Karen Hoguet - CFO Jeffrey Gennette - Chairman & CEO

Lorraine Hutchinson - Bank of America Merrill Lynch Robert Drbul - Guggenheim Securities Matthew Boss - JPMorgan Chase & Co. Paul Trussell - Deutsche Bank AG Charles Grom - Gordon Haskett Research Advisors Kimberly Greenberger - Morgan Stanley Paul Lejuez - Citigroup Oliver Chen - Cowen and Company Omar Saad - Evercore ISI Michael Binetti - Crédit Suisse AG Dana Telsey - Telsey Advisory Group

Good morning and welcome to Macy's First Quarter 2018 Earnings Conference Call. Today's call is being recorded. I would now like to turn the call over to your host, Karen Hoguet. Please go ahead.

Thanks. Good morning, everyone. And Jeff Gennette, our Chairman and CEO and I would like to welcome you to the Macy's call to discuss our first quarter earnings and our outlook for the remainder of the year. Any transcription or other reproduction of the statements made in this call without our consent is prohibited. A replay of the call will be available on our website, www.macysinc.com, beginning approximately two hours after the call concludes. Please refer to the Investor Relations section of our website for a discussion and reconciliation of any non-GAAP financial measures discussed this morning. Keep in mind that all forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the company's most recent Form 10-K and other SEC filings. I'm now going to turn the call over to Jeff.

Thank you, Karen, and good morning, everyone, and welcome to the call. As you saw in this morning's release, we continued our momentum from the holiday season into the first quarter. In fact, exceeding our own expectations on most measures. We delivered adjusted earnings per share of $0.48. Comparable store sales were up 4.2% on an owned plus licensed basis. And when adjusted for the estimated impact of the shift of Friends and Family from the second quarter to the first quarter, comparable store sales were up 1.7% for owned plus licensed. I'm pleased to report strong performance across all three brands, Macy's, Bloomingdale’s and Bluemercury. Across all families business and all regions of the country. And it's very encouraging to see the continued improvement in our brick-and-mortar business. We still have a lot of work ahead of us. But store by store, quarter by quarter, we are on the path to return Macy's Inc. to consistent comparable store sales growth. Based on the strong start to the year and the healthy macroenvironment, we are raising both earnings and sales guidance for the year. We now anticipate annual comparable store sales in the 1% to 2% range for owned plus licensed which is a 1 point lift from our prior guidance. And we anticipate that annual earnings per share will be in the $3.75 to $0.395 range which is up $0.20 from our prior guidance. Karen will take you through the details of the quarter and give you some additional context on guidance. But before she does, I want to give you some perspective on the first quarter and an update on our strategic initiatives. So looking at the quarter, we did have the wind in our back as consumer spending remains strong and we saw significant improvement in international tourism spending. We anticipate this to continue through the year. But in addition to healthy spending trends, the team is also executing really well. We have a very healthy inventory position which helps our margins and our fashion freshness. Our focused merchandising strategies had resulted in great assortments and great strong fashion in our stores. The new loyalty program is having the intended impact on the spending patterns of our best customers. And we are taking the necessary steps to improve the customer journey, both in our stores and when she's shopping online. And it's starting to pay off. Average unit retail or AUR was up 5% in the first quarter compared to last year. It is encouraging to see the continued improvement in brick-and-mortar. We also continued to see sales pick up in nearby stores and markets where we've closed stores last year. And our digital business continues with double-digit growth. We also saw strong performance across all regions of the country in all families of business. In Centocor, fine jewelry was a standout performer, including our proprietary Star Signature Diamond Collection. We also saw improvement in accessories, handbags and sleepwear, largely driven by our Private Brands. In beauty, we saw meaningful lift in AUR for the quarter, driven by fragrances for both men and women as well as skincare. We also saw standout performance in men's tailored clothing, in kids, dresses, active and home. So all in, the first quarter was a good one for us. And I'm pleased to see our fourth quarter momentum continuing into the New Year. So when we look ahead at the rest of 2018, our growth plan is built on ongoing improvements in execution, continued strength in merchandising and key strategic initiatives. I want to take a few minutes to take you through the 5 strategic initiatives. So first is our Star Rewards loyalty program. You'll remember in October that we launched the first stage of the Star Rewards program and our customers are responding enthusiastically. At the platinum level, our most valuable customer is spending more with us. And while it is still early, we are starting to see improvement at the gold and silver levels as well. Last week, we rolled out the second phase of our loyalty program, which includes a tender neutral option, allowing customers to participate in the loyalty program without having a Macy's credit card. This is what we call our bronze tier. There are no spending qualifications and this program is open to all customers no matter how they pay. We are also adding more unique experience-based benefits for our platinum customers. For instance we are offering, or we did offer private early store hours for iconic Flower Show in our New York and Chicago and San Francisco locations. These new benefits will increase brand engagement and customer retention. The second initiative is our Backstage expansion. Last quarter, we said we would open approximately 100 additional Backstage locations within Macy's stores in fiscal 2018. In the first quarter, we opened up 18 Backstage locations. We expect to open approximately 40 more locations during the second quarter. We are expanding Backstage to some of our premium malls and to the West Coast for the first time. We also announced that we are opening a new distribution center in Columbus, Ohio, dedicated to Backstage. This will allow us to move merchandise to our Backstage locations faster and with more flexibility. The third initiative is the expansion of products available for sale on our website shipped directly from our vendors or what we call vendor direct. We are significantly increasing our online assortment in select departments. In stores, our customers will continue to find curated, localized assortments. And on macys.com, they will have access to an endless aisle curated through personalization. In the first quarter, we started the vendor direct expansion and expect to have it fully underway by the fall season. The fourth initiative we are focused on this year is store pickup. We are offering more options for pickup and delivery, including the expansion of Buy Online Pickup in Store and the implementation of Buy Online Ship to Store or what we call BOSS. In the first quarter, we are focused on the rollout of extra service counters which makes picking up orders in our stores albeit Bob's or Bob's quick and easy. By August, these will be in almost every single store. Our fifth initiatives is what we call the Growth 50. These are 50 stores where we are implementing the best of what we tested in 2017. This work will complete in time for the fall season and we intend to come out of the year with a model that we can scale. We are making a point of visiting each of the Growth 50 stores and I'm very excited about what I'm seeing. From merchandising strengths and strategies, more staffing in key areas, facility upgrades as well as local marketing plans. And what's really striking is the renewed energy of our colleagues that they are putting into serving our customers. So those are our 2018 strategic initiatives. We do anticipate that much of the impact of these initiatives will fall into the second half of the year. But we are already beginning to see some benefits, including from the earlier Backstage openings. While the strategic initiatives are key components of our 2018 growth plan, we are also looking more broadly in what we need to do to improve the customer experience. A few weeks ago, we announced that we had acquired STORY, a concept store in New York City. For those of you that are not familiar with STORY, the space reinvents itself every 6 to 8 weeks, highlighting new themes that bring new customers in and keep existing customers coming back to see what's next. We are not in the commodity business. We are in the experience business and Rachel Shakman, who is STORY's Founder and CEO, is now Macy's first Brand Experience Officer. Rachel has a clear vision of how merchandising and marketing strategies come to life in the store and we are very excited to have her and the STORY team join us at Macy's. In the first quarter, we also introduced new technology, both on our mobile app and in our stores that will help us eliminate friction from store visits and improve the shopping experience. One of these initiatives is mobile check out. We know that the checkout process can be a pain point for our customer. With mobile check out, we are speeding things up. Customers can scan a product with the Macy's app, pay with a store credit card and then go to a dedicated counter to remove security tags. We call it Scan, Pay, Go. We've been testing and fine-tuning mobile checkout and we plan to roll it out to every Macy's store by the end of the year. We are also using virtual and augmented reality to help grow our furniture business. We like this business because it's high-margin but it's also very high touch business. And like many of our competitors who have been looking at VR and AR, in furniture, we have found a practical application. We've piloted VR in three of our furniture stores and found it significantly increased transaction size and also reduced returns. Using VR allows us to offer a full range of furniture in roughly half the space. So we are now scaling this to 60 more doors this year. We've also launched an augmented feature, reality feature on our mobile app that allows customers to see furniture in their actual living spaces. We've rolled it out to a portion of our app users as we test and learn. And to date, it's been very well received. So as you can see, it's -- a lot is happening with the Macy's brand. But let me take a minute to touch on Bloomingdale’s and Bluemercury, both had a great first quarter. So Bloomingdale’s opened its newly remodeled shoe floor at the flagship 59th Street location in New York City. All women's shoes have now been relocated to a single floor that's more than 25,000 square feet. This is a 40% increase over prior shoe floors. There are more than 100 brands, 17 that are new to Bloomingdale’s and 34 that are exclusive. It's aligned with what Bloomingdale’s customers want and love and initial feedback has been very positive. Bluemercury also had a great quarter. It's a small part of our business but it's growing at a rapid pace. They launched a number of new products under their private labels, Lune and Aster and M-61, which have performed well. We continue to see potential for Bluemercury stores, both freestanding and within Macy's stores. We anticipate opening approximately 25 additional freestanding Bluemercurys this year. Before I hand it back over to Karen, I do want to note that a significant factor in our improved performance is that we have the organization aligned, focused and growing in the same direction. On our last call, I described the path to growth incentives that we've implemented this year. This puts every Macy's colleague full-time, part-time, hourly and seasonally, on an incentive program tied to our growth plan. And I'm pleased to say that about 3/4 of our eligible colleagues made bonus in the first quarter. I'm both proud and encouraged by the energy and engagement that I see that are out on the stores, in our call centers and in our warehouse. So overall, we feel good about the quarter and the path we are on for 2018. This is the most competitive retail environment I've ever seen. And we know that we need to get up every morning committed to winning our customers business. We are making the right investment in the business, focusing on areas where we seek the best returns and are confident this will support our commitment to growth in 2018. And now I'm going to hand it back over to Karen who will take you through the numbers.

Thanks, Jeff. So Jeff said, sales, earnings and cash flow all surpassed our expectations in the first quarter. Sales in the first quarter were $5,541,000,000, up 3.6% versus last year or up 4.2% on a comp owned plus licensed basis. As Jeff mentioned, we benefited from the timing of the shift of our Friends and Family event. We estimate that this shift is worth 250 basis points. So excluding the shift, comp sales on an owned plus licensed basis are estimated to have been up 1.7%. We are getting lots of questions this morning about whether this adjustment includes the calendar shift as well. It does not. This is consistent with what we experienced in 2013. It's frankly hard to measure that because when we follow a 53-week year, we shift promotional events around. We do not think the impact is meaningful although there is a slight benefit in the first half and a slight negative in the second half of the year. As Jeff said, we saw improvement in both our digital and stores business with particularly strong performance to Bloomingdale’s. In addition to our improved execution and our North Star Strategy, we believe we benefited from both stronger customer spending and an increase in international tourist business. International tourist sales were up close to 10% in the quarter, which is only the second time since 2014 when we experienced an increase. Total transactions were up 1% in the quarter, with average unit retail up 5% and units per transaction down 2%. This increase in average unit retail reflects the higher regular price selling and distorted growth in our strategic businesses like fine jewelry, dresses, handbags and furniture. Additionally, as a result of having significantly less and also much fresher inventory this year, there was less selling in the quarter of deeply discounted clearance merchandise. Credit card revenue net was $157 million in the quarter versus $161 million last year. This too was better-than-expected, primarily due to higher balances. This is resulting largely from higher credit sales and new accounts also. In part, due to our new loyalty program which, as Jeff said, was launched last fall. Penetration on our private label cards was approximately 45.5% in the quarter, which is just slightly above last year. This compares though to the 90 basis points decline in penetration that we experienced both in the fourth quarter and the full year of 2017. Gross margin as a percent of net sales for the quarter was 39%, up 70 basis points over last year. We benefited from the much improved inventory position during the quarter and we ended the quarter with 5% less inventory on a comp basis. SG&A dollars in the quarter were $2,083,000,000 or 37.6% of sales. This compares to $2,057,000,000 or 38.5% last year. This increase in dollars is driven primarily by the investments we are making to support the North Star Strategy, such as digital, the Growth 50 store, Backstage and the new path to growth incentive plan. The savings from the change in the tax law is helping to offset these sales driving investments. Asset sale gains were $24 million in the quarter, $44 million lower than last year. Remember that this year's asset sale gains are expected to be back-end loaded into the fourth quarter when we are assuming that we will sell the I Magnin building on Union Square and San Francisco as we discussed last quarter. We booked $19 million in impairment and other costs in the quarter, primarily associated with the decision to end our China joint venture. We will continue to have an ongoing presence on Alibaba's TMall platform as well as social media channels in China. But it will now be managed by our digital operation in San Francisco. We expect to book an estimated additional $10 million over the next few quarters related to this change in approach. Benefits plan income net was $11 million versus $13 million last year. Consolidated EBIT in the quarter was $249 million or $268 million before the impairment and other costs. This compares to $232 million last year. And excluding asset sale gains, EBIT on this basis was $80 million or 49% over last year. Interest expense was $66 million, down from last year's $84 million due to our debt reduction. Tax expense in the quarter was $52 million or 28.4% of pretax income. This represents a $16 million reduction from last year and approximately 19 basis points lower as a rate. Net income attributable to the Macy's Inc. shareholders in the quarter was $139 million versus $78 million last year. And excluding asset sale gains in both years, the impairment and other costs this year and the premium on early retirement of debt last year, net income was $93 million higher than last year. EPS on a diluted basis excluding the impairment and other costs in the quarter this year and a premium on early retirement of debt last year was $0.48 versus $0.26 last year. And when we exclude asset sale gains as well, EPS was $0.42 this year versus $0.12 last year. Cash flow was strong as well in the quarter with an $85 million increase in cash provided by operating activities. We spent $13 million more in CapEx and received $73 million less in proceeds for property and equipment sales this year. It really was a great quarter on every metric. We exceeded our expectations. And as a result, are increasing what we expect for the full year. For sales, we are now assuming a comp owned plus licensed increase of 1% to 2% for fiscal 2018 as compared to the assumed 0% to 1% previously. Comp sales on an owned basis are assumed to increase by approximately 20 to 30 basis points less than the comp on an owned plus licensed basis. And total sales are now expected to be down 1% to up 0.5% versus down 2% to down 0.5% previously. Remember the total sales are impacted by the fact that fiscal 2018 has 1 week less than 2017. The comp sizes however is stated on a comparable 52-week basis. We still expect comp sales on an owned as well as owned plus licensed basis in the second quarter to be negative due to the Friends and Family shift. However, comp sales on an owned plus licensed basis are now expected to increase 1% to 2% for the first half of the year, the first and second quarters combined. And total sales for the first plus second quarter, or the first half of the year, are now expected to be flat to up 1%. As we have discussed, we are benefiting from stronger-than-expected external factors as well as the earlier execution of some of our strategic initiatives. We still expect the comp sales in the back half of the year or what we call the fall season, to exceed that of the spring season due to the ongoing rollout of our strategic initiatives. Remember though that last year, we had a much stronger fall season and spring so that will impact the degree of improvement as we year around on the stronger performance particularly in the fourth quarter. We are also increasing earnings guidance by $0.20 a share to $3.75 to $3.95, excluding anticipated pension settlement, impairment and other costs. This increase is the result primarily of the strong first quarter performance, the better second quarter expectation, as well as an increase in our assumptions for annual credit card revenues to $675 million to $690 million. All of our other assumptions are unchanged. Like I said earlier, it was just a terrific first quarter all around. It's encouraging to see the business getting stronger and I feel good about both our own plans as well as the external environment in which we are working. Spirits are up and this is an organization that is committed to winning and getting better every day. So with that, Jeff and I will take your questions.

[Operator Instructions]. We will now take our first question from Lorraine Hutchinson of Bank of America.

Karen, I just wanted to confirm. So you talked about the second half comp guidance now being better than the 1% to 2% in the first half, is that correct?

Yes, what we have said in February and we would say again now is that we do expect the fall season to exceed the spring. But I want to remind people that the second half is a much harder comparison. So you really have to look to some degree onto your numbers. So we do expect the fall to be better. But maybe not by the magnitude that you might have thought for 2 reasons. One is the fact that the fall, and particularly the fourth quarter is a harder comparison. But secondly, the spring has gotten better as well with the earlier execution of some of our initiatives. So we still expect Q2 to be higher than -- I'm sorry, the back half of the year to be better than the first half of the year. We are just cautioning on the degree of the difference between those two. And again, all of that is reflected in our guidance. So the big increase has been in the spring season as opposed to the fall.

Thank you. And then when you look back on the first quarter, were there any challenges posed by the very cold weather? Or is there anything that you can talk about in terms of cadence or how the quarter unfolded versus your expectations?

So Lorraine, it's Jeff. I didn't see and we didn't see really any material difference in our business based on weather. You had some markets that were affected and you had some markets that were positive. So in aggregate, it did not have a significant impact on business at all.

And the quarter was good every month. In fact, every week. So the consistency of the good performance was really important as we were looking at the first quarter.

We will now take our next question from Robert Drbul of Guggenheim security.

I guess the question that I have is on the Friends and Family. The year-over-year, was the 30% off the same as it was last year? And can you just talk a little bit...

Yes.

So it was. And from the perspective of like the trend throughout the quarter, you said weather didn't have an impact. But around in the comparisons, as you look into the second quarter, can you just talk a little bit about how much you feel like you pulled forward? I think you said it was going to be a negative comp?

No. The only thing that we pulled forward was the Friends and Family event. So in the first quarter, it's worth 250 basis points. In the second quarter, it's worth about 240 basis points because it's a bigger quarter but roughly the same. So the negative -- whatever the second quarter turns out to be, add 240 basis points to that and that would be the comparable to the 1 7.

Got it. Okay, okay, great. And just within the Backstage initiative, can you just provide an update on category learnings as you continue to roll this out versus what's in the traditional store?

So Bob, it's as we discussed in prior calls, the strength of Backstage continues to improve. The standout categories were men's, shoes and homestore. But we are getting traction really across all categories which will be beauty and the apparel areas in kids and women's and men's. So what we're doing is we are tailoring the assortment depending on what building that we are in. And we are strongly advantaged by having Michelle Israel, who basically leads Backstage, but she also leads Bloomingdale's Outlet. So she's been at this for some time with the successful strategy that we are implementing at Bloomingdale's Outlet. And she has the full scope of vendor menu that really spans all different price points that we can now tailor based on whatever store it's in. So as you heard us say earlier, our objective with Backstage is to start to test that in premium malls in 2018 as well as entering the West Coast for the first time. So we are still in the early innings of Backstage and we've got -- we are layering on another 100 plus stores in 2018, 18 of which we opened in the first quarter.

We will now take our next question from Matthew Boss of JPMorgan.

Karen, if this happens to be your last call, congrats on moving to the next chapter.

Thank you.

Jeff, with two straight positive comps, I guess if you broke down the drivers of the top line inflection that you're seeing, I guess how would you rank the impact of the stronger consumer backdrop and some of the macro factors such as tourism versus what you're seeing and doing from a company specific execution standpoint? I know you have a laundry list of initiatives. I guess what's the best way to think about what are you seeing and where are you seeing the earlier-than-expected benefits and what are you the most excited about incrementally for the back half?

Okay. So I think the backdrop of a very healthy consumer is the tailwinds that Karen is referring to. Certainly helping us. I think that the international tourism, it's good to have that in the plus column. And what we started to see in the fourth quarter and what we certainly showed up in the first quarter, that's going to -- that trend we believe is going to take us all the way through to 2018 at least. As you get to the execution issue, let me just kind of step back a bit. I think when we made the announcement last August, we really announced two things. We announced this, the new kind of massive simplification of three organizations that went down to 1 merchant organization and we also announced the hire of Hal Lawton and these two things have really helped our execution. Starting with the kind of the structure. Massively simplified the merchant structure. We have five great merchants that are leading each of the families of business. They are veterans that I go into battle every day with them. And they are led by one amazing Chief Merchant which is Jeff Kantor, who really is just breathing new life into our merchant organization. I think if you asked our partners or our vendors, they would say at Macy's that we are operating now with courage and more speed and more agility that we are making calls and the divisionals are making calls without oversight. There's less meetings and here's more countable people. So I think the new structure is really helping us in execution. Then you ask, how are the mix? If you think, Howell is a very disciplined and he's got a very solid retail chops. I think we are getting on more disciplined operational cadence and you couple that with his deep technology background that is really primarily focused on improving the customer experience. And he's just very comfortable and confident in making decisions on tough calls and we are moving better and faster as a result of his leadership and his work with all of our veteran teams. So as you think about the back half of your question which is which of these initiatives are, do I believe, give us the most continued traction, you'd have to put on her Backstage. Vendor Direct is a big opportunity for us and we start picking momentum up on that, we started that we've done vendor direct in the past. But the idea about adding new content and new categories onto that which we will do a lot through our relationship and new partnership with CommerceHub, that comes on in the back half of the year. And then the new loyalty program is obviously bringing us to customers that are more engaged with us. And then the last thing I'd say, Matt, would be, which is really the Growth 50 which is our brick-and-mortar initiative to get each of these 50 stores right. And you're going to see, and I can talk about that later. But that is really one of the most exciting things that we're doing right now.

Great. And then just a follow-up. Karen, on the gross margin front. Can you just touch on the drivers of the outsized merchandise margins this quarter? I guess how best to think about 2Q when we still have somewhat of an easier compare? And as we think forward, what's the best way to think about the spreads between inventory and sales on a multiyear basis?

So let me start with gross margin in the first quarter. The merchandise margin was actually up a little higher than the gross margin because again, we are getting -- the gross margin gets negatively impacted by the growth in digital and the free shipping associated with the loyalty programs. What we said about margins for the year is that we expect it to be flat to up slightly. And so again, I'd hold with that and we will see from there. But there's nothing that happened in the first quarter that should reverse in the second quarter. So the first quarter is clean from that perspective. In terms of inventory, one of our key initiatives is to improve our inventory turnover over time and over multiple years. So Hal and Jeff Kantor and the teams are working very hard on that in part to help working capital but frankly, more so to improve sales and margin. And so I'm pretty excited about that. But I don't yet know the magnitude of that over time. But you could see that to be an important initiative for us going forward.

We will now take our next question from Paul Trussell of Deutsche Bank.

Congratulations, Karen. I wanted to just think about in hindsight, if you could provide insight on what your internal expectations were for first quarter comps, gross margin and EPS? Really just trying to better understand how we should think about the raise in full year guidance? To what extent it was related to the beat in the first quarter performance or your expectations or increased outlook for 2Q and beyond?

Yes. I think I'm not going to tell you what our plan was for the first quarter. We did beat it on every line. But again, I would focus on these two key things we talked about. The increase in sales guidance with no change really in the margin and expense. It was really all driven by the extra point-of-sale and also the change in the credit revenue much of which happened in the first quarter. So that's not all incremental to the rest of the year.

Got it. And then while you've touched on this, in terms of kind of ranking the impacts to the raise in the point of comp to the full year, how would you kind of break down or prioritize the impact of tourism or the loyalty program? You've mentioned Backstage and merchandising. How should we think about that order?

Honestly, I can't give you a breakdown. I would just assume that fall in the mix as we raise the guidance.

Fair enough. And then lastly then on gross margins. As you just spoke about, the merchandise margins were very strong in 1Q. Why should the full year still end up in the flat to just up slightly range? I was surprised that wasn't adjusted.

Well, remember. This includes the digital [indiscernible] and as the platinum customers and gold customers and our Star Rewards program keep increasing their shipments with macys.com that does go through gross margins. We also had a good gross margin performance in the back half of the year. And the first quarter, as you remember from last year, was really not very good. Some opportunity in Q2. But it was really Q1. And the comparisons get harder as we get to the fall season.

We will now take our next question from Chuck Grom of Gordon Haskett.

Jeff, incentivizing your employees is always a good thing. Curious how much you think that decision to tie comp to sales across the chain may have helped sales in the quarter?

It made a difference, Chuck. I think it's hard to quantify that. And I think as we saw in the incentive program that we did in the pilot that, which, we basically did in the back half of 2017, and that's what really informed our decision to do it companywide in 2018. What we found is once you get that first paycheck, these front-line colleagues. And these are like part-time doc associates, these are front line associates, they are serving customers, call centers, warehouses, these are corporate colleagues that when they get that first paycheck for that quarter, that what it does to kind of reinforce great behaviors and how they can live the North Star Strategy in the next quarter, so we think this is nothing but good news. And again, it was almost 3/4 of our full colleague population. We have 130,000 employees that benefited from this. They get that in their paycheck, particularly our front-line colleagues. They get that in their paycheck in the next week or the next two weeks. So we know that's going to make a difference in the reinforcing behaviors that we've seen them exhibit with such courage in this first three-month window of the quarter. So I do think it's made a difference. But hard to quantify how much of our momentum right now is attributed to it. It's all part of it.

Okay, great. And just on tourism, when you look back, when the business from tourism starts to turn, how long do the benefit will last you and is it possible to quantify what the lift was?

It's really hard to know how long it's going to last. We know that the negative lasted a long time. So my hope is that the positive does as well, Chuck. But I don't know the answer to that.

And then one last one for your Karen. Just leverage ratio is around 2.8x. I think I touched above your comfort zone. But given back-to-back orders of good sales here. How are you guys thinking about stock buybacks in terms of capital allocation?

I think the issue is we still need to get the leverage ratio to the target level and that continues to be the priority. Should the EBITDA significantly improve versus what we would have expected, such as that happens faster, that's a change. But at this point, we are still anticipating debt reduction being the use of excess cash.

We will now take our next question from Kimberly Greenberger of Morgan Stanley.

Karen, I wanted to just follow-up on Lorraine's question on the monthly comp cadence here in Q1. And I think you mentioned every week was a good and there was consistent performance throughout the quarter. Is this compared to your plan? Or is this consistent performance relative to the 3.9% comp that you reported this quarter?

No. Compared our expectations, obviously, depending on the timing of promotions, it can be up and down relative to the 4Q OL. But relative to our expectations, it was consistently a strong quarter week in, week out, month in, month out.

And then Kimberly we had an Easter shift obviously. So the big shift despite for us in the first quarter was the Easter shift. So when you look at the combination between March and April, we got this -- we got the planning of this one right and that's what's Karen is referring to in terms of exceeding expectations and the way we plan the weeks. We plan the Easter shift, right? And then the Friends and Family shift that we described, it's affected the first quarter performance. We planned that right as well.

Great. Okay. That's super helpful. And then I think you mentioned that the average unit retail price in the quarter was up 5%, Karen. I think you said that, that was because last year contained a lot of markdown selling. I think looking back at the comments you made last year, it was because of the carryover inventory from the fourth quarter. So given that it was such a significant driver here in the first quarter, I'm wondering how we should think about the AUR throughout the rest of the year.

Well, I said it was good in two factors. One is the one you mentioned. The second was much higher AUR in regular price selling driven by this growth in our strategic categories, fine jewelry, dresses that I had alluded to and talked about on the call. So it's really both factors. One is ongoing and the other is more temporary. So we don't forecast AUR increases. But it isn't all due to the clearance merchandise being less. What really encouraged us was the strong increase in AUR in the regular price out.

I think the merchants are doing a very good job of really putting all of our goods, packing them with value and really going after the fashionable spender which is really our sweet spot. And so the sellthroughs on that product at higher AURs is really healthy right now. So just to amplify the second part of Karen's point, fashion is selling. We are getting better sellthroughs and we are getting more value for it.

I will take our next question from Paul Lejuez of Citi.

With the launch of the tender neutral card, can you build into your expectations any decline in credit penetration or would you assume that that stays consistent?

We think it just stays consistent because you continue to get better benefit if you use our card. So if you're a cardholder, you're always going to want to use your card versus take advantage of the tender, the bronze level or where you don't have to use our credit card. So while I would say that is a risk we've considered, we think we have the risk contained and that should not be an issue. And we are hoping that it gets further engagement from the half of our customers who don't use a credit card which will help sales.

I will just amplify that, Paul. We are staying very disciplined in making sure that the tiered benefits between bronze, silver, gold and platinum are really clear and the customer clearly sees the stepup of. So the fact that they are a bronze player, they can pay in any payment type, we are going to make sure they are very clear about what they get if they were to change what level they go to. And those will be increased benefits. So we are very hopeful that we are going to get new customers into our credit portfolio as a result of introducing the bronze program.

Got you. And then Karen, I think the comp metrics that you gave for the quarter include that Friends and Family benefit. Is there any way you can talk about outside that Friends and Family period? What were the comp metrics and traffic ticket AUR basis?

No, I can't. We will give it to you when we finish the second quarter when we do this spring. We don't have that we stated.

Okay. And how about if you look at Friends and Family versus same promotion last year, how did it perform, right? We crossed over quarters now. But I'm just curious if you kind of just separate that one event and look year-over-year, how did it perform?

It performed better for both Macy's and Bloomingdale’s. It was -- to the earlier question, it was the same discount. And -- but the customers responded better to it this year based on the fashion content that we have as well as some of the exclusive products that we had about Bloomingdale’s and Macy's. So we're pleased with this performance.

We will now take our next question from Brian Tunick of RBC.

This is [indiscernible] on for Brian. First of all, I wanted to ask about the Backstage. You've been seeing as you added more stores. I believe in the past you had mentioned the high single digits lift for the overall store comp when you added a Backstage to an existing store. Is that sort of the lift you're still seeing and do you still have new customers coming in for that concept where the Backstage store has been opened now for over a year?

So your question is suggesting one of the things that we were most interested in saying which was how would Backstage within a Macy's perform in the second full year after anniversarying its introduction? And what we talked about is that the introduction means a 7-point lift to the full building versus buildings of that control set. And what we are seeing now were those -- when we opened the Backstage in 2016. And at the beginning of 2017 that we are getting positive comps in those stores, in that Backstage location. So that is really good news for us. As to the conversation about existing versus new customers, so existing customers are clearly, when they are experiencing both Backstage and the full price side in the store that has both, they are spending more and they are visiting more often. So that is always good news for us. We have not marketed really Backstage outside of the inaugural opening in a particular market. We don't market it nationwide. And when we get to get more critical mass we will do that. And with that, we expect that we will be attracting more broadly new customers into it. But right now, it's working quite well with getting more spend with existing customers. And as mentioned, the growth rate of it is disproportional in those Backstage locations that have been opened more than 1 year. So that's all good news.

Great. Thank you. Then I believe you mentioned the strong recap of sales from closed stores here in Q1. Does this recap [indiscernible] opportunity and very strong obviously, e-commerce sales make you maybe reconsider the optimal store count for Macy's?

I mean, that's always in the map as we think about the store count. So I don't think it makes us reconsider the store count. But it is great news that we have been able to retain the sales in nearby stores as well as online.

We will now take our next question from Oliver Chen of Cowen and Company.

Regarding the brand experience and as you're thinking about what you can do there and through the lens of curation, culture and convenience, what are your thoughts on what will be more shorter-term opportunities versus more longer term opportunities as you reinvent the store in a customer-centric basis? I think related to that is the Growth 50 and would love your hypothesis on which are the more profound differences in the Growth 50 which could be ported over to your larger store base?

Oliver, let me talk first. I think that if I had to kind of sum up, I think on the curation comment that you're making. That's certainly what we're looking to do with our brick-and-mortar portfolio, it's to make sure that we got the best possible assortment, localized at the store level and you're seeing us make much more aggressive edits and really amplify in the fashion of the trends and the brands that remain. And we tested that all the way through 2017. You've seen this do that in 2018. So that continues. So I think in terms of the convenience question, us being able to make sure that wherever our customer wants to shop, if she's browsing online but she wants to feel the fabric in store, if she wants to get into a store but get out, how could she transact without having to deal with any friction, that's why we have mobile checkouts, making sure that we've got all delivery models, including same-day delivery for that last mile imperative. We've got that very well focused. In terms of making sure that the store experience is heightened, that just leads you into kind of how we are thinking about that, it's really kind of the Nexus of what we're doing with the Growth 50. And really the recent acquisition of STORY and really all we are doing with Market @ Macy's. So let's just start with Growth 50. So Growth 50 is something that when we sat down and looked at how are we going to improve our trend in brick-and-mortar, it was all on the thesis that Macy's is going to do best when we've got robust digital growth, we've got healthy brick-and-mortar and we've got a mobile platform that connects customers to all channels. And so we had the mobile piece well on way. We have the digital growth obviously, percolating and we are driving that very successfully. Brick-and-mortar needed a lot of work. So we took 50 doors that are representative of a lot of other doors and we are focusing on the 5 Ps which for us are product, presentation, process, promotion and making sure that they are right. And the fifth is really people. And so what we're doing in each of those 50 doors is really looking at hyper curated assortments, making sure that the facilities are in great shape, that we are putting capital in those buildings but modest capital so that it can be scaled with what we learned, really making sure that the marketing localized. We're bringing communities into the store. But the big win is really what we're doing with our teams. Great store managers, great operational and sales managers, great front-line colleagues, particularly in those businesses where the customer likes that touch, fine jewelry, Big Ticket, women's shoes, those, and beauty businesses. So all of those, we are in process of completing all that work. We are going to be done with that by mid third quarter and we can expect to have strong growth in those 50 doors. If we do, based on the expense and the capital we are putting into those buildings, that will form our thesis for how we take that into more brick-and-mortar in future years. So that is a very important initiative for us. As it relates to STORY, and as it relates to Market @ Macy's. So STORY is obviously, you know the STORY in Manhattan. Rachel [indiscernible], the Founder of STORY is now the chief, she is basically the brand officer, Brand Experience Officer at Macy's. And we believe that not only will we see opportunities for the expression of STORY within Macy's stores but also her work in really helping connect marketing and merchandising within the store experience, which is really cut her teeth on over the years that she has been leading the subject. So very excited about what her leadership is going to be. She reports directly to Hal. Her peers are running marketing, running stores, running merchandising. She's going to work very closely with all of that. And then Market @ Macy's is really our opportunity to take unknown brands or categories that can be hyper localized in a space that we run and operate and it brings new ideas into stores in a scalable way with this kind of movable piece of content. And so far so good. We have like, 500 vendors in products that are in the Q to come into this. We've got it in 10 stores and it's working quite well for us. So expect to hear more about that in the future.

That sounds really innovative, Jeff. As I think about Growth 50 and different CapEx decisions you'll make as you test, read and react, how do you juxtapose that against thinking about different level productivity stores whether they be A, B and C stores and what you think your footprint should look like in the context of stores really transforming as acquisition points and rethinking the bricks and clicks in a modern way?

So I think Growth 50 is representative of A, not all of our stores portfolio but a big piece of it. And certainly in all the premium malls of the nation, and certainly the stores that make up the bulk of our business and the majority of our store profits. So I think we've got -- our thesis on this is that we are going to test all this. We are going to take what works. But one of the driving ambitions of this thing was to make sure that whatever we did was scalable. So I've got confidence that we are going to come out of 2018 with what that looks like. There is going to be other stores in which we are looking at new ways to operate. They've got positive cash flow. But it would not necessarily make sense for us to invest in them like we are at Growth 50. But there's new ways that we can hit customer expectation, potentially operate them more profitably and we are hard at work right now figuring out what we are going to do with that subject. So more to come on that.

And lastly, as you know, we have been focused on big data and data driving personalization and loyalty and data also driving convenience. And you've made a lot of strides with prioritizing data in your organization. Could you just brief us on what we should focus on in terms of your priorities in this subject and how it may impact our models over time?

Yes, I think what -- again, is the notion that hyper curation at a brick-and-mortar level is data [indiscernible] format. It's going to be the cross breed of art and science and great merchants to understand what's ahead. But then also look at past history. And to look at the particular community of that store and make sure that we are sorting appropriately. Endless aisle is a long line. And where vendor direct is taking us is the opportunity to massively expand our SKU counts online and then use data to hyper personalize that at a customer level. So we are in the beginning stages of that, both in expanding of the -- right now, we are at about 6:1 of online SKUs to an average store. You're going to see us take that ratio much higher and you're going to see us use data to then personalize that messaging to a customer in the future so that that also is curated like the store brick-and-mortar experience would be. So expect to hear more from that from us.

We'll take our next question from Omar Saad of Evercore ISI.

I wanted to actually ask you about a little bit deeper on the inventory. I mean, they've been running really lean for the last couple of quarters and it seems like all the initiatives you put in and the growing kind of centralized e-commerce business are giving a greater ability that kind of turns inventories faster and do a little bit more with less. Can you expand upon that and how you're thinking about the inventory management, and how it's evolving in the digital area, giving single potential, single view inventory, et cetera?

I think as I said earlier, it is a high priority for us but not prepared yet to tell us how low we think it can go. But we absolutely agree with your premise that both through technology as well as looking at our business in a way that focuses on curation more, we should be able to bring the inventories down. But again, I can't today tell you how much or on what timeframe.

We will take our next question from Michael Binetti of Crédit Suisse.

Let me add my congrats on performance in the quarter. And Karen, I'll add my best wishes for you as well. I know you wouldn't normally comment on matrons. But some other areas of retail this week have seen some really big growth rates as we get into fiscal quarter. If we run the back half math that, Karen, you helped us with, it looks like you're pointing to about flat to negative 2% in the second quarter which -- with the help you gave us on the shift implies that you guys feel like the core is just fine. Do I have the components there correct? And have you seen any context you can play around May here as we get in the quarter?

We are not going to comment on May. And again, the guidance for the spring season, you have to do your own math. It's about 1% to 2% comp and then flat to 1% total sales growth.

Okay. And then I guess Kimberly asked earlier but on the AUR and I know you don't forecast that either. But that obviously had kind of a strange quarter last year in the first quarter and baseline. As this year rolls on, you said a couple of these components are continuing and some rolloff but you do start accelerate backstage which I would imagine would be somewhat of a neutralizing impact on the strategic lift you are getting to the AUR that you think would continue. So I guess the longer-term question is if that is something that you think fades from the 5% level through the year a little bit as we think about our models? And then may be just a longer-term question is the first positive transaction count quarter you've had in a while, is that something that you see a sustainable? You added a lot of components [indiscernible] about in the traffic in the stores I'm just curious how you're feeling about that line.

Well, as I said earlier, we don't forecast AUR. So I'm not sure I can help you with your first question. The second question on transactions, I think we need to see the whole spring season before we can respond to that.

Okay, fair enough. I guess thinking out a little bit getting away from the [indiscernible] here in the near term. Are you ready yet to talk about more of how you're thinking about the margin outlook for the business over multiple years, I won't pin you down on the timeframe. I think when you look at the dollar amount the real estate has added -- real estate gains has added a lot in the last few years. I'm assuming you'd say that that probably were past the peak on the gains there and that will be less of a contributor starting in 2019 and beyond. So how -- it becomes more important for us to think what the multiyear margin outlook [indiscernible] think about this.

It's already the assets against are already forecasted this year to be significantly less than last year. So that's already happening, which is why you hear us talking more about net income and EPS excluding the assets sale gains, just so you see the comparables. But when you think about the fundamental profitability, the net income excluding asset sale gains should grow particularly as we return the company to comp growth and growth. That's really the key message here. And that's what we're focused on.

We will now take our final question from Dana Telsey of Telsey Advisory Group.

On the private-label side of the business, anything that you're seeing there that we should be looking forward as we go through the balance of the year? And Jeff, as I think about the store, the mix of apparels versus other categories in the future, where should it be? And then Karen, just on the platinum doors. Did they perform any -- were their performance more accelerated than the chain average? How do you look at it?

So I'll take your first two, Dana. So private brand is healthy. And you've heard us say that in the second of our five North Star Strategy points, which is Must be Macy's, it's really all about taking our poster Private Brands as well as exclusive product with other brands up to a 40% from its current 29% and we are well on our way on that. And when you look at that and what we are doing it right with a number of our Private Brands, our margins are better. Our supply chain is shorter and we are getting more value in the products. The AUR is higher than the average. We are doing some, we're having some really great success with a number of our Private Brands and it's our objective to get all of our Private Brands performing that way. We feel like we have the right number. They're spread across the right FOBs, they are addressing the right lifestyle for our customers. So we feel good about that. With respect to the mix of apparel versus balance of store, we talked about the 8 businesses that we are really focused on, a number of those are apparel. We have some that are in the Center Core world. There are some that are in home and what I tell you is that there's good success stories in each of those. When you look at the overall mix, apparel is not going to grow in to penetration because right now when you're thinking about Vendor Direct, our Vendor Direct first big initiative is to go after the home store because there's a lot of non-cannibalizing categories that we will bring into the mix with that. But we are happy with our overall apparel business. And very happy with our accessories business. And so we're going to be looking at individual components to grow them more profitably.

And relating to the -- you said platinum doors, I'm assuming you meant Growth 50 doors. The first thing I would say stores of all sizes and [indiscernible] did well in the first quarter. As Jeff said, close to 75% of our associates made the bonus which means they exceeded their sales plan. So -- everybody did better across the company. Relative to last year, the Growth 50 doors are accelerating beginning to which was we said is a bit earlier than we had anticipated. So we feel really good about the outlook for those stores.

And I add, Dana, the range of store sizes that are touched by Growth 50 is 20 million all the way to over -- to much bigger than that. So we are testing through the Growth 50 All Star sizes.

As there is no further questions, I'd like to turn the conference back to your host for any additional or closing remarks.

Great. Thank you all for your interest and support and as always if you have other questions, come on and call me and we will do what we can to get your questions answered.

Thanks, everybody.

Thanks.

This concludes today's call. Thank you for your participation. You may now disconnect.