Greetings, and welcome to Macy's, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pamela Quintiliano, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us. With me on the call today are Tony Spring, our Chairman and CEO; and Adrian Mitchell, our COO and CFO. Along with our second quarter 2024 press release, a presentation has been posted on the Investors section of our website, macysinc.com, and is being displayed live during today's webcast. Unless otherwise noted, the comparisons we provide will be versus 2023. All references to our prior expectations, outlook or guidance refer to information provided on our May 21 earnings call unless otherwise noted. In addition, all references to comp sales throughout today's prepared remarks represent comparable owned plus licensed plus marketplace sales and owned plus licensed sales for our store locations unless otherwise noted. All forward-looking statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures as well as others on the Investors section of our website. Today's call is being webcast on our website. A replay will be available approximately 2 hours after the conclusion of this call. With that, I'll turn it over to Tony.

Thanks, Pam, and good morning, everyone. I'd like to start by expressing my sincere appreciation for our stores, distribution centers and corporate colleagues, as well as our trusted partners. Your ongoing commitment to our customer and to our long-term goals empowered us to achieve better-than-expected earnings results and make meaningful progress on our Bold New Chapter strategy. We continue to be encouraged by the performance of our First 50 stores at the Macy's nameplate. These stores, which we view as the leading indicator of our Go-Forward Macy's growth and ultimately our ability to achieve comp sales growth, delivered a 1% comp sales gain for the quarter. At our luxury nameplates, Bloomingdale's and Bluemercury, the breadth of our merchandise offering across aspirational to luxury price points continued to resonate and we delivered strong gross margin expansion and better-than-expected SG&A as we continue to fund our growth investments. Before I share a more detailed update on each pillar of our Bold New Chapter strategy, I would like to briefly touch on the consumer discretionary environment. We entered the second quarter with an expectation that discretionary spend would remain stable, reflecting a resilient but choiceful consumer. As the quarter progressed, our customer became more discriminating, which we attribute to ongoing macroeconomic uncertainty and an increasingly complex news cycle. As trends diverged from our expectations, we did not stand still. We took proactive steps to drive profitable sales, protect our gross margins and further control SG&A. As a result, while second quarter sales of $4.9 billion were slightly below our outlook, adjusted EPS of $0.53 was well above. At Macy's, which was the most impacted by the shift in consumer behavior, we aligned our assortments and shifted our marketing calendar to better balance value and fashion. We enhanced our promotions and delivered more targeted, personalized messages across categories and brands and we invested in newness and proven areas of product strength while reducing our exposure to areas of softer demand. These actions incrementally shifted the course of our business late in the second quarter, which is encouraging and speaks to our ability to quickly and thoughtfully analyze results and identify areas of opportunity. And while we cannot control the external environment, we are taking recent learnings and applying them. As we navigate the current landscape, our teams remain focused on the execution of our Bold New Chapter strategy. Turning to the first pillar, strengthening the Macy's nameplate. Second quarter net sales declined 4.4% and comparable sales were down 3.6%, but those numbers don't tell the full story. During the quarter, Macy's experienced ongoing strength in fragrances and green shoots in women's ready-to-wear apparel, including Donna Karan, Steve Madden, Avec Les Filles and French Connection, to name a few. Customers also responded well to the ongoing private brand ready-to-wear reimagination, including elevated fashion and quality in our heritage labels. As we lap last year's private brand exits, we have been introducing new market and private brands that more closely align with customer demand. Continuing to build on the momentum in this important category is a top priority and we are making the appropriate investments to support growth. At the same time, we are also addressing the weaknesses in men's apparel, handbags and home. In men's apparel, contemporary has been a bright spot and we believe there's an opportunity for growth in this category. Earlier this month, we soft launch a new private brand targeting the under 40 consumer to support our growth aspirations. Within handbags, we are continuing to diversify our brand portfolio. Lauren by Ralph Lauren and Karl Lagerfeld have been well received and we are experiencing strong demand for Coach's new product assortment. And in home, we are strengthening our holiday gift giving assortment ahead of our broad private brand reimagination next year. Moving from product to stores. As previously mentioned, the First 50 achieved their second consecutive quarter of positive comps, posting a 1% gain. For the quarter, the disparity in performance between the First 50 and the Total Macy's nameplate widened, with the First 50 comps outperforming the Total Macy's nameplate by 460 basis points compared to 380 basis points last quarter. Initiatives at these locations continue to gain traction and include: improving the customer experience through focused staffing in key departments such as shoes, handbags, ready-to-wear, as well as fitting room and checkout; enhancing merchandise offerings to emphasize freshness, relevance and inspiration with a focus on variety rather than redundancy by editing existing assortments and adding new brands; modernizing our visual presentations and offering unique store level activations and community events. First 50 customer satisfaction is growing. Net promoter scores were 600 basis points above last year and over 200 basis points better than other go-forward locations with improvements in availability of salespeople, quick and easy checkout, and neat and clean stores. These locations also had higher traffic and conversion relative to other go-forward locations, and all merchandise categories outperformed with shoes, handbags, men's and kid's apparel, as well as women's ready-to-wear, registering the most improvement. To pause on that, two categories where we've been struggling more broadly, men's and handbags were among the most significant relative outperformers, which is exciting and could serve as a broader unlock. The First 50 were created with an eye toward the future expansion. Locations have diverse geographic and socioeconomic representation, and initiatives are cross functional and designed to be replicated. And with two consecutive quarters of meaningful comp out performance, we are pleased to announce that we are implementing women's shoe and handbag staffing tests in roughly 100 additional go-forward locations this fall. These tests will provide valuable insights that will be used as we further refine our initiatives. Beyond the First 50, another important element of strengthening the Macy's nameplate is closing and monetizing our 150 non-go-forward locations. As a reminder, in fiscal 2023, comp sales of Macy's go-forward locations outperformed non-go-forward locations by approximately 500 basis points and the four wall adjusted EBITDA rate outperformed by roughly 950 basis points. While non-go-forward locations are underperformers relative to the total Macy's fleet, they are valuable real estate assets. Demand for these properties has been strong. We are pleased with the pace and the quality of dealmaking and now expect to close approximately 55 stores this year versus prior expectations of roughly 50. We will continue to thoughtfully evaluate all opportunities presented to us, but given our strong balance sheet and that we have no material debt maturities until 2027, we will not execute a deal unless it is accretive. As we think about the future of the Macy's nameplate, we are committed to reading and reacting in real-time to consumer demand to offer increasingly relevant product, messaging and experiences at a compelling value regardless of the environment. Reflecting that mindset, we have adjusted back half marketing and the promotional calendars and the depth and composition of buys, pulling back where business has been soft, while protecting areas where we have momentum. We're evolving our product, partnering closely with our vendors to better serve our customers through owned, concession, marketplace and consignment, understanding that our customer wants to see the best aisle, not just an endless aisle. And in digital, we are focused on search engine optimization, site enhancements, more transparent pricing and a better mobile experience. Turning to luxury, which is our second pillar of the strategy. At Bloomingdale's, net sales were down 0.2% and comp sales were down 1.4%. Customers responded well to advanced contemporary market brands including Veronica Beard, Alice and Olivia, L'AGENCE and Farm Rio. The Venus Williams AQUA collaboration, which launched in mid-June just ahead of Wimbledon and the Olympics was very well received. And for the quarter, net promoter scores improved over 250 basis points year-over-year and remained the strength of this brand. Looking ahead in the next few weeks, Bloomingdale's will kick-off New York Fashion Week with a two month long immersive experience that brings the best of Italy to its customers through over 300 exclusive products and 30 new brands across apparel, fine jewelry, accessories, beauty and home. All Bloomingdale's locations will host a celebration with food, art and music. And throughout the activation, our 59th Street flagship will have shops, installations and pop-ups on every floor. At Bluemercury, we achieved our 14th consecutive quarter of comp store sales growth, posting a 2% gain with net sales growing 1.7%. Customers continue to respond well to differentiated skincare offerings, including new brands like Dr. Diamonds Metacine, and we see an opportunity to expand fragrances with the recent launches of Creed and Parfums de Marly. During the quarter, Bluemercury opened one new store and remodeled another. New and remodeled locations continued to be received well and are outperforming the total fleet. With each new store, our team is elevating its service model, spa integration and product mix curation to further establish Bluemercury as the authority in professional skincare. And in just a few weeks, Bluemercury will kick-off its 25th anniversary celebration, which will run throughout the remainder of the year. We are confident in the luxury category and its long-term potential. Although, Bloomingdale's and Bluemercury are not immune from the broader macro pressures, the variety of our market and private brand merchandise offerings provides compelling options that will allow us to capture wallet share. As the environment evolves, we will continue to leverage our strong storytelling heritage through new brands, expanded partnerships and exciting launches and events. Regarding the final pillar of our strategy, simplifying and modernizing end-to-end operations, we are reducing organizational complexity and generating cost savings to fund growth investments. Adrian will go into more detail shortly, but the work within this pillar, including improving our fulfillment network productivity and simplifying our technology ecosystem is fostering an even more disciplined organization. In closing, confidence in our Bold New Chapter strategy is unwavering and we are steadfast in our commitment to improving the fundamentals of our business. As I am a merchant at heart, I understand that retailing is a balance of art and science. As a team, we are actively listening to our customers to improve our results across the organization. We continue to view 2024 as a transition and investment year. While we're pleased with the recent progress on our strategy and profitability profile, we are clear eyed about the challenges, yet energized by the opportunities that lie ahead. We will remain competitive to win the customer but we will not deviate from our path to sustainable, profitable sales growth, and we are confident that the actions we are taking across all three Bold New Chapter pillars will benefit near-term and longer-term results. With that, let me turn it over to Adrian for his remarks.

Thank you, Tony, and good morning, everyone. As we navigated the second quarter, we continued to focus on controlling what is within our reach to drive our business. We delivered strong gross margin and better than expected SG&A, as we diligently managed our margin and expense disciplines throughout the quarter. Our teams are also making progress on our Bold New Chapter strategy, including our third pillar, simplifying and modernizing end-to-end operations. We are leaning into cost savings programs and working capital disciplines as we make targeted investments in areas such as automation and process simplification, which should benefit day-to-day execution. Thus far, these investments have improved the customer experience through faster online delivery and higher product in stocks, while contributing to strong bottom-line performance and cash flow generation. Now let's turn to our second quarter results. As a reminder, all comparisons are to the comparable year ago period unless otherwise stated. During the quarter, we focused on gross margin expansion and effective expense management. This combined with the actions Tony described earlier, allows us to achieve adjusted EPS that was significantly above our expectations even without the benefit of the second quarter asset sale gain. Overall, Total Macy's, Inc. net sales were $4.9 billion, down 3.8% and total enterprise comps were down 3.3%. Within that go-forward business Macy's, Inc. comps defined as Macy's, Bloomingdale's and Bluemercury go-forward locations plus digital declined 3%. By nameplate, Macy's net sales, inclusive of all Macy's locations and digital were down 4.4% and comps were down 3.6%. Macy's nameplate go-forward business comps, which include all 350 go-forward locations in digital were down 3.3%. Looking just at stores, all go-forward location comps were down 2.3% with First 50 up 1%, other go-forward locations down 3.7% and non-go-forward locations down 6.5%. We remain encouraged by our First 50 performance. We're also excited for the rollout of additional staffing in handbags and shoes to another 100 locations this fall. The impact of these changes are reflected in our current outlook, which I will discuss in a moment. Turning to luxury. Bloomingdale's net sales were down 0.2% and comps were down 1.4%, while Bluemercury net sales and comps rose 1.7% and 2%, respectively. We're confident in the future of these two nameplates and believe our initiatives sets us up well to take additional luxury market share. Moving to other revenues, which rose 6% to $159 million. Net credit card revenues were up $5 million, or 4.2% to $125 million. Net credit losses were in line with our expectations. As a reminder, in the second quarter of 2023, credit card revenues were negatively impacted by a change in net credit loss trends. Our priority remains to strengthen card usage among current holders while acquiring new cardholders, and we are pleased to have achieved three consecutive quarters of year-over-year new credit card application growth. Macy's Media Network revenue rose $4 million, or 13.3% to $34 million, driven by higher advertiser and campaign counts. Before discussing gross margin and inventory, it is important to note that both are not directly comparable to the prior year given the recent conversion to cost accounting. Second quarter gross margin rate was 40.5%, 240 basis points higher than last year and better than our expectation. Merchandise margin improvements were driven by lower year-over-year discounting, favorable shortage due to the company's asset protection work, and partially by the company's shift to cost accounting. In addition, improved delivery expense benefited from lower shipped sales volume and ongoing expense control, reflecting cost savings and process reengineering initiatives. End of quarter inventories were up 6% year-over-year which was above our expectations due to second quarter sales results and the decision to invest in areas of product strength for the back half of the year. We estimate that approximately half of the increase is due to the shift to cost accounting. Looking ahead, we will continue to remain disciplined about the quantity and composition of our inventory. SG&A expense dollars of $2 billion, or 38.7% as a percent of total revenue were better than our expectations. Our teams pursued cost controls while protecting customer facing investments where we're seeing tangible returns, particularly in First 50 locations. Compared to last year, SG&A expense was $7 million lower and up 120 basis points as a percent of total revenue due to lower sales volume. For the second quarter, we delivered adjusted EPS of $0.53 well above our outlook of $0.25 to $0.33 and compared to $0.26 last year, reflecting an improved year-over-year gross margin rate and strong expense controls. In addition, an earlier than expected non-go-forward asset sale gain benefited EPS by $0.10. Cash from operating activities was $137 million while capital expenditures totaled $432 million. Free cash flow was an outflow of $244 million and we paid $96 million in cash dividends. We believe our healthy liquidity, including our asset based credit facility, support our ability to navigate any potential uncertainty that may arise as we head into the back half of the year. Regarding real estate monetization, we are pleased with the traction we've experienced to date with landlords and developers. We're committed to monetizing these assets in certain distribution centers, but only at the right value. We are encouraged by the progress that our seasoned real estate team is making. As noted earlier, we have increased our expected number of store closures this year to approximately 55 locations from roughly 50. To conclude the conversation on recent results, I am proud of our teams. As the environment became more challenging, we executed with discipline. We found opportunities and efficiencies that supported our bottom line performance, while continuing to make progress on our Bold New Chapter strategy. Our full year and third quarter outlooks reflect everything we know about the consumer, our operations and our goals as of today. As we navigate the remainder of the year, we will leverage our operational agility and execution disciplines to protect our profitability. Before discussing our full year and third quarter assumptions, a few reminders. First, our outlook assumes a more discriminating consumer and heightened promotional environment relative to our prior expectations. We believe our range gives us room to address the ongoing uncertainty in the discretionary consumer market. Second, we have not included any impact from the potential CFPB late fee regulation. Third, the outlook for gross margin and inventory continues to reflect the conversion to cost accounting earlier this year and as previously noted, are not directly comparable to prior year balances. And lastly, 2024 continues to be a transition and investment year for Macy's, Inc. We will continue to evaluate pilot and iterate new ideas. Not everything will work, but as we find what does, we will scale as appropriate. With that, for fiscal 2024, we now expect net sales of approximately $22.1 billion to $22.4 billion. The primary drivers of our reduced sales outlook relative to prior expectations are second quarter sales results and the more challenging environment. For the full year, we now assume Macy's, Inc. comps, inclusive of non-go-forward locations and digital to be down 2% to down 0.5% with Macy's nameplate go-forward locations and digital to be down 1.5% to flat and our luxury nameplates to collectively be up 0.5% to up 2%. Other revenue of $670 million to $685 million, including credit card revenues of $490 million to $505 million. Gross margin as a percent of net sales of 39% to 39.2%, primarily reflecting our expectation for a heightened promotional landscape partially offset by sales mix and second quarter shortage benefit. SG&A as a percent of total revenue of 36.3% to 36.6%. We will continue to invest in near-term sales driving efforts and longer-term Bold New Chapter strategy initiatives, while prioritizing efficiency and effectiveness in non-customer facing areas. Asset sale gains of approximately $115 million with related sales proceeds of roughly $150 million. We have updated our annual outlook based on the progress we are making on deal making, including the second quarter monetization and our upwardly revised monetization expectation for the third quarter. Adjusted EBITDA as a percent of total revenue of 8.6% to 9%. Interest expense of $120 million due to higher expected interest income. We are maintaining our annual adjusted diluted EPS outlook of $2.55 to $2.90 reflecting our commitment to enhancing gross margin and exercising expense controls. Our second quarter beat and favorable interest expense assumptions are expected to be offset by headwinds from lower sales volume and a heightened promotional landscape. Capital spend of about $875 million to $890 million, slightly higher than our prior outlook as we pursue additional growth investments. For the third quarter, net sales are expected to be $4.7 billion to $4.82 billion. Other revenues are projected to be roughly $152 million, including credit card revenues of approximately $110 million. Gross margin rate to be approximately 40.3% to 40.5% and end of quarter inventories versus last year up mid-single digits on a reported basis. Entering the third quarter, the quantity and composition of our inventory is well positioned. Aged inventories are under control and we are pleased with the level of newness. We're also seeing healthy inventory flows and have ongoing mitigation strategies in place to offset elevated ocean transit times and constrained container capacity. We expect to end the third quarter and ultimately the fall season without any meaningful inventory liabilities. Finally, we expect adjusted diluted EPS of a loss of $0.04 to earnings of $0.01, including a roughly $30 million asset sale gain assumption for the monetization of non-go-forward assets. In closing, we remain relentlessly focused on executing our Bold New Chapter strategy and controlling what we can control. This includes cost savings initiatives, inventory discipline, cash management and strong operational execution. With that, I'll now pass it back to Tony.

Thank you, Adrian. I'm pleased with the progress we're making on our Bold New Chapter strategy. My team and I share a passion for finding new and innovative ways to serve and excite the customer, and we have a unique advantage through our iconic events as well as our everyday interactions. We understand that being in the business of retail is being in the business of people. We're listening to our customers finding that balance between art and science and are committed to delivering improved product and a better more connected customer experience while returning the company to long-term profitable sales growth. With that, operator, we are ready for questions.

Thank you. The floor is now open for questions. [Operator Instructions] Today's first question is coming from Matthew Boss of J.P. Morgan. Please go ahead.

Great. Thanks. So, Tony, could you speak to the cadence of comps as the second quarter progressed? Elaborate on changes that you cited in the consumer backdrop and just what you've seen with early back-to-school or August trends, maybe relative to the second quarter comp performance. And then Adrian, if you could just walk through drivers of back half gross margin expansion despite embedding the heightened promotional backdrop, I think, that would be great.

Thanks, Matt. Good to talk to you. The quarter played out obviously softer than we expected. It started to get softer in the middle of the quarter and the team immediately took action, strengthening marketing, improving the quality of the products we're focused on, making sure that we were cutting back on receipts that were no longer necessary and flowing back into things that were working. We saw an immediate impact. And while I'm not going to comment on third quarter sales, I will say that the changes we made in the second quarter are showing in the third quarter as well. And our guidance, I think, gives us that conservative outlook for the remainder of the year that is both prudent and appropriate, allowing us to reaffirm our EPS guidance for the year and at the same time, acknowledge the fact that the consumer is more discriminating. I do think that the changes that we're making in the First 50 serve as a great barometer and opportunity for us to continue to learn and apply to more stores going forward. We did announce 100 stores that we're adding staffing tests to in both handbags and shoes. The fact that in the First 50, all categories outperform the rest of the nameplate, the fact that we're seeing it on the top-line, we're seeing it on the customer service scores, we're seeing it in better traffic and conversion. So we think we have a model that we just need a little longer to learn from, but we're prepared to use that as the go-forward strategy for the Macy's brand. Adrian?

Good morning, Matt. Let me speak a little bit to gross margin. So, as you know that we're quite pleased with our Q2 gross margin results and we're certainly confident in our outlook for the year, as we spoke about a few moments ago. The range that we have for the year of 39% to 39.2%, we believe just gives us sufficient flexibility to respond to the uncertainty that may be on the horizon. Now, as we plan -- as we think about our gross margin outlook for the balance of the year and the fall season, there are really three things that we're focused on. The first is around inventories, and we feel, at this point, that we do have inventories under control. We took some actions coming out of the second quarter, given we had softer sales in the quarter and we've already made the appropriate adjustments for Q3 and Q4. And the kinds of things that we're leaning into are the things that you're familiar with. We have good disciplines and good controls already in place. At this moment in time, our aged inventories are well under control. We're pleased with the level of newness because we're now approaching the holiday season and we have a healthy flow given some of the constraints I mentioned a bit earlier around container availability and supply chain delays. But there are a couple of other things that are important for us as well. The second one being shortage trends. We benefited in the second quarter from lower shortage than we expected as we've made investments at the end of last year into the beginning of this year with our asset protection team and the initiatives that they're pursuing seem to be working. So we're very pleased with that. The last piece is lower delivery costs. We continue to diversify our carriers who have lower rates without actually compromising service levels. We also recognize that it's important to have the right balance of upstream versus downstream fulfillment, which has enabled us to minimize split shipments, which can be quite costly for us. So as we think about inventory discipline, shortage trends, and lower delivery costs, we're encouraged by our outlook for the balance of the year and also encouraged by what we expect to deliver in the third quarter.

Great color. Best of luck.

Thanks, Matt.

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

Good morning, and thank you for taking our question. Tony, I was hoping you could help frame the magnitude of the potential tailwinds you see from the rollout of these select First 50 staffing tests to locations this fall. And then broader -- bigger picture, the key factors that you're looking for that will allow you to more aggressively expand these First 50 initiatives to the rest of the fleet. And then perhaps for Adrian, can you elaborate on the adjustments that Macy's is making to its promotion and marketing calendar for the balance of the year? Thank you.

Thanks, Brooke. Good to talk to you. We are excited about the First 50. If we haven't made that clear enough, it's two consecutive quarters of comp store growth, it's 600 basis points of improvement in NPS, 460 basis points of improvement versus the rest of Macy's. And I want to make clearly we will expand F-50 or First 50. It's a question of when not if. And I think we've said before on the fourth quarter call, we will elaborate further on how many stores next year. But I think you can view it as a positive sign that we went ahead and did the 100 store test on handbags and shoes as the confidence that we have on those particular families of business on what it can mean to provide the ample level of staffing in a service-oriented business. In terms of the magnitude, it's incorporated into our guidance. I think our guidance gives us the range to be able to use those levers to improve our performance. But I look at the First 50 as continuing to be the best example of what Macy's can be in the future. And please know we are going to move as fast as we possibly can without tripping on our way to success. So I'm just careful about making sure that there are not false positives. We got a lot of noise in the public environment right now. Let's make sure we understand what's causation versus correlation. Adrian?

Good morning, Brooke. To your question about the adjustments on promotions and marketing, the context that we are operating under is a consumer that's really oriented on value. And so some of the things that we've been doing is experimenting with our media marketing mix, which we're very encouraged by the experiments that we're seeing on the business as Tony referenced. Since we've made those changes from Q2, we're being very clear on value in our promotional calendar and our communicated messages. But, we also recognize that there are other dimensions when the customer shows up on our website or in our stores that matter around value as well. And that's having colleagues available, having a good experience within our stores, making sure that we have strong visual presentation, that we're amplifying the value that's available to the customer when they visit us. So those are the kinds of adjustments that we're making, but really all centered around sharper on the value messaging to the consumer every day that they're actually visiting with us.

Great. Thanks so much. I'll pass it on.

Thanks, Brooke.

Thank you. The next question is coming from Ashley Helgans of Jefferies. Please go ahead.

Ashley, you may be on mute.

Would you like me to move on to the next question?

Yes.

Thank you. The next question is coming from Bob Drbul of Guggenheim. Please go ahead.

Hi. Good morning. Just a couple of questions for me. On the merchandising side, just -- what you're seeing in handbags and shoes to really lead that acceleration. Just wondering if you could comment, I think that's been a tougher category, so some of the changes that you're seeing would be helpful. And a similar question just on women's, when you look at what's happening in women's and some of the brands that you called out, any of the trends that you see in sort of legs to those trends in the back half of the year?

Sure. Thanks, Bob for the question. We are seeing green shoots in ready-to-wear. So that's why we're citing those examples in terms of Donna Karan or Avec Les Filles or Karl Lagerfeld, or at Bloomingdale's in L'AGENCE, or in Alice and Olivia or Veronica Beard. We are taking advantage of the fact that we are in an apparel cycle. And whether that's wide bottom, denim, or change in silhouette or improved fabrications, we want to go after the business at both brands. In terms of handbags and shoes, we were pleased to see the disparate or the magnitude of the difference in our F-50 stores in those two categories, which have been tougher for us. And I would say, we know staffing is an ingredient. We know merchandise is an ingredient. So we're pleased to go after 100 more stores in those two categories. And we think that the assortment in shoes is very conducive to a department store environment where a customer wants selection and variety of price points and brands, doesn't always know their size by brand, and it's a chance for us to lean into something that we're particularly good at. In the case of handbags, I think we cited the fact that we're starting to see some light at the end of the tunnel on brands like Lauren by Ralph Lauren and Karl Lagerfeld. And the Coach business has been particularly good lately. So, cautiously optimistic that those tests are going to help improve the quality of our business in the fall.

And if I could just ask a follow-up. Adrian, on the credit card business, can you expand a bit more, sort of, in some of the trends that you're seeing within the cardholders and delinquencies, I think you said, as expected. But can you put a little more color on that for us?

Absolutely, Bob, and good morning. So our net credit losses and delinquencies, as I mentioned earlier, were very much in line with our expectations. What we are seeing is that there are slightly lower payment rates, which is not necessarily and is not necessarily translating into bad debt. So what's been happening is that we're seeing the customer sit on revolving balances a little bit longer, but certainly paying off their -- paying their bills in a cycle that effectively has allowed us to have revenue a little bit better than our expectations. And that revenue is really driven by higher balances with delinquencies and net credit losses in line with what we expected in our forecast.

Thank you very much.

No problem, Bob.

Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Hi. Good morning, everyone. As you think about some of your other formats, whether it's the smaller format, Macy's Backstage outlets and digital, how did they perform relative to the core and how you're thinking about them for the back half? And then just following up on AUR, which I think was up 4% in the first quarter, up 3.6% in the second, drivers of AUR gains and how you're thinking about it going forward. And just lastly, you tweaked up the investment in CapEx. What are those growth initiatives? Is some of it by the -- by Italy for Bloomingdale's that's coming up or how you're thinking about it? Thank you.

Thanks, Dana. Good to talk to you. Let's first talk about portfolios, because I think it's a big part of what we're trying to accomplish with opening Macy's small format. We opened six in the spring. We have six more that we're opening in the fall, which brings us to 24 stores. We, obviously, have the First 50 initiative and we have our digital business. And what we have focused on is trying to win by market. And what you'll see us talking more about is, what is the right complement of small format stores, great on mall stores and the digital business by geography to be able to win the customer and succeed market-by-market. So it's not like choosing your favorite child. These all fit into our ecosystem. We have to have the best off-mall stores and best on-mall stores and a healthy digital business. The AUR increase is consistent with what we've seen by improving the quality of our product, not charging more, not pulling back from a promotion. So I would continue to expect to see low-single digit AUR growth, as we continue to try to improve the traffic and conversion on our store -- in our stores and on our site. The single biggest area that we have been challenged with is on conversion, and we're doing everything we can on both the site and the presentation in our stores to improve the quality of conversion. I think Adrian mentioned on the call, both traffic and conversion were stronger in our First 50. So I think we know what we have to do. We just need to react appropriately and make sure that we're managing both the top-line and the bottom line. Adrian, anything you add?

Yes. Good morning, Dana. To your question on capital investment, you know that we're very disciplined on capital allocation. We're very focused on maintaining a healthy balance sheet, returning excess cash value to our investors. But the second dimension of our capital allocation is really what you're experiencing with a slight increase in capital spend for this year. We're going to be investing in high return investments in the business. For example, what we're seeing in our F-50 stores is that some of the visual enhancements in areas like our private brands seem to be working. So we want to lean into that. Some of the biggest improvement in our scores around F-50 stores, as well as a broader network, is around neat and clean. But we want to make sure that in these stores where we're making the changes that the general upkeep of the store and the maintenance of the store is actually appropriately invested in so that there's a good experience for the customer. We see some opportunities around digital, and so we've been leaning into that piece as well. So really being very thoughtful and surgical about those investments that will help us deliver a better experience and also deliver growth. And so we're really taking the opportunity to lean into some of those investments this year.

Thank you.

Thank you, Dana.

Thank you. The next question is coming from Ashley Helgans of Jefferies. Please go ahead.

Hey, guys. Apologies about earlier. This is Blake on for Ashley. Wanted to ask on the implied sales guide for this second half. In terms of kind of your consumer assumptions, are you assuming the consumer is more stable or becomes increasingly challenged? How is that reflected in the guide? And also on the color in Q3 sales, Adrian, did you provide a comp at all for that? And then last one for us was also for Adrian on cost accounting, how much is embedded in that for the full year gross margin? Thanks so much.

Absolutely. So, Blake, great to be with you. Let me talk a little bit about sales to get started. When you think about our sales range for both Q3 and for the year, it just gives us an opportunity to address the uncertainty and the discretionary spending categories that we operate in. And so, as Tony mentioned a bit earlier, we've been very thoughtful and cautious about what we're seeing in the back half. At the same time, we expect our F-50 Macy's locations to outperform the broader fleet. We're encouraged enough in terms of the performance that Tony just spoke to expand a couple of changes around handbags and shoes that we're seeing real gains in the First 50 locations to an additional 100 locations this fall. We're continuing to make investments in our digital business around site enhancement, search engine optimization, a better mobile mix. So again, we have a number of things that we see green shoots that we're leaning into, but we also recognize that we're in a context of uncertainty with regards to discretionary spend. As we think about cost accounting, the way I would think about it is that the best way to track our performance this year is to look at our outlook for the year. That's really going to be the best way. On an annual basis, some of the adjustments that you would expect from the transition from retail accounting to cost accounting are not material for the year. We provided a little bit more detail in Q2, but it's a bit chunky as you go throughout the year, but again, not material for the overall year. And with regards to how we're thinking about gross margin in the third quarter, we're looking at about 40.3% to 40.5%. And we feel that given the ranges on topline, on gross margin, on the bottom line, we should be able to navigate to those outcomes.

Great. Thank you. Best of luck.

Thank you, Blake.

Thank you. The next question is coming from Paul Lejuez, Citi. Please go ahead.

Thanks. It's Tracy Kogan filling in for Paul. I was wondering, if you could talk about performance by income demographic, particularly, as the quarter played out and we saw that weakness overall. I was wondering, if you saw any differences by the different income cohorts. Thanks.

Thanks for the question, Tracy. Yeah, I think that there was a pretty consistent reaction across all of our nameplates in terms of the second quarter being softer than the first quarter. So, yeah, you have to believe that everybody is being a little more cautious as they kind of watch what's going on in the macro environment and are just being more judicious in the purchases they make. I am really pleased with -- if I look at the First 50 or I look at Bloomingdale's performance or I look at Bluemercury, those were all essentially in the flat to positive range I think in an environment where the customer is looking for why should I buy. And I've said to our team, our challenge is not just to have the lowest price. Our challenge is to create a compelling reason for the customer to buy at Macy's, Bloomingdale's or Bluemercury. And we have that in our inventory composition. We have that in the amount of newness that we flow to our stores and to our site. We have that in the exclusivity that we offer with private brands. And I think, as we mentioned, we have the celebration of Italy at Bloomingdale's which begins in September, and the 25th anniversary campaign from Bluemercury, which begins in September. So those are all other ways that we get all economic income levels of consumers to shop and buy at our three nameplates.

Thank you.

Thank you. The next question is coming from Alex Straton of Morgan Stanley. Please go ahead.

Perfect. Thanks a lot for taking the question. First one maybe for Tony is just on your holiday fourth quarter approach. You've got election, compressed shopping period, we're lopping 53rd week. Just wondering if you guys have a different strategy this year with that backdrop? And then for Adrian, with the back half comp acceleration from the front half trend, I'm looking at that compared to a back half comp, that's getting harder. So I'm just trying to understand how things get better or what exactly you're assuming there that results in that outcome. Thanks a lot, guys.

Thanks, Alex. Good to talk to you. Let me start with holiday, and Adrian will cover the comp progression. I just actually did the holiday style out with the team about a month ago and I feel really good about our assortments at both Macy's, Bloomingdale's and Bluemercury. We have more newness than we had a year ago. We have some exclusive partnerships at both Macy's and Bloomingdale's that I'll wait till the next call to share in more detail. But I would tell you the teams are really leaning into we don't want to have last year's assortment, we don't want to have the same old things that we've had in our mix of holiday gifting. We're being highly sensitive to the change in weather trends. So we have a broader range of product ideas than just cold weather categories. We're obviously leaning into the strength that we have at fragrances across the three brands. So, yes, we got five less shopping days between Thanksgiving and Christmas. We certainly have an election in there. But I think, remember, retail and our three brands provide a form of escapism and entertainment. And our job is to make sure that we're capitalizing on an opportunity to have a larger share of wallet in the fourth quarter because of the range of prices and brands and categories that we sell. Adrian?

Good morning, Alex. Look, the punchline is we're not standing still. We're two quarters into a Bold New Chapter strategy. And there's not only changes that we've implemented, that we're tracking and iterating and deploying where we have energy and confidence. But there are also more changes underway. We're continuing to make changes in stores as we both Tony and I spoke about earlier. We're making changes in digital that's coming online as we speak. We're making adjustments with our media mix and marketing spend mix that seems to be giving us some good results. We're very encouraged with what we're seeing there. As I spoke about earlier, we're leading them to the value orientation of today's consumer, being very clear on value, not just the price for the quality of products that we offer, but also the total value equation. We're flowing goods better. We have better in-stocks this year than we did last year. We have faster digital deliveries for our digital orders than we did last year. So there are a number of things across the business that's just getting better, we're more disciplined, better execution, and that gives us confidence that these building blocks are going to build into sequential improvement and topline as we get into the back half of the year.

Thanks a lot. Good luck.

Thank you, Alex.

Thank you.

Thank you. The next question is coming from Oliver Chen of TD Cowen. Please go ahead.

Hi, good morning. This is Neil Goh on for Oliver this morning. I just want to touch more on the promotional cadence as it pertains to the 2024 guidance. How much of the heightened promotional environment that you expect in the back half is driven from the competitive landscape, both from legacy players and new digital concepts, versus what's more reflective of Macy's current inventory position? And then just more broadly, just any key puts and takes that you're watching as it pertains to the health of consumer that you see currently. Thanks.

Thanks, Neil. Let me take the first part and Adrian can add his commentary. Yeah. I think we're looking at all the indicators that each of you are looking at. We're looking at inflation coming down, we're excited about potential rate cuts, we're looking at jobless claims. We're looking at the discretionary spending, consumer optimism. But I'm also focused predominantly on our -- health of our inventory levels, the compelling nature of our marketing campaigns. I think that we look well positioned from an inventory composition level, from an age of inventory level, from a percent of newness. And I would add in where we haven't always got it right, the balance of transitional product, the balance of clearance, the balance of newness. And I think that's why the trends that we saw in the second quarter after we started to take some action are continuing into the third quarter. So this is always a game of making sure that you have the right balance of going after the consumer and where she is -- he or she are shopping and at the same time that you are protecting the bottom line. I think the team is doing a really good job of that and we're obviously not sitting on where we are today. We're aggressively pursuing opportunities to enhance and improve the business going forward.

Neil, Tony summed it up quite well. The only thing I would add is that we're controlling what we can control. We have a lot of opportunities that we see ahead within the business to provide a better experience. We see the green shoots on the growth. And so we're just being very thoughtful as we enter the biggest time of year for us, which is the holiday season.

Great. Thank you, both.

Thank you, Neil.

Thank you.

Thank you. The next question is coming from Michael Binetti of Evercore ISI. Please go ahead.

Hey, guys. Thanks for taking our questions here. I guess, Adrian, maybe just any thought on your assumption for the second half same-store sales guidance you just gave us between the go-forward stores and the non-go-forward stores or any thought on how to think about maybe the spread between the two? Any way to help triangulate our model? And then I know you don't usually guide on forward quarter comps on a quarterly basis, but we usually model it off of the spread of comps to total sales. Is there any reason that spread changes in 3Q relative to 2Q just to be aware of? I know the calendar adds some noise. Maybe just remind us how that impacted 2Q and 3Q if there's a difference?

Absolutely. So I'll comment and if you have anything to add, please do, Tony. So one of the things we expected on the non-go-forward stores is that they would actually perform worse than we effectively performed better than what we'd actually planned. So customers are still shopping those stores. So when we think about the year-over-year performance, they're slightly better. So we made some of that adjustment overall in our outlook and guidance for the back half of the year. As we think about comps, it's really getting the fundamentals better and better every day, every week, every month. And as we think about the trajectory for the back half of the year, third quarter and fourth quarter, it's a lot of the adjustments that Tony and I have been speaking about on this call. And so as we think about those investments, we actually believe that it's going to improve the business sequentially as we get into the back half of the year. As we think about the performance of, for example, the Macy's First 50 other go-forward stores within the fleet and the non-go-forward, we continue to see, for example, with our First 50 stores, the sequential trends continuing to improve relative to the balance. So it just gives us confidence that as we introduce changes into these stores, whether it's visual changes, whether it's some of the staffing changes, and the 100 additional stores in handbag and shoes, that we'll be able to actually put in more of those building blocks to really get the relative comp sales growth year-over-year to improve.

Okay. And then if I could sneak one more in, can you just talk to us about how you're thinking about inventory investments, specifically in the go-forward stores? We're kind of watching how the inventory is pacing a little bit ahead of sales now, thinking about how you've made some changes to your buying operations a couple of years ago. Are those -- maybe any thoughts on the investments you're making on the inventory in the -- just specifically in the go-forward stores relative to the sales plan for the second half?

Yeah, Mike. Let me just add a couple of things on inventory because I think it's important. We, obviously, don't have a great clear compare in terms of year-over-year because of the conversion, but I would say that inventory levels remain down double-digits to a few years ago, and we are intent on being in stock for the customer. I think that one of the things that we have worked on very carefully, as I said, is getting transitional inventory, the level of clearance and value and the amount of newness flowing properly. Neither Adrian or I are worried about the risk associated with our inventory kind of going into the fall season. We look at it on an age basis, we look at it on a markdown inventory basis, and I think it's being in stock on replenishment, flowing fashion and newness into those go-forward stores. I think we're so much better positioned than we were a year ago going into the third quarter.

The only thing I'd add there is we do acknowledge to your point, Mike, that inventories at the end of the second quarter were slightly higher than our expectation. But the good news is that, in the second quarter, we already started to take action to adjust the appropriate quantity and composition of inventory for the fall season Q3 and Q4 as Tony mentioned. With regards to the type of inventory or the amount of inventory by store, we're looking at sell-through trends, weeks of supply trends at a very specific location by location, by category. So really being much more diligent with some of the disciplines that we've added in over the course of the last year to really manage the allocation of inventory in places where we can sell more at full price or first mark than what we would have seen in the past. Because as you know, our margin expansion over the last several years has been around reducing the amount of clearance to the appropriate level as we transition from season to season.

Okay. Thanks a lot. Makes a lot of sense. Appreciate it, guys.

Thanks, Mike.

Thank you. The next question is coming from Chuck Grom of Gordon Haskett. Please go ahead.

Hi. This is Eric (ph) on for Chuck. Just want to ask about the First 50 locations, the positive comps. Are you seeing the growth from existing customers coming and spending more, or is this new or lapsed customers coming back? And how do you get out to customers that all the changes that have been made that get them to come back to the store?

Eric, thanks for the question. I think we are again excited about the continued progress that we're seeing in the First 50. It's two consecutive quarters of comp store growth. It's 460 basis points of improvement versus the other Macy's locations or business. I think that the growth that we are seeing across all families of business, the fact that we have increased traffic and increased conversion versus other Macy's stores shows us that the work that we're doing is resonating with the consumer. It is a combination of existing customers and some new customers. And our new Head of Marketing is working closely with our stores team in geotargeting communication via email and search, as well as SMS messages to make sure that the eventing and the activations and new product message is getting out to customers. So the good news is we're seeing it resonate, customers' awareness is growing. We're only two quarters into a three-year plan and a change plan, and obviously, we want to have the right level of patience and determination.

The only other thing I would add Eric, is when you think about some of the things that's driving the business, as Tony described, we just have more number of customers actually coming into these stores relative to what we saw in prior years. And when you think about the experience that we've been investing in, just to bring up a little bit of color that Tony spoke about in previous calls, we're making additional staff, investments in handbags, in shoes and ready-to-wear, in home, also in the fitting room, which gives us the best opportunity to convert that customer and check out to make sure that we don't have long lines. We're activating the store through better visual presentation, sharper looks, greater value. We have events to give people reasons to come back to the store and spend time with us. We have digital messaging going out to customers in that locale that we know to get them excited about what's being offered in their local store. And we have local marketing to keep Macy's top of mind for those customers. So, those are the kinds of things that we're seeing gaining traction. And to Tony's point, we're seeing it in terms of traffic and relative conversion. We're seeing it in the number of customers. The categories that are touched have a sequential improvement in sales performance. So a lot of what we talk about is what's the appropriate pace, although a healthy pace, but the appropriate pace, as Tony said, without tripping over ourselves.

Thank you. The next question is coming from Jay Sole of UBS. Please [Technical Difficulty]

Great. Hopefully, you can hear me. My question is about asset sale gains and monetization proceeds. It looks like the guidance for this year went to the high end of the range compared to where it was last quarter. Maybe, Adrian, could you elaborate a little bit on what assets were sold and what's driving the raised guidance? And that would be helpful. Thank you.

Great to be with you, Jay. The punchline here is we're very pleased with the traction and progress. We're getting very healthy responses from landlords and developers. The deal pipeline is healthy even in this environment. So to your point, coming into the quarter, we had a range of $90 million to $115 million in asset sale gains. Now we're seeing approximately $115 million. We were pleased with $36 million of gains in Q2. We're forecasting our -- in our guidance $30 million in Q3, which leaves a balance of $67 million in Q4. But overall, what I will tell you is trending quite well. Lots of good traction. The implication of that is that we're going to be closing approximately 55 stores relative to our prior outlook of 50 stores. So this is just all further evidence of the traction that we're having and we're also very pleased with the value we're able to unlock in those deals and those transactions.

Got it. Okay, Adrian. Thank you.

Thank you, Jay.

Thank you. The next question is coming from Janet Joseph Kloppenburg of JJK Research. Please go ahead.

Good morning, everyone. I had a couple of questions. First, on merchandise margin or product margin, whichever way you look at it, Tony, for the second quarter, how was that versus your expectations? I mean, peeling away the favorable transportation and the cost accounting benefits. How was it and what's the thought process on that merchandise margin level in the second half of the year? And I also wanted to ask if the enhanced results you're seeing in handbags and men's in the 50 stores, is that primarily from service and environment, or is there a different brand matrix that you'll start to put in to the existing Macy's stores? And just lastly, if you could talk a little bit about the denim cycle, which we're seeing help a lot of companies this second quarter going into third quarter, and how Macy's has acted upon that opportunity? Thank you.

Thanks, Janet. Appreciate the questions. First, on merchandise margin, I think it's the collective work of the team that led to beating our margin guidance for the quarter and has led us to guide appropriately for the fall season. It's making sure that we're providing compelling value, but we're, obviously, learning from all the pricing science and the opportunities to negotiate in the market and give value to the consumer without giving away margin as a brand and a company. A part of our margin is always related to the quality of our inventory. So that's why Adrian and I both emphasize we feel good about the quality of our inventories. As it relates to the First 50 and the opportunity to expand to 100 other doors with handbags and shoe pilots, yes, it's a combination of the staffing and of the inventory, the quality inventory. So that's why it's good to hear brands like Lauren by Ralph Lauren and Karl Lagerfeld and Coach, which are available in all of these stores, doing well. In addition, we know that having a service model in an environment where you're buying a $300, $400 handbag, you need assistance. And so we've seen that impact in the First 50. We're excited to see that impact in both handbags and shoes in the 100 stores that we are expanding this fall. And finally…

Thank you.

On your question on the denim cycle, Janet, we absolutely are in a new silhouette or shape in denim. After so many years in skinny, we're now in a wide leg and a high rise. And so how we take advantage of that, we obviously have the great premium assortment at Bloomingdale's, and we have an assortment -- powerful assortment of Levi's as well as brands like Seven and Silver at Macy's. And so expect to find in men's and in women's, in kid's at both Macy's and Bloomingdale's a great assortment of denim for the fall season.

Lots of luck.

Thanks so much.

Thank you. At this time, I would like to turn the floor back over to Mr. Spring for closing comments.

Thank you, all -- thanks, everyone. I should say. We appreciate your time today. We hope you have a good rest of what is a few days, I guess, left of summer. And we certainly look forward to providing another update on the third quarter call. Have a good morning.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.