Macy’s, Inc. (NYSE:M) Q4 2022 Earnings Call Transcript

Macy’s, Inc. (NYSE:M) Q4 2022 Earnings Call Transcript March 2, 2023

Operator: Greetings and welcome to the Macy’s, Inc. Fourth Quarter 2022 Earnings Conference. As a reminder, this conference is being recorded. I would now like to turn the call over to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.

Pamela Quintiliano: Thank you, operator. Good morning, everyone and thanks for joining us to discuss our fourth quarter 2022 results. With me on the call today are Jeff Gennette, our Chairman and CEO and Adrian Mitchell, our CFO. Jeff and Adrian have prepared remarks that they will share, after which we will provide time for your questions. Given the time constraints, we ask that participants in the Q&A please limit their questions to one single-part question. Along with our press release, from earlier this morning, a slide presentation has been posted on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes supplementary data to assist you in your analysis of Macy’s.

Also note that, unless otherwise noted, the comparisons that will speak to this morning will be versus 2021. Comparisons to 2019 are provided where appropriate to best benchmark our performance given impacts from the pandemic. 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. The 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 in our earnings release and our presentation on the Investors section of our website. Finally, 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.

Jeff Gennette: Thanks, Pam and good morning and thank you for joining us today. So I’d like to start by recognizing our colleagues. In 2022, as consumer behavior rapidly changed, we adjusted our receipts and operations accordingly. At the same time, we fortified our balance sheet and continue to execute our long-term goals. In the fourth quarter, we achieved net sales of $8.3 billion. Beauty, dresses, tailored clothing, luggage and gift giving outperformed while soft home, active and casual were challenged. We offered freshness in every category and brand, even down trending ones that are still important to customers. Peak holiday selling periods mirrored pre-pandemic patterns, but lulls were longer and deeper. Post-holiday demand for remaining winter and early spring product was stronger than expected and markdowns were shallower than contemplated when we provided our updated guidance in early January.

End-of-year inventories declined 3% to 2021 and were down 18% to 2019. Looking back on 2022, we began to see signs of consumer weakness and a shift in category demand late in the first quarter. We adjusted the timing, amount and composition of receipts by channel, category and brand. As macro pressures mounted and industry-wide inventory built on easing supply chain constraints, we bought closer to meet, held open-to-buy reserves and bought into areas of strength. We were measured with promotions and markdowns and did not chase unprofitable sales. These actions benefited fourth quarter results. We had our ninth consecutive quarter of AUR improvement and a better-than-expected gross margin rate of 34.1%. Our adjusted EBITDA margin rate was 11% and adjusted diluted EPS was $1.88, including a $0.17 discrete benefit related to the favorable resolution of a state income tax litigation.

Our financial health and stability enabled us to navigate uncertainties while continuing to invest in growth drivers. At the end of the year, we had $862 million of cash, $1.2 billion less debt than 2019 and no material debt maturities until 2027. Turning to 2023, there is conflicting data regarding the U.S. consumer as a modern department store operating from off-price to luxury, we have a full view of income tiers, aided by our high penetration of loyalty members and robust credit card portfolio. On the surface, the consumer is in better shape than 2019. Jobs and wages are strong and savings levels are elevated relative to historic levels. But prices for services and goods are higher. Inflation has surpassed wage growth and revolving credit is rising.

Adrian will provide specifics on our 2023 outlook, but we believe discretionary spend will be under pressure across income tiers and expect the allocation of disposable income to continue shifting towards services and essential goods. Even as consumers reprioritize spend, there is opportunity. With the continued expansion of a hybrid work model, there are more in-person meetings and flexibility for personal travel. We believe the desire to be with loved ones, go on vacation and attend events has not diminished and expect gift giving and occasion-based demand to continue. Reflecting on the last 3 years, 2020 was a year of crisis management. 2021 was stabilization. And in 2022, we laid the foundation for a sustainable low double-digit adjusted EBITDA margin and longer term sales growth.

So, let’s discuss our progress. At Macy’s, we reevaluated our approach to merchandising. Since the pandemic, we have materially reduced markdown allowances and made a strong pivot to an upfront cost negotiation model, changed how we incentivize merchants. So bonuses are based on Macy’s, Inc. sales versus functional responsibilities allowing us to shift receipts and markdown dollars. Increased open-to-buy reserves enabling us to read and react to customer signals intra-quarter and begin to work more closely with strategic brand partners to mutually grow brands in a healthier way. Beyond merchandising in 2022, Macy’s also launched Own Your Style, an omnichannel brand platform, encouraging customers to celebrate their personal style. Introduced a marketplace on macys.com, ending the year with 20 new categories and 500 new brands that our customers have been signaling demand for and introduce Toys”R”Us store within stores in every Macy’s, more than doubling toys sales for the year and attracting over 0.5 million new customers.

In 2022, we continue to embed data and analytics across the enterprise. We added and refined pricing science capabilities such as competitive pricing and enhanced channel and location level markdowns and there is opportunity to further maximize profitability and drive even more productive sell-throughs. We also introduced Mission Every One, our social purpose platform designed to advance Macy’s long-term brand relevancy for all stakeholders. We look forward to reporting on our year one progress in the coming weeks. And we invested in our number resource, our colleagues. We completed a $15 per hour minimum wage increase nationwide and introduced our Guild Education partnership with approximately 3,000 colleagues taking advantage of free education benefits.

These actions helped reduce overall turnover by roughly 3% since 2019, excluding reductions in force and seasonal employees. We have entered 2023 in a position of financial and operational strength with a proven track record of executing our strategic priorities even in periods of uncertainty. This year, we will be testing, investing and scaling for sales and margin expansion. In addition to our existing initiatives, including pricing science and data and analytics, we will focus on our five primary growth vectors: number one, Macy’s private brand reimagination; two, Market by Macy’s and Bloomie’s off-mall stores; three, marketplace; four, luxury; and five, personalized offers and communication, which we have broadly described as personalization in the past.

These vectors were contemplated when we introduced our long-term low single-digit annual growth sales CAGR goal in the fourth quarter of 2021. Since then, we have steadily invested even as macro pressures have intensified. We are currently targeting low single-digit annual net sales and comparable owned plus license sales growth beginning in 2024, off an assumption for a low single-digit decline in both metrics this year. Our target is based on the timing and anticipated impact of several rollouts and does not assume a dramatic improvement in consumer health. We are making strategic investments to fuel future profitable growth and these investments are reflected in our 2023 SG&A and CapEx assumptions, which Adrian will discuss shortly. This morning, we will provide an overview of the five vectors, including proof points that give us confidence in their viability.

So, let’s start with Macy’s Private Brands. When our Chief Merchandising Officer was promoted to her role roughly 2 years ago, Private Brands became one of her top priorities. Since then, we have built the capabilities and infrastructure to reimagine, strengthen and grow the portfolio. We have created a dedicated private brand team with new design, sourcing and merchandising roles and broad cross-functional support. The team is now executing our vision for a differentiated, defendable and durable portfolio. Our approach is rooted in consumer insights. Our team has conducted over 80,000 online surveys, 35 days of digital community engagement and hundreds of hours of in-store fit research and shopper loans. This data has informed our go-forward strategy, which is focused on five key pillars: brand identity, original design, strategic sourcing, relevant size and fit and compelling value.

The role of Private Brands is to drive customer loyalty, be a differentiator for our business, complement our matrix of national brands and benefit our gross margin. We currently have 24 private label brands in the Macy’s portfolio, which combined represented roughly 16% of Macy’s 2022 sales. Over the next 3 years, we will rigorously evaluate all of them and will refresh, reimagine and replace brands. As part of our commitment to inclusivity, our new portfolio will reflect customers across every life stage, style preference and price point. We started with an initial update of INC in mid-2022. Early results have been favorable with fourth quarter sales up 28% to last year. So, turning to our second growth vector, our off-mall smaller format stores.

These stores play an integral role in supporting our omnichannel ecosystem. We currently have 8 Market by Macy’s and 2 Bloomie’s. These average about 30,000 to 40,000 square feet or roughly one-fifth the size of our on-mall locations. Looking at the 5 Market by Macy’s and the 1 Bloomie’s that have been open for over a year, fourth quarter comparable owned plus licensed sales increased by 8% and 12% respectively. Of-mall conversion is significantly above mall locations and customer experience scores on layout and neatness of the store, ease of the checkout process and availability of colleagues are 25 to 30 points higher. According to Placer.ai data, off-mall centers have 2.5x more visits than online. Thus far, we are most successful in centers that include high-traffic concepts like off-price or grocery, where our unique products and brands provide a differentiated option.

When opening in existing markets, cannibalization is lower than anticipated and new customer acquisition rates are higher than on-mall. In 2023, we plan on opening 4 Market by Macy’s and 1 Bloomie’s and if new locations continue to outperform, we will look to incrementally accelerate off-mall openings beginning in 2024. With our strong liquidity position, we are prepared to take advantage of opportunities as they present themselves. We are currently evaluating the right number and mix of on and off-mall locations, our ecosystem and customer are dramatically different today than when we announced our 125 Macy’s store closure plan in February of 2020. Since then, we have closed approximately 80 Macy’s locations and plan to close another 5 this fiscal year.

We have shuttered our most significant underperformers, exited dine centers and improved the existing store experience, while delaying closures of others that are cash flow positive. Today, roughly 99% of our mall base is profitable on a four-wall basis. Our third growth vector is our online marketplace. Over the last year, we have built a team focused on identifying, recruiting, onboarding and supporting sellers. Since its launch last September, we had found that over 90% of our total marketplace customer base are Macy’s Cross shoppers. Additionally, marketplace, number one, captures incremental sales opportunity in categories and brands where we have historically limited offers such as videogames and electronics; two, drives a larger average order value and higher units per order; three, allows us to quickly move into new and adjacent categories without inventory risk; four, gives our customers more choice at scale; five, enables us to ship channels for certain customer wanted brands that do not have a high velocity of sell-throughs; and six, attracts a new younger customer.

We have plans to add 2,000 brands on Macy’s marketplace this year and to launch on Bloomingdale’s marketplace in the back half. Luxury is our fourth growth vector. In 2022, both Bloomingdale’s and Bluemercury achieved their highest annual sales volume in history. Congratulations to the teams. At Bloomingdale’s, which just celebrated its 150th anniversary, loyalist members accounted for over 70% of owned plus licensed comparable sales and spent 7% more year-over-year. Our top of the list loyalty customer defined as loyalists who spend at least $5,000 annually spent 9% more year-over-year. Over the past several years, we have used data and analytics to allocate assortments on a store level, including an elevated mix of brands and categories at our top locations.

And across our base, we have been refreshing and remodeling our center core areas. Response from customers and partners has been positive and we plan on accelerating this program in 2023. Bluemercury has been under new leadership since mid-2021. Over the past year, our active customer base grew by 12% and our loyalty customer, which represents over 80% of sales, spent roughly twice as much as nominal fee. Outstanding service, exclusive events and cutting-edge national and proprietary brands continue to be top priorities. At Macy’s, our focus on luxury beauty continues to strengthen our presence with great brands. Over the past 5 years, we have been actively updating our beauty departments and plan to renovate roughly 8 to 10 per year over the next several years.

These are full beauty floor remodels, where we will add new brands, right-size some existing brands and focus on adjacencies and services. A key piece has been upgrading our luxury omnichannel beauty experience with brands like Armani, Chanel, Creed, Dior, Jo Malone, La Mer, Tom Ford and YSL Beauty. We are also working with our luxury brand partners to create memorable events such as our Dior Made With Love experience at this year’s upcoming Flower Show. The fifth growth vector is personalized offers and communication. By targeting at the customer level, we can build loyalty, grow customer lifetime value and further protect margins. This year, we have run tests with tens of millions of Macy’s customers, including our Star Rewards members, who represent roughly 70% of our Macy’s owned plus licensed comparable sales.

The test to focus on individualized promotions and consistent cross-channel experiences. We are pleased with early learnings and we will continue to refine offers and communication to make the experience more tailored and intimate. It’s an exciting time to be here at Macy’s. We have exited 2022 more relevant, flexible and disciplined with a firm understanding of what it means to be a successful modern department store. We are committed to freshness across categories. Our model allows us to pivot products, promotions and messaging. We will buy conservatively, preserve liquidity and open to buy and not chase unprofitable sales. We are confident in the amount, composition and mix of inventories and we will continue to evaluate macro indicators and customer data to respond to signals positioning us to compete and win regardless of the environment.

So with that, I am going to turn it over to Adrian for more detail on our fourth quarter and forward outlook.

Adrian Mitchell: Thanks, Jeff and good morning everyone. 2022 was a year of volatility and uncertainty and provided further proof that the disciplines we have built into our business are driving us forward and strengthening our modern department store positioning. Our diversified model allows us to respond to shifting demands of our customers across categories, brands and the value spectrum. As we look ahead, we are confident that the investments we are making today in our five vectors will drive long-term profitable growth. We will balance testing and iterating to ensure that we scale these critical initiatives with an educated perspective on their ability to contribute a high return to our business. Now, I will take a few moments to walk through the fourth quarter results of our five value creation levers before providing additional details on our expectations for 2023 and beyond.

First, omnichannel sales, we generated net sales of $8.3 billion for the fourth quarter, a decline of 4.6% versus the prior year and down 0.9% to 2019. Comparable sales on an owned plus licensed basis decreased 2.7%. Moving to the second value creation lever, gross margin. Our gross margin rate was 34.1%, down 240 basis points from the prior year and down 270 basis points versus 2019. Of the year-over-year decline, 300 basis points was due to lower merchandise margin, primarily driven by higher markdowns and promotions relative to last year when inventory constraints in the industry led to low promotion and robust full price sell-throughs. This year’s higher level of markdowns and promotions reflected our commitment to N22 at the right level and composition of inventory and our response to the competitive retail environment, both of which were contemplated when we provided our fourth quarter outlook.

While markdowns and promotions were elevated versus last year, they were better than our expectations. However, inventory shortage was above plan in prior year due to increased step consistent with trends seen throughout retail. Despite merchandise margin degradation, Macy’s, Inc. owned AUR rose 2% in the fourth quarter, driven by ticket increases and category mix. For the year, owned AUR increased over 4%. Delivery expense was 60 basis points below last year on a 2-point decline in digital penetration and lower peak delivery surcharges. Compared to 2019, gross margin degradation was primarily due to a 7 point increase in digital penetration. The third value creation lever is inventory productivity. Inventory declined 3% year-over-year and 18% compared to 2019.

Inventory turnover was down 4% to last year and improved 15% to 2019. We made significant progress in leveraging data and analytics to better forecast sales demand, receipt timing and flow across the supply chain. In 2023, we will focus on more advanced inventory productivity initiatives, including improved automation and more flexible inventory allocation to drive higher sell-throughs and ultimately, more sales. Expense discipline is the fourth value creation lever. SG&A decreased $30 million or 1.2% to $2.4 billion. SG&A as a percent of net sales was 29%, 100 basis points higher than last year. Compared to 2019, SG&A improved by 110 basis points. The year-over-year rate increase was primarily driven by continued investments in colleagues across competitive pay, incentives and benefits.

Retaining and hiring the best talent is imperative to operate at the caliber needed to deliver our low single-digit sales CAGR target and a sustainable low double-digit adjusted EBITDA margin. We remain focused on increasing our productivity and managing controllable costs to align with our expense disciplines. However, as a result of the investments we have made and will continue to make in our people, we expect our 2023 SG&A rate to delever. I will discuss this further in a few minutes. Within SG&A, Macy’s Media Network had net revenue of $57 million in the quarter and $144 million for the year, up 34% to 2021. Credit card revenues were $262 million, down $2 million from last year, but above our expectations. As a percent of net sales, credit card revenues were 3.2% or 20 basis points higher than the prior year, primarily benefiting from higher balances in the portfolio and better-than-expected bad debt levels.

As Jeff mentioned, we expect the consumer to continue to be under pressure in 2023. Within our portfolio, we see higher credit usage trends, slower repayment rates and increasing bad debt levels. While not at 2019 levels, we are watching these metrics closely to get perspective on the consumer and the potential impact on credit card revenues, particularly profit share, which is the largest component of the credit revenue stream. In addition, we are reviewing the Consumer Financial Protection Bureau’s proposed rule relating to late fees and are evaluating the implications that the proposed changes may have on the credit card program. Due to the uncertainty around the proposed rule, our outlook for 2023 does not reflect any estimate for potential impact.

Fourth quarter diluted EPS was $1.88 versus $2.45 in 2021 and $2.12 in 2019. Adjusted EPS exceeded our expectations, even excluding benefits from the better-than-expected interest income due to higher interest rates and a lower effective tax rate largely due to a favorable state income tax settlement. Lastly, the fifth value creation lever is capital allocation. We continue to take a balanced approach to capital allocation with an ongoing focus on maintaining a healthy balance sheet, investing in our business and returning capital to shareholders. In 2022, we generated $1.6 billion of operating cash flow compared to $2.7 billion last year. The year-over-year decline was primarily due to lower earnings and last year’s receipt of the $582 million CARES Act refund in the fourth quarter.

During the year, we invested $1.3 billion in capital expenditures, upwards roughly two-thirds related to enhanced omnichannel capabilities, digital and technology, data and analytics and supply chain modernization. Free cash flow inclusive of proceeds from real estate was an inflow of $457 million in 2022. Our focus and discipline around balance sheet health has contributed to strong leverage with an adjusted debt to adjusted EBITDA leverage ratio of 2.0x, in line with our target. We have paid down over $1.8 billion of long-term debt since August 2021, inclusive of the $1.3 billion secured note we issued during COVID in June 2020, and have no material debt maturities until 2027. Additionally, we benefit from having fixed rate debt in a rising interest rate environment.

Our balance sheet gives us the capacity to invest in initiatives that drive long-term profitable growth. We expect approximately $1 billion of capital spend in 2023. Over the next 3 years through 2025, we expect to spend up to $3 billion in total capital expenditures focused on digital and technology investments, data and analytics, supply chain modernization and omni-channel capabilities, including our growth vectors. We expect to continue returning excess cash to shareholders through dividends and share repurchases and are pleased to have recently announced a 5% increase in our annual dividend, resulting in a quarterly dividend of $0.165 per share. We will continue to apply a thoughtful approach to excess cash with our remaining $1.4 billion share repurchase authorization.

Next, I’ll spend some time discussing 2023 guidance and expectations. Our 2023 outlook reflects heightened uncertainty surrounding both the consumer and the macro environment. We believe allocation of spend between goods and services and essentials and non-essentials will continue to shift away from discretionary categories. The low and high end of our guidance reflects various scenarios regarding the severity and duration of headwinds, offset by how we can and will respond. To pause on that, we believe our tools and processes give us the ability to navigate dynamic environments. We have the flexibility to respond to changing demand and the freshness customers are looking for. This is supported by financial and operational health. Before discussing our outlook, I have two housekeeping items.

First, fiscal 2023 is a 53-week year. This is reflected in our guidance unless otherwise noted. Second, beginning in the first quarter of 2023, we are planning to combine credit card revenues net and Macy’s Media Networks net monetization revenue as part of our other revenue line item in our income statement to provide increased transparency. Historically, monetization revenue has been reported as an offset within SG&A, while credit card revenue has been reported as its own net revenue line item. In conjunction with this change, we will begin presenting SG&A and adjusted EBITDA as a percent of total revenues rather than net sales. Total revenues will include net sales and other revenue. Additional information on this presentation change, a reconciliation to prior years and full details of our 2023 guidance are available at the back of our earnings presentation on our website.

For the full year, our expectations for Macy’s, Inc. are as follows: Net sales of $23.7 billion to $24.2 billion, representing a low single-digit year-over-year decline, reflecting our view that the consumer will be more challenged in 2023 relative to 2022. Comparable sales on a 52-week owned plus licensed basis to be down approximately 2% to 4% year-over-year; digital as a percent of net sales to be roughly 32% to 34%; other revenue to be about 3.7% of net sales with credit card revenues accounting for approximately 84% of that. Our credit card revenue outlook assumes increased bad debt compared to 2022, reflecting recent credit card portfolio trends, a gross margin rate of 38.7% to 39.2%. Our disciplined approach to inventory management and pricing signs should result in lower markdowns and promotions year-over-year.

We will continue to refine location-level pricing and expand machine learning pricing capabilities to automate strategic promotions from vendor direct inventory to owned inventory. Partially offsetting these benefits is the lapping of ticket increases in 2022 that we do not anticipate repeating. SG&A as a percent of total revenue is expected to be about 35%, reflecting ongoing investments in our colleagues and infrastructure consistent with our focus on long-term profitable growth. On payroll, we see these investments in three ways: first, customer experience. Store productivity has increased over 20% since 2019. Our innovative selling model has improved productivity while providing a convenience and experiential in-store shopping journey. Second, we must pay competitively to recruit and retain the best talent.

The strength of our colleagues is on full display with recent performance, where we achieved a 10.8% annual adjusted EBITDA margin rate despite a volatile macro environment. And third, the new capabilities we have and are continuing to build require different skill sets than we have historically needed. We have thoughtfully added dedicated teams to support growth, resulting in over 100 new colleagues. The capabilities we’ve added have helped support our operational strength and control and are critical to the success of our growth initiatives. For non-payroll expenses, which account for approximately 55% of our SG&A, we managed well against inflation in 2022, achieving low single-digit growth despite roughly 6% increase in the consumer price index.

We will continue to be disciplined with our expense management in 2023 and beyond. We expect asset sale gains of $60 million to $75 million, reflecting anticipated headwinds from rising interest rates. Adjusted EBITDA as a percent of total revenue of roughly 10% to 10.4% or 10.3% to 10.8% as a percent of net sales and interest expense of $165 million. After interest and taxes, we are estimating annual adjusted earnings per share of $3.67 to $4.11. Our adjusted EPS guidance does not assume any impact for potential share repurchases. As we think about the first half versus second half of 2023, we expect year-over-year sales performance to be softer in the first half. As a reminder, in the first half of 2022, the consumer was still benefiting from stimulus as well as the return to travel, occasions and events.

This was particularly evident in the first quarter of 2022 when we posted a 13.6% year-over-year net sales increase, making it our strongest sales growth quarter of the year. In the second quarter, starting around Father’s Day, we began to see a slowdown in pandemic-related categories, increasing inflationary pressures and savings rate declines, which impacted sales and gross margin. These pressures built through the year. In the second half, we are anniversarying an accelerated weakening of the consumer a shift in spend to services and essential goods and excess industry-wide inventories and composition misalignments, which subsequently led to heightened markdowns and promotions beginning in fall of 2022. For the first quarter of 2023, we expect net sales of $5 billion to $5.1 billion.

Adjusted EPS is expected to be $0.42 to $0.48. In addition to the quarterly sales comparison I just discussed, our net sales outlook assumes that the stronger sales we experienced in the peak holiday season and into January do not continue the consumer further depletes their savings and becomes even more selective in their spend across goods and services. Gross margin rate is expected to be down no more than 20 basis points for the first quarter of 2022, and our outlook also includes a $7 million asset sale gain we expect to recognize. End of quarter inventories are expected to be down mid-single digits to last year on a percentage basis. We have made great progress transforming our business. We have achieved financial and operational stability while navigating the past 3 years of global uncertainty.

Now more than ever, we believe we are poised for long-term profitable growth, leading to additional shareholder value creation. With that, I’ll turn the call back over to Jeff.

Jeff Gennette: Thanks, Adrian. So as we look to 2023 and beyond, we have the capabilities, infrastructure and discipline in place, supported by a highly engaged team that is incentivized to win. We are taking a prudent approach to our capital allocation to protect our financial health, which provides us with significant flexibility to respond to changing trends while also prioritizing our five growth vectors. This provides the fuel to achieve sales growth beginning in 2024. We look forward to sharing more on our progress in the coming quarters. And operator, we are now ready for questions.

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Q&A Session

Operator: Thank you. The first question is coming from Brooke Roach of Goldman Sachs. Please go ahead.

Brooke Roach: Good morning. And thank you so much for taking our question. Jeff, can you elaborate a bit more on the inflection to positive sales and comp growth that you’re expecting beginning in 2024. What gives you the confidence in that inflection against a choppy macro? And what are the key drivers there? And then perhaps for Adrian, can you also provide some additional context on how you’re approaching sales guidance for 2023 and in particular, 1Q? Have you seen a deceleration in the consumer recently that’s driving that conservatism? Thank you.

Jeff Gennette: So good morning, Brook, and I’ll take the first part to your question about €“ so our growth outlook is really supported by the five growth vectors that we spoke to on the call. We’re not ready to size each growth factor individually, but it will definitely give everybody an update on that in the future. We’re in the early innings of these growth factors, but we’ve been building them for a couple of years, and we have a lot of confidence in that. So let me just kind of tick through them. I think the first one is the private brands reimagination. So this is €“ when you think about we are €“ we started touching the private brands about 2 years ago with new talent that we brought in. We looked at existing brands that we wanted to burns, INC is a good example of that.

And you saw in the fourth quarter, INC is our biggest and most powerful Missy brand, picked up 28% in the fourth quarter. The new brands start to launch in the back half of €˜23, and we have a very aggressive schedule going through all €“ through 2025. Right now, private brands is about 16% of our business and we know that can grow. But it’s lots of refreshed content replacement of existing brands and adding new brands. The second one is really off-price or off-mall expansion. And we’re just really focused on unlocking the full potential of our off-mall fleet, knowing that what a storage base does to our overall omni-channel business. So I think the headline here is that the ones that we’ve opened, we have eight on the Macy’s side, two on the Bloomingdale’s side, when you look at those that have been open more than a year and you look at the fourth quarter business, on the Macy’s side, it picked up 8% in the fourth quarter, and the Bloomingdale side had picked up 12%.

And it’s attracting a new raft of customers. It’s helping the digital business in those ZIP codes. We are looking for €“ we’re going to be launching new ones in €˜23. And by the end of the year, we are hoping for a scalable model. If we look at the digital marketplace, so this is one that we launched in September of 2022. We ended the year with 500 brands and also 20 new categories, so aggressive schedule there. We’re looking to add 2,000 more brands in €˜23 and importantly, we’re launching the Bloomingdale’s marketplace in the back half of this year. We talked about luxury brands. And so as we mentioned, Bloomingdale’s and Bluemercury as well as Macy’s Beauty, where we have a lot of luxury offerings. But the Bloomingdale and Bluemercury had a record year in 2022 and Macy’s Beauty with great strength in fragrance and skincare and color.