梅西百貨 (M) 2020 Q3 法說會逐字稿

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

Third Quarter 2020 Earnings Conference Call.

Today's online conference is being recorded.

I would now like to turn the conference 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 third quarter 2020 results.

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

Jeff and Adrian 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 and include some additional facts and figures.

I do have 2 housekeeping items to share.

First, Jeff and Adrian will be participating in a fireside chat at the Morgan Stanley Virtual Global Consumer and Retail Conference on Tuesday, December 1 at 8:00 a.m.

Eastern time.

This event will be webcast on our Investor Relations website, so please mark your calendars for that.

Second, we will not be providing a holiday sales update in January.

We'll be discussing our holiday performance as well as our 2021 outlook during our fourth quarter conference call on February 23.

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 is 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 this over to Jeff.

Thanks, Mike.

And good morning, everyone, and thank you for joining us.

With me today is Adrian Mitchell, who joined Macy's Inc.

as Chief Financial Officer on November 2. I'm thrilled to have Adrian onboard, and you will hear from him in a few minutes.

As you have seen in the press release this morning, we delivered a solid third quarter.

Comparable sales declined approximately 21% on an owned basis and approximately 20% on an owned plus license basis.

Operating results came in somewhat better than we had anticipated based on cost management, strong execution by the team and an early start to holiday shopping.

We also returned to positive EBITDA a quarter ahead of our plans and didn't draw on our asset-based facility.

So we entered the fourth quarter in a stronger-than-expected financial position.

I want to thank every colleague on the Macy's, Bloomingdale's and Bluemercury teams for their hard work not only in the third quarter but also throughout the pandemic.

Their dedication to our customers has been a tremendous asset, and because of them, we are well positioned to deliver a successful Holiday 2020.

I also want to thank our market brands for their partnership as we work together to serve our shared customer.

This morning, I will start by providing some high-level commentary on the third quarter.

Then I'll hand it over to Adrian who will take you through the quarter in more detail.

I will then share some insights into Holiday 2020 before we open the line for your questions.

We gave an update on the Polaris strategy last quarter so we won't go into the details today.

But to sum it up, the Polaris strategy continues our work to strengthen customer relationships, hones our merchandise strategy to focus on categories that matter most to customers today, aggressively accelerates digital, optimizes all aspects of our network to deliver the best customer omnichannel experience and delivers profitable growth on a rewired cost base.

I want to take a few minutes now to dig into some of the contributors to our third quarter performance: our customer franchise, category performance and our omni approach to business recovery.

Starting with our customer franchise.

We continue to make progress with customer acquisition and retention.

As an update on the 4 million new customers that came into macys.com in the second quarter, we were seeing good retention rates, with many having made repeat online shopping visits.

We're targeting these customers with personalized messages and intend to keep them engaged throughout the holiday season.

We continue to see a good flow of new customers through our digital business, customers who are younger and more diverse than our typical core customer.

Our Star Rewards loyalty program continues to attract new customers to the brand while strengthening our relationship with existing customers.

In the third quarter, more than 1 million new customers signed up to the Bronze program, our gender-neutral tier, taking our Bronze enrollment to 9 million members since we launched this option.

Total loyalty penetration improved sequentially to more than 56% in the quarter.

Next, turning to category performance.

I'm encouraged that all 4 of our Polaris-focused categories, fine jewelry, beauty, furniture and Backstage, performed very well in the quarter and outpaced the business.

In addition, we're continuing to emphasize the categories our customers increasingly value as they spend more time at home such as textiles, housewares and home entertainment and decor.

All had double-digit sales increases in the quarter.

We had strong performance at both ends of the value spectrum.

The luxury trend continues across Macy's and Bloomingdale's as customers shift their spending from experiences to products.

In off-price, our new and existing Backstage store-within-store locations performed well.

And while overall apparel is still down, we have been able to shift effectively into casual and active categories where the customer is shopping.

And last, our response to COVID-19 has heightened our focus on the omni customer.

We are redefining the experience our customers are looking for today and are improving all legs of the omni experience, stores, digital and fulfillment, so our customers can shop when, where and how they want safely and without friction.

In the third quarter, our customers continued to respond well to our expanded fulfillment options, allowing them to shop safely and conveniently in store or online.

Our same-day delivery partnership with DoorDash is fully rolled out across Macy's and Bloomingdale's stores.

DoorDash gives customers another convenient way to shop from the comfort of their home and get their deliveries quickly.

This will be especially important as we get closer to the holidays and customers have a more urgent need for their purchases.

It provides a fast reliable way to deliver gifts to last-minute shoppers.

And curbside pickup, we launched curbside quickly last spring to meet immediate customer need at the onset of COVID-19.

We recently completed a significant upgrade to our curbside offering, which includes an improved digital check-in experience and a new colleague app to quickly process curbside orders.

Customers are responding well to the enhanced experience.

Digital continues to thrive and is a healthy component of our business.

We're pleased with the performance across all metrics, including traffic, search and conversion.

Importantly, our growing digital business continues to contribute to profitability, and we're making constant improvements to our mobile and dot-com experience.

We launched our partnership with Klarna, our buy now, pay later partner, in early October.

And we're especially excited about this relationship because their customer tends to skew younger.

On the store side, I'm encouraged that our stores are showing a gradual steady recovery across all 3 brands: Macy's, Bloomingdale's and Bluemercury.

I'm proud that much of our enhanced productivity is driven by our colleagues who are showing improvements in conversion, service and customer satisfaction.

We're seeing that when customers make the decision to come to our stores, they are doing so with the intention to purchase rather than browse and discover, and our colleagues are ready to serve them.

We're also seeing a positive impact from improved receipt flow.

And we will continue to watch the resurgence of COVID-19 closely but have shown that we can operate responsibly and safely.

Customers continue to respond well to our enhanced health and safety measures in stores.

And safety and cleanliness are consistently our top NPS scores.

So now I'm pleased to introduce you to Adrian Mitchell.

Adrian joins us from the Boston Consulting Group, where he was Managing Director and partner in the digital BCG and consumer practices.

He has worked with many retail brands, including REI, Arhaus, Crate and Barrel and Target.

While Adrian has deep financial and operational experience, he's also held leadership roles in strategy, innovation and transformation, so he really adds depth to our bench.

So Adrian, over to you.

Thank you, Jeff.

It is a pleasure to be with you all this morning.

In the moments we have together today, I'd like to share with you why I joined Macy's, our focus looking forward and my reflections on our Q3 performance and the outlook for Q4.

So why did I join Macy's?

The first reason is that Macy's is an iconic brand.

Our brand has a long 162-year history of providing delightful and innovative shopping experiences for our customers, and I believe that Macy's will continue to do this for years to come.

And what really excites me is the opportunity I now have to be a part of the reinvention of this iconic brand.

Like many retailers, we have been impacted by the acceleration of digital sales and the shifting customer expectations, particularly among our younger customers.

I joined Macy's at a time where the company is reinvigorating our focus on innovation in order to better address this evolving marketplace and ultimately strengthen our business.

The company's Polaris strategy, introduced earlier this year, is a compelling multiyear journey that aims to drive both top and bottom line growth, and I wanted the opportunity to be a key contributor to the success of this journey.

I've been impressed with what Macy's has accomplished during the pandemic, moving with speed and agility to respond to the constantly changing market as we work to redefine the role of the department store.

I'm confident, given what I've learned in recent weeks and months, that we have the energy, the focus and the capacity to completely transform our business into the modern omnichannel retailer that it needs to be to successfully compete.

The other reason I joined Macy's was because of the great quality of our team.

Our colleagues are talented, focused and excited about the journey that's ahead of us, and they are very committed to the success of our iconic business.

So I'm thrilled to be a part of this experienced team.

I'm excited to contribute to the work of reimagining how to best serve our customers.

Through our Polaris strategy, we will continue to positively contribute to our communities as a thriving and relevant retail business for years to come.

Now let me be clear on our focus looking forward.

We are laser-focused on delivering strong and sustainable returns for our investors over the long term.

At this moment in our history, we have the unique opportunity and the capacity to invest in transforming and modernizing our business.

As we said when we introduced the Polaris strategy back in February, we will create shareholder value by returning Macy's to long-term sustainable growth and clearly tracking our progress with well-defined KPIs, milestones and aligned incentives.

In my former roles, I've led work with a wide variety of retailers, helping them solve their toughest challenges in an increasingly competitive and disruptive environment.

As I reflect on the strategic, operational and financial experiences I've gained through this work, being able to achieve consistent and sustainable growth in a more digital and analytics-driven world is paramount.

At the same time, maintaining a healthy balance sheet, generating strong free cash flow and being disciplined stewards of capital prudently deployed in projects that generate strong returns remain our priorities, and we are fortunate to have the capacity to invest in our customer value proposition, our omnichannel shopping experiences and our supporting infrastructure to once again take on the mantle of a leading retailer.

As Jeff has shared, we continue to evolve our Polaris strategy to be competitive in the new retail normal in the years ahead, and we will share with you our progress as we move forward.

Now let me turn to our performance.

We are pleased with our Q3 results and are cautiously optimistic about the outlook for Q4.

However, we remain conservative given the uncertainty and recent surges in COVID cases across the U.S. As Jeff mentioned, we are pleased to have delivered not only positive adjusted EBITDA in the third quarter but also positive unadjusted EBITDA.

Given the strong performance throughout the income statement, especially SG&A, our teams were able to accomplish this a quarter earlier than we had originally expected, generating $159 million in adjusted EBITDA and $113 million in unadjusted EBITDA in the quarter.

We know we have a lot of work in front of us to grow profitably, but this is a significant achievement given what the business has endured during the pandemic.

Notably, given this overperformance in cash generation and our continued disciplined inventory management, we finished the quarter without drawing from our asset-backed credit facility as we had previously anticipated.

This is also a significant achievement and underscores our ample liquidity and financial flexibility.

And while unknowns remain through the end of the year, we currently anticipate having to draw very little, if any, from the facility as we head into the first quarter of next year.

Third quarter sales finished better than what we had anticipated a few months ago.

The industry experienced earlier-than-normal holiday demand in October, as did Macy's, and this benefited our top line.

Combined with a shift in the start of our Friends and Family event from November into October, these helped to pull some sales forward into Q3.

Overall, we delivered omnichannel sales of approximately $4 billion, a decline of 20.2% on an owned plus licensed comparable basis.

Remember that we were expecting omnichannel comps of down low to mid-20s for the entire fall season, so we delivered sales in the quarter in line with those expectations, albeit at the better end.

Our digital business as an omnichannel retailer remained strong in the quarter, growing by approximately 27%.

As expected, with all the stores open during the quarter, digital penetration moderated to about 38%, up significantly from last year by more than 14 percentage points.

Store sales decline improved to about 36%, slightly better than expected, again largely due to the pull forward of sales.

Omnichannel gross margin was 35.6%, down 440 basis points from last year, in line with our expectations for the fall season and up significantly from the second quarter's 23.6% rate.

Retail margins benefited from disciplined inventory management, better sell-through of both full-price and clearance merchandise and lower clearance markdowns.

Importantly, we ended the quarter with balance sheet inventory down 29% year-over-year, and we again are entering the next quarter with clean inventory and an appropriate stock-to-sales ratio, including the fresh fashion and gift-giving to support the holiday time period.

We recorded approximately $1.7 billion of SG&A expense, an improvement of 22% or $476 million from last year's third quarter, which is better than what we had expected.

This was driven largely by strict expense management.

As a percent of sales, SG&A expenses deteriorated by about 70 basis points in the quarter from last year to 43.3%.

Sales deleverage was the major driver of this increase, offset by the reset of our cost base in February and our restructuring in July.

Overall, this quarter, we'll continue to be very disciplined with our variable costs, and we expect that to continue through the end of the year.

We earned credit card revenue in the third quarter of $195 million, up $12 million from last year and ahead of expectations.

Our profit sharing from our Citibank arrangements has performed better than anticipated in recent months as customers are evolving and maintaining their credit spend with us.

Potentially influenced by the broader macro observations and savings rate, industry COVID relief efforts and fewer new customer acquisitions in the near term, we do not see an increase into delinquency at this time.

Our proprietary credit card penetration was down 330 basis points in the quarter at 45% this year compared to 48.3% last year.

That is a sizable improvement from the second quarter, which was down 590 basis points to its prior year period.

We incurred net interest expense of $80 million, an increase of $32 million to the prior year period, driven by the additional long-term secured debt we took on during the second quarter.

We recorded a tax benefit of $126 million, representing an effective tax rate of 58.1%.

This high rate reflects the impact of the carryback of net operating losses as permitted under the CARES Act.

In total, we saw $60 million of adjusted net loss in the quarter versus adjusted net income of $21 million last year.

Adjusted EPS was a loss of $0.19 in the quarter compared to adjusted EPS income of $0.07 last year.

Notably, we again finished the quarter in a strong liquidity position with approximately $1.6 billion in cash and approximately $3 billion of untapped capacity in the new asset-backed credit facility.

As you'll recall, we withdrew our 2020 guidance in March.

Given that there still remain many unknown and uncontrollable factors impacting consumer behavior and the retail landscape, we are not providing new guidance at this time.

However, as we have done in the last couple of calls, I would like to update you on our current thinking as it relates to the rest of the year.

We continue to model various scenarios for the last quarter of the year, and ultimately, we continue to take a conservative approach to our forecasting.

While we closed out the third quarter strong, our performance was within our overall expectations for the fall.

COVID is surging again across the country, and that continues to impede our recovery in international tourism and urban areas.

And the supply chains have opened up, yet bottlenecks remain.

Many of the expectations we've laid out on our last call remain the same, and you can view those within the slide presentation posted on our website.

Now to briefly summarize, we expect total company comps to be down in the low to mid-20s range for the back half of the year.

Gross margin expectations have not changed, and we continue to expect third quarter margins to be slightly stronger than margins in the fourth quarter due to the digital growth and holiday surcharges from our shipping partners.

We continue to expect SG&A as a percent of sales to be low to mid-single-digit percentage points higher than last year for the fall.

Our outlook on credit revenues has improved, thanks to the reasons I mentioned earlier.

However, unlike what we earned in the third quarter, we expect them to be down year-over-year in the fourth quarter.

However, as a percent of sales, we expect to see a modest improvement from what we generated in fourth quarter of 2019.

Finally, we continue to expect our CapEx spend this year of about $450 million.

Overall, we are pleased with the performance in the third quarter, and I'm particularly happy with the solid progress the business is making as it comes back.

We continue to plan the year conservatively but have great confidence in our ability to execute well during the holiday season.

I'm excited to be joining the Macy's team at this critical point in our company's history, and I look forward to meeting and talking with everyone in the weeks and the months ahead.

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

Thanks, Adrian.

So looking to Holiday 2020.

We know the season is different as our customers continue to spend more time at home, but the holidays are when Macy's shines and this year will be no exception.

We're already celebrating with local community events around the country.

For the holidays, America comes to Macy's and Bloomingdale's for gifting, and we have the right gifting assortment from gifts under to luxury, bringing the best national and private brands to our customers.

50% of the content is new.

Our expanded fulfillment options, including curbside pickup and same-day delivery, allow customers to shop safely and without friction in store or online and to shop right up until December 24.

We've elongated events and put an increased emphasis on digital to even out the flow of traffic in our stores through the holiday season to maintain health and safety for our customers and colleagues.

Most stores are dressed for the holidays, and our digital platforms are ready to go.

Our teams are 100% focused on executing holiday, and we are confident in our plans.

So like all of 2020, we know unexpected challenges and opportunities will come our way and our team is prepared to tackle them.

So looking to the future.

While this has been an extraordinarily disruptive year, we feel good about the health of our core business, and there are things that we learned about our business in 2020 that gives us confidence in the future.

We've successfully managed the channel shift to address customer demand for a true omnichannel experience.

We have new customers coming into the brand via digital and loyal customers that continue to be attached to the brand.

We've shown that we can flex categories and price points as customer needs and demands change.

We are early enough in our supply chain redesign that we were able to adjust our plans for a more omni future.

We've been incredibly focused on how we manage our cash.

We have market share to gain and an aggressive and intentional plan to go after it.

And our teams are more agile than ever.

They listen to our customers, follow the data and pivot quickly.

And importantly, we have a flexible business model that enables us to remain relevant to our customers.

We can adjust formats, channels, categories, brands, services and price points to meet our customers wherever and however they're shopping.

In closing, we're pleased with our third quarter results, particularly as we got back to positive EBITDA a quarter earlier than anticipated.

We're watching the resurgence of COVID-19 closely.

Despite the uncertainty, we're ready for holiday.

And we're confident in our future and our ability to invest in becoming a healthier business based on how our customers are shopping now and in the future.

And with that, we're going to open it up for questions.

Before we go to Q&A, I want to remind everyone that there are time constraints given multiple industry calls this morning.

(Operator Instructions)

Thank you.

Operator?

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

So Jeff, relative to comps down low 20s this quarter, near term and based on what you've seen in November, is it best to think about similar performance in the fourth quarter?

And then the second part of my question is larger picture and looking to 2021.

What gives you confidence that post the vaccine, when demand returns to your core categories, that Macy's will be the primary destination and that you'll be able to regain your overall share?

Matt, so let's just first talk about the fourth quarter question.

I do believe that the trend line that we showed in the third quarter, it's safe to pull that into the fourth quarter.

That's assuming no significant regional or national shutdowns in stores.

So in our digital business, we expect to continue to grow at a very aggressive rate based on all of our plans and have a lot of confidence in that.

That will obviously continue to grow even faster depending on what any shutdowns might look like in stores.

So we are taking a conservative view to the fourth quarter, but I really feel good about where we stand right now.

As it relates to vaccination, a safe, scalable vaccination is obviously on everybody's mind.

And what I'd tell you is that there is a -- how people return to their old normal, if you will, both the work that they did as well as occasion-based activities, so that's weddings, proms, just going out, and when you look at those particular categories, I think the customers are going to be -- there is going to be a surge of demand when that happens.

And there is going to be customers that have been wearing the same clothes, have been lounging in active and in casual sportswear, and they're going to want to dress up.

That fits squarely in our strengths.

I'm very pleased with the way that we've controlled our inventory.

And we've gotten our inventories down in those dressier categories that are very appropriate to the demand we're seeing right now.

But we will ramp that up very quickly with all of our partners and our private brands as the vaccination becomes more apparent.

So I feel very strongly that we will reap the benefit of that when we do go back to a new normal, if you will.

We now move to Paul Lejuez of Citigroup.

It's Tracy Kogan filling in for Paul.

I was wondering if you guys could talk about the private versus national brand performance in the quarter and then how your private brand performance and penetration compares in the digital channel versus in stores.

Yes.

Let me take that.

So clearly, when you looked at the quarter and you looked at the composition of our business, private brands played a significant role in those categories that are trending.

And so when you look at the home categories, our home business was -- across all of home furnishings as well as big ticket, was up double digits in the quarter.

And private brand is a big piece of that, particularly in textiles.

When you look at the big ticket, much of what we do there is exclusive content that, in fact, is made exclusively for us.

So that part is -- private brand played a big role.

As you get into the apparel categories, we definitely -- when you looked at the active, you looked at sleepwear, you looked at those categories with private brand being a big component of them, those did very well.

And when you look at the other categories in the sportswear areas, kids performed better than women's and men's.

And men's is -- when you look at the private brand, that was a better penetration than we were historically.

And in the women's area, that is our most depressed overall category.

Private brand is a big piece of that.

But what I'm really excited about is the work that the team has done on reinventing these private brands, which we talked about back in February with the Polaris strategy.

All that content is now in stores, and those are getting excellent sell-throughs even with a business that has been challenged.

So as Adrian mentioned in his message, in his comments, regular-price sell-through is up sharply.

So when you look at the new content that customers are voting on, which includes many of our private brands across all categories, I'm really liking the signals that we're seeing.

We now move to Bob Drbul of Guggenheim.

Just a couple of questions on the 4 million new customers.

Can you just give us a little bit more color in terms of, I mean, the characteristics and the dynamics of who you are tracking in?

And I'm just curious if you could talk a little bit about sort of Backstage and how that's performing and inventory procurement in the full Backstage a little bit.

So Bob, let me -- first off, on the 4 million new customers that came in, in the second quarter, they were much younger and more diverse than what we're in seeing our core business.

And so the thing that we were excited about was their behavior in the third quarter.

So a nice chunk of those have already gone on to a second purchase, mostly online, but a number of them have also come into our stores.

We've also seen that trend of new customers, again more diverse and younger, 3 million new customers came in during the third quarter.

And so really, our full focus is ensuring that these customers are seated with the right content to get another purchase.

We're trying to get them into our loyalty programs.

A number of them have converted into the Star Rewards program.

Most of them are coming into the Bronze tier, which is gender-neutral.

And that gives us the opportunity to track them very carefully, look at the cohorts that they might behave like and look at their signals and then feed them personalized content based on that.

So we're -- with everything that we have been talking about in terms of personalization and our ambitions with customer acquisition, this was -- the 7 million new customers that have come into the brand has been a great opportunity for us to make -- to build on their lifetime value with us.

So as to Backstage, to your other question, Backstage performed very well in the quarter, both at Bloomingdale's, at Bloomingdale's Outlet as well as Macy's Backstage.

And it's basically about twice the trend of what we're seeing in the balance of the store, the same categories that you're seeing in the store.

Home store is off the hook.

Some of -- the beauty area is doing quite well.

The apparel areas are more slow.

But at those price points, we're seeing great sell-throughs, better than what we were up against from last year.

The supply chain is in very good shape on that.

So we remain committed to this business.

We're obviously looking very carefully, as we have in times passed, to cross-sell.

That's going on for Backstage, how they continue to purchase in Backstage, but how they're also migrating to the Macy's and the Bloomingdale's mother brands on both online and in store.

And that behavior continues through the last 2 quarters.

Paul Trussell of Deutsche Bank has our next question.

Paul, are you there?

Yes.

Can you hear me now?

We can hear you now.

Great, great.

I wanted to ask about the margin performance.

Maybe a little bit more color on the puts and takes in GPM in 3Q and how we should think about areas like markdowns, the digital mix, inventory position into 4Q.

And then the savings, obviously, on the SG&A side, were very meaningful.

And so just help us understand what within that is really sustainable from here versus more temporary in nature.

So let me start with the margin question.

And then, Adrian, I'm going to throw it to you for SG&A.

So Paul, on margin is that we're very focused.

First off, margin has definitely benefited by having our inventory in great shape.

And so to -- as you've seen in the last 2 quarters, to have our inventory below where our sales line is, to be down 29%, we're able to react in season to any demand that's coming our way.

And you can see that in our regular-price sell-throughs, you can see that on our AUR.

So our maintained mark is continuing to improve.

We're getting faster sell-throughs.

We definitely are dealing very aggressively with anything that customers are not signaling demand for, taking those markdowns, and we're -- our inventory is in as good a shape as it has been in a long while.

Very pleased with that.

And even in those areas where the demand is off and even in those areas where the demand is quite high, we'd been able to react very quickly in season to that, been able to get the receipts in, in those categories that customers are showing strong signals to.

So when you look at the home textiles area, you look at fine jewelry, you look at fragrances, being able to get that inventory in to meet that customer demand.

Those sell-throughs are great.

That -- those margins are growing.

When you look at the overall, the headwind on margin is really about delivery expenses.

So we're very focused on the omnichannel strategy of that, how much of our digital demand is going to be fulfilled out of our stores, which obviously decreases shipping expenses.

And when you look at what that's going to look like in the fourth quarter, obviously, shipping goes up.

We're expecting robust growth online.

We're anticipating that in what our shipping charges are going to be, what we're going to fulfill out of stores, the surcharges that we have with some of our carriers.

So all that is built into our fourth quarter planning.

And we have a clear line of sight on that and a clear line of sight on how we're improving margins.

And I'd love to just throw it over to Adrian to kind of talk about some of the things that we're doing to improve margins as well as to address your SG&A question.

So Adrian, take it away.

Yes.

Thank you very much.

And Paul, pleasure to meet you.

As we think about our expectations on gross margin, we have not changed kind of how we view gross margin for the rest of the year, relative to your question, as we look to Q4.

The improvement in gross margin in Q3 compared to Q4 was really driven by a lot of what Jeff described around strong inventory management, better sell-through of our full-priced and clearance merchandise as well as our lower markdowns.

And what's really nice as well is that we're getting a tremendous amount of credit for the progress that we're making as we think about managing our inventory down, which was down 29% from last year coming out of the quarter.

As we go into the fourth quarter, the thing we have to keep in mind, Paul, is that we recognize that there will be significant shipping surcharges in Q4, in the fourth quarter.

And so we're working pretty diligently to figure out how to offset some of those headwinds.

Going into the quarter with lean inventory will be helpful to help us manage some of those markdowns and hopefully help us also drive some higher sell-throughs.

Now you also asked about SG&A.

And as we spoke about a bit earlier, our SG&A came in at about $1.7 billion, which was down $476 million in the third -- relative to the third quarter of 2019.

What I would say, there are 3 things that we've been quite focused on.

The first is just our colleagues' productivity in our stores.

They've been doing a terrific job in terms of driving great customer experiences, driving conversion.

And our teams are doing a terrific job of just managing the productivity of our labor hours in those stores.

The second thing is, through our Polaris strategy, we've been very, very diligent in really getting good expense control within our SG&A.

So we have a number of initiatives that we have put in place that we have benefited from for most of 2020, and so we'll continue to have that as a big focus for us as we look forward as well.

The third thing I would speak to, Paul, is really our credit revenue.

So when I think about the health of our basis customer and our credit portfolio, we continue to see pretty healthy performance and pretty solid profit sharing on the credit side of the business.

So credit, from what we saw in Q3, was at $195 million, up $12 million over last year, despite the expectations of depressed credit that we were hearing in the marketplace.

So overall, we feel very good about Q3 performance.

As we get into Q4, we'll manage the headwinds on margin, and we'll continue to be very disciplined in our SG&A management.

William Reuter of Bank of America has our next question.

My question is just around performance by geography or by store attributes.

So thinking about how your urban stores were doing versus your more suburban ones and if this is going to have any impact on your expectations for store closures over the next 3 years.

So clearly, the stores that are performing the worst are the ones that are in our downtown locations.

So when you look at Herald Square, you look at 59th Street at Bloomingdale's, State Street, Union Square, they're our most challenged.

And there's -- the 2 biggest factors on that is basically what's happened to the transient work population, the office workers; as well as tourists.

So I'm actually very heartened by the performance of what's going on in those buildings with the local customers.

And those teams have been very focused on giving great experiences, inviting those customers into those buildings.

So we're seeing those purchasing is up.

But when you look at the transient population and the tourist business, that's been the most challenged.

So those are our most difficult, the urban flagship stores.

When you get into the suburban population, what we used to call our magnet stores as well as our neighborhood stores, they're pretty consistent.

Depending on what part of the country it's in, when you were in the -- obviously, when you had -- in the heat of the pandemic, there were certain regions of the country that were either closed or they were reopening and the customer didn't have confidence to return to brick-and-mortar shopping.

So you saw those kind of -- those highs and lows.

Right now, it's pretty consistent.

And what we are seeing is that our neighborhood stores are great convenient locations.

Customers are very comfortable shopping in them.

And they are completing their shopping journeys.

They're very intention-based when they go into these stores.

They're not browsing.

They have a mission.

They know what they want.

They're either having that fulfilled at the actual service stations, which are in every single one of our stores, or they are in the store at a long -- at a shorter period of time.

Conversion is way up.

Their UPL -- or what we call the NPS scores are quite high.

They're very satisfied about what they're seeing in our stores.

And I'd say it's a pretty consistent trend between the magnets and the neighborhoods at this point across all regions of the country.

Omar Saad of Evercore ISI has our next question.

Great update.

You guys mentioned you're watching the COVID surge in the release and a few times on the call.

Are you seeing an impact at all from that?

How concerned are you about this resurgence?

Do you think there's a chance we could go into lockdown again with store closures?

And if we do end up in that sort of scenario, how do you feel about your chances this time around having kind of gone through it versus back in March and April?

Well, Omar, that's -- I think it's a great question.

Look, we're -- we definitely believe that we can operate through COVID and keep every one of our stores open.

And I think we've clearly shown that we know how to keep our colleagues and our customers safe.

And so that's what we're clearly pushing through the NRF and RILA, working with all of our -- the municipal leaders as well as governors.

We don't believe the designation of essential and nonessential should play in retail.

We believe you either have a safe environment or not.

You should be held accountable to health and safety standards, and we stand by those.

And based on how we've performed and based on how our customers have signaled to us, we're doing a great job with that.

So when you look at -- the first part of your question, there are places like in El Paso, Texas, which everybody knows about, where that particular store is closed right now.

But all of our stores are opening.

And even in California, where they have laws right now that basically are talking to 25% occupancy, we have some stores in which we are adhering to strict line control on those.

Because of -- we were very aggressive about going after in-store fulfillment, we went after making sure that we had curbside, that we had same-day delivery, all of that has been built.

So even if a store may close, in the future, we believe that we'll be able to -- that will not be orphan inventory, and we'll have lots of colleagues that will be ready to satisfy the demand in those particular areas.

So we're working hard to ensure that we're operating safely.

We've modeled closures.

I don't anticipate them.

But if they were to happen, we'll be ready.

And so it's heartening to hear about vaccines.

But when you look at the surging that's going on right now in the country, we're mindful of that.

So we have a dashboard that looks at all those metrics, what that means in terms of the customer sentiment, how confident they are to go into those buildings.

What that means in terms of our staffing levels or what we need to do with our services.

So we're getting expert at this, and we're ready to go no matter what comes our way.

Next, we move to Carla Casella with JPMorgan.

I have some balance sheet questions.

Your working capital was a lot better than expected.

I'm wondering if some of those deferrals -- will you have to pay down more of the payables or deferrals in the fourth quarter?

Or is that something that's been deferred to '21?

And then on the real estate front, if you're sitting on any -- I wonder if you're sitting on the balance sheet on anything -- any real estate where you've sold it -- I'm sorry, not sold but closed the stores but not yet sold them.

Yes.

I can speak a little bit to that.

I mean the thing that we're pretty excited about as we think about our current position on inventory is we've been very good in terms of managing our clean inventory.

So a big part of that is just making sure that as we look at our sales expectations going forward, that we're managing our buys.

We are very fortunate to see that our inventory is coming in, but we do feel that we've been very diligent and planful in looking ahead at our expectations around sales and managing that inventory appropriately.

We continue to pay for our inventory on good terms with our vendors.

And so we feel really good about that.

But Carla, if I take a step back, the thing that we're really excited about is just really the strong cash position that we have within the business, which was one of the things I was very pleased to see coming into the business as CFO.

We came out of the quarter with $1.6 billion in cash.

We plan to pay off our maturities coming in the year at $530 million in January and $450 million in January of 2022.

So we just continue to be very focused on cash generation through managing expenses, managing very healthy our working capital but also making sure we're using any excess cash to really invest in profitable growth initiatives as we navigate through the pandemic.

Okay.

On the real estate front, are you sitting on any owned stores that you -- that are closed?

We do have -- I do want to -- we do have like 2 stores that -- as you know, that we have that are closed that basically are operating as fulfillment centers.

And so what we have on those, we call them the dark stores, and we're experimenting with that.

I know that what we're looking at with the omnichannel customer is having inventory that is available at wherever the customer is demanding it and so to have -- and to have inventory that is available to go.

We are looking at some of our real estate to test into that, to see how do we -- particularly with the demand and the spike that we get during the holiday purchasing for our customers.

So we are looking at our real estate with that in mind as well.

We next move to Kimberly Greenberger of Morgan Stanley.

Great.

I wanted to ask about credit revenue.

It was obviously up very, very nicely.

And I guess intuitively, we would expect credit revenue to move with the total revenue perhaps on a lagged basis.

So can you just talk to us about why the divergence in the trends this quarter and perhaps how we can better think about credit revenue going forward?

And then I just wanted to follow up on the Buy Online, Pickup in Store and the curbside capabilities in particular that you rolled out this year.

In the third quarter, what's sort of uptake or consumer response to those programs?

Was it 1/4 of your e-commerce orders through either of those vehicles or something higher than that?

Just any color you could give us on the success of those programs.

Adrian, why don't you take the credit question, and I'll take curbside.

Terrific, terrific.

So Kimberly, overall, we've been very pleased with the health of the Macy's customer and also the credit portfolio.

And the performance of our profit sharing in recent months has actually been better than expected, and we're hopeful that this performance will actually continue through the pandemic.

As I shared in the opening remarks, our earned credit revenue in Q3 was about $195 million despite expectations for depressed credit that we were expecting to experience as we went through the third quarter.

We did observe that our new accounts were down compared to last year.

Now in terms of your question around the outlook, our outlook on Q4 credit revenue has improved, but we expect them to be down year-over-year.

We do however expect to see a modest improvement from what we generated in the fourth quarter of 2019.

And more broadly, we know that over time, as macro conditions change, that Jeff spoke to at the beginning of the call, that will have an impact on our portfolio, but this is just simply something we're watching quite closely.

And Kimberly, on curbside, so we don't know how this is going to play out yet.

I'll tell you that when we went to curbside, we launched this, as we talked about in a previous call, in about 18 days across Macy's.

And it was kind of -- it was -- we cobbled that together very quickly.

We've since launched what we call curbside 2.0, which we've really improved the app experience and the speed of this.

The colleague response to this has been quite strong.

And customers are really signaling high -- they're liking what they're seeing on this.

We're getting very high NPS scores on this.

So what does this mean for the holiday season?

This is going to be a great question for us when we talk about the holiday season in February.

We expect this to dramatically go up.

We've really focused on forward deploying inventory and all of our key items and our giftables ready to go for same-day delivery or through curbside.

So it's ramping up as we expected.

It really is going to spike over the next number of weeks.

When you look at our digital experience on this, how we're signaling this online or on the app and our ability to respond to the customer when they signal it or need it, we'll be there.

So more to come on that.

We do expect it to be a significantly higher percentage of our overall digital demand through the combination of curbside, BOPS, BOSS and same-day delivery than where we were last year.

And I'll be able to update the group on those 4 elements of our digital demand when we talk again on February 23.

Next, we move to Oliver Chen of Cowen.

On the younger customer acquisition, that's very encouraging.

What do you see ahead as the bigger opportunities across categories and/or execution to attract and retain younger customers?

Oliver, that's the shortest question you've ever asked.

Let me just say that on this, it's a multipronged question.

The first thing with the younger customer is really looking at the content.

So we've been hard at work at this for the last year and really looking at, first off in our private brand portfolio, what adjustments we need to make.

So we have repositioned brands.

We've retired brands.

We're adding a brand in 2020 -- '21 on this.

We've actually really quite good value from ticket to promotion to loyalty.

We've looked at experiences and how we merchandise it, how we showcase it online in experiences.

So if you look at our website right now and you look at some of the big changes that we've made in the experience on our website, it was with the under-40 customer in mind in certain brands and categories, how we're marketing to them.

It's just -- it's all interrelated.

So we'll give everybody an update on that again in February, about where we stand with the under-40 customer.

In some categories, we're quite strong with them.

We're their -- we're one of the top retailers in the country, and there's other areas in which we have strong ambition to get much stronger with and market share that we see that we can gain.

And so we will detail all those plans when we talk next.

Next, we move to Alexandra Walvis of Goldman Sachs.

And I wanted to ask you a question about the e-commerce growth rate.

The growth rate for the quarter was a little slower than in the prior quarter.

You mentioned that as distorted when you opened.

Can you comment on the cadence of e-commerce growth for the quarter?

And any thoughts on how we should be thinking about e-commerce growth into the fourth quarter and into next year.

What's the right run rate?

And where should we be thinking about penetration as we move into 2021?

Alex, so what I'd say on this, we definitely will continue to have strong, robust growth in digital.

So when you look at it, we expect that we're lapping obviously a -- the highest penetration of digital is in the fourth quarter always for us, but we're ready.

And so when you look at the -- let me just kind of back up and just say we've really focused on everything that we can do to improve this.

So when you look at what we've done to replatform, we've gone after Google search.

We basically have really improved the browse and filter features.

We've enhanced all the product pages.

We've tested and scaled product recommendations.

We've added monetization.

Then we've added like Klarna, which is a huge component of the under-40 customer; the whole curbside experience; what we've done with DoorDash because it's much about what we do in digital as well as what we can do in fulfillment.

So we've really focused on all this.

And so I think when you look at our website and our app today, it's in far better shape from where it was a year ago.

And all those enhancements just continue into 2021.

Very happy with the product -- the plans that we have for all the product upgrades coming up.

So we expect robust double-digit growth of digital going all the way through 2021, and that's what we're planning for.

As for penetration, what you saw in the third quarter was about a 38% penetration to the total business.

It's always going to be, I think, with either a 3 or 4 in front of it as it builds.

It's going to continue to grow as an important penetration in our overall business.

We were at 25% in 2019.

Obviously, with the stores closed for 3 months, it's going to be higher in '20 than I expect it's going to be in '21, but it's still going to be in the mid-30s.

So expect double digits continuing.

Our next question comes from Chuck Grom of Gordon Haskett.

This is actually Garrett Greenblatt on for Chuck.

I just wanted to ask about -- could you guys provide more color on the sales cadence throughout the quarter as well as kind of quantify what the impact the shift from Friends and Family event was?

And maybe if you could elaborate on what you're seeing quarter to date regarding the spike in COVID cases having an impact on store traffic.

I apologize, I could not understand your question.

Could you just say that more clearly, please?

Yes, apologies.

Can you talk to the sales cadence of the third quarter as well as kind of quantify the shift of the Friends and Family event for us?

Yes.

So the -- we obviously, like other retailers, have responsibility to elongate holiday demand if we can.

And so in the month of October, you saw what all of us did to try and start that early.

So we did that by basically bringing up the Friends and Family event into the third week of October.

And you can see what we're doing now with Black Friday specials, kind of drawing those off of the Black Friday event and bringing that earlier into the month of November.

We did have some volume that pulled forward.

We're not quantifying what that is.

But it is a -- we are trying to see how the customer responds to it, and so far, they're biting.

And liking what we're seeing on that.

We're making -- we made the decision to close on Thanksgiving day.

We're definitely expecting that we're going to bring down the traffic in brick-and-mortar on Black Friday itself and getting that demand earlier.

But also, if the customer decides to shop in the last 10 days or during Cyber Monday or -- we're going to be ready for that.

So you can see what we've done with our events if you look at our calendar.

We're just elongating the demand, as are our competitors.

Some of that did come into the last 2 weeks of October based on the actions that we took.

We take our next question from Dana Telsey of Telsey Group.

As we get past 2020 and into 2021, Jeff, how are you thinking about the first half of the year and planning, whether it's regarding inventory, marketing or how you're thinking of the store channel versus the digital channel moving forward with all the new customers that you've gained from this time period?

Dana, so 2 big factors here that are going to affect first half is going to be what does the scalable vaccination look like and does that come in at -- in the second quarter, does that come in -- we're anticipating that it's going to be in the back half of the year where it's scalable.

But the first half, we are looking at some level of stimulus package that Congress would put through, and that certainly can motivate, certainly, consumer confidence and what that would look like.

So when you think about the first quarter, we're kind of pulling our trend from the fourth quarter forward, and we are expecting gradual improvement as we get into the second quarter and then improvement as we get into the back half based on a potential vaccination.

We do have another scenario that would suggest that we don't have a vaccination that's scalable.

We'll be ready for either.

But we're looking for signals on that.

In terms of the composition of the business, depending on the vaccination, it could be as is or it could be as people return back to normal occasion, we have started to amplify those categories and we're ready to go.

From an inventory perspective, we're being conservative.

We know we can chase demand.

We know we have more room in regular-price sell-throughs.

We're not going to get ahead of ourselves.

We're going to keep our inventory lean and ready to react to customer signals and demand.

As a fashion retailer, that's an absolute must, and we're committed to it.

So the more we're doing that, the better sell-throughs we're getting, the more our natural margins will improve.

It puts us in a good position to be flexible to wherever the customer goes.

We next move to Jay Sole of UBS.

Great.

Jeff, it sounds like you're really pleased with the jewelry business, and the jewelry strategy overall continues to be something that really works.

I know you've tried it in different categories, but can you just tell us any thoughts you have to try to extend that strategy to other categories and other areas of the business just to try to continue to leverage those learnings in other areas?

Yes.

So Jay, clearly, when you looked at the jewelry business, it really is the -- it's the combination of value, product, service, marketing and in-store experience.

And there's definitely other businesses that we're clearly doing that right now.

In the big-ticket business, women's shoes, you look at the entire beauty business, those are all categories that we're doing that very carefully with, when you look at home textiles because of the price points we sell.

We've learned a lot from Bloomingdale's, and Bloomingdale's does that in more categories.

They do it through a combination of different partners that they use.

Some of those are leased.

But we look at their category management and their customer, how they attract and hold customers, and that gives us a lot of learnings about what we do in our businesses.

When you look at -- when you get back to the new normal, when that does happen, you look at the clothing business, the men's clothing business, the women's clothing business, those are all categories that will benefit from the learnings that we got from the jewelry category.

So jewelry is interesting because when you think about our market share, when you look at where our competitors are, frankly, that is a -- the apparel is a much more crowded playing field.

So it doesn't always translate directly into apparel, but there's enough learnings there in the categories that we have strengthened that it does.

So we look at Bloomingdale's, we look at jewelry, that certainly informs the answer to your question.

We have no further questions at this time.

Okay.

Everybody, thank you.

Happy holidays.

Thank you.

Ladies and gentlemen, that will conclude today's conference call.

Thank you for your participation.

You may now disconnect.