Macy's Inc
NYSE:M
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Macy's Inc
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Greetings, and welcome to the Macy's, Inc. First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn.
The call over to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.
Thank you, operator. Good morning, everyone, and thanks for joining us. With me on the call today are Jeff Gennette, our Chairman and CEO; Tony Spring, President, Macy's Inc. and CEO elect; and Adrian Mitchell, our COO and CFO. Along with our first quarter 2023 press release, a presentation has been posted on the Investors section of our website, macysinc.com.
Unless otherwise noted, the comparisons we provide will be versus 2022. Comparisons to 2019 are provided where appropriate to best benchmark performance. 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 our 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 on the Investors section of our website. Today's call is being webcast on our website. A replay will be available approximately 2 hours after the conclusion of this call.
With that, I'll turn it over to Jeff.
Thanks, Pam. So good morning, everyone, and thank you for joining us. Before getting started, I want to take a moment to acknowledge our team and how they have continued to navigate an extremely dynamic macro environment. On that note, let's discuss the current macro landscape. On our fourth quarter earnings call, we said that we expected pressure to be more intense in 2023 compared to 2022. Subsequently, demand trends began to worsen in mid-March and further decelerated in April.
We believe cooler temperatures and headlines surrounding layoffs and the banking crisis were factors, but so were the compounding effect of some previously identified macro headwinds. The U.S. consumer, particularly at Macy's, pulled back more than we anticipated as they reallocated spend to food, essentials and services. We have planned our business for the remainder of the year, assuming mid-March through April macro headwinds continue and potentially worsen, and we have taken decisive actions in the second quarter and the back half of the year to ensure we are well positioned to compete.
We will go into more detail on these shortly. But first, let's discuss first quarter results. We achieved adjusted diluted EPS of $0.56 versus our expectations net sales were below, gross margin rate was above and inventories were in line at down 7% year-over-year. February and early March performed largely in line with expectations. As previously mentioned, trends worsened in late March. We entered April confident in our product and had several important events, including Friends and Family of Macy's, the spring break season and Easter.
As April progressed, demand worsened across nameplates. The decline was most pronounced at Macy's, which has the largest exposure to the lower and middle income consumer with roughly 50% of its identified customers and an average household income of $75,000 or under and about 85% at $150,000 or under. By nameplate, Macy's net sales declined 7.7% and comparable sales declined 7.9% on an owned plus licensed basis versus a 10.1% increase last year. We began the quarter with limited inventory carryover. Consistent with our inventory discipline, we had sold through the majority of fall and holiday product in the fourth quarter.
In hindsight, we converted too early with spring fashion well set by early March, but without enough balance in weather-appropriate apparel and footwear. Store traffic was healthy but conversion was challenged. Most of the country experienced below average temperatures for an extended period of time, while we were over-indexed in spring and early summer fashion, including special occasion and did not have enough colder weather and seasonless product.
Ultimately, sell-throughs were below expectations as our customer became increasingly more deliberate in how they are allocating discretionary spend and buying closer to need. On the flip side, categories we are known for that are less discretionary and weather dependent, including beauty, particularly fragrances, women's career sportswear and men's tailored all outperformed. We also began to experience a comeback in certain pandemic categories including textiles, housewares and top of table, which is encouraging.
At Macy's Backstage, which curates lower price point merchandise and flows and freshness more often, store within stores outperformed the full-line locations in which they operate by approximately 150 basis points on a comp owned plus licensed sales basis. These locations benefited from a greater emphasis on seasonless product and a strong value proposition. We currently operate a 310 back stages, including 301 store within stores and plan to open 9 more this year. Our luxury nameplates, Bloomingdale's and Bluemercury were also impacted by macro pressures, although not at the same rate or intensity as Macy's. Bloomingdale's results were roughly in line with our expectations. Net sales declined 2.3% and comparable sales were down 4.3% on an owned plus licensed basis versus a 26.9% gain last year.
Bloomingdale's registered strength in beauty, particularly fragrances, men's and women's contemporary apparel and housewares. Bloomingdale's outlet, a relatively undeveloped part of the nameplate that appeals to the more value-conscious luxury customer also continued to outperform. At Bluemercury, results once again exceeded expectations, benefiting from our differentiated product mix and unique competitive position as a luxury beauty retailer. Net sales rose 4.4% and comparable sales increased 4.3% versus a 25.2% gain last year, benefiting from strength in clinical and medical skin care as well as color.
Quarter-to-date, demand trends have accelerated from April across nameplates. As the weather has turned more seasonal, our customer has been responding well to our compelling offerings and price points. We are likely also benefiting from pent-up demand. Although encouraging, we do not have clarity on whether or not these improvements indicate a trend change reflective of a healthier consumer. These improvements have been strongest at Bloomingdale's and Bluemercury, potentially indicating a further bifurcation of customer behavior by income tier, which we are closely monitoring.
While first quarter adjusted EPS at Macy's, Inc. was ultimately better than our expectations, we did not end as strong as we would have liked. We will not carry problems from one quarter to the next. We have moved quickly to improve the composition of our assortments for the back half. At the same time, we are also taking a more cautious view of our customer. The high end of our second quarter and full year guidance ranges assume heightened macro pressures experienced in mid-March through April that they persist, while the low end of both contemplates potential deterioration as the year progresses.
If demand improves, we will use our ample inventory receipt reserve, which is above last year's levels to chase into areas of strength as they materialize. Availability of goods remains robust, and we are confident that with our strong liquidity position, we will be able to secure the right product to support demand curves, if justified. Now let's turn to the specific actions we have taken to ensure we are well positioned to compete in the back half and longer term.
For the second quarter, we have accelerated the timing and depth of promotional events, markdowns and clearance at Macy's to liquidate seasonal merchandise. This includes slower moving first quarter spring transitional receipts as well as May flows that we were unable to impact following the rapid deterioration in demand. We are utilizing our pricing science tools to approach markdowns and promotions with precision to maximize merchandise margin. We have also adjusted the timing, composition, amount and value proposition of receipts.
For the third and fourth quarters, we are leaning into categories that are working, like beauty, career sportswear and gifting and are further reducing our emphasis on down-trending categories. Looking specifically at the fourth quarter and our leading position as a gifting destination, this year, we will have more newness compared to last year, including exclusives that leverage our strong vendor relationships in beauty, where we had great Mother's Day and Valentine's Day performance and in toys.
We also recognized the need for a better balance of cold and warm weather goods at Macy's. Adjustments have been made to flow product closer to need. In addition, we are working with our partners to offer more seasonless year-round fashion content. Other actions taken, improved receipt flow and in-stock position within our core assortment, enhanced pricing algorithms to maximize sales, margin and competitive positioning and updated marketing messaging to speak to our even stronger value proposition.
It is imperative that we have the right assortment, including the appropriate mix of private and national brands that our customers care about with compelling value and price points that appeal to our diverse fashion-conscious base. Value does not mean the lowest price. It means offering the right brands, fashion content and elevated omnichannel shopping experiences. This morning, we are excited to share that we are bringing Nike back to the Macy's nameplate this fall. This mutually beneficial relationship reflects our strategy to provide customers with an enhanced and elevated offering.
Starting in October, an expanded Nike selection, including apparel, plus size women's, big and tall men's, kids, bags and gear will be available online and in key locations nationwide. Footwear will continue to be sold in our Finish Line licensed locations. We look forward to scaling our Nike partnership with additional locations in spring of 2024. We remain focused on the long term. Balance sheet health and cash preservation are critical to achieving our goals. About 6 months ago, we embarked on a cost-savings project to reimagine our ways of working, drive clear prioritization across key enterprise capabilities and reduce complexity.
Given late first quarter trends, that work was accelerated, and we have identified an additional $200 million of cost savings for this year and roughly $300 million to $350 million of savings in 2024. We have also reduced this year's planned CapEx spend by roughly $50 million. Adrian will discuss the specifics, but investments in our five growth vectors remain protected. Our ambitions are greater than our recent results. As a seasoned retailer, we understand the challenges that we are facing, and we'll continue to pull the levers needed to achieve our aspiration of low single-digit sales growth and a sustainable low double-digit adjusted EBITDA margin beginning in 2024.
The biggest risk to achieving that goal is that pressures on the consumer further intensify at an accelerated rate next year. I am confident that we have the right strategy and team to lead us into the future. I have a tremendous amount of personal and professional respect for incoming CEO, Tony Spring. He is an excellent merchant and marketer and has a well-deserved reputation as an innovator, brand builder and talent developer. And this marks Adrian's first call as Chief Operating Officer and Chief Financial Officer, a promotion that is well deserved. Adrian's strategic thinking and financial acumen have enabled us to achieve our current position of financial strength and has set us up to continue to make crucial investments for future success. Congratulations to you both. I look forward to what you will achieve together. And I know you're all excited to hear from Tony, so I'm going to turn it over to him for some brief comments.
Thank you for the introduction, Jeff, and for your leadership and tremendous support. And thank you to our Board of Directors for their confidence and support. I also want to acknowledge the entire leadership team and our colleagues for their ongoing commitment to our brands and business. Please know how humbled and honored I am to have been chosen to take on Macy's Inc.'s CEO role this upcoming February.
For those of you I have not met before, let's start with my background and approach to leadership. I consider myself a curious generalist, who brings a high level of self-awareness and ambition to the teams I lead. As many of you know, I began my career at Bloomingdale's roughly 36 years ago. During my tenure, I've split my time somewhat equally between merchandise, marketing, stores and senior leadership. As I look back, I've always viewed the area I was in as the engine that was driving the business. Today, I realize how complementary and intertwined they all are. As a merchant, our products must be curated and compelling. As a marketer, our strategy must be engaging, inspiring and personalized.
Of course, our digital experience is closely linked as the window to our brands and a large source of commerce. As a stores leader, we must rally our colleagues around an enjoyable and differentiated experience centered on the customer. Finally, as a senior leader, we must ensure that our recipe includes the right balance of all of these elements. Over the last decade, I've had the distinct privilege of leading Bloomingdale's. I want to take a moment to acknowledge my team there.
During my tenure, we achieved record sales and customer and colleague engagement. Coming off our 150th anniversary, Bloomingdale's offers a curated merchandise assortment and has a loyal following. Our loyalty program is best-in-class, and our marketing is distinctive with events, activations and pop-ups animating many campaigns, which underscores my personal belief in retailers there. I view Macy's Inc. as an incredible and unparalleled portfolio of nameplates and brands, representing off-price to luxury, on-mall to off-mall, private to national brands, our multichannel, multigenerational and multi-category platform gives us opportunity to satisfy the customers' appetite for all of our categories.
It's important to acknowledge the tremendous progress we've made as we've modernized our business, which sets us up for future success, but it's also important to recognize that across nameplates, we have room to improve. That is what makes our potential so exciting to be a part of. My experience at Bloomingdale's bring an outsider insider perspective to the Macy's brand, which is beneficial during this heightened period of uncertainty.
Over the next several months, I intend to continue to listen and learn and lead my new areas of responsibility, which include merchandise, marketing and digital strategy. I will do so with clear eyes and a focus on what's possible long term while maintaining a disciplined approach to near-term controllables. I look forward to sharing my thoughts and observations as the year progresses. One thing I know for certain is that this is a renowned business and one which I'm incredibly passionate about. Recent results and our revised outlook have not changed my view. However, we were out of balance in the first quarter, overemphasizing spring seasonal merchandise rather than cold weather and seasonless merchandise. We are containing the related markdown to the second quarter and have adjusted the timing amount and composition of buys for the fall and holiday.
Turning to the long term. I now want to take a moment to provide my thoughts on each of our five growth vectors, which are designed to focus our resources and our teams on the leverage that will bring top line growth back to Macy's, Inc. in 2024 and beyond. While still early, we believe that each will be a meaningful contributor to the future. First, let's start with Macy's private brands. I firmly believe that our success is tied to the right combination of compelling private brands, popular national brands and the curation of unique brands appropriate for our target customers, all of the compelling value equation. That has been one of our formulas of success at both Bloomingdale's and Bluemercury. In my new role, I have had the pleasure of working even more closely with the Macy's private brand team on their strategy.
During the first quarter, INC Women's and Club Room Men's both of which have been reimagined, outperformed their respective broader apparel segments at Macy's. Looking ahead, we are excited about the launch of our newest brand, which will offer women's apparel and accessories later this summer. Stay tuned. Our second growth vector is small format stores. These allow us to optimize our total store portfolio at both Macy's and Bloomingdales' through replacement, densification and new market opportunities. They balance our traditional large-format on-mall locations with a more localized off-mall experience that's physically closer to our existing and target customers, encouraging a higher frequency of trips.
We're continuing to enhance these stores and are learning every day how we can better serve our customers. Results are very encouraging. During the first quarter, our small format stores opened at least one fiscal year achieved positive comparable owned plus licensed sales group. Customer experience scores, particularly regarding the physical environment, ease of checkout and colleagues being helpful and available are high. Interestingly, we are experiencing limited-to-no cannibalization in existing markets where we open off-mall formats.
Instead, customers are making additional shopping trips. Long term, we remain bullish about the small format store opportunity as off-mall retail continues to be a dominant in-person shopping method for U.S. consumers, and we're evaluating potential locations to enable accelerated growth. We look forward to sharing more as this work develops further. Now on to our third growth vector, Macy's marketplace. We are seeing new customers and a younger existing customer respond to our new and expanding categories, which has resulted in increased basket size.
During the first quarter, we added approximately 450 brands ending the quarter roughly 950 brands. We're seeing indicators of a strong growth rate with marketplace's gross merchandise value increasing over 50% compared to the fourth quarter of 2022 and average order value and units per order approximately 50% above those customers not [ shopping ] at marketplace.
Needless to say, we are very excited to launch a Bloomingdale's marketplace earlier in the fall. Our fourth growth vector is luxury. With fiscal 2022 representing record sales at both Bloomingdale's and Bluemercury, we're excited to continue to invest in both nameplates. The teams are attracting sought-after brands, leveraging their distinctive marketing and satisfying their core customer.
Based on the power of our relationships with our vendors and customers, I see opportunity for store, digital and marketplace growth in both nameplates. At Macy's, we've made a commitment to elevate our beauty business with a larger luxury assortment. We first began to offer more luxury beauty at Macy's in 2018 and has since added many brands, including Carolina Herrera Beauty, which is exclusive; Armani; Saint Laurent; Tom Ford; Gucci, Maison Margiela; and La Mer, just a name a few. This is an area that even in the current environment, we're seeing very limited price resistance and even more partnerships on the horizon.
Last but certainly not least, our fifth growth vector, personalized offers and communications. The power to talk to over 40 million consumers with the right offer at the right time really resonates with me. I believe it will be a true unlock for both our promotional offerings and merchandise messaging. During the first quarter, we leaned into personalization of a customer's offer within our typical event structure. These tests, which were based on predictive behavioral models allow us to show different customers' various value propositions by level of discount and category of offer.
This is in addition to loyalty life cycle offers such as [ data's ] earn-back accelerators and targeted offers to at-risk customers. Testing suggest that personalized offers can foster sales growth, margin expansion and stronger customer engagement. We have accelerated our analytics-powered campaigns in the second quarter, and we'll use learnings to inform our view of opportunities at both Bloomingdale's and Bluemercury.
Now before I turn it over to Adrian, let me say how excited I am to be working even more closely with him and to have his counsel, leadership and partnership. What makes this transition so seamless and the succession so thoughtful is the complementary skills that Adrian and I bring to this company. He has had a noticeable impact on the organization since he joined almost 3 years ago. Our balance sheet health, including no material debt maturities until 2027 and fixed interest rate debt give us the financial flexibility to continue to invest in our long-term opportunities and return capital to shareholders despite the uncertainty within the macroeconomic environment.
With Jeff's support, we will return Macy's Inc. to profitable growth. I look forward to getting to know all of you and sharing our progress. Now I'll turn it over to Adrian.
Thanks, Tony, and good morning, everyone. I want to start by thanking Jeff and the Board for their ongoing belief and trust in me. From bringing me on three years ago as Chief Financial Officer to recently expanding my responsibilities to include stores, supply chain and technology. With my new responsibilities as Chief Operating Officer, I have the opportunity to go deeper into the design and execution of our long-term goals. As we aim to maximize opportunity and value, I am hyper-focused on building a faster, more flexible and more efficient operating model that drives sustainable sales and margin growth by creating alignment on those priorities that will have a meaningful longer-term impact on this business.
That's a multiyear effort. And as I think about how to tackle it, I have started with several fundamental questions. What can we do to better serve our customers and improve the end-to-end omnichannel shopping experience? How do we optimize our physical store footprint with the small-format stores to accelerate growth while enhancing our inventory flow, merchandise planning and localized assortment capabilities and evaluating our updated growth aspirations, how do we further modernize our supply chain and technology infrastructure to support the omnichannel shopping experience we aspire to deliver in the future.
Reflecting on the last two months, I've been on a listening tour, spending a lot more time in stores, DCs and with the technology team identifying areas of opportunity. As I have been ramping up on these businesses, I've been highly encouraged to see stability in hiring, retention and turnover and have been impressed with the talent across these teams. I've also spent a significant amount of time with Tony. His experience in merchandising, marketing and stores serves as a nice balance to my years in large-scale transformation and consulting and my background in retail operations, including data and analytics, technology, strategy, stores and supply chain.
He is a seasoned operator that understands department stores and fashion inside and out while I'm the transformational specialists focused on modernizing our retail operations. We are fully aligned of what is needed to propel Macy's Inc. into the future. We will maintain a disciplined approach to our inventories and markdown liability, offer differentiated products and value to our customers and we'll not chase unprofitable sales. For us, that's now table stakes. Looking ahead, we will continue to strengthen the foundation of our core businesses while simultaneously investing in our five growth vectors. Despite recent headwinds, Tony and I remain committed to our aspiration of achieving low single-digit sales growth and a sustainable low double-digit EBITDA margin starting in 2024.
Now let's walk through the first quarter results of our five value-creation levers before I provide an update on our 2023 outlook. First, omnichannel sales. We generated net sales of $5 billion, a decline of 6.8% versus the prior year. Comparable sales on an owned plus licensed basis decreased 7.2%. Macy's, Inc owned AUR rose 4.7%, driven by ticket increases and category mix. For the year, we continue to expect an improvement in AUR year-over-year through a combination of ticket increases, lower markdowns and category mix.
Next, other revenue. As a reminder, beginning this quarter, we are reclassing credit card revenues and Macy's Media Network revenue to other revenue. Credit card revenues were previously reported as their own cash in, while Macy's Media Network revenue was reported within SG&A. During the quarter, other revenues were 3.8% of net sales. Credit card revenues were $162 million, down $29 million from last year. As a percent of net sales, credit card revenues were 3.3% or 30 basis points lower than last year, primarily reflecting the impact of higher bad debt within the portfolio.
Macy's Media Network revenue was $29 million versus $26 million in the prior year. Moving to the second value creation lever, gross margin. Our gross margin rate was 40%, 40 basis points above prior year. Merchandise margin was flat, benefiting from lean beginning of the year inventory levels and lower clearance markdowns, offset by promotion and category mix shifts. As it relates to delivery expense, continued cost mitigation efforts contributed to a 40 basis point improvement versus last year, primarily on better contracted rates, reductions in packages per order and a 1-point decline in digital penetration.
The third value creation lever is inventory productivity. Inventory declined 7% year-over-year, in line with our net sales decline. Trailing 12-month inventory turnover was down 2% to last year, reflecting the decline in sales versus the comparable period. Adjustments to the timing, amount and composition of receipts beginning in the second quarter are expected to drive back half sell-throughs and strengthen inventory productivity.
Expense discipline is the fourth value creation lever. SG&A increased $45 million or 2.4% to $1.95 billion. SG&A as a percent of total revenue was 37.7%, 350 basis points higher than last year. As a reminder, the increase in minimum wage for stores colleagues was fully implemented on May 1 last year. The higher year-over-year SG&A dollars and rate reflects the lapping of these increases and includes continued investments in colleagues across competitive pay incentives and benefits.
SG&A also includes the increase in depreciation and amortization expense. After accounting for interest and taxes, first quarter adjusted diluted EPS was $0.56 versus $1.08 in 2022. Lastly, the fifth value creation lever capital allocation. Our top focus is liquidity. We continue to take a thoughtful approach to capital allocation, prioritizing a healthy balance sheet, investments in our business and our five growth vectors and returning capital to shareholders.
In the first quarter, we generated $105 million of operating cash flow compared to $248 million last year, primarily due to lower earnings in the current year quarter versus last year. We invested $296 million in capital expenditures. Free cash flow inclusive of proceeds from real estate was an outflow of $166 million. As part of our open-ended share repurchase authorization, we bought back approximately 1.4 million shares for $25 million. We also paid $45 million of dividends. Now on to our outlook.
Let's start with a discussion of our cost savings efforts. As Jeff mentioned, we have identified an incremental $200 million of cost savings for this year versus our prior outlook. For 2024, we estimate the savings to be between $300 million and $350 million, impacting both gross margin and SG&A. Roughly 30% of the savings in 2023 will be in gross margin, and the remainder will be in SG&A. A small portion has been recognized in the first quarter. Savings build as the year progresses and will be most significant in the fourth quarter.
Now let's discuss our full year and second quarter outlook, both of which contemplate ongoing pressure on our customer. The low end assumes macro pressures worsen while the high end assumes they remain stable with levels experienced in mid-March through April. With so many mixed signals, it is prudent to take a cautious stance. We will continue to embrace the financial and operational disciplines that we have implemented over the past several years. If demand improves, we will lean into our reserves and chase intra-quarter. But we are going to wait for proof points to do that, and our improved May trends are not enough.
Alternatively, if demand trends worsen, we have the flexibility to make further adjustments. We can and will do better. We have been course correcting and have made adjustments to the second, third and fourth quarters. Looking at the full year, our expectations for Macy's, Inc. are now as follows: net sales of $22.8 billion to $23.2 billion. Comparable sales on a 52-week owned-plus license basis to be down about 7.5% to 6% year-over-year.
As a reminder, compares ease in the third and fourth quarters. Other revenue to be about 3.6% of net sales with credit card revenues accounting for 82% to 83% of that. The reduction in our credit card revenue outlook is primarily a result of our reduced annual sales expectations. A gross margin rate of 38% to 38.5% on our expectation for deeper markdowns in the second quarter to drive sell-throughs and ensure we enter the third quarter in a clean inventory position. The second quarter should be viewed as an exception, not a change in course.
Our philosophy remains unchanged. We continue to be focused on protecting gross margin. We will navigate the year with the intent to stimulate increased conversion and margin dollar expansion. Our annual gross margin rate outlook also includes an estimate for increased shrink, which we call shortage relative to our initial expectations. Starting in Q2, we have further enhanced our pricing science capabilities to automate strategic promotions from vendor direct to owned inventory. This gives us the opportunity to bring an automated pricing solution that incorporates category elasticities, maximizes inventory turnover and optimizes unit sales left and margin dollar expansion to our owned inventory portfolio.
In addition, we also continued to refine our competitive intelligence, which provides us a better understanding of the competitive landscape and enhances our decisions around location-level pricing. SG&A as a percent of total revenue is expected to be about 35.4% to 35.5%, reflecting the reduction in our sales expectations, along with the cost savings work discussed earlier.
And adjusted EBITDA as a percent of total revenue of roughly 8.8% to 9.4% or 9.1% to 9.7% as a percent of net sales. After interest and taxes, we are estimating annual adjusted diluted EPS of $2.70 to $3.20. This takes into account a roughly $0.12 negative impact from increased shortage relative to our previous expectations. Our adjusted EPS guidance does not assume the impact of potential share repurchases but does consider the proactive actions taken for the back half.
For the second quarter, we expect net sales of $5 billion to $5.1 billion. Gross margin rate to be down no more than 100 basis points for the second quarter of 2022. The second quarter includes clearance markdowns to address remaining first quarter seasonal inventory and May receipts that we were unable to adjust in time to align with our updated sales expectations. We expect this to be the only quarterly deterioration to prior year.
Adjusted diluted EPS is expected to be $0.10 to $0.15. End-of-quarter inventories to be down low to mid-single digits to last year on a percentage basis. While we cannot control the macro environment and how our consumers respond, we remain focused on offering our customer the best product, experience and value. There is no finish line for this work. Over the past few years, we have made significant progress across the organization. We have reduced our reliance on markdown allowances, shifted to an upfront cost negotiation model with vendors, incentivized merchants at the Macy's Inc. level rather than by their respective category performance and build data and analytics into our processes.
Looking ahead, the Macy's nameplate is shifting to cost accounting in 2024, which should help incorporate further disciplines. These actions together speak to how we are running our business from a much healthier and more educated place than in the past. So while we recognize the macroeconomic climate has created a larger headwind on our business than originally anticipated when we first introduced our annual outlook in early March, we are responding and remaining agile to ensure we meet the needs of our customers. The disciplines we have built into our decision-making and culture gives us the foundation to balance the current environment while executing with clarity on our long-term growth goals.
We remain committed to our aspiration of achieving low single-digit sales growth and a sustainable low double-digit adjusted EBITDA margin beginning in fiscal 2024, even with the assumption that macro pressures persist. With that, I'll turn the call back over to Jeff for some closing remarks.
Thanks, Adrian. We are a modern department store with a rich history that has weathered these storms before, and we will do so again. Our financial health, operational efficiencies and data-driven process and tools are unique advantages that allow us to navigate through uncertain periods as we continue to invest in the future.
We are a competitive team here at Macy's. We are not standing still. We are committed to better serving our customers and improving our business. Our teams are fully aligned, and we remain focused on protecting and preserving the second half of 2023 in our future growth opportunities, including achieving our sales and EBITDA goals. And with that, operator, we will open it up for Q&A.
[Operator Instructions] Today's first question is coming from Matthew Boss of JPMorgan.
So first, Tony, congrats on the promotion. Maybe high level, where do you see the largest low-hanging fruit for acceleration opportunity as you take the helm? Jeff, could you elaborate on the cadence of top line trends? And in particular, where have you seen this most recent acceleration, whether by category or across income cohorts? And then finally, for Adrian, with this dynamic backdrop, what's your comfort with inventory on hand and just your confidence in clearing any excess by the end of this quarter?
So Matt, let me go first, and then we'll turn it over to Tony and Adrian. On the cadence of the top line, what you saw was that when you looked at our demand and what was happening in the -- February hit our expectations. As did early March. It started to deteriorate in the latter part of March, and then it decelerated even further in the month of April. So what we saw there was when you look at the seasonal categories, so we basically had -- we thought the appropriate level of carryover in fall and holiday, we had some fresh transitional receipts there. We sold through that pretty aggressively in the first half of the quarter and did not have enough content in those categories as we look at the back half. We had well transitioned into spring and seasonal, and we did not have the sell-throughs that we expected at regular price and when we started to mark it down. So that's the piece that when we're starting to see those inventory levels come up, which is where we kind of bucketed where we're going to be in the second quarter to deal with that to have the appropriate units going into the third quarter.
So that would be on kind of the cadence of the top line. When you look at the recent trends in the month of May, you definitely saw a bounce back across nameplates, but most pronounced when you look at Bloomingdale's and Bluemercury. So that's the comment that we're making. We're attributing that to two things. One is that it's a pent-up demand for warm weather categories, which is definitely where we saw the acceleration of sell-throughs or is it an improvement in the macro environment? We don't know that answer yet. So when you look at our guide for both the second quarter and the balance of the year, just to reiterate where we're at, we looked at the trend from the end of March through April and extended that by brand, by category, all the way through the rest of the year.
We obviously have lots of penetration differences between quarters. Certain businesses become much more important as you get to the back half of the year. We did this very scientifically. We looked at the 1-year CAGR. We looked at a 2-year CAGR. We even went back and looked at 2019. So that's how we approached when we looked at how we were looking at the top end. And then the lower end of the guide was really if the macro conditions step in and they get worse. So that is what's implied in our guide know that when you look at our overall strategy, our objective is to make sure that we are responding in the moment to how customers are transacting.
What I would tell you about the customer right now, particularly on the Macy's side, is they're buying much closer to need. So our opportunity to have the receipt reserves that we have to be able to respond in time with all the abundance of inventory to send to market is prudent. So I'll turn it over to Tony to answer your first part of your question.
Thanks, Matt. I would say, first off, I'm obviously excited about the opportunity and excited about the team that I see at Macy's as being really dedicated, passionate and certainly committed to the overall business results despite the challenging business climate. Macy's is a beloved brand with a multigenerational customer base. The scale of the business really should be an asset. I do see, however, opportunities to simplify our operation, make the experience easier for our colleagues to execute and more enjoyable for our customer.
I believe the Macy's Inc. portfolio should be one that we can leverage more fully from both off-price to luxury. I think we've done a good job of leaning into the opportunity on data science or the STEM part of our business. I think if you think of Steam, the art part of our business, we have more work to do on curation, imagination, storytelling and inspiration.
Terrific. Just to speak and close out on the topic of inventory. The simple answer is that we're confident in clearing through the inventory coming out of the second quarter. And as you know, we have the track record around inventory management. Our track record is clear, and we're getting better and better every quarter. Just to put in perspective, we ended last year down 3% in inventory. We ended the first quarter down 7% in inventory. We expect to end the second quarter down low to mid-single digits on inventory, so we are confident given our capabilities and our tools.
Now just to put in context, the way we think about inventories in terms of the volume, the mix and having fresh content. And the reality is what we experienced in the first quarter is that we transitioned early. That was a clear bet for us because we were able to have limited carryover coming out of the fourth quarter and coming out of holiday. So we entered in a very solid position, but the weather cooled. But when you look at our content, beauty healthy numbers; career sportswear, healthy numbers; men's tailored, healthy numbers; warm weather, spring seasonal for most of the quarter, soft numbers. So we're putting in our tools and our actions in place, which we have a clear track record on. And we are confident that we'll be able to work through the inventory and get back to a balanced perspective on inventory entering the fall season.
The next question is coming from Oliver Chen of TD Cowen.
Jeff, Tony and Adrian, I was curious about merchandise margins and promotions for the back half and what's implied in guidance. As you do take the markdowns in Q2, what's the duration of those? And how do you do those most efficiently? Would also love your take on just things you're monitoring with the consumer of that behavior. And I assume that the comp volatility is likely in transaction counts. I would love your thoughts on that. And lastly, Tony, what do you think about the younger customer and the opportunity there more broadly? How are you dissecting strategies with respect to that?
Oliver, let me take two of your questions. So the merchandise margins, when you look at that, as we indicated, we think that we're going to be above last year's levels for obviously saw that in the first quarter. We're anticipating that in both the third and the fourth and the second, we thought it was going to be within 100 basis points of last year. Now the full year will be higher than the previous year.
What you see and can expect from us is that when you look at the spring overhang that we have right now and are anticipating that we will take the appropriate price markdowns there. And what we've been doing through the first part before we marked it down as we were doing higher POS on those. So that has a cycle that we're playing through. We've got -- we have a number of categories in which we're getting higher AURs and higher margins than we did last year. We're expecting that to continue.
And then there's other categories in which we're getting sharper on our price points as we know that the customer is looking for promotional value right now. You can see what we're seeing in our price arms in both outlet as well as Backstage. But what we're doing with specials and what we're doing with flash sales. Those are all going to be comparable to where we were last year, and we're looking at the content right now of where that is going to be. So we have a lot of confidence when we look at the back half with respect to where we're going to be with pricing promotion. Probably more important when we look at the back half is where we're going to be with the newness and where we're going to be with all of our gifting categories and how we've rebuilt that based on all the learnings that we had from fourth quarter of last year. So that is how merchandise margin. So expect merchandise margins to continue to be stable and the promotional as I've described. So Tony.
Oliver, thanks for the question. Let me say first, we will continue to attract a multi-generational customer. I think it's an advantage of being a department store that we have five generations shopping with us. But in terms of your question and how we target and grow the younger customer base, I start with, I'm proud of the fact that the Bloomingdale team has generated more business with the younger customer than we did years ago.
It starts with first having the brands consumers are looking for, so challenging our merchant team to be in the market and inquiring through marketplace or through our own distribution channels, those brands. Second is obviously a strong digital strategy. We know the younger customer starts first online. And then thirdly, making sure that we have a powerful presence in the social space.
I think we've made some progress, we still have more work to do. I would also add that remember, all of our brands are great at being a part of life moments. And so whether that is sweet 16s, birthdays, anniversaries, wedding, first house first job, all those connote a younger customer. And I think we have an opportunity to own a greater share of that business.
Let me amplify a point that Jeff made on margin, and then I'll speak to the consumer. With regards to the merch margin, I just want to be very clear that the deterioration of no more than 100 basis points is isolated to the second quarter. When you look at our annual outlook for the year on gross margin, it is going to be higher than last year. And as we think about the back half of last year, we have the opportunity to actually beat just given the softness on margin that we experienced in the third and fourth quarters.
With regards to the consumer for the year, we're being cautious about the consumer. Now in the month of May, we have seen slightly better trends than what we saw coming out of April. But it's too early to tell from our perspective. So we're actually taking a cautious approach to the high end of our guide, which reflects the March and April trends, the low end of our guide assumes worsening of consumer trends. As we think about May and that favorability on the trends there, is it warm weather? Is it more compelling values? Is it pent-up demand? Is it a new trend? For us, it's too early to tell, so we're taking a cautious stance.
The next question is coming from Brooke Roach of Goldman Sachs.
Jeff, I was wondering if you could provide a bit more context on the customer engagement trends that you're seeing between your higher-income demographic cohorts and your lower-income demographic cohorts as you ended the quarter and moved into May. Are you seeing evidence of trade down or further pressure on traffic or ticket among any specific sub demographic? And then for Adrian, can you provide a little bit more context on the additional cost savings that you identified. Where are these cost savings being sourced from? How much do you expect to drop to the bottom line? And are there further opportunities to continue to optimize your cost structure?
So Brooke, let me start with your question on customer behavior. As we've reported in past quarters, we're not seeing a trade down not yet. What we have seen is that all customer types, I'll speak to the Macy's brand, has been basically down about the exact same percentage. What we're seeing is that in some cases, with customers that are responding to either Backstage or they're responding to Market by Macy's, it's entailing another trip, and we're seeing more spend out of them.
When you look at the dynamics of our transactions, what you see across all of our customers is basically an increase in AUR about the exact same basket size is what they had in their visits last year. So what they're doing is they're buying less units. They're buying with the higher AUR, so the basket size is about the same. They're coming with the expectation of spending x and that's what they're going out with.
But we're not seeing where you're seeing that -- but when you look at the income types that you're seeing, one showing up in Backstage that didn't before. The ones that are showing up in Backstage are in the main house, and we're getting more spend out of them in aggregate. So what we saw in the month of May, though was a separation of the trend, the improvement in the trend at both Bluemercury as well as Bloomingdale's. So there is something that's on our radar screen to see does that more affluent customer. Are they -- is it showing up right now that they're healthier than the Macy's customer, Roach, obviously, watching that one very carefully.
Brooke, great to be with you as well. With regards to cost savings, let me give a little bit of context. We started this work about 6 months ago. And so what we've been doing, given the trends that we saw in the first quarter and year-to-date is really accelerate those activities. The source of the savings comes from two places. The first is gross margin, which represents about 30%. The second is around SG&A.
Within gross margin, we really focus on our inbound freight, our carrier network, our delivery expense, and we've been able to contract lower rates. So this is something that should actually trickle into future years for us. The remaining balance is really around SG&A, and it's about reducing the complexity within the business, repositioning the organization for growth and identifying operating expenses on the non-payroll SG&A side that we can actually take out of the system.
This year, we've identified an incremental $200 million of opportunity. Next year, the annualized run rate is $300 million to $350 million. In addition to responding to the environment, we've actually reduced our CapEx forecast laminate at that dimension from $1 billion to about $950 million. But to be clear, the growth vectors are protected. We're investing appropriately in the team and the initiatives to get back to growth in 2024. So we've been very surgical, very disciplined in where we're making adjustments and it's just going to be good for the business longer term.
The next question is coming from Dana Telsey of Telsey Advisory Group.
Welcome, Tony, can you please expand on the AUR improvement you're expecting to see in the back half of the year, which categories. And also, can you expand a little bit on the store strategy, both for Bloomingdale's and for Macy's in the small store component? And lastly, welcome, Tony, what do you see as bringing over from Bloomingdale's to Macy's.
Dana, so let me take the one on AUR. And what you saw from our first quarter post was about a almost 5% -- a 4.7% increase. We do expect that we're going to have a higher AUR in the back half. A lot of that is category mix. So when you look at some of the higher AUR categories are trending for us, and that is driving up that what you see there. There's other categories in which our AUR is below last year based on where we see the environment, how we're looking at price matching, when you look at our competitive cycle, ensuring that we've got the best value for our customers as they're searching in that particular time.
So we do expect an improvement in AUR year-over-year. I think that outlook reflects our expectation for all of the heightened markdowns that we're talking about in the second quarter and the planned markdowns that we have for what we're doing in the back half both POS as well as clearance. What I'd bring up is just that our inventory is in really good shape.
So while we are heightened right now in spring merchandise, we are chasing opportunities in other categories, we are very committed to that. We have inventory reserve across all of our categories, even the ones that are down trending because freshness is the name of the game in our business, and we always have available content that's out there in the market to purchase. So any demand signal that our merchants have, just remember that our merchants are all rewarded based on the collective Macy’'s brand and how it's doing. So there's huge opportunities for us to ensure that the right customers are being addressed with the right content at the right time.
So there is going to be AUR improvement and -- but through all of that, but at the end of the day, we're making sure that our receipts are consistent with where our customers are going.
Dana, nice to connect again. I appreciate the question. No one is a bigger fan of the Bloomingdale's brand in business than I am. But I would reframe your question is how do we develop a stronger portfolio. Where we can learn from each other without becoming one another. Bloomingdale's strength is certainly curation, bringing variety versus redundancy to the expanded assortments that we offer.
Bloomingdale's has a great, strong, best customer base, representing a large portion of their business, but how do we create stronger best customer programs for each of our brands. While Bloomingdale's gets credit for retail-is-theater, The Parade, The Fireworks, the Flower Show are all a part of Macy's heritage. Each brand needs to develop compelling programs to motivate their customer base to engage more frequently, both in-store and online. So I'm looking forward to what we can do going forward.
Dana, good to be with you as well. With regards to our store strategy that focuses on growth and our small format stores is actually part of that. As we think about the store strategy, we feel good about the box size we're looking at, the format we're looking at the locations and the power centers that we've been having conversations with.
But the thing that we're very excited about is what Tony spoke to earlier in the conversation, which is on a comp basis on small stores, what we're seeing is no cannibalization against the big box as well as comp positive growth in those stores that are not able to comp. So we're on to something quite special here, and we'll share more information as things progress.
The next question is coming from Paul Lejuez of Citi.
Curious how your e-com business performed over the quarter versus stores, if you saw a similar fall off on e-com or was it more isolated to the store level? And then I'm curious if you could just talk about how you came into the year thinking about how you would manage inventory in the second half versus how you're planning inventories currently?
Paul dot-com and stores were very similar in terms of what happened to their performance in the first quarter. We came into the year expecting that, that was going to be the case that, however, we were modeling dot-com and stores. So just remember where we were in terms of penetration in dot-com. This is basically the resettling of that as customers are coming more back to the stores channel. Obviously, very influenced by what they see digitally, either they transact there or they do research there.
But in 2019, we were at a 25% penetration of digital. And in '22, we were 33% after a high in the pandemic of 40%. That settles in '23 at 33%. So the dot-com business was off 1 point for where stores were in the first quarter, pretty consistent with what we expected. I would tell you that on the big headline with respect to both stores and digital is the traffic has been relatively good. So basically flattish online, slightly up in stores, conversion down in both at about the same rate. So we do expect that this is the reset year with the penetration between them, but we do expect more aggressive growth in digital in the future versus stores as we think about '24 and beyond.
And that's going to be [ hoisted ] by a lot of ideas and strategies, the one of the big ones is going to be what we're doing with Marketplace. Marketplace had an outstanding first quarter. We're in the beginning stages of it. But to Oliver's earlier question, we're very excited to have about Marketplace is really attracting the Gen Z customer, particularly in categories where it was not economically feasible for us to carry in the past. So when it relates to the way that we kind of plan inventory, I think that outside of what happened to us in spring with spring seasonal content and seeing the drop off in sell-throughs across all different value buckets, everything else has pretty much performed as we expected it.
Again, just to remind, we have a very healthy reserve. So if we're buying into a sales plan, we hold back in the receipts. We've worked all that out by our new model of working at upfront costing versus working on an MDA model or a markdown allowance model that we used to have in the past. So we're not buying really needless receipts where we have not seen the signal for customer demand, and we are not perfect here. We have so much opportunity. We've got a really good pricing science as it relates to how we mark down goods. We are developing much better pricing science in how we promote goods based on demand signals and personalized marketing and just the opportunities that we see there as well as being very responsive to where in common items like Levi or wherever it might be, a lot of retailers carry but making sure that we're well priced, so that the customer is not disappointed with our values versus a competitor. So all that goes into the mix. And I would just say that inventory control, not a lot of surprises outside of what we talked about in terms of spring seasonal sell-through.
The one thing I would add, just to amplify a few things on the inventory. Going back to the question earlier around the importance of volume mix and content. As we think about the volume, we've already made adjustments for the back half to align with our sales volume expectations for the balance of the year. The important actions were taken in Q2 to minimize liability going into the back half really gets into the mix for the back half of the year.
The one thing I would amplify that Jeff spoke to earlier is we're gifting the destination. And when you think about the shift in our content getting into the back half, we're going to be leaning more into beauty and gifting, which is 30% of our business in the first quarter but exceeds 40% in the fourth quarter. And the beauty business has been growing going through the first quarter. So we feel that we're really moving ourselves into a position of strength. And with newness, we'll have more newness this year than we did last year. And you don't want to forget about the Disney distortion and toys as well as Nike being in the fourth quarter.
The next question is coming from Alex Straton of Morgan Stanley.
I just have a couple for the group here. First, I know that higher private label penetration was an opportunity for the year. So I'm just wondering where that stands now and if your view has changed at all there? And then second, just a quick follow-up on the cost savings question from earlier do you still plan to invest in people and tech in the same way you've outlined last quarter? Or has anything been pared back there on the demand slowdown?
Alex, could you repeat your question on the SG&A or the cost savings, we didn't quite catch it. Our apologies.
No problem. The question was just do you still plan to invest in people and tech in the same way that you outlined last quarter or if that's been pared back at all on the demand slowdown?
Got you.
Alex, let me take the private brand, and then Adrian will take the second part of your question. Our ambition on private brands remains the same. So it was 16% of our penetration. We do see that growing over time. And as you've heard us talk about in this particular call about INC and Club Room, which have been brands that have been touched and basically -- they basically have been burnished. So they're performing quite well. And then when you look at what we've got coming, we've got a whole portfolio. We have 24 private brands that are all being touched over the next 2.5 years. So we're in the middle of that right now.
So the first brand new one is coming in the summer, and we'll stay tuned on all the details of that, but it is across accessories, it's across women's. It does address those key basics that we're talking about seasonal-based -- seasonless basics. We're actually quite excited about where that will be, and we'll give you a full rundown on that. But we do think that the private brands will raise in penetration in out years and it is why it's one of the big growth factors. -- not only is the -- when you look at the [ Mugs ] opportunity, the margin opportunity. But really importantly, when you look at the five things that we are doing with private brand, brand identity against customer types, original design, really strong strategic sourcing, relevant size and fit, which is one of the biggest pain points for our customer and, of course, compelling value. So we're very bullish on private brands and look forward to sharing all of those learnings and as we develop those strategies and launch them.
Alex, I think what you're hearing from Tony, Jeff and I today is the importance of navigating the near term in terms of what's in front of us, but not losing sight and clarity about the long term. So in terms of being prudent about what's happening in the current environment and the uncertainty that's out there, we've accelerated the $200 million this year, which will translate to $300 million to $350 million in cost savings next year. We've reduced our capital spend from $1 billion to $950 million in terms of our current projections for this year. The key thing to keep in mind is that we will continue to invest in growth, whether that be tech, whether that be people.
So as we move through this uncertain period, we're taking the necessary aggressive actions to protect growth investments that will get us to positive growth and profitable growth in future years. So we'll continue to drive efficiencies in our operating model. We'll continue to invest in the growth vectors, and we'll find ways to be more productive with our assets.
The next question is coming from Chuck Grom of Gordon Haskett.
Jeff, you talked about flowing product closer to need, and I think that's interesting and important for the business. And I'm wondering if you could just elaborate on that a little bit further and how deep the conversations have been on that front with some of your suppliers?
Yes, Chuck. So as I mentioned, when you look at the receipt reserve, that is always available to respond in season. So we're not allocating that in advance. So when we cut back, we went to kind of the upfront cost model versus the MDA model that gave us all of the liquidity that we wanted to build into the system. And that when a customer is signaling something in season, we're able to jump on that. So that is a discipline that has been well honed over the past year that you will see play out for the balance of the year.
We did, though, do receive cuts when you look at total to make sure that we retain that liquidity, and we didn't take our full reserve to respond to where we took sales down for the balance of the year. So there were conversations that we had with brands. We see downtrend in categories that are not doing well to ensure that we're able to put the right receipts against those categories that are trending. This is a balanced conversation for us. Every single merchant knows that those receipts are really company assets to serve our customers and not their own.
And that has -- expect that discipline to continue with us. So as soon as -- I mean we're ordering every single week based on how things are trending. And as I mentioned, we find there's plenty of inventory in the market to be able to respond to that.
Okay. Helpful. And then from a category perspective, I wonder if you could just elaborate across the board, what you saw in apparel and other areas. And in particular, you called out textiles and top of table and housewares improving which is interesting. So I was wondering if you could just elaborate on that and what that tells you about trends over the next few quarters in that area.
Yes. So what we're seeing right now in apparel is that when you think about the bulk of our drop in the first quarter from our expectations has been in the seasonal categories in men's, women's and kids. So that would be all the spring and early summer content. And again, too early to tell whether or not that is content or whether or not that is environment. So we're working through that right now. But we're going to -- as mentioned, all the pricing that we are taking is to ensure that we have the right number of units going into the third quarter.
What's going on in the rest of the business is that you've got pockets of strength in center core. The beauty category continues to be strong across fragrance, color and treatment. You've got the home categories, as you mentioned. Things like textiles has been a real turnaround for us with newness coming, like our [ Mugs ] opportunity that you're going to see from us in the fourth quarter. The Housewares and the tabletop, they were quite depressed based on coming out of the pandemic and the demand curve there.
We're starting to see signs of life there. On our last call, we talked about looking for signs of life there. We started to see that in the first quarter. We really see it in the Bloomingdale's brand right now where the home business is quite robust. We're starting to see signs of that in -- on the Macy's side. So again, when you look at the overall categories, I think to a comment that Adrian made to Paul Lejuez' question earlier, what you need to look at is look at the categories and how they penetrate in each quarter. So this idea about beauty and gifting being our two strengths that are trending positively in the first quarter and having a much higher penetration of those in the fourth quarter is our confidence in where we completely de-risked our plan for what we know today with our customers today for the back half of the year. And we feel like our guide is appropriate and conservative for what we see in the customer underpinning.
We're showing time for one final question today. The final question is coming from Jay Sole of UBS.
I wanted to ask about this new Nike partnership. Maybe can you just tell us a little bit about how that partnership came together? And maybe how big was NIKE as a percent of sales back the last time Macy’'s had it? And do you expect this to be like a long-term partnership? Or is this getting inventory for a couple of quarters and then sort of we'll see from there?
Long-term partnership. So I look at it as we took a pause. We've been out of the Nike brand outside of where we are in footwear and certain license businesses in the kids really for the last 1.5 years. And we're committing to a long-term partnership together and our opportunity to basically provide our customer a multi-brand or a multi-category experience that is elevated and enhanced. And so we're not quoting what we used to do, but obviously, it's one of the most important brands for our customer.
We had lots of customers that were disappointed that we didn't carry it over the past year. So this is very important to uniform for many of our customers. It gives [ heft ] to the balance of our active assortments. We're excited about things like our Reebok engagement, obviously, what we're doing with the other brands. This is going to be, we believe, a real catalyst without cannibalizing much else in the balance of the apparel assortments. So this is a win for us. And we think it's a win for Nike.
When you look at our 40 million-plus customers that come to us for curation across multi-categories and wanting Nike. So those are the conversations that we had with Nike Management on the pause that we took. So you're going to see it come in, in the month of October. You have it in apparel, that's including plus size women's, it's big and tall men's -- it's the kids area that we weren't carrying it through the licensed areas. It's badge, It's gear. It's going to be in key locations, obviously, online and then expands out to many, many more locations as we get into '24. Our finish line business has been quite strong, and so that will continue in all the doors that we have in today.
Thank you. At this time, I'd like to turn the floor back over to Mr. Gannette for closing comments.
Just thank you, everybody, for your interest in Macy's, and everybody, have a great summer. Look forward to talking to you again in August with our first -- with our second quarter results.
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.