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…

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…

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…

[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.

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.

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.