Macy's, Inc.
Q3 2021 Earnings Call Transcript

Published: 18 Nov 2021

[Operator:]

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.

[Mike Mcguire:]

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

[Jeff Gennette:]

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 curate of 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 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, stay 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 a nearly 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 shoes, and contemporary apparel in both stores and bloomingdales.com outperformed 2019. Bloomberg 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% 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 up 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 rep. Turning to Merchandising, which we think about it in 3 buckets

[Adrian Mitchell:]

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’s 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 seasons are leading us to narrow and weigh 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

[Jeff Gennette:]

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 look 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’s strategy that we are successfully executing. That said, we also recognize the significant value of the market is assigning the 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, giving 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.

[Operator:]

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

[Chuck Grom:]

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 a 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.

[Adrian Mitchell:]

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, 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, overtime.

[Chuck Grom:]

Thanks. Good luck.

[Adrian Mitchell:]

Thank you.

[Operator:]

Our next question comes from Matthew Boss with JP Morgan.

[Matthew Boss:]

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 sited, do you see AUR gains that's sustainable in the first front half of the year? And is tourism a potential second half of the year opportunity in your view?

[Jeff Gennette:]

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 them 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 them 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 be benefited.

[Matthew Boss:]

Great color. Best of luck.

[Jeff Gennette:]

Thanks, Matt.

[Operator:]

Our next question comes from Kimberly Greenberger with Morgan Stanley.

[Kimberly Greenberger:]

Great. Thank you so much for taking the question. Jeff, I was very interested about 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 2 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 for 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.

[Jeff Gennette:]

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 touch points now are on an average transaction for omnichannel customers now around 6 different touch points 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 load, 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 him and her. 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 3 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 of that 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 the 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?

[Adrian Mitchell:]

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 as well as the store's footprint. So, they're 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 1 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 multi-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 then 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.

[Kimberly Greenberger:]

Very clear and helpful. Thank you, both.

[Jeff Gennette:]

Thank you.

[Operator:]

And our next question comes from Paul Lejuez with Citigroup.

[Tracy Kogan:]

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.

[Jeff Gennette:]

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 business is really done through our private brands and we've worked really closely with our oversea 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 want. 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 and that 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 AUR s just because of the clarity of our prices. The big solve for us is 2 things

[Tracy Kogan:]

Great. Thanks very much.

[Operator:]

Our next question comes from Stephanie Wissink with Jefferies.

[Blake Anderson:]

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?

[Jeff Gennette:]

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. 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 own or through VDF and the opportunity now what's for us to look at getting done -- 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.

[Blake Anderson:]

That's great color, I really appreciate it. Last 1 for me, I think last quarter you had said you are 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.

[Adrian Mitchell:]

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 store. There's 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

[Adrian Mitchell:]

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 a little bit 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 allow the customer to have real choice in however he or she wants to shop.

[Operator:]

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

[Oliver Chen:]

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.

[Jeff Gennette:]

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 a 1 integrated business versus operating at 2 separate businesses. And 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 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, 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 the moving of 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.

[Operator:]

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

[William Reuter:]

Hi, I just have 1. I think you took down your leverage target by 1/2 turn to 2 turns to 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.

[Adrian Mitchell:]

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 deliver our balance sheet, and we've been able to accomplish that well ahead of schedule. If you remember -- as 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 is 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 to capacity 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.

[Operator:]

Our next question comes from Omar Saad, with Evercore.

[Omar Saad:]

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 fourth quarter, is there anything you were looking for in December-January time frame that might cause that deceleration that's implied by the guidance? Is there inventory and transit issues or other things that are going to cause the sales to deshell 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 lease like what that plus 7 might be like if the tourism and city center stores were back to normal? Thanks.

[Jeff Gennette:]

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 219 stacks. It basically decreases the trend by about a 120 basis points in the fourth quarter. So, take that comp of the a 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 ends, is because 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 an 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 as international tourism, is the dearth of office workers. If you look at New York City alone, you got about 28% of the office workers have returned to 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 it 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.

[Operator:]

Our next question comes from Dana Telsey with Telsey Groups.

[Dana Telsey:]

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 that 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 for that format? Thank you.

[Jeff Gennette:]

Dana let me take the Backstage question and then I'll throw it to Adrian to take the small door 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, that 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 stores of measurement. We continue to add new stores in stores and you saw in the quarter that we also added some freestanding 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 one’s 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 time line pick up in store. Backstage locations would have that for the full enterprise. So bullish on Backstage.

[Adrian Mitchell:]

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 overplay 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 that also some 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, omnichannel ecosystem.

[Mike Mcguire:]

Operator, we'll take 2 more questions.

[Operator:]

Our next question comes, comes from Bob Drbul with Guggenheim Securities.

[Robert Drbul:]

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.

[Adrian Mitchell:]

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 be in the 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. And 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.

[Operator:]

Our next question comes from Jay Sole with UBS.

[Jay Sole:]

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.

[Jeff Gennette:]

Hey, Jay. So, Toys is meeting our expectations and -- which is great news obviously. We had a -- when you look at our market share in Toys, 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, 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. 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, hold that through a hoteling 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 the 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 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.

[Operator:]

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