Please standby. Good morning and welcome to the Macy's, Inc. Third Quarter 2021 Earnings Conference Call. Today's hour-long conference is being recorded. I would now like to turn the call over to Mike McGuire, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and thanks for joining us to discuss our third quarter 2021 results. With me on the call are Jeff Gennette, our Chairman and CEO, and Adrian Mitchell, our CFO. Jeff and Adrian have prepared remarks that they'll share, after which we'll provide time for questions. Given the time constraints and the number of participants, we ask that you please limit your questions to 1. Along with our press release, we've posted a slide presentation on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes additional facts and figures to assist your analysis of Macy's. Also note that given the pandemic impact on 2020 results, unless otherwise noted, the comparisons that we'll speak to you this morning will be versus 2019 as we feel that benchmarks are performance more appropriately. We noted in our press release this morning that on Thursday, December 2nd at 8:00 AM Eastern Time, Adrian will be participating in a fireside chat at the Morgan Stanley Virtual Global Consumer & Retail Conference. This event will be webcast on our Investor Relations website, so please mark your calendars. 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 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 other views in our earnings release, and our presentation on the Investors section of our website. And 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. With that, I will turn the call over to Jeff.

Thanks, Mike. And good morning, everyone. And thank you for joining us. Our Company delivered another strong quarter and exceeded our expectations on both top and bottom lines; outperforming 2020 and notably 2019. With strong cash generation year-to-date, we were able to execute on our capital allocation priorities, including returning capital to shareholders. Our businesses demonstrated resilience, and we remain confident in our ability to deliver on the Polaris strategy. And as a result, we are raising and narrowing our full year 2021 guidance. Our '21 results demonstrate the progress we've made with our Polaris strategy, operating in a better economic environment as well as the strength of our digitally led omnichannel model. We are poised for sustainable and profitable growth and we'll continue to build and invest in our retail ecosystem to both maximize and accelerate our opportunities. Today I'm pleased to announce that we are making a significant investment to launch a curated digital marketplace platform to enhance the existing Macy's, Inc. business, fuel customer acquisition, and drive growth across all of our channels. We will partner with the enterprise marketplace technology company, Mirakl, to build the platform. Through this new digital marketplace platform, which we'll launch in the second half of 2022, we will connect carefully selected third-party sellers with our customers in a scalable way and provide even greater breadth of assortment of exciting products to deliver on our promise of style and curation. Our digital business is on track to generate $10 billion in sales by 2023, and that figure does not include the incremental revenue we expect this new marketplace platform to generate for Macy's, Inc. Now I will provide you some highlights from the third quarter. Comparable owned plus licensed sales increased 8.7%, an improvement in trend from the 5.9% increase we saw in Q2, even after adjusting for changes in our marketing calendar. Adjusted diluted EPS was $1.23, up significantly from Q3 2019, and adjusted EBITDA was more than 2 times better than 2019. Gross margin for the quarter improved by approximately 100 basis points, driven by stronger regular price selling, fewer markdowns due to leaner inventories, and a number of pricing and promotion initiatives, and offset by increased delivery expenses. Gross margins and inventory are benefiting from the outstanding work that our supply chain teams have done in navigating the recent disruptions. When they first began in the fourth quarter of 2020, our teams activated plans to mitigate bottlenecks, and since then, have stayed agile and flexible, leveraging our strong networks and relationships with international carriers and brands, and diversifying how we move product both up and downstream. Significantly, as a result, we don't expect to be materially impacted by supply chain issues during the critical holiday shopping season. Total Company AUR was up more than 12% across our 3 nameplates. SG&A dollars were significantly lower, driven by a combination of ongoing expense discipline and unfilled open positions. Looking at each of our nameplates, comparable sales for Macy's brand were up 8.4% on an owned-plus-licensed basis, which represents nearly a 1-point improvement versus last quarter, when we take into consideration the friends and family marketing shift. Macy's brand full-price sell-through improved 610 basis points, while full-priced AURs increased by 6.9% driven by high demand and our gross margin initiatives. Our Bloomingdale's business performed well with comp sales on an owned-plus-licensed basis up 11.2%, which was in line with the second quarter. Results were driven by strong sales of luxury handbags, fine jewelry, home, men's shoes, and contemporary apparel, with both stores and bloomingdales.com outperforming 2019. Bloomingdale's rate continues to recover, outperforming versus 2020, but was down 2.2% compared to the third quarter of 2019. We see strong sales performance in private brands, home fragrance, and treatment. Turning to the health of our customer base, we brought in 4.4 billion new customers into the Macy's brand, a 28% increase compared to 2019. Approximately 30% of these new customers were dormant customers over the last 12 months who have now reengaged. In addition to growth in new customers, customer loyalty has also increased. Star Rewards program members now make up nearly 70% of the total Macy's brand comparable owned-plus-licensed sales, up approximately 10 percentage points compared to 2019. During the quarter, we saw Platinum, Gold, and Silver customers reengage with average customer spend in these tiers up 16% compared to the third quarter of 2019. Bronze members, who represent our youngest and most diverse loyalty tier, continued to grow with the addition of 2.3 million members during the quarter, and we're seeing average spend per customer increase 13%. Bronze is one of our best customer acquisition vehicles, with approximately 35% of members under the age of 40 and 57% ethnically diverse. Our Star Rewards Loyalty customers had a more personalized and productive shopping experience with the most relevant offer presented to them, right down to the particular homepage they see. This is leading to increased conversion, higher revenue per visit, and a decreased rate of customers leaving the site. And through targeted personalization and pricing science, we've been able to reduce the number of broad-based promotional days and increase AURs. Having a strong integrated retail ecosystem that provides a seamless shopping journey enables us to successfully attract and retain our most productive omnichannel customers. The growth of our omnichannel ecosystem is powered by our thriving online business, relevant full-line brick-and-mortar stores, and growing off-mall format stores, all soon to be further accelerated by the new digital marketplace platform. Our data validates that in markets where we have a physical presence, our online business is stronger. The interplay between our digital and physical assets is more important than ever, and we are focused on establishing an appropriate footprint in markets that drive our sustainable and profitable omnichannel growth. Turning to merchandising, which we think about in 3 buckets: first, our products and categories that were strong during the height of the pandemic, such as fragrance, watches, jewelry, sleepwear, and home, continued to perform well during the third quarter. Second, occasion-based categories such as dresses and men's tailored clothing and luggage are continuing to see renewed interest from our customers. We're able to meet their shifting demand thanks to our wide range of assortments. And third, our emerging categories and new brands are expected to drive sustainable and profitable growth in the future. These complement our core categories while satisfying the customer shopping journey, and we are seeing encouraging results. To give you an example, since bringing the Toys 'R' Us business to macys.com in August, our toy sales have more than doubled in stores and online, compared to 2019. We continue to expand on our assortment in these emerging categories. During the quarter, we added another important new brand partner, Fanatics, which offers our customers the largest selection of licensed sports products and increases our fan apparel offering 20-fold. This expanded assortment drove a 22% AUR increase in sports apparel and headgear compared to 2019. Using data and analytics, we continue to grow key brand partnerships with more vendors looking to us for expanded relationships. One element of this is the B2B monetization of our advertising partnerships that we realize through our in-house media agency, Macy's Media Network, which continues to generate solid results and recently expanded in scope to include Bloomingdale's. We see a lot of potential to further strengthen our relationships with vendor partners and cultivate greater customer engagement. Overall, through Polaris, we laid a solid foundation for digital growth, and we're seeing that growth come to fruition. We are now able to focus on additional strategic investments to refresh the digital experience, create more experiential customer engagements, enhance our stores, and further empower our colleagues who drive the success of our business on every level. Our important digital initiatives during the quarter included a refresh of Macy's mobile app, the launch of live shopping at both Macy's and Bloomingdale's, and a fragrance finder. We also rolled out our 3D Room Planning expansion, added PayPal and Venmo to in-store and online payments, and launched a sustainability product segment. As a result of these and other investments, digital conversion for the quarter was 4.25%, up 14% compared to the third quarter of 2020, and up 27% compared to the third quarter of 2019. Turning from digital to stores, we also continued to invest in our brick-and-mortar business and are seeing ongoing trend improvement in store conversion. During the quarter, sales in our non-downtown locations continued to sequentially improve, but due to the slow return of international tourism and office workers, our downtown doors continue to significantly lag our other doors versus 2019. A good example of store recovery is our backstage store-within-store format, with sales up 24 percentage points compared to full-line stores. Backstage store customers are more diverse, with 56% of customers ethnically diverse, and have a higher spend. Across our ecosystem, everything we do starts with and is driven by our colleagues. They are our most significant contributors to our success. And we're pleased that the strength of our performance this year has made it possible for us to double down on our investment in talent. Last week, we announced the plan to launch a best-in-class benefit program to give our colleagues access to debt-free education. We're also raising our minimum wage rate to $15 an hour, which will be in effect nationally by May of 2022. This will increase our average total pay for hourly colleagues to about $20 an hour. Our workplace culture and colleague engagement have never been stronger, and we see it as a meaningful competitive advantage in this tight labor market. Adrian will now summarize the financial details before I make brief closing remarks.

Thank you, Jeff, and good morning, everyone. As Jeff shared, our third quarter results demonstrate the strength and momentum of our digitally led omnichannel Polaris strategy. Top-line sales continued to grow, gross margin continued to expand, SG&A continued to gain leverage, and as a result, we delivered EBITDA and EPS far above our expectations. Additionally, we continue to successfully execute on our capital allocation priority aimed at strengthening our balance sheet and returning capital to shareholders. Our strong results, combined with our continued confidence as we move into the holiday season, are leading us to narrow and raise our full year 2021 guidance, which I will expand upon in a few moments. Now, as I do each quarter in summarizing our results, our focus on the metrics that are most important to value creation: 1. sales, 2. gross margin, 3. inventory productivity, 4. expense management, and 5. capital allocation. First, for the second quarter in a row, we have generated top-line sales above 2019 levels. In the quarter, net sales increased by $267 million, or 5.2%, to $5.4 billion, while we posted comparable owned plus licensed sales of 8.7%. Keep in mind that compared to 2019, October benefited from the pull forward of some sales from the fourth quarter into the third quarter. The early start of our Friends and Family Sale in late October contributed to this, adding about 200 basis points to the owned plus licensed sales comp. Additionally, holiday shopping began earlier, as it did last year, but we won't know the full extent of the pull forward until we get further into the season. Nevertheless, even when adjusted for Friends and Family, we produced solid sales growth and continued to expand our trend of sequential improvement. Now, I want to take a moment to highlight the progress we've made as a true omnichannel retailer, as we have become increasingly focused on the sustainability of omnichannel sales growth. The true performance and potential of our omnichannel performance is hidden when sales outcomes are viewed as digital results versus brick-and-mortar results. Recall that Jeff said we'd see stronger digital sales in those markets where we had physical stores, and we certainly saw this to be the case in the third quarter. Moreover, while digital sales continued to grow and store sales trends improved, notably more than 70% of our omnichannel market saw overall sales growth over and above 2019 levels, which represented approximately 85% of Macy's brand comparable owned plus licensed sales. So, digital isn't merely benefiting from a shift of sales from stores; it is actually growing beyond that. In our presentation, you will see several examples of these growing omnichannel markets. Within these markets, there is an added potential to expand our market share further with the addition of new off-mall locations. During the quarter, we've opened 5 new locations in the Washington, DC, Dallas, and Atlanta markets. We've seen a strong sales response and solid net promoter scores from customers well above our current expectations. We are very encouraged by the initial results, and we now see a clearer path to new store off-mall growth. So, it's really a combination of physical stores in the best malls, the most productive off-mall locations, and a best-in-class e-commerce platform; our sales growth is accelerating as we move customers whenever, wherever, and however they choose to shop. In addition, an omnichannel view has also highlighted the need for us to take a second look at the timing of when we closed the approximately 60 remaining stores we previously planned to close as part of Polaris. Those markets that are performing best in aggregate include many of the stores previously slated for closure. With this in mind, we are considering the following points as we approach the optimization of our store portfolio. First, as it relates to underperforming mall-based stores, the lane closure of certain stores allows us to maintain a physical presence in the market, which is critical to our top-line growth. Second, these stores are cash flow positive and support the funding of investment needed to reposition our store portfolio over time. And lastly, we're adapting our learning in the smaller off-mall formats to more quickly introduce these concepts to more markets with plans to open more of these stores next year. Scaling our off-mall formats will allow us to reposition our brick-and-mortar assets within markets to more effectively support omnichannel sales growth. As a result, we expect to announce about 10 closures in January, with more details of the remaining stores to come later in 2022. Moving onto gross margin, we saw another quarter of great expansion to 41%, an increase of 100 basis points compared to the third quarter of 2019. We continued to generate very healthy merchandise margins, which improved by 270 basis points to 45.3%. The primary drivers were the consistent improvement we maintained in lower markdowns and inventory productivity, which I will expand upon shortly. Markdown levels were the result of a combination of lower inventory levels and further scaling of pricing strategies, including location level pricing and POS pricing work. And as Jeff noted, these efforts drove higher full-price sell-throughs and full-price AUR as compared to 2019. We continue to roll out additional initiatives, including a new promotional effectiveness tool, giving our teams access to advanced analytics to better understand the profitability of prior promotional events. The improvement in merchandise margin was offset by a rise in delivery expense due to increased digital penetration. Delivery expense was 4.2% of net sales, 170 basis points higher than the third quarter of 2019. Even though the increase in merchandise margin more than offset the increase in delivery expense, the mitigation and reduction of this expense is a top priority for us. We have initiatives for cost savings in this area, which we outlined in the presentation. With regards to inventory productivity, inventory levels were down 15.4% compared to the third quarter of 2019, a product of ongoing market dynamics and our own Polaris initiatives. Our sales to stock ratio remains healthy, and the improved use of data science continues to enhance our inventory management practices from order placements all the way to customer sale. Inventory turn for the trailing 12 months improved by nearly 18%, while for the trailing 6 months, inventory turn improved by approximately 22%. Additionally, given the macro challenges facing the retail industry, we're staying ahead by making further shifts in our inventory management practices and implementing a number of initiatives. As we noted on our last call, we do not anticipate improvements to many of the macro supply chain constraints until mid to late 2022. Moving on, we again exercised strong expense management discipline, our net value creation metric. SG&A expenses of $2 billion improved by about 10%, or $229 million, from the third quarter of 2019 levels. At the percent of net sales, SG&A expenses were 36.3%, a significant improvement of 630 basis points compared to the third quarter of 2019, as we continue to benefit from permanent cost savings and reduced costs due to elevated job openings. The impact of the labor shortages is transitory, and we expect them to moderate going into the next quarter, as well as into the next year. Improved bad debt levels driven by strong customer credit helped continue to contribute to the growth of credit card revenues to $213 million, up $30 million from the third quarter of 2019 and ahead of what we expected. Credit card revenues were also ahead as a percent of net sales, increasing by 40 basis points to 3.9% and trending ahead of our prior annual guidance. As it relates to our credit card program, we're close to finalizing our decision on a partner and expect to announce a decision in the upcoming weeks. As a digitally led retailer, we must have a partner with strong digital capabilities today and a strong innovation pipeline with the prospect to further expand that pipeline in the future. Our loyalty and personalization initiative serve as key growth levers in our ability to obtain and retain more customers to drive omnichannel sales growth. That said, over the next few years, we expect credit card revenue levels will be slightly lower as a percent of sales than the 3% we have historically experienced. Given our strong performance across these areas, as well as the $60 million of asset sale gains recognized during the third quarter, we generated positive adjusted EBITDA of $765 million. Notably, adjusted EBITDA margin of 14.1% exceeded the margin in the third quarter of 2019 by 780 basis points on the strength of expense management discipline and gross margin expansion. After accounting for interest and taxes, collectively, these results helped to generate quarterly adjusted net income of $386 million, and adjusted diluted EPS of $1.23 versus $21 million and $0.07 respectively in 2019. Our final value creator is capital allocation and our meaningful free cash flow generation of $574 million year-to-date has served us well in this regard. In the third quarter, we repaid approximately $1.6 billion of debt early, which brings our leverage ratio well under our year-end target. And while we drew on our credit facility to support the build of seasonal merchandise during the quarter, we did so at a much lower interest rate than that of the debt we retired. Going forward, we expect to use the facility periodically based on the needs of the business. Now, we've successfully regained an investment grade profile well ahead of schedule. We will continue to pay down debt as it matures, with an aim to achieve a leverage ratio below 2 times in the upcoming years. Additionally, we paid $46 million in cash dividends and announced our fourth-quarter dividend earlier this month. And we repurchased 13 million shares, or more than 4% of total shares outstanding, for a total share buyback of $300 million. With $200 million of authorization remaining, we plan to look for further opportunities to repurchase shares. These actions underscore our confidence in our business and our commitment to our capital allocation priorities that create shareholder value in the near-term and the long-term. Turning to our outlook, as mentioned, we are narrowing and raising our full-year guidance. We have strong momentum entering the fourth quarter, but the headwinds that we noted on last quarter's call remain in play. The supply chain constraints, the tight labor market, elevated levels of holiday shipping surcharges, and potential unforeseen impact of COVID variants. The low end of our guidance considers the impact of these headwinds. You can refer to our slide presentation for the complete fourth-quarter and full-year guidance metrics, but here are some of the highlights. For the full year, we now expect net sales to be between $24.1 billion and $24.3 billion, which at the midpoint of the ranges, an increase of over $400 million from our prior guidance. We narrowed and increased our adjusted EPS range to $4.57 to $4.76, from $3.41 to $3.75, an increase of more than a dollar compared to our prior guidance. Now for the fourth quarter, comparable sales on an owned-plus-licensed basis versus 2019 are expected to increase between 2% and 4%. This includes an approximately 125 basis point adverse impact due to the shift of the Friends and Family promotional event from the fourth quarter into the third quarter, as compared to 2019. Gross margin rate expectations are between 100 and 150 basis points lower than 2019. SG&A expense, as a percent of sales, is expected to improve by approximately 75 basis points compared to 2019. And adjusted diluted EPS is expected to be between $1.67 and $1.87, excluding the impact of any additional share repurchases other than those already executed in the third quarter. Our progress to date, combined with our Polaris initiatives already underway, puts us well on the path to profitable and sustainable sales growth. As such, we have increased clarity on our business outlook over the next few years. In 2022, we see several incremental tailwinds for our business beyond those from our Polaris initiatives. The consumer is healthy and we expect strong demand to continue, particularly as people return to work. As borders opened, we anticipate an uptick in tourism, although we don't yet see tourism returning back to 2019 levels in 2022. At the same time, we're keeping a watchful eye on headwinds. As mentioned, we are actively managing supply chain disruptions with success. We're continuing to navigate the labor shortages and competition for talent, by investing in our current and future colleagues. We're also focused on mitigating inflationary pressures on our customers, by leveraging our pricing strategies while continuing to provide our customers with clear value. In summary, our team is committed to accelerating and sustaining top and bottom-line growth through the continued successful execution of our digitally led omnichannel Polaris strategy, which in turn will strengthen the health of our balance sheet and deliver strong returns to our shareholders. Next quarter, we look forward to sharing with you further details on our guidance for 2022 and our outlook for 2023 and beyond. With that, I'll turn the call back over to Jeff for some closing remarks.

Thanks, Adrian. In summary, we remain focused on executing our Polaris strategy to position Macy's, Inc. for sustainable and profitable growth. We regularly review the structure of our business and our strategy and are open to all options that are likely to create long-term shareholder value. This past year, we conducted an analysis of our e-commerce and brick-and-mortar operations, evaluating how each contribute to the value of the company, as well as how each benefit from being integrated and working together. In collaboration with our board and with assistance from our advisors, we looked at multiple business models that would create long-term shareholder value while always respecting the omnichannel behavior of the customer. This work supported our digitally led omnichannel Polaris strategy, which we are successfully executing. That said, we also recognize the significant value that the market is assigning to pure e-commerce businesses. And as we look at the landscape today, we are undertaking additional analysis that could help inform our long-term strategy to further unlock value for Macy's, Inc. To help in these efforts, we have recently engaged AlixPartners to work with our board and financial advisors. It is too early to tell what the results of this additional analysis will be, but we plan to update everyone after the work is complete. Before we take your questions, I want to express my gratitude to the entire Macy's, Inc. team for delivering another quarter of strong results. I am confident that we have a lot more opportunity ahead. Our colleagues focus on both strengthening the fundamentals of our business and driving innovation gives me great confidence that a bolder and brighter future for Macy's, Inc. lies ahead. So, thank you, everyone. And, Operator, please begin the Q&A.

Thank you. [Operator Instructions]. We'll pause for just a moment to allow everyone an opportunity to signal. Our first question comes from Chuck Grom, with Gordon Haskett.

Thank you. Congrats on a great quarter. Adrian, I wanted to ask about your gross margin levels. They're going to be approaching 39% this year, which is really impressive. How should we think about that line item going forward? Do you think you can maintain it given some of the Polaris efforts? And then more specifically on slide 6, you call out the $76 million benefit from the local pricing and POS pricing work. Where are we on that journey? Is there still a lot left you can gain from that? Thank you.

Good morning, Chuck, and thanks very much for your question. We're very pleased with the gross margin performance that we've seen and I think it really speaks to just the traction that we continue to have with regards to our Polaris strategy. As we've spoken about before, we're using a lot of data science to inform how we are actually thinking about inventory allocation and how we're thinking about our pricing and promotion activities. And so, we feel really good about the progress that we're making, and we do believe that as we continue to scale those initiatives, we'll certainly have additional opportunities as we move forward. When I think about the $76 million that you're referencing, my perspective on that is that there is continued progress that we're making with regards to our pricing and gross margin efforts. And so, you actually -- when you look at our overall gross margin performance year-to-date and in the quarter, it's really just a reflection of that. And so, we'll continue to lean into those initiatives and make sure that we continue to improve our margin position, both on the gross margin rate side as well as on the merchandising margin side over time.

Thanks. Good luck.

Thank you.

Great. Thanks. Congrats on another nice quarter. Jeff, with 3Q comps further improving from the second quarter; how do you feel about the health of your customer base in the holiday, maybe based on what you've seen in November? And then with supply chain disruption lasting into next year, as Adrian cited, do you see AUR gains that are sustainable in the first front half of the year? And is tourism a potential second half of the year opportunity in your view?

Hi, Matt. On the health of the customer, we definitely see that continuing. So, when you look at the number of active customers with us versus 2019, you look at the AOV, you look at the AUR, and you look at just their spend overall, all of those metrics are improving. So, we hark back to looking at the active customers and how they're responding both online and as well as in our stores, check that box, improvements there. And then when you just look at the new customers that are coming, they have another 4.4 million coming in. Some of those are re-engaged, but the bulk of those are new to our brand, and to see their spend metrics. As we've talked about in the past, we always track a new customer and how they shop with us the quarter and then the quarter after that. We're getting about 20% of new customers that are always shopping in the next quarter and another 20% in the quarter after that. So that is consistent with what we're seeing. As it relates to kind of supply chain, we really -- we're in good shape right now. Obviously, we want the inventory to be below where we were in 2019. When you look at our inventory level versus 2020 to be up about 19%. That syncs with our mid-20s volume that we're guiding in terms of fourth quarter sales above 2020, so we're in good shape with that. We certainly have pockets that remain tough, but we're mitigating those by all the things that we've talked about in the past. So that continues, we expect supply chain issues are going to continue into 2022. Some categories are much better, some categories persist, but I think overall we've got a great handle on how we're mitigating that through all of our tactics. As it relates to tourism, we have not yet seen a change really in international tourism. So, you know that that's about 3 to 4 points of total comp for Macy's and Bloomingdale's that is going to be a tailwind for us. We do expect that -- part of that to come back in 2022, not fully to 2019 levels, but that will go into '23 as well. When you look at our downtown stores, they're still struggling. Our suburban stores are performing much better. When that tourism comes back and when office workers come back with higher percentages, we do expect those downtown stores to really benefit.

Great color. Best of luck.

Thanks, Matt.

Great. Thank you so much for taking the question. Jeff, I was very interested in your comments on the importance of both the digital and the physical assets. It sounds like you did a good deal of work here over the past year to understand the interplay between these two channels. I'm wondering if there are any sort of key data points you could share with us from that work. It sounds obviously very interesting. And then secondarily, reassessing the store closures that you all talked about, I'm wondering what are -- as you wind the clock forward, let's say a year from now, what are you looking for those stores to produce, that would give you the all-clear signal that you should and want to keep them open? And is -- do you maintain your optionality on those stores that you choose to keep open? Do you have the option to close them at some future date, should the financial performance change? Thanks so much.

Kimberly, thanks for your questions. I'm going to take the interplay and the omnichannel behavior of our customer, and then I'll have Adrian take the store closure question. Absolutely, I think any retail brand right now is reaping the full benefit with the right investments in the omnichannel customer. And clearly, what we've seen over the years has been just increased activity that's going on between the app, between the website, and store behavior. And so those touchpoints now are on an average transaction for omnichannel customers now around 6 different touchpoints before a purchase is consummated versus where it used to be 5 years ago, it was in the 2 range. So clearly, the more the customer is engaging with omnichannel, the more they like it. And that's a reinforcing loop, so we certainly see huge interplay going on. Research is generally starting on the app. Most of our digital business now, the majority of it is now coming on via the app. A much bigger chunk of transactions is going on there via app. But a lot of that behavior is while they're in a store. And you just -- from research from pre-purchase discovery to purchase to post-purchase engagement. And then of course, what we're doing with all of our data and analytics and personalization to reach out and see that behavior is where this is going. So, it's just getting to be a tighter and tighter loop and we fully respect the omnichannel behavior and we're making the appropriate investments to ensure that it's a frictionless experience for customers. So that's where that's going. It certainly begs where we're going with our entire market strategy. The idea that the interplay that goes on with brick-and-mortar that's on-mall as well as testing our new off-mall formats. That has played out in the three markets that we said it would. We're digesting all of those new openings that Adrian talked about in his comments. And we'll talk on our next call about what that looks like for our expansion in 2022, but that loop is increasing. And what we're seeing is that the more brick-and-mortar business that we're creating, the more digital is happening in those particular zip codes. We'll give you more color on that when we speak next. Adrian, why don't you take on that store closures?

Thank you, Jeff. Kimberly, good morning to you. Very good question as it relates to store closures but let me start by giving a little bit of context. So, as we've mentioned earlier, we've spent about a year really trying to understand what the future footprint of our business will look like. And part of that is for us to focus on creating a growing and profitable omnichannel ecosystem that is really a combination of our existing best malls or off-mall stores populated by digital experience. Now, as we think about omnichannel growth, we're very much focused on the fact that digital performance is stronger in the markets where we have stores. And as we shared on the call, our omnichannel performance is actually very critical to have both the digital footprint and the store's footprint. So, there are kind of three things that we've really been thinking through as we're moving forward with regards to store closures. The first is that delaying the closure of certain stores really allows us to maintain that physical presence. And that physical presence allows us to grow omnichannel sales, which is one of the reasons why we wanted to share some of the progress we're making on omnichannel sales recovery relative to 2019. The second thing is that all of the deferred multiple stores are actually cash-flow positive. So, this becomes the funding mechanism for investments as we reposition that portfolio that we're working towards over the next several years. And the third piece is we're continuing to learn and adapt our off-mall format. We're very pleased with the early results that we're seeing with this Version 2.0 of our market by Macy's/ Bloomingdale's small off-mall locations. And so, we feel really good about the progress that we're making there. But ultimately, we are constantly reviewing all of these store locations. We're expecting to announce 10 closures in the beginning of next year. And ultimately how many we close on a monthly timetable continues to be a work in progress, but we will continue to be very transparent on the pace of those closures as we progress.

Very clear and helpful. Thank you, both.

Thank you.

And our next question comes from Paul Lejuez with Citigroup.

Thanks. It's Tracy Kogan filling in for Paul. I was wondering if you could talk about what you're seeing on the inflation side, both in the cost to you and then how -- talk about your strategy, I guess, in how you're presenting that to consumers on the pricing side. Thank you.

Hi, Tracy. Obviously, we've been through these inflationary cycles before. And when you look at -- Jeff made some generalizations about cost increases, in some cases in fashion we can pass that on. But commodities are a different story. Now, thankfully, and I'm talking like shorts, tans, Ts, commodities that we and our competitors all compete with, in that, thankfully, a chunk of those commodity businesses is really done through our private brands and we've worked really closely with our overseas suppliers on our sourcing capability to really help mitigate rising costs. As you would expect, we have -- we're very focused on testing in our pricing science. So, all the way through this third quarter, we had over POS pricing tests of where customers will accept cost increases and where they won't. And we're making all adjustments in future as well as promotion based on that. We also have -- when you think about what Macy's and Bloomingdale's brands have been doing over the years, we've really changed the historical practice of overlapping discounts. So, the value that we're offering customers is much clearer, which gives you higher AUR. And we're looking at that market share events versus 1-day sales versus weekend events, so we're getting higher AURs just because of the clarity of our prices. The big solve for us is two things: One is we're really committed to maintaining leaner inventories and ensuring that those inventories are being allocated to the right portal for where we expect omnichannel behavior. And then the second big thing is the big tools we're doing through data and analytics and automation, which is our opportunity to mitigate price increases when they come. And that would be personalized POS messaging, which we'll do through our personalization as well as the science that we're deploying against the discrete hard markdown gains. So, our opportunity to now take a price decrease on a permanent basis at a store or channel level is something we've never been able to accomplish before. That's going to help us with whatever price increases we might put into effect. So, we feel like we've got a really good science and good history and experience on inflation, and we will react as it comes.

Great. Thanks very much.

Our next question comes from Stephanie Wissink with Jefferies.

Hi. Good morning. It's Blake on for Steph. Thanks for taking our questions. I was wondering on your digital marketplace. How many skews and which categories are you targeting? I wonder if you could provide any commentary there? And then how should we think about this impacting your Macy's Media Network business?

Hi, Blake. The details of your question, we're not ready to answer it yet, so we will be giving you more detail on this as we launch it, but a couple of headlines is that when you think about this, we have a very successful digital business now. And the marketplace announcement that we made today was the next natural step in our evolution as a digitally led omnichannel retailer; so just a ground, we put down the marker on a couple of earnings calls ago that we were going to hit $10 billion by '23. We are very committed to that. The marketplace would be on top of that. And what we found in just everything we've done to develop our digital business was really the customer behavior and the categories that they were requesting, and the brands that they were requesting, and what was the best way for us to capitalize on that. So, we've been doing that through our own or through VDF, and the opportunity now is for us to look at achieving some of that through our marketplace platform. As you would expect, we studied all the types that are out there. Being the number 2 website in our category in the nation, we have a lot of competition and some of the other really strong players, and all of them have marketplaces. So, our ability to be able to study how they do it, what the competitive landscape is, how this is going to align against the Polaris strategy, what are the risks? What is the financial opportunity ensuring that we had a scalable model that minimized our investment in incremental costs on this for both Bloomingdale's and Macy's are what led us to our partnership with Mirakl, which we think is best-in-class? So, we're deep at work with them. We're standing up our discrete marketplace team within our digital pyramid, and we will be ready for a launch in the second half of '22. We believe that the customer benefits of this is curated assortment. To get that is a must. It needs to be curated by a fashion and style retailer. It needs to be a seamless experience for the customer. And then of course, the business benefits are we know that we can grow digital -- our business is faster. We can generate more profitability, we can get more depth and breadth of assortment and really address new brands and emerging trends for a customer who looks to us to be able to do that.

That's great color, I really appreciate it. Last one for me, I think last quarter you had said you were going to test a few stores with various fulfillment initiatives, including some automation and ship from store. I was wondering if you had any update on that so far? or maybe you could speak more broadly to just getting more customers comfortable picking up from store, as well, in addition to delivery? Thank you.

Thank you very much for your question, Blake. With regards to the fulfillment operation, we'll share a lot more detail about the success of that as we get into our next earnings call, our Q4 earnings call. What I would say is that we're very pleased with the progress that we've seen, thus far. And the true tests will really come when we hit our full peak season going into the holidays in terms of really pressure testing with technology; but so far so good with the robotics, with the investments that we've made in space, as well as with the productivity that we've seen as we are ramping up. As we think about pickup in store, we want to be able to have a flexible fulfillment operation that gives the customer choice. There's going to be moments in time where the customer will pick up from the store. There are going to be moments in time where we'll be shipping to his or her home. I think we're very much focused on what's really bringing down the delivery expense, while also increasing speed to the customer. And so, as we begin to think about our downstream fulfillment capabilities and storage and continue to expand that beyond where we are today, in addition to the automation and other investments we're making upstream, we feel that we'll be able to both bring down our delivery expense as well as increase the speed for the customer. So, we're just really focusing on a flexible operating structure that allows the customer to have real choice in however he or she wants to shop.

Our next question will come from Oliver Chen with Cowen and Company.

Hi, Jeff, and Adrian. Congrats on a great quarter. We upgraded the stock on a lot of the digital agility you're seeing and conducting. Jeff, what are your thoughts on as you look at value creation, and the undervaluation of the digital business? What might be key criteria or things or scenario of possibilities or framework for the next stage of that analysis? And then I'd also love your views as we approach Black Friday and holiday. What are some highlights? This will be a season like no other in terms of what's the most different or strategies that you really focused on this time versus others? Thank you.

Hi, Oliver, let me take the first question. Look, our focus is to ensure the omnichannel behavior of customers is going to be respected at all costs. I think the omnichannel behavior is irrefutable, and we need to respect that. But we're looking at a range of things including the net of costs. That's an execution that's associated with operating as one integrated business versus operating as two separate businesses. Ultimately, we just need to see that the additional shareholder value can be unlocked beyond the potential of our current approach with our digitally led omnichannel Polaris strategy. We're working with our board and our advisors for some time on this. But based on how the market is assigning value to e-commerce businesses, we just added AlixPartners, which we announced this morning as an objective third-party firm to really pressure test all of our analyses. And so, we're in the middle of that work, and we need to complete our analysis, and we plan to provide an update after the work is complete. As it relates to Black Friday, I think they hit it; it's going to be like none other. What is it going to be like versus 2019, versus what it was in 2020? What we saw in 2020 was a pull forward demand. Clearly, we're prepared for that again. You saw that in what we did with moving the Friends and Family event into October. As we just stated now, October was our best month of our third quarter, even when you take out the Friends and Family shift. November has started out strong. But what that means, obviously, the amount of business that we do for Thanksgiving Cyber week going into the holiday, all is in front of us. So, we're prepared. We are closed on Thanksgiving Day, which is a big change from where we were in 2019, but we expect our digital business to obviously track very strongly all the way through now and the holiday, as well as we are ready for all of the expected traffic that's going to start at 6 AM the day after Thanksgiving. So, the values are very similar in the context of categories, but we are ramping up on exclusive, on premium products, on products that customers have frankly been signaling all the way through the pandemic and since. And so, we are ready on all that content. And I really like our stock position on all of that going through the Black Friday through holiday timeframe. So, we're in a good position and we're going to be ready to adjust all of our strategies based on how the customer ultimately shops.

We'll take our next question from William Reuter with Bank of America.

Hi, I just have one. I think you took down your leverage target by half a turn to 2 turns this quarter from second quarter, I guess. Does this indicate any increased interest in trying to actually attain an investment-grade rating? And would there be advantages to you of being explicitly rated investment grade? That's it. Thanks.

Good morning, and thanks very much for your questions. So, I would start by saying that we're just very pleased with the efforts that we've made to really strengthen our balance sheet, and we've been able to accomplish that well ahead of schedule. If you remember, our previous target was to get under 2.5 times. And so now that we've been able to achieve that, we are now saying, look, financial health and flexibility are really important for our business. And so, we've now targeted ourselves to get below 2 times. So, as we are in conversations with the rating agencies, this is something that we continue to feel really good about. But the additional thing I would point to is that we do also have the capacity to do all the other things that are really critical to the business; investing in the business, continuing to take advantage of increasing our sustainable dividend every year over time, and also repurchasing shares. So, I think the leverage ratio target of below 2 times is all about financial health about the business, and it gives us the capacity to be able to do a lot of things that we need to do to continue to accelerate profitable growth, generate strong cash flows, and increase our return to shareholders.

Our next question comes from Omar Saad, with Evercore.

Good morning. Thanks for taking my question. Great quarter. A couple of quick follow-ups. Obviously, you guys are generating strong demand plus 7 comps extra shift; sounds like October was strong, November is off to a strong start. Looking at the 2-4 guide for the fourth quarter, is there anything you were looking for in December-January timeframe that might cause that deceleration that's implied by the guidance? Is there inventory in transit issues or other things that are going to cause the sales to decelerate there? And also really quickly, I know tourism and city center, that's a drag, those downtown stores are a drag. Can you give us a sense at a high level like what that plus 7 might be like if the tourism and city center stores were back to normal? Thanks.

Let me start Omar with the 2 to 4. When you think about the Friends and Family shifts that improved the third quarter trend by 2 points versus the 2019 stacks. It basically decreases the trend by about 120 basis points in the fourth quarter. So, take that comp of the 2 to 4 to a 3-2 to a 5-2. When you look at that 5-2 versus what we have been for the other two quarters restated, it's in that ballpark. What Adrian said in his comments would be that if you were on the lower end, it's because of some of these external factors, more about COVID, more about if there's something that goes on. And I don't think it's going to be a supply chain issue that could affect our trend. So that's where it’s basically comparable to where we've been running. As it relates to what's going on with the downtown stores, we don't quote what the -- how those 3 to 4 points in international tourism affects by location, but rest assured that there is a chunk of that that affects our downtown stores. As a meaningful, in the downtown stores, international tourism is the dearth of office workers. If you look at New York City alone, you've got about 28% of the office workers have returned to the office. That will grow into, we believe, the 60% range as you get into the second quarter of 2022. That's obviously going to be a big boost to those downtown locations that are served by those customers. So, what I'd look at is just a total of 3 to 4 points, that's going to come into our trend. At some point it's going to be a tailwind. We don't expect to see all of that in '22, but '22, '23 that's going to be a plus for us.

Our next question comes from Dana Telsey with Telsey Group.

Good morning, everyone. And so nice to see the progress. Backstage. Can you give an update on Backstage, what you are seeing there in inventory? And then also on the small store format that I think debuted in Washington DC and certainly feels like it's getting encouraging results. What is the opportunity there? And could that be square footage from existing stores that you may allocate to that format? Thank you.

Dana, let me take the Backstage question and then I'll throw it to Adrian to take the small store strategy. Backstage had another great quarter, and this has been just a complete growth curve for us. It's a profitable business. What we see is it's mostly been in existing stores with very strong comps over any point of measurement, great sell-throughs, and regular-priced sell-throughs just continue to climb with each quarter in this business. You've heard us say in our comments that backstage store has been surged for 24 points better than the balance of the stores at the same-store measurement. We continue to add new stores in stores, and you saw in the quarter that we also added some freestanding stores, which joined the first iteration of freestanding stores that we added in 2015. We're going to continue to do that, we've got that new store on the docket for '22, a slate of new ones store in stores, with like Herald Square being one of those. We're adding Backstage in '22 in Herald Square, which is going to be a nice add; but then also new freestanding stores that we will add, again, into the ecosystem. Ecosystem, for us would be the opportunity to have all omnichannel behavior, be it Backstage or full-on; it could go into any location. So, the opportunity for returns or buy online, ship to store in the cadence timeline pick up in store. Backstage locations would have that for the full enterprise. So bullish on Backstage.

Good morning, Dana. And thank you for your question on off-mall. As I mentioned a bit earlier, we are just very encouraged with the initial results. And these off-mall locations really provided us with a clear path to new store off-mall growth, which we're very pleased with. And that is within the context of how we're thinking about our ecosystem, our omnichannel ecosystem, which is a combination of the best malls. So how many of those malls have longevity off-mall, which this gives us a clearer line of sight to, and then obviously the interplay with online and our mobile experience. We opened 5 formats in Dallas, Atlanta, and D.C. We continue to see not just strong sales response; we also see very strong customer response, as we see very elevated net promoter scores as well. We're quickly learning, we're adapting, we will open and introduce more of these concepts to more markets next year, as we begin to grow this portfolio. But overall, what we're feeling good about is that there's just a clear path for off-mall growth as we continue to work towards the optimal network and omnichannel ecosystem.

Operator, we'll take two more questions.

Hey, good morning. I guess just one quick question for me is on the credit card renewal. Can you talk a little bit about whether or not you think your terms will be better than the existing agreement? Would just love to hear a little more color and update on that moving forward. Thanks.

Good morning, Bob. We are very much in the final stages of a decision here with regards to our credit card RFP. Where we are right now is we're just a few weeks away; we will share more specifics about the program. And obviously, as we get into Q4 earnings, we'll be able to give much more details around where we are with the decision, what the impact will be on that program. But I think the key thing that we're very much focused on is ensuring that we're actually with a partner that has strong digital capabilities, a robust pipeline, and making sure that there's strong alignment and reinforcement of our digitally led omnichannel strategy. The integration of our loyalty program, our credit card program, our Star Rewards program, our personalization program, and the credit card is a critical combination in terms of our growth for our business. So more to come.

Our next question comes from Jay Sole with UBS.

Great. Thank you so much. Jeff, I just want to ask you if you could elaborate a little bit on toys. It sounded like that's starting off pretty promising, but how big do you think that business can get? How impactful will it be to 4Q? And then my other question is about inventory coming in from vendors. I mean, do you anticipate canceling a lot of orders as we go through the year just because maybe you ordered a little bit extra just in case the supply chain is a little bit more challenging? If you could talk about how you feel about that, that would be helpful. Thank you.

Hey, Jay. So, Toys are meeting our expectations, which is great news obviously. We had a -- when you look at our market share in Toys, there's certainly opportunity. Toys 'R' Us at the moment we made the announcement, the digital business skyrocketed, and now you see it positioned in our stores. But the real growth is going to be in '22 when we create substantially larger shops in 400 of our stores. We're working with all of our partners right now on all the content for that. And looking at exclusive content, we do believe we can be the premier brick-and-mortar destination for toys in America, based on the innovation that we want to create and the experience we want to create, backed up with just a really robust website. So, as you know, toys -- the customers fuse to the millennial mom and dad. It's a younger customer. They've got a great profile. What we're seeing is the new customers are coming in in toys. A higher proportion of new customers and then our opportunity to personalize touch points with them after their purchase to be able to get and see opportunities in other categories, so it's a great on-ramp customer for us, so very happy with how that is going. As it relates to cancellations, Jay, your second question. Right now, obviously, we're working with our vendors as well as our own private brands about what content that is. We think we've got all the mitigations. If you do have content that is on a boat right now, but it's going to miss Christmas, what do we do with that? Do we cancel it? Do we hold it at the manufacturing partner, hotel that through a hotel program or do we take it in, depending on if it's a longer life? If it's got Christmas motive, then that would be something that we wouldn't take. But if it was something that had life, if it's a weather product, it might go into the first quarter. We're making all those decisions with our manufacturing partners. So, we are in constant communication with them and we've got a great strategy across all of our categories and all of our brands. And I feel good that these are going to be win-win decisions that we're making with all of our partners. Okay. I think that's the end. I just wanted to say to everybody that I think the headline for us is that the Polaris strategy is working, that we had another strong quarter as a digitally led omnichannel retailer. We beat expectations on both top and bottom lines, and that our '21 results just demonstrate the effective execution of Polaris and that we're positioned for long, sustainable, and profitable growth in the future. And we thank everybody for your interest in our brand and have a great day.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.