.

In terms of SG&A, though, is small-parcel contracting, looking at our freight expenses very carefully, optimizing lane rates.

All of that will benefit our SG&A line overall.

But in terms of neighborhood stores, think about those as we're really managing those for productivity and profitability.

right.

And Paula, the closing of the stores, that is -- I just want to make sure I understand.

That is not included in those SG&A savings, that, that just is a separate save?

I would think about -- the total savings from Polaris, I would think about that as $1.5 billion.

And I would think about that as against the overall onetime costs that we've projected.

So I think about, it is all-in.

Okay.

And just one follow-up.

The -- when do those closing stores come out of the comp base?

Is it when they are finally closed?

Or do they come out when they're in wind-down mode?

We take them out as we close them.

So when we announced the specific stores, we have taken those out of comp.

So that's about a 10 basis points lift, the 29 stores are already out.

But the balance of the stores are in because we're still operating them.

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

Can you talk about the P&L impact of the Loyalty program updates?

And then any early feedback that you've had from the changes that you've made there?

So what we talked about in the Investor Day, Lorraine, was that we discontinued the Thanks for Sharing program.

And so those monies and markdowns that we had accorded to, that were already built as part of the base, are now going towards the Loyalty 3.0 launch.

So we do not expect a deleterious effect on our gross margin.

It's all comprehended.

And as mentioned, it's exceeded our expectations thus far.

It's early, but in the first 2 weeks, we're off to a great start.

So again, the biggest objective on this was for us to get a clear line of sight on a larger penetration of our overall customer base regardless of how they spend with us.

So to be able to give every one of our customers, even though they may be buying either cash or another form of payment outside of credit card, benefits, has been a big hit thus far.

So our objective is to get at least 70% of our known customer transactions within our line of sight for all the things that we can spin from that, be it personalization or monetization in the future.

So Loyalty program was an important step in that.

But to answer your first question, we do not expect any gross margin implication as a result of adding these great benefits in -- as part of Loyalty 3.0.

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

This is Gabby Carbone on for Paul.

I know it is early, but looking at the recent Macy's closures, can you discuss what you're seeing in terms of recapturing those sales?

And maybe if you can just remind us how you're thinking about that opportunity moving ahead.

Yes.

So I was just speaking to the recapture.

What we've assumed is that we would have a retention rate similar to what we've seen in the past, which sort of averages out to the mid-teens.

And the way to think about that is retention is always sort of a function of the proximity to the -- of any nearest -- of the nearest Macy's stores, the mix of products that they're buying out of those stores, competition, demographics.

And also in multi-store markets, our ability to retain sales is obviously better than when we exit a single-store market.

But in terms of how we're thinking about retention, that -- I would say that.

The other thing is that, as we talked about at Investor Day, we're looking at a number of different strategies to migrate customer to other Macy's stores, including our new off-mall formats as we place them and also macys.com.

It's a little bit too early to say what the actual retention will be, though.

But that's how we're generally thinking about it.

Just a quick follow-up.

I may have missed it, but I was wondering how outerwear performed over holiday.

We don't comment on that one, Gabby.

But basically, it is -- it performed at our expectations when you looked at all the cold weather businesses.

We'll now take our next question from Priya Ohri-Gupta of Barclays.

Great.

Paula, just wondering if I could circle back to your thoughts around the credit profile and sort of how the rating agencies are thinking about rating vis-à-vis your leverage target.

So as you're seeing some of the rating agencies, you're baking additional considerations, the leverage target you've given remains consistent.

How are you thinking about other levers to pull in the event that you need to sort of preserve ratings at some of the other agencies?

Or is there enough sort of cushion within the operating profile to withstand a short-term migration into high yield if that becomes the case?

Priya, so we have -- really, our cash profile and the cash targets that we shared at Investor Day and how we are thinking about cash efficiency, none of that has changed as a result of this recent change in our credit rating.

And as you saw during the Investor Day presentation, we expect that, over the next 3 years, through our Polaris strategy, we will in fact have excess cash to determine how to use that within the 4 prongs of our capital allocation strategy.

So we haven't changed in terms of how we're thinking about capital allocation, in terms of how we're thinking about our financial policy.

And we'll continue to execute on both sides, the operating side with our Polaris strategy, and on the financial side as we think about continuing to pay down debt and continuing to target our leverage ratio.

But I guess, as a follow-up, how important or critical is it for you to try to retain investment-grade ratings at, at least 1 of the other 2 rating agencies?

Yes.

Again, that hasn't changed either.

Investment-grade rating is very important to us.

The data show, and we believe that investment-grade companies have more cost-effective access to capital.

So that's important to us.

It's also important to demonstrate financial strength and prudent risk management to our vendors and our partners.

And so that can -- nothing's changed there.

We continue to view that as important.

We can't, again, control how the rating agencies rate us.

But we are, as I said before, very much focused on what we can control, and that's encapsulated in our plans to stabilize and then grow profitability and cash flows; and also in continuing to prudently manage our balance sheet and, again, move towards our target leverage ratio.

So nothing has changed there.

Thank you.

Ladies and gentleman, there are no more questions at this time.

I would like to turn the conference back over to the speakers for any additional or closing remarks.

Thank you.

Thanks, everybody.

Thank you.

Ladies and gentlemen, this concludes today's call.

Thank you for your participation.

You may now disconnect.