Good morning and welcome to Macy's, Inc.'s Fourth Quarter 2018 Earnings Call. Today's hour-long conference will end promptly at 10:30 Eastern time and is being recorded. In the interest of time, we ask that you please limit yourself to one question. I'd now like to turn the call over to Ryan Alleman, Director of Treasury and Investor Relations. Please go ahead.

Good morning and welcome to the Macy's, Inc. conference call to discuss our fourth quarter and fiscal 2018 results and our 2019 outlook. Joining us on the call today are Jeff Gennette, our Chairman and Chief Executive Officer; and Paula Price, our Chief Financial Officer. Any transcription or reproduction of the statements made on this call without our consent is prohibited. Please note that we will be referring to slides throughout today's conference call. These slides can be viewed by going to the Investors section of our website macysinc.com. Additionally, a replay of today's call will be available on our website beginning approximately two hours after the call concludes. Keep in mind that all forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in the company’s filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing adjusted earnings before interest, taxes, depreciation and amortization, net income, and diluted earnings per share amounts that exclude the impact of restructuring and other costs, settlement charges associated with our defined benefit plans, losses and gains on the early retirement of debt and the impacts of federal tax reform on the company's deferred taxes. You can find additional information regarding these non-GAAP financial measures as well as others used in our earnings release and during this call on the Investors section of our website. We look forward to taking your questions after our prepared remarks. With that, I'll turn the call over to Jeff.

Thank you, Ryan. So, good morning, everyone, and welcome to the Macy's, Inc. fourth quarter and 2018 full year earnings call. Paul and I will take you through our 2018 fourth quarter and fiscal year results and 2019 guidance and high-level plans, then we will open up the line for Q&A. So as you saw in this morning's press release, we delivered on our goal of returning Macy's, Inc. to comparable sales growth. This was our fifth consecutive quarter of positive comp sales and we achieved a full year of positive comparable sales for the first time since 2014. For the fourth quarter, comparable sales were up 0.7% on an owned plus licensed basis and we delivered earnings of $2.73 per share. For the year, comparable sales grew 2% on an owned plus licensed basis and we achieved earnings of $4.18 per share. I want to thank our 130,000 colleagues for all they've done over the course of the year to get Macy's, Inc. back to comparable sales growth. While we delivered a positive comp against what was a strong holiday season in 2017, our results in holiday 2018 were lower than our expectations. And I want to give you additional color on two events that we referenced in our November-December sales release on January 10. Although difficult to quantify precisely, the combined impact of these two events on our fourth quarter sales was as much as 70 basis points. First and the bigger of the two was the fire in our West Virginia mega center, which occurred November 24. Thankfully our nearly 1,000 colleagues were evacuated safely. We recovered quickly and resumed limited operations within 48 hours. Nevertheless, the incident put pressure on our fulfillment network as it required us to shift volume to our other mega centers as well as to our stores. The fire also caused a portion of our merchandise inventory to be unavailable on dotcom during Cyber Week. Second, our pre-Christmas earn and redeem event. This year we limited the event to our Star Rewards loyalty program members only, while in the past years all customers in our stores have been able to participate. The response from our loyalty members was quite strong, but we would have fared better if we had kept the promotion open to all customers. Holiday is the time where we have a steady flow of new and occasional customers into the brand and into 2018. We missed an opportunity to engage them more fully with our great values. We have adjusted our promotional calendar for 2019 to address this. Before we get into the business review, I also want to address the organizational restructuring that we announced this morning. We are streamlining the upper management teams in order to reduce complexity, improve agility and move faster to respond to customer changing expectations. We are also moving key leaders into expanded roles in areas that support our growth strategies, which you are familiar with and our productivity agenda, which Paula will discuss. This restructuring impacted a number of colleagues who have made many contributions to our company over the years. Decisions like this are never easy and I thank each of these individuals for their service. Looking back at fiscal 2018 let me take you through a few of the highlights of our performance for the quarter and the year. All three brands Macy's, Bloomingdale's and Bluemercury delivered solid results for the full year. In 2018, the Bloomingdale's team focused on reenergizing the brand and enhancing the customer experience. We saw double-digit sales growth online and an improved trend in stores’ performance. In fact Bloomingdale's flagship store, 59th Street has had its best year since 2013. The renovation of the 59th Street store brought new energy, products and experiences to this great location. At Bluemercury, we saw total sales up double digits. We opened 26 new standalone stores and continued robust growth in both the standalone stores and our shops within Macy's stores. Online sales increased more than 50%. We also continued to expand our proprietary brands Lune+Aster and M-61, which now account for more than 10% of total Bluemercury sales. At Macy's, the recipe for success is a healthy brick-and-mortar business, robust e-commerce and a great mobile experience. We have a balanced investment strategy that supports all three of these components. The customer journey informs our strategy and our strategic initiatives put extra weight against the areas that we have the biggest impact on our customer and we know that when we move the needle on sales growth. In fact in 2018, each initiative was additive to our customer comparable sales growth and we see the greatest impact in our Growth 50 stores where all this comes together. Let me give you a quick year-end snapshot on each of the 2018 strategic initiatives. First, loyalty. In 2018, our goal was to strengthen the relationship with our proprietary customer with a focus on the Platinum tier of loyalty. Our Platinum customers generate nearly 30% of our sales. So, it's encouraging to see that they are shopping more frequently and spending 10% more. Among Platinum customers, we have also seen an uptick in every indicator of brand health that we track. We've also focused on bringing new customers into the brand. The tender neutral Bronze tier has already brought more than 3 million new customers into the program since it was rolled out last spring. We anniversaried the launch of the loyalty program in October and we now have a full year of data to look at. And we're pleased to say, the program is outperforming our expectation. Second, store pickup. 2018 was a strong year for our store pickup strategy, both Buy Online, Pickup in Store, or BOPS, and Buy Online, Ship to Store, BOSS. BOSS was a big hit with our customers in the holiday season and outperformed our expectations. Store pickup now accounts for approximately 7% of our online sales and store pickup nearly doubled during the holiday season. Importantly, we continue to see an approximate 25% associated sales on BOSS and BOPS orders. Our customers love the convenience and security of being able to pick up in their local store. Third, Backstage. We successfully expanded Backstage, Macy's on-mall off-price business, to more than 120 new locations within Macy's stores. This aggressive rollout was a heavy lift and I'm proud of the tenacity and agility that the team showed in getting this done on time and with minimal disruption. We are pleased with how Backstage is performing across the full portfolio of Backstage within a Macy's, we are seeing more than 5% average lift to the total box. Around 15% of our customers are shopping Backstage and the main store and it's encouraging to see continued double-digit comp growth in the Backstage portion of the stores that have been opened for more than one year. We are getting better at off-price every day. Fourth, Vendor Direct. In 2018, we expanded our Vendor Direct business on macys.com and vastly increased our online assortment, having nearly doubled our SKUs online since the expansion in early 2019. Approximately, 10% of our online sales now come from Vendor Direct. Our expanded assortment includes products from our existing national brands and the addition of new brands and categories which we know our customers love. And the fifth strategic priority for 2018 was our Growth 50 stores. Each of these stores received significant upgrades from facilities and fixtures to assortment and customer service and many received targeted local marketing plans. The Growth 50 stores significantly outperformed the rest of the fleet. These stores had notably higher customer retention rates and better overall customer satisfaction. The performance of these 50 stores confirms our investment thesis for our flagship and magnet stores. We expect the Growth 50 stores to carry their sales momentum into 2019. The improvement in the health of our brick-and-mortar business is very encouraging. And in 2018 our e-commerce business continued its strong growth delivering the 38th consecutive quarter of double-digit sales growth, driven by an improved site experience enhanced delivery options and Vendor Direct. Mobile continues to be our fastest-growing channel for sales and our mobile app is becoming an indispensable companion for our customers. The Macy's app has a 4.8 star rating with more than 0.5 million reviews. 2018 was also a strong innovation year for Macy's. We innovate to create engaging experiences for our customers. We invested in b8ta and launched the Market @ Macy's. We acquired STORY and we're excited about the potential of this new concept in Macy's. And we also innovate to apply technology to customer friction points. One of the highlights of the year was virtual reality, where we delivered the first national VR rollout in retail. In fact, earlier this month we opened our 100th VR furniture gallery. For the customers who use VR, we've seen return rates that are 25% lower and basket sizes 44% greater than customers who don't use VR. Shifting gears. We've also made good progress in 2018 on our real estate strategy. Let me give you two updates. First, Union Square. In January, we closed on the transaction to sell the I. Magnin portion of our Union Square flagship in San Francisco. This transaction is part of our multiyear plan to invest in making Macy's Union Square an even more vibrant experience for our customers. Second, Herald Square. We have talked in the past about how this is a valuable and complex property and any strategy to unlock additional real estate value will be on a long-term horizon. The Herald Square building is important to our brand, to our customers and to the neighborhood. Over the last year and half, we have been working closely with the team of land-use development and design experts to produce a menu of economically viable redevelopment alternatives. These could densify the real estate with complementary uses and will certainly preserve the store and enhance the customer experience. As we've said before, our real estate strategy and our retail strategy go hand-in-hand. This Herald Square work is ongoing and we are beginning preliminary meetings with city officials and community stakeholders to gather their input and feedback. We expect to be able to provide more detail later in the year as the Herald Square plan develops and we get the necessary feedback from everyone involved. We had deep respect for the history of this building and in the near term, we will continue to invest in Herald Square retail experience and our customers have and will enjoy a number of exciting enhancements in the store in 2019. Looking back at 2018 overall, I am pleased that we have changed the trajectory of the company and delivered full year comparable sales growth. We are a stronger company than we were a year ago with healthier stores, growing e-commerce business and a mobile experience that just keeps getting better. Now, I will turn it over to Paula, to go over the 2018 fourth quarter and full year financials and our guidance for 2019.

Thank you, Jeff, and good morning, everyone. As Jeff mentioned, 2018 was a very important year for Macy's, Inc. We returned to positive annual comparable sales growth, achieved our second consecutive holiday season of positive comparable sales and significantly deleveraged our balance sheet. We implemented initiatives that grew our sales in 2018 and that positioned Macy's, Inc. to capitalize on the ways consumers shops to date and how they will shop in the future. We, again, made strengthening our balance sheet a high priority, meaningfully reducing our debt for the second consecutive year and as a result, we have increased our financial flexibility to help fund our growth initiative and continued to return cash to our shareholders through ongoing dividends and in time share repurchases. We will continue this operational and financial discipline by managing all aspects of our business with an eye towards profit growth, while rooting out or reprioritizing unproductive costs. Before I discuss financial performance, let me share my perspective on two areas of our business, credit and asset sales. As you know, credit card revenue is its own line item on our P&L because of changes to the revenue recognition standards in fiscal 2018. That said, our credit card plays a very integrated role in our overall customer offering. We have provided credit for many decades and our customers expect and highly value it, with roughly half of our sales occurring on our proprietary card. Credit helps us grow our sales and our relationship with Citibank is a strong and profitable one. Our credit revenue stream is also enhanced by our loyalty program which we execute primarily through our proprietary credit card. The economics of our loyalty program contemplate incremental sales and credit revenue in conjunction with the incremental costs associated with the loyalty program such as rewards, free shipping for our Gold and Platinum customers. We believe our credit program in conjunction with our loyalty program sets us apart from our peers making both programs a competitive advantage. Asset sales have been another important area of management focus. Over the last several years we have sought to ensure the highest and best use of our real estate assets as we have monetized properties where the real estate value exceeded our retail value. These asset sales have generated gains that have benefited our earnings, and more importantly, have generated more than $1.7 billion of cash proceeds over the past four years. We have redeployed this cash in the business through investments that drive sales growth. And it has also helped us to strengthen our balance sheet as we have reduced our debt by more than $2.5 billion over that same time frame. As part of our normal course of business, we will routinely evaluate our store fleet and expect this ongoing process to appropriately yield a more moderate stream of gains over time. Now, let's turn to our fourth quarter and full year results which were in line with the updated expectations we shared in January. In the fourth quarter, we delivered $8.46 billion of sales, an increase of 0.7% on an owned plus licensed comparable basis. And for the full year, we delivered sales of $24.97 billion increasing our owned plus licensed comparable sale by 2%. For the fourth quarter we saw strength in fragrances skin care, women's shoes, actives, fine jewelry, men's tailored clothing, and furniture. We were disappointed in our performance in women's sportswear collection, handbags, and color cosmetics. We delivered our strongest performance in the South, Southwest, and Midwest regions of the country and our business with international tourists was down 4% in the quarter and up 0.5% for the year. Total transactions were up 6.2% in the quarter, reflecting strong customer demand both online and in store. Average units per transaction were down 4.9% as our platinum customers continued to spend more buying few units over multiple transactions and as we continued to test and iterate our free shipping threshold. Our average unit retail was down 0.3%, reflecting additional markdowns taken following the softer than expected holiday sale. We generated net credit card revenues in the quarter of $240 million, up 4.8% from last year. Strong credit card income continued to be driven by the momentum of our Star Rewards loyalty program which saw credit card penetration up 80 basis points in the quarter to 47%. Our gross margin rates for the quarter was 37.5% of sales, down 110 basis points to last year. The decline in gross margin was primarily driven by lower merchandise margin as we work to clear inventory. We are pleased to have ended the year with comparable inventory down 0.3%. Gross margin was also impacted by delivery expense in the quarter from our continued strong growth in digital and loyalty. We were able to fully offset increased delivery expense in 2018 through improved merchandise margin. As a result, our full year gross margin rate was 39.1% which was flat to 2017. We recorded $2.54 billion of SG&A expense in the quarter, $10 million lower than last year. On a rate basis, SG&A expense was 30% compared to 29.3% last year. The increase in rate was driven by the combination of lower-than-expected holiday sales and the investments we made in store hours to improve the customer experience and to fulfill online orders. For the full year, SG&A expense increased $85 million or 30 basis points on a rate basis, reflective of our investment in our strategic initiative, technology and our Path to Growth Incentive plan, partially offset by some lower year-over-year expense from the 53rd week in 2017. Asset sale gains in the quarter were $278 million, which was $90 million lower than last year. For the year, asset sale gains were $389 million which was $155 million lower than last year but $29 million above our previous guidance. The sale of the former I. Magnin building of our Union Square flagship in San Francisco generated cash proceeds of $250 million and an asset sale gain of $178 million. These results combined with lower interest from lower debt and lower tax expense from the Federal Tax Reform Act resulted in adjusted net income of $850 million in the quarter versus $876 million last year. When excluding asset sale gains, we delivered adjusted net income of $646 million, which was flat to last year. Adjusted EPS was $2.73 in the quarter compared to $2.85 last year. When excluding asset sale gains, adjusted fourth quarter EPS was $2.08 compared to $2.10 last year. For the full year, we delivered adjusted EPS excluding asset sale gains of $3.26, up 21% versus the prior year. Cash flow from operating activities was $1.74 billion for the year, down $241 million versus last year. The year-over-year decline was driven by lower EBITDA and higher net inventory investment, offset by lower cash taxes in 2018 compared to 2017. Capital expenditures were $932 million for the year compared to $760 million last year. While we spent our full capital budget of $1.05 billion in 2018, a portion of this spend is captured in the year-end table. Asset sale proceeds were $474 million compared to $411 million last year. We paid cash dividends to our shareholders of $463 million this year. As I mentioned, we have worked diligently to strengthen our balance sheet. In 2018, we voluntarily repurchased approximately $1.1 billion of debt, including $344 million in the open market and the $750 million tender completed in December. As a result of the debt reduction, our leverage ratio at year-end was 2.5 times as compared to 2.7 times last year. Excluding asset sale gains, our leverage ratio was 2.9 times. Our target leverage range continues to be 2.5 times to 2.8 times and we look at this range both with and without asset sale gains. We remain committed to maintaining a flexible and durable balance sheet and plan to use excess cash in 2019 to further reduce our debt to within our target leverage range, when excluding asset sale gain. In summary, we accomplished a great deal in fiscal 2018 and our entire team is energized and focused on delivering higher levels of growth and profitability in the future. We know that this is a pivotal moment for retail and for our company. Our industry is rapidly evolving and we must move faster to continually meet the needs of our customer. We will make balanced investments in the strategic initiatives that are driving our growth, while also being a mindful of our profit and cash flow and being committed to EBITDA improvements in the future. With this commitment in mind, in 2019, we will have an enhanced focus on the Funding Our Future point of our North Star strategy. The aim of Funding Our Future is to execute initiatives that improve gross margins and SG&A through a disciplined multiyear productivity program directed at all aspects of our P&L and working capital and changing the way we conduct our work. The Funding Our Future program is comprehensive and includes work streams across our supply chain merchandising and pricing, marketing, stores, private brand sourcing and non-retail procurement team. I am pleased to co-lead this program with Hal Lawton, our Macy's President. For now let me give you a quick example of the work already underway. As part of our supply chain work stream we are scaling the hold and flow approach that we piloted in 2018. This approach allows us to provide our stores with an initial allocation of inventory and then to dynamically reallocate in-season to stores needing it most, reducing markdown risk out of stocks and helping to drive fashion and newness. Our recent limited pilot resulted in a 15% improvement in gross sales versus control, driven primarily by improved in-stock performance. We are aggressively targeting similar opportunities in replenishment, pricing, marketing and shortage prevention. As part of the restructuring we have announced today, we have assigned strong cross-functional teams to execute this critical work and they are tackling it with rigor and a sense of urgency. With our Funding Our Future teams now in place, we are currently validating our three to five year savings goal which we will share with you later this year. Beginning in 2019, we expect the restructuring actions to generate annual expense savings of $100 million. So let's talk about 2019. As we saw on our release, we are guiding 2019 earnings per share to a range of $3.05 to $3.25. Included in this guidance is $100 million for asset sale gains as compared to $389 million in 2018. Excluding asset sale gains we are guiding EPS to be $2.80 to $3. Let me cover some of the key assumptions behind this guidance. We expect comparable sales on an owned plus licensed basis to be flat to up 1%. We expect our comparable sales performance to be relatively consistent throughout the year with the fall slightly better than the spring. Total sales to be approximately flat. Credit revenue to be $740 million to $765 million as compared to $768 million in 2018. We expect our gross margin rate to be down moderately in the first half and down slightly in the second half of the year. We expect the greatest gross margin pressure in the first quarter with sequential improvement throughout the year. While we are entering the year in claimed inventory position with lower levels of age or non-current inventory, our spring transition receipts are slightly elevated. Additionally, our Funding Our Future initiatives will improve gross margin as we move through the year, but will be more back half weighted. We expect expense savings to increase as we move through the year, helping to offset incremental investment spend. However, we expect SG&A rate to be up slightly. Our 2019 guidance also assumes approximately $25 million of retirement plan income, $190 million of interest expense and an effective tax rate of 23%. Capital expenditures are expected to be approximately $1 billion in 2019, and we expect approximately $975 million of depreciation and amortization. In closing, I have been the Macy's, Inc. CFO now for eight months. I see a clear path to sustainable sales growth that builds off of the year of growth that we just achieved. We also have a significant opportunity to deliver improved productivity and profitability. The plan has been mapped out and the work is underway. I am confident in the teams that we have established to do the work and also that we have the necessary levers to pull to create additional shareholder value. I am excited about being the part of an organization where every colleague has committed to winning in this fiercely competitive environment. And now, I’ll turn the call back over to Jeff.

Thanks, Paula. So as Paula said in 2019, we will improve productivity and are aggressively going after both near-term and long-term opportunities. We will continue to strengthen our execution. We will place an intense focus on bringing new customers into the brand and keeping them happy and engaged once they're with us and we will continue to drive sales growth through our strategic initiatives. In 2019, our strategic initiatives will be Growth 150, Backstage, Vendor Direct, Mobile and Destination Businesses. And let me give you a brief description of what to expect from us in each of these in 2019. First, Growth 50, becomes Growth 150 as we expand this treatment to another 100 stores. By year-end, we will have applied the growth investment to one quarter of our store base, which accounts for nearly two-thirds of our brick-and-mortar sales. Importantly, the teams have already begun work on these stores, so we have a head start compared to last year. Our growth stores are where we see the impact of our strategic initiatives come together and the performance in 2018 gives us confidence in the return on investment for the next 100. And in 2019 we will also test and iterate to find the right approach to our neighborhood stores. It’s early days but we see opportunity for better store productivity as well as an expanded role for fulfillment. Second, we will expand Backstage to at least 45 more Macy's stores and deliver positive comparable sales for the Backstage stores opened in 2016 through 2018. As I said earlier we are getting better at off-price every day. Third, on Vendor Direct, we will continue the expansion of vendors and SKUs. In 2018 we focused on our home category to gain experience with the platform. In 2019, we will expand the program to more categories, more brands and more SKUs. Fourth, in mobile. We will continue with the mobile-first strategy that we launched several years ago. In 2019, we will enhance the Macy's app with new features to improve payment, shopping, and style advice. Mobile is our fastest growing channel. We delivered more than $1 billion in sales through our apps alone in 2018, and we expect to deliver outsized growth in mobile sales in the year ahead. The fifth initiative for 2019 is our Destination Businesses. These are six businesses where we are in the top three market share where the market is growing and in four of the six where we already are gaining market share. We know that Macy's is the destination for dresses, fine jewelry, big ticket, men's tailored clothing, women's shoes and beauty. When a customer comes to us to shop in one of these categories, we have the opportunity to drive cross-shopping inter-related content within the store and this is the competitive advantage of the being a department store. In 2019, we will put additional resources against these destination businesses and I will be satisfied until Macy's is taking total market share and we will get there business by business, starting with these six destination businesses. So those were our five strategic initiatives for 2019: Growth 150, Backstage, Vendor Direct, Mobile and Destination businesses. In 2019, we will continue to innovate and explore new experiences and new content into our stores. We will double the number of the market at Macy's, which are now all powered by the beta technology platform and stay tuned for an update on STORY this spring. I'm confident that we have the right plan in place and we have 130,000 colleagues, who are rowing in the same direction. We are continuing the Path to Growth Incentive program. This program gives every colleague at Macy's a stake in our success and I believe it will continue to be an accelerant to our performance in 2019. 2019 will be another year of investment for the company. We are taking a balanced investment approach that is focused on what our customer desires and we are directing investment towards activities that we know work and will have the strongest return on investments. We are confident that this strategy puts us back on the path to sustainable profitable growth. And now, Paula, and I, will take your questions.

[Operator Instructions] We'll first go to Chuck Grom with Gordon Haskett.

Hey, thanks. Good morning. Thanks for the color. Just, Paul, on the gross profit margin commentary for the first quarter, I'm just wondering if you could just hold our hands as to the expectation for the compression in the first quarter. Do you think it would be commensurate with the fourth quarter levels? A little bit better than that? Just trying to get a little bit of sense directionally on the gross margin line?

So, thanks, Chuck. We're guiding 2019 gross margin down moderately in the first half and down slightly in the second half of the year. And while we're entering the year in a clean inventory position with lower levels of aged inventory, our spring transition receipts are slightly elevated and also we're cycling the first quarter last year with very little clearance and also we expect to see increased fulfillment expenses, driven by our growing digital and loyalty revenue and so this is one of the reasons were launching -- Funding Our Future, which will improve gross margins and help offset the fulfillment expenses throughout the year, but in that – we are guiding the first quarter, we're going to see the most gross margin impact, the most gross margin pressure in the first quarter rather. But then, Chuck, we’ll see sequential improvements over the course of the year.

Okay. Any sense for how you could quantify that? Just maybe just a ballpark directionally for the first quarter?

As you know, we don't guide the quarters, but I would expect to see in terms of the full year, most of the gross pressure in the first quarter and, again, sequentially improving over the course of the year.

Okay, okay. I understand. And then just on the flat to up 1% comp guide, just wondering if you could just unpack for us the drivers to get there. I guess when you think about the five to six self-help initiatives that you've talked about, I guess, which two or three do you feel like you feel the most comfortable with in terms of helping you bridge that comp?

So, Chuck I think when you look at all six of them, but let me just kind of unpack it for a second. So the Growth 50 that's momentum that's coming in those stores into the first quarter. When you look at the destination businesses, those six businesses are a big piece of our overall total. And when you look at the health of them where we're already taking market share, we expect that to come right into the first quarter with us. And then when you look at better at Vendor Direct, so Vendor Direct that 10% of all-digital sales that is only going to continue to grow with our ambition to the expanding assortment in Vendor Direct. I'd also just tell you that Backstage is doing quite well. And when you look at the double-digit increases we're getting in the Backstage locations that have been open longer than one year, we're now getting -- we have now 165 Backstages that are up and running in our stores, so you should see that also help our comp in 2019.

All right. Thanks very much.

Okay. Next we'll go to Bob Drbul with Guggenheim Securities.

Hi, good morning. I just wondered if we could spend a little bit of time on the Backstage business. I think overall one of the last statistics you gave us was a 7% lift and now, it's a 5% lift. Just wondering if you could talk about -- is it a cannibalization issue that you're seeing. And I guess just the decision to do 45, if it's doing so well, wouldn't it be better to be a little bit more aggressive with that one? Thanks very much.

So, Bob the answer to those two questions are actually linked. And so let me just kind of take you through what we've done with that. So, we did open 120 new Backstages in 2018, a quite heavy lifting for us. And we were actually very pleased that the entire store lift between the stores that we opened as well as the ones that were have been up and running from 2016 that the full lift of those – boxes was a five-point lift, so you're not talking about stores, some of our more premium locations that have higher productivity where the ripple was more extreme, so we're looking at all of those very, very carefully. And the reason we made the decision to only open about 45 was making sure that on our most premium locations that we're doing all of our decisions carefully on what is being displaced as a result of adding Backstage. We think we've got the formula. They're just more complicated for us to deal with. I think the headlines on Backstage for us is that the doors that have been opened more than a year were getting double-digit increases and that's what we always hoped for by having this off-price on-mall experiments that we started with Backstage. We're getting lots of traction with it. And now that were in more doors, we now are being able to -- we're able to market it. The other thing that I think is a real headline with Backstage is the customer behavior, we have 15% of our customers where we have Backstage within that in those stores that have Backstage, 15% of the customers that are shopping both Backstage and the main store and that behavior is very encouraging. We're getting two additional shopping trips from them and we're getting about 60% more in their purchases for those customers that exhibit those behaviors. So, now that we've gotten kind of look alike customers, we're now going after them with direct mail or with targeted emails and we expect to get lots of dividends from those cross-shopping customers in the future. So, I think actually the cannibalization is not the factor that was once feared. And we've really been able to overcome that. We always tested rate and scale and we're always careful about the categories that we're in that we're not in the main box, where we do have crossover categories really having discrete content. So Backstage is working for us and off-price is, we're learning more about it every day and it's getting better. The other headline on Backstage is that we're adding a warehouse that's going to be dedicated to Backstage in the third quarter of this year, which should just help speed and efficiency getting all this content at all these locations with more speed.

Great. Thank you very much.

And next we'll go to Matthew Boss with JPMorgan.

Thanks. Maybe just to break down your annual comp guide a little bit further. I guess what's the best way to think about AUR versus transactions for the year? And just what drives the improvement in the fall relative to the spring, despite in the tougher comparison?

So, Matt, let me take on the fall versus the spring. I think that what we looked at was opportunity for execution in the fourth quarter. Obviously, when we talk about what happened to us in West Virginia and the decision that we made on the promotional calendar. We think we can execute that better. We don't expect another fire, so that -- we expect was about 70 basis points of comp in the fourth quarter. That's -- we have more confidence in the fourth quarter based on lapping that activity of what happened to us in 2018. We're also looking at what we learned in the categories that could be expanded. All the merchants are completely doing a teardown of everything we learned in the holiday of 2018, additional gift opportunities that we have. So we're on the throngs of that right now. And I would tell you there are some really encouraging developments that are happening with that. So I think the fourth quarter, we know what -- what went wrong for us that we can control and what we couldn't control and at the end of the day we think we have opportunity in the fourth quarter, which is going to weigh at the back half as we described.

Great. And then just a follow-up, Jeff. Maybe just post holiday and into 2019 any changes you're making to the promotional approach this year to capture market share? And I'm just looking at the back half gross margin, a bit down slightly, sounds like out of the front half of the year inventory should be clean. So the down slightly gross margin outlook in the back half of the year, do you see opportunity just lapping the declines that we're just coming off of?

We do see opportunity with that and we also think that where we're growing merchandise margin, we definitely are going to be offsetting what we expect to be increased delivery charges that are all part of the gross margin calculation. So as that business continues to grow as a penetration in our overall customer profile, we will be able to -- that's how we’re -- what we're guiding to, moderately down in the first half and slightly down the back half.

All right. Best of luck.

The other piece to that, as we expect our initiative to come on board, more in the back half of the year, things like hold and flow, we expect that to influence our gross margins, but that will come on in the back half of the year as well and continue in 2019 and beyond that.

That’s great. Thank you.

Okay. And next we'll go to Oliver Chen with Cowen & Co.

Hi. Good morning. Jeff, you've been agile and thoughtful with the investments across physical and digital. Just, could you revisit your thoughts on Funding Our Future with respect to being as competitive as possible versus Amazon, where you see the most opportunities for enhancing speed and also your thoughts on the biggest opportunities for physical in-store traffic growth? And then, Paula, just a modeling question. What are your thoughts on inventory versus sales trends as we model that throughout the year? Will that be a benefit to net working capital and the occupancy leverage line, how should we model that? Will there be deleverage just given the way your guidance comps? Thank you.

Oliver, we can always depend on a complicated question from you. I love that. Let me kind of start and let Paula then take it. With respect to agility and what we're spending on tech, I think what we talked about this one of the opportunities that we see with tech and Paula went into with Funding Our Future there's big opportunities with technology and some of the fund in the future to fix our core processes, so when you look at how we’re applying tech and our supply chain, what we're doing with merchandise mix and pricing, what we're doing with our marketing models, what we're doing with store labor, what we're doing with customer initiatives like Mobile Checkout. And then to the second part of your question on tech of using tech basically for customer activity where it increases the customer advocacy for the Macy's brand and solves their pain points. So a big one on that for us was what tech did for us with VR. So VR for us wasn't a shiny penny. It really did solve a problem that our customers are experiencing, so we talked about this. But just to repeat this idea about the customer walking into one of our furniture floors 40,000 square feet of case goods and couches and rugs and pretty overwhelming. And so what VR gave us the opportunity to do is for customers and then they all wondered about okay, how does this fit into my 800 square-foot apartment or my 2,000-square foot house. So the opportunity that through VR technology, we were able to take those floor plans, move-in all of our assortment and really help customer choice on this. It's improved for the customers that are using VR in furniture. Their basket size is up over 40% and the return rate is down 25%. When you look at how VR is helping the market at Macy's. So this is underpinned by the b8ta technology that platform and gives us the opportunity of taking thousands of vendors that are part of this overall menu and tailoring it to a buy store, buy adjacency, so that we have this caravan of content it's coming into the stores and based on the initial reads we're getting about market and Macy's we made the decision to double the number of stores that are going to have that. So, those are – that’s the answering the first couple points of your question.

And so in terms of inventory, one of the work streams Funding Our Future is supply chain transformation, so we're looking across the whole of the supply chain and so that will include initiatives like I talked about for hold and flow and that's focused on improving our inventory and it would also improve our inventory turns we always see opportunity there. And again while we're entering the year in pre-inventory position, we do expect that our spring transition receipts will cause our inventory to be slightly elevated and so we are expected to end the year with inventory down, but it's expected to be up in the spring. And in terms of SG&A and our leverage there, our SG&A expense will increase. As we move through the year the investments that we are of the savings rather will increase as we move through the year. The investments that we're making this year they'll be partially offset by the $100 million of cost savings from the restructuring that we announced today, but there's also another $200 million of cost savings that we identified in 2018 and that's as a result of our normal ongoing cost reduction work that we didn't call out and so we'll expect SG&A and operating leverage to improve over the course of the year. So that's how I think about that.

Okay. And on the speed question, Jeff just dissecting or intersecting that opportunity against your initiatives, where do you see the lowest hanging fruit and how does speed manifest in the context of maintaining know great relationships with your vendor and also driving differentiated product versus Amazon.

So I think what speed as you know we've certainly shown that with the initiatives that we put in place in 2018 that we’re going fast. So if you look at Backstage of opening 120, Backstages, if you look at what we did with Vendor Direct and doubling the number of SKUs, if you look at the speed in which we operated the loyalty program and then added the tender neutral option for the occasional customer, we're operating with speed. And what I would tell you is that, our vendors are rooting for us. And in many cases we're there number one purveyor of their particular brands. We bring their bands together in the fullness that is really probably only second to their own stores and their own websites. So we've got very developed relationships with our vendors and we're on this journey together.

Thank you. Best regards.

Thank you.

Next we'll go to Michael Binetti with Credit Suisse.

Hey guys. Just quickly on the model, I'm wondering if you guys contemplated the shorter window between Thanksgiving and Christmas next year into the fourth quarter all. And then maybe any thoughts on why credit income would be down in 2019 versus 2018, I know that's been typically very nice growth business for you? And then I have a follow-up for Paula after that.

So I'll start with a credit income comment. Our guide for credit income is prudent for the year. And our range -- we've guided a range and it just really reflects the range of identical sales. So it's consistent with the sales that we've modeled.

And Michael let me thank the shorter window, Thanksgiving and Christmas. Actually we are lapping the longest window and we’re now going to the shortest window. When you actually look at those differences between years, what we see is the customers are basically spending the same amount; they’re just doing it in fewer days. So that gives us an opportunity to kind of gang our resources against these really concentrated activities, we're looking forward to it. So we have looked at our promotional calendar very aggressively. We're admitting the mistake that we made in December lull last year and 10 days before Christmas. We're not going to be repeating that. And we're packing that time frame as we always do with great content. We're expecting high customer interest starting with really, the Thanksgiving week going all the way through Cyber Week and then going into the last 10 days before for the holiday season. So we’re going to be ready this year.

Okay, thanks. Paula I'm not sure at a higher level, when it's appropriate to look at the financials with the credit business included versus when to separate it out and just look at the retail business in isolation, since it’s obviously an integrated model and you said that. But if we look at the profitability of the stores excluding credit, it does look meaningfully lower on a profitability basis today from the past few years and the guidance today again sounds like that trend continues in 2019. How do you think about the business and the margins of the business when you do separate out that credit? And do you think -- what do you think could drive an inflection in that longer-term trend, the margins being in the isolated and the retail business being down next credit?

So Michael 2018 was a positive step forward for our company with comp sales up 2% and we are elevating and adding to our strategic initiatives in 2019. And so we expect that to drive our 0% to up 1% comp next year. We are committed to EBITDA growth in the future, but 2019 like 2018 will be a year of investment and we’ll invest in the strategies that are driving our sales growth and our cost savings will kick in during the second half of the year. And as I've said, our credit program is an integral part of our overall business strategy. It is the primary vehicle for delivering our loyalty program and nearly half of our sales occur on the credit card. And so we look at it holistically. Our EPS guidance reflects the integrated relationship and the fact that we're making key investments in 2019 that will drive our continued comparable sales growth and we're confident that the steps we're taking with our sales growth initiatives and now with Funding Our Future will help us grow EBITDA and we see a clear path to get there.

Thanks a lot for the help there.

Thanks Michael.

Next we'll go to Paul Trussell with Deutsche Bank.

Good morning. Just to continue the conversation on margins. You referenced in this multiyear effort with the Funding Our Future. Could you help us understand which of the areas mentioned today between supply chain and store labor, private label sourcing, et cetera are driving the savings in 2019? And how should we think about that breakdown between a reduction in SG&A expenses versus cost of goods savings? And is in the $100 million outline for this year, is that a number that is steady? Or is that a number that you expect to increase over the years?

So, the $100 million, Paul, relates to the restructuring that we announced today and that's an ongoing savings, but also included in our 2019 numbers is our normal ongoing cost reductions of $200 million. One thing I've observed about this business is that we're very good at cost management and so there's an ongoing continuous improvement element that happens with respect to cost reduction. So, that's a $200 million there. When I think about Funding Our Future, it will cross the gross margin and SG&A part of our P&L and we're also exploring working capital improvements too. And so we're looking at work streams that are across supply chain, merchandising, and pricing, marketing, stores, private label sourcing, and non-retail procurement. Many of those will impact gross margin. Many of those will impact SG&A. When you're looking at 2019, the initiative that from Funding Our Future that will impact gross margin most is hold-and-flow and that will come on later in the year. But again we're also looking at things like location pricing and optimizing our end-to-end processing. The way I think about Funding Our Future is that it's all about looking across our entire organization end-to-end and determining how we can operate more efficiently through technology, process changes, and data analytics, so it will cover our whole sort of financials in that respect.

And also in that respect, you highlighted that SG&A rates will be up slightly this year. Ultimately, what is the thought process around the comp threshold needed to leverage SG&A?

So, again, this will be a year for investment for us and so we'll begin, for example, Growth 100, we're investing in those, right out the gates. So, we're getting a head start in those investments and so our savings will kick-in in the second half of the year. So, look for our SG&A expense savings to improve over the course of the year. So, we'll have both our expense and our gross margin performance will be better in the fall than in the spring.

Thank you.

And next we'll go to Lorraine Hutchinson with Bank of America.

Thank you. Good morning. I wanted to ask a two-part real estate question. First, is this $100 million for this year what we should think about is an ongoing run rate for real estate gains? Are there enough properties still to sell - seller repurpose? And then secondly, Herald Square you mentioned that there've been some preliminary meetings. Should we assume that the store stays open and stays in your ownership and you just try to monetize some of the space that isn’t being utilized fully?

So, Lorraine -- so the $100 million that we've got to built into our guidance for 2019 is a -- I think about that as an ongoing rate for us. We don't think it's going to be at the levels you've seen in years past and this is outside of the Herald Square conversation. So that's about what -- but I think you should be expecting is around that number in the out years. And then to your second question, Herald Square, we're definitely staying open in Herald Square. When you think about our real estate strategy, it has always gone hand in hand with our retail strategy and Herald Square is an incredibly important to our brand, to our customers to the neighborhood and we're just exploring a full menu of alternatives for this building, have been for the past year-and-a-half. And just to be clear on this, to guide everybody, this couldn't lead to densification, but with complementary uses, but we're certainly going to preserve the store and enhance the customer experience. We've got preliminary meetings with city officials and neighborhood groups. And we will update you later this year as we get input from everybody involved, which includes government officials, neighborhoods, et cetera. So we're doing this one carefully, but we know what the asset that we have year and we're making good progress on it.

And I would say that, we are moderating the asset sales. And so when we think about our real estate strategy, we are always going to look at the highest and best use of our real estate, but the greatest value creation will come from how we perform as a retailer. And so, real estate will continue to be an important part of our strategy, but we don't expect asset sales to be at the same level, because we are intentionally moderating them over time and that's looking at the relative value of us -- of our real estate relative to our retail value, for those stores.

Thank you.

And next we'll go to Kimberly Greenberger with Morgan Stanley.

Great. Thank you so much. Good morning. Paula, you mentioned in the press release that you're looking at opportunities to enhance inventory planning and you referred to the hold and flow strategy on the call. I was just wondering if there are any other examples you might like to share with us today for how to optimize your inventory planning. And then separately, Jeff, you talked about some -- or you mentioned in the press release, new customer acquisition and retention strategies. I'm wondering if you could expand on that. And lastly, it looks like EBITDA this year is falling. So I'm wondering, should we expect the excess free cash flow this year to be dedicated to repurchasing debt in order to get into your target leverage range by the end of 2019 and thus no share repurchases this year? I'm just wondering when we might be able to contemplate share repurchases again. Thank you so much.

So, Kimberly, I may take your middle question, which is really about new customer acquisition. So as I think you saw from us with the bronze part of our loyalty program, we really saw that as a big opportunity for us to attract a loyalty program that was not tied to our proprietary customer or a proprietary customer card. And so, we brought on 3 million new customers in 2018 with that program. We've got ambition to bring on another 4 million in 2019. The other point about new customers is, we're really looking at the younger customer and we're having success with the male younger customer coming into our brand. When you look at the new customers that are males that are under 40 and you look at the percent of them that feel great about the brand, they feel great about our offerings and you look at their customer account. Doing – we’re doing well there. When you look at on the female side, that's where we have our opportunity and that's going to be a combination of content, of values, of marketing, making sure that we got the right additives for them, and so that's what we're really focused on. So at the end of the day, what we're really looking at our overall customer profile is making sure that the lifetime value of our existing customer is building. We think our loyalty program is certainly helping us with that but the true test is going to be if we get the other half of customer acquisition right, we’re doing well with mails, we have opportunities in females and we're really working hard at that right now.

So, in terms of our inventory, we are looking at -- we're continuing to mine our data analytics team and you'll recall that late in 2017 we move, for example, primary responsibility for pricing strategy into our data analytics teams, so we’re going to leverage them more, and that means that we’re bringing the full strength of both our – both art and science into this critical function as we marry the data analytics team with our merchandising team. And the other thing I would say is that we are looking to transform the entire supply chain, so that will have a significant impact on our inventory. We're looking at areas in the replenishment space. There are a number of different initiatives that fall under supply chain transformations that you can look for us to talk more about. In terms of power using our excess cash in 2019, again we're planning to use the excess cash to get closer to our target leverage range of 2.5 times to 2.8 times when looking at it without asset sale gains, so that will be our first priority. And then beyond that, we'll then see how the cash position develops. And if warranted, we will evaluate share repurchases next. That something that we'll have to discuss with our board for 2019, but we're just going to have to wait and see, how the cash develops over the course of the year, Kimberly.

Thank you so much.

Next we'll take our next question from Jay Sole with UBS.

Great, thank you. My question is what, kind of, online growth combined total digital growth, do you expect next year, do you think you can continue a double-digit rate? And do you see that double-digit rate continuing beyond fiscal 2019 into 2020 and beyond that?

So, Jay on – there is – when you look at our digital business, we've had 38 quarters of double-digit growth. And obviously if the base continues to grow that becomes -- you're looking at very large numbers. But one of the things that we've added is this Vendor Direct and really expanding the amount of assortment that customers have access to with new economic models to get at those transactions. So this idea about doubling the amount of SKUs that are available online and what we experimented with in 2018 was where we could do it quickly. So we spent a lot of time on the home area. And now we are really looking at other areas that are more margin rich and the balance of the store. We're really focused on the extension of categories, on the extension of content within brands, getting those SKUs available, so the full portfolio of brands merchandise portfolio as well as new brands that we would add. So I would say that's how I would describe one of the big drivers of continued growth. But when we look at our digital strategy overall, it's really focused on four key elements. It's choice, it's convenience, it's personalization and it's experience. And we do the cocktail of all those right our business will continue to grow. So I talked about choice. We doubled the amount of assortment on macys.com. Convenience, I mean, one of the big things that we learned about digital business is how much the customer really wants to pick up in the store. They want the security of going to a store to pick it up. They love the convenience of it. So, when you think about double-digit as a penetration of our digital business was fulfilled by our stores, BOSS has been an absolute home run buy online ship to store. We expect that to grow and that also helps traffic into every one of our buildings and our entire portfolio of neighborhood all the way through flagships. And when they're in those stores, they also buy other things. We add about a 25% appended sales ratio in those transactions. Number three on this is personalization. So, we're getting better and better at personalization. It's increased and it's really driven by improved product recommendations and the technology and analytics that are behind that. And lastly about digital is really about experience. We're putting the improvements in our digital environments. If you look at our app, we got a good app and it's got a 4.8 star rating. We're going to continue to get better at that. Our conversion speeds are improving. If you look at the site speed, you look at the content you put on it, that's only going to help our digital business overall and being a destination for our customers. So, we feel very good about our strategies here and we have continued growth planned.

It sounds like a lot of that growth is going to be -- sort of due to self-help and lot of things that you can do just from the advantage you have from scale. Is there sort of implied in what you're saying that you see sort of -- the retail trending toward more of an equilibrium between the growth of online and sort of like how consumers are using stores?

Yes. I think what's interesting is one of the headlines of the Macy's brand outside of the 2% increase in 2018 was the relative improvement of what happened to brick-and-mortar. And so when you look at our entire stores portfolio from neighborhood all the way through to flagship, all store types improved. And so we're getting very encouraged by the numbers that we're seeing. And for us as an omnichannel brand, it really is that equilibrium that goes on between robust, digital, healthy brick-and-mortar, and this great mobile experience that ties together all browsing, all shopping behavior, the opportunity to get a stylist if you need it. So there -- and equal investments in those three main platforms is really important as an omnichannel brand. So, I think there is going to be more equilibrium as we go into future years.

Got it. Thanks so much.

Next we'll go with Paul Lejuez with Citi.

Hey, thanks guys. Curious if you could quantify the impact of doubling of the SKUs online? What were the impact of our comps this quarter? And I'm curious against that doubling this year, what sort of percentage increase are we talking about in terms of SKUs available online this upcoming year 2019?

So, Paul what I'll say is that -- again, what we called out is the Vendor Direct SKUs were worth about 10% of our digital business in 2018. And in some cases that was content that they would have made potentially bought in another content, so it's not the pure pickup on that. We're also looking at okay how much of that content was transacted on, what exactly happened with that. So, we're getting better at this every day. So, when you think about 2019, we expect to reach 1 million new SKUs on Vendor Direct which is a 500,000 SKU pick-up from 2018. We expect to reach 1,000-plus vendors versus the 700 that we had in 2018. And we're looking at a lot of new categories, hundreds of new categories that were added. We're looking at expansion in 11 different categories, things like electronics, and toys and games, and home décor, window treatments, outdoor entertaining, cleaning and organization, holiday, kids, baby, those are all categories where customers we saw failed searches. We saw customers coming into our digital assets and plug it in and we didn't have content for them. So, that has driven a lot of our decisions about what we we're doing, but we're going to be better at it. We're still in the early days of Vendor Direct and -- but I think there's a direct correlation to say that this number of SKUs is going to drive this percent of business, but overall I think it's going to keep our digital platform healthy and more relevant.

Thanks. Thank you. Just one follow-up. How much capital is required on a per store basis when you talk about the Growth 50? Maybe looking historically, what was the average cost of what those stores got from a capital perspective? And how did that change for the next 100?

Yeah. I think this is a really good story. Because in the past when you kind of looked at it, if you looked at the breakdown of our capital, what percent is going to digital and mobile, what's going to brick-and-mortar, what's going to just other technology upgrades? What you would've seen is, you would've seen a store number, but it was highly concentrated in key remodels. We were spending a lot of money on too fewer stores and the big unlock for us was finding a strategy in which we could get a return on the investment for what we were spending. So when you looked at the Growth 50, we're spending about an average a little more than $3 million for each of those stores. We've got that down slightly as we think about the Growth 100 and that is the right amount of capital we believed to make a demonstrable change in how the customer experience those stores. There're things like amenities, like lighting and bathrooms. There're things like new content that we bring in and just working with that amount of capital, that gives us the opportunity where the customer notices, they give us credit for it, but we're not overspending. And it gives us the opportunity to touch a lot more buildings. So what we tested in Growth 50, we're not ready to apply that to the Growth 100. And as we said earlier, these 150 stores may only be a certain part of our fleet, but its two-thirds of our overall brick-and-mortar sales. So that's what we're excited about to get to that amount through the balance of 2019.

Thank you. Good luck.

Thank you.

And next we'll go to Alexandra Walvis with Goldman Sachs.

Good morning and thanks for taking the question. My question was about the beauty area, you've highlighted it as one of the destination businesses within your strategy. You've seen some discrepancy in performance there between fragrance, which has been consistently strong and cosmetics, which has more recently been highlighted as an area that's underperforming. I wonder if you could talk a little bit about those recent trends and what's driving that discrepancy. And also about how the strategy is expected to drive both parts and -- all parts of that beauty business going forward.

Hi, Alexandra. So let me talk about beauty, there's four parts of it, the way we look at it. Let me talk about the first part first, which is the Bluemercury brand. So when you look at Bluemercury, we had a stellar year and we opened up 26 stores. Our dot.com business was up 50%. Lune+Aster and m-61, which are two proprietary brands within Bluemercury are now 10% of the business, getting great comps in stores that have been open more than one year and double-digit comps in those Bluemercurys that are store within store at Macy's. So we really have a good formula there that we're going to continue to leverage. The other three parts. The first one you mentioned, which is fragrance. So we're doing about 50% of the nation's prestige fragrance business. We are growing share, AUR is up dramatically. Customers love us for this. We expect that to continue to grow. So we're banging on cylinders in fragrance. Then when you look at the beauty business at the Macy's brand, you've got to look at it in two parts. Look at skincare versus color. So skincare, we continue to do well in skincare. We're able to capitalize on the learnings that we saw from Bluemercury. We're doing very well with our historical brands as well as new brands we're bringing into this, really like what we're doing there with our increases. Our opportunity remains in color cosmetics and new models, new price points, new customer-centric models and this is an area that the industry is starting to see some softening. It has been challenging for us. So this is the one that we're really focused on. We've tried new formats and flexible formats through our Growth 50 strategy. We're starting to get some traction on that. We're very focused on trend like here, so expect good learnings from us. And everything we're going to do, we're going to test on with customers over the next number of months.

Great. Thank you. And then one more question on the store fleet. You've explained very clearly what your strategy is with respect to the different parts of the store fleet. I just wonder how you are thinking about potential in the future for openings or closures, how has the decision-making process around those types of decisions changed at all, and are those things that you would consider in the future?

Yeah. So, Alexandra -- so our store segmentation strategy really responds to how our customers are shopping more with us. That has really driven the strategy. And when you look at our core customer, 50% of our business when you look at the Gold and the Platinum customers, they mostly live in multi-store markets. They're shopping aggressively with us online. They're doing research and browsing on mobile and they're shopping in two or more stores. And when you look at the way we segmented our stores, a flagship, magnet and neighborhood they were always shopping in neighborhood and a magnet or a magnet and neighborhood and a flagship, and they were doing different things in each of those stores. They were buying basics. They were picking up their fulfillment in neighborhoods. They were looking for more expanded fashion assortments and expanded FOBs and magnets and then they were spending more of the day in our flagships. And so that is what has informed our investment strategy. One thing that we do know is that when we close a store, we lose a customer. And so when you think about the ZIP codes that are around those stores, you see a definite depression in their online activity when you close their neighborhood or their magnet store. So we're really focused on how we take care of these customers and their full omni-channel ecosystem with Macy's. and so that's why when you have not seen or heard from us talk about large-scale store closures, because we don't want to fire these customers, and so we got to figure out a way to make these neighborhood stores more profitable and more viable for these customers and so that's what we're experimenting with right now in our pilot. We do feel like we have the right formula on magnet and flagships going forward.

Okay. And we’ll move to our final question from Priya Ohri-Gupta with Barclays. Priya Ohri-Gupta: Okay, thank you so much for taking the question. Paula, I just had one point of clarification. Based on your comments around leverage, it seems like your focus there is unchanged but your commentary around the balance sheet just spoke to a commitment to a flexible and durable balance sheet. How should we think about this sensitivity around investment grade versus high yield in that context? And if you could just share your thoughts there that would be helpful. Thank you.

So certainly maintaining an investment grade rating is very important to us. And so that's one of the reasons for being very much focused on reducing our debt to what we also believe is an appropriate leverage range, so 2.5 to 2.8 times. And so we also look at that range as I mentioned before with and without asset sale gains. And so while we are there in terms of looking at the ratio with gains, we want to be there on the most conservative basis, which is excluding asset sale gains. And so we're using our excess cash in 2019 first to further reduce our debt. And then beyond that will look at other options as our cash position warrants. Ours is a business that consistently generates strong cash flow and we manage it prudently. Priya Ohri-Gupta: Thank you.

I'll turn the call back over to our speakers for any additional or closing remarks.

Great. Thank you everyone for your time today. We appreciate your interest in Macy's, Inc. If you have follow-up questions don’t hesitate to reach out to us. Thanks everybody.

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