Macy’s, Inc. raised its guidance for the year as third-quarter results topped analysts’ estimates in large part because consumers have returned to purchasing career and other dressier offerings.

“Customers continue to return to in-person post-pandemic shopping experiences, and were searching for occasion-based products, including career in tailored sportswear, dresses and luggage rather than popular pandemic categories such as active, casual sportswear, sleepwear and soft home, that skew more heavily towards digital purchases,” said Jeff Gennette, chairman and CEO, on a call with analysts.

Net sales of $5.2 billion were down 3.9 percent versus the third quarter of 2021 but up 1.1 percent versus the third quarter of 2019. Sales were at the high end of Macy’s guidance.

Brick-and-mortar sales declined 1 percent to last year but topped expectations. Digital sales declined 9 percent to last year.  Relative to 2019, brick-and-mortar sales declined 9 percent and digital sales rose 35 percent.

“During the quarter, Macy’s digital traffic remained relatively consistent, but conversion softened, suggesting that while discovery is still occurring online, there has been a shift in in-person transactions,” said Gennette. “Regardless of where our customer ultimately makes a purchase, we strive to provide the best omnichannel experience throughout their journey.”

He said Macy’s continues to invest in the omnichannel experience, including introducing personalization and live shopping, as well as the ongoing refinement of existing online platforms, including its mobile app where the company registered an 11 percent rise in active customers on a trailing 12-month basis. Compared to the average Macy’s customer, active app users spend more per transaction and per year.

Comparable sales across its owned-plus-licensed basis were down 2.7 percent. Versus the third quarter of 2019, comps on that basis gained 6.0 percent.

Bloomingdale’s and Bluemercury continued to outperform. Bloomingdale’s posted 4.1 percent comp sales growth and expanded its active customer file by 9 percent on a trailing 12-month basis, while Bluemercury saw comp sales growth of 14 percent and grew its active customer file by 15 percent. Said Gennette, “Although in different stages of the revolution, we see a significant long-term growth opportunity for both nameplates.”

Macy’s owned-plus-licensed comp sales declined 4 percent. On a trailing 12-month basis, active customer count grew by 2 percent and its Star Rewards active customer base, which is the chain’s most valuable customer, represented 70 percent of Macy’s owned-plus-licensed comparable sales, five points higher than last year.

Said Gennette, “Throughout the quarter, our customer responded well to our mix of full price, promotions and markdown items. When combined with selectively higher tickets, we realized our executive quarter of AUR gains.

Gross margin for the quarter declined 230 basis points to 38.7 percent. Merchandise margin decline was driven by a year-over-year increase in promotional and permanent markdowns within the Macy’s brand, as the company sold through slower-moving categories including casual apparel, soft home, and warmer weather seasonal goods. Delivery expense, as a percent of sales, was relatively consistent with the prior year. Higher fuel costs more than offset the impact of a 2-percentage point decline in digital penetration and reductions in cost-per-package.

SG&A expenses of $2.1 billion, an $84 million increase. SG&A expense as a percent of sales was 39.3 percent, 300 basis points higher compared to the third quarter of 2021 and an improvement of 330 basis points compared to the third quarter of 2019. The higher expenses year-over-year reflect additional hires as the year-ago period saw a high portion of open positions due to the tight labor market. Higher wage costs also played a role in the increase.

Net income declined 54.8 percent to $108 million, or 39 cents a share, from $239 million, or 76 cents, a year ago. On an adjusted basis, profits fell 63.0 percent to $143 million, or 52 cents a share, from $386 million, or $1.23, but easily topped Wall Street’s consensus target of 19 cents. Adjusted EBITDA was reduced 42.6 percent to $439 million from $765 million.

End-of-quarter inventories were better than expected, rising 4 percent to 2021 and down 12 percent to 2019.

“Our inventory is in great shape,” said Gennette. “We have roughly 55 percent newness for holiday, 30 percentage points higher than 2019, and we are not saddled with older receipts in pandemic category overstocks. Across nameplates, we have products and brands that cater to our customer’s lifestyle needs with a variety of price points that will allow everyone, including last-minute shoppers to participate in the magic of holiday at Macy’s, Inc. This includes exclusive cosmetics and fragrances from Dior and Armani, established brands such as UGG, Ralph Lauren, The North Face and Jordan, as well as newer additions, Kylie Cosmetics, Nest Candle, Friends and Pandora.”

Looking ahead, Macy’s raised its adjusted EPS guidance to a range of $4.07 to $4.27, up from its previous guidance of $4.00 to $4.20. Guidance for sales were unchanged in the range of $24,340 million to $24,580 million. Guidance for adjusted EBITDA as a percent of sales was also unchanged at approximately 10.5 percent.

Gennette said that in the middle of October, there was an unexpected slowdown in sales, which continued into November. Markets that were unseasonably warm were most affected. Over the past week, the retailer’s sales performance has improved.

“We are evaluating the sustainability of recent trends and the drivers that we believe will impact holiday consumption. When we think about last year, the consumer was flushed with cash. and there was a pull-forward of demand on well-documented inventory constraints. This year, they’re hearing about a glut of inventory. They are under a tighter budget feeling the impact of inflation on non-discretionary items and beginning to deplete their savings. With that in mind, we believe they are waiting until closer to holiday to make purchases, especially as there is an extra day, which is a Saturday between Thanksgiving and Christmas.”

Gennette said Macy’s expects holiday shopping patterns to be similar to 2019 and it’s taking the appropriate actions to support anticipated higher peaks around Black Friday, Cyber Week and the two weeks before Christmas.

“The holidays are happening. Trips are booked, parties and family gatherings are planned,” said Gennette. “Consumers will be spending, but it is too early to tell how much they will allocate to our categories. We are confident in the amount and composition of our inventory, timing of flows and marketing, but cognizant that we do not operate in a vacuum. The low end of our outlook assumes late October and early November sales trends continue, pressure on the consumer persists and the promotional competitive landscape intensifies throughout the holiday and into January. The high end assumes that sales patterns will be consistent with our 2019 trends and reflects recent adjustments to our operating plan for the holiday.”

Photo courtesy Macy’s