Good morning. And welcome to Macy’s, Inc. Second Quarter 2019 Earnings Conference Call. Today’s hour-long conference is being recorded. I would now like to turn the call over to Mike McGuire, Head, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone. And thanks for joining us on this conference call to discuss our second quarter 2019 results and our full year 2019 outlook. With me on the call today are Jeff Gennette, our Chairman and CEO; and Paula Price, our CFO. Jeff and Paula have several prepared remarks to share, after which we will open it up for a question-and-answer session. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick follow up. In addition to this call and our press release, we have posted a slide presentation on the Investor section of our website, macysinc.com. The presentation summarizes the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance and guidance. Additionally, our Form 10-Q will be filed in a few weeks and that too will be available on our website at that time. I do have one administrative note to share and that is that we will be adjusting the timing of our typical quarterly earnings release beginning with our next quarterly earnings call, which will be on Thursday, November 21st. As a rough rule of thumb and barring any minor conflicts going forward, we plan to release our results for the first through third quarters on the third Thursday after the quarter end. However, the timing of the fourth quarter call is not planned to change. In addition, we will now be publishing our earnings release one hour earlier and moving up the time of our call to 8 o’clock a.m. Eastern Time for all quarterly results. So please mark your calendars accordingly. 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 net income and diluted earnings per share amounts that exclude the impact of impairment and other costs. 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. As a reminder, today’s call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call and it will be archived there following the call for one year. Now, I’d like to turn this over to Jeff.

Well, thank you, Mike, and good morning, everyone, and thanks for joining us. So, Paula and I will take you through our second quarter results and then we will open up the line for Q&A. As you saw in our press release this morning, Macy’s, Inc. delivered another quarter of comparable sales growth. We achieved a 0.3% increase in comparable sales on an owned plus license basis. Our earnings per share was $0.28, well below our expectation. As we communicated on our first quarter earnings call, we walked into the second quarter with elevated spring inventory. The second quarter got off to a very slow start. As we moved deeper into the quarter, it became clear that inventory was a amounting problem due to a combination of factors, a miss on fashion in our key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in our international tourism business. We took the necessary markdowns to clear inventory. The unanticipated markdowns impacted our gross margin for the second quarter by almost one full point. We now enter the fall season with the right inventory level and mix to meet anticipated customer demand, with improved freshness and liquidity to respond to in-season fall trends. We remain confident in our annual comparable sales guidance of flat to up 1%. That said, in light of our second quarter results, we are lowering adjusted earnings guidance by $0.20 for the full year. We now expect adjusted earnings per share in the range of $2.85 to $3.05, including asset sale gains or $2.60 to $2.80 minus asset sale gains. When I step back and look at the business more broadly, while we had our seasonal inventory challenges in the second quarter, there are many areas of the business that are performing…

Thank you, Jeff, and good morning, everyone. While we achieved another consecutive quarter of positive comparable sales, we were not pleased with our overall performance. That said, we are fully focused on a successful fall season and confident in the benefits we expect to deliver in the second half of the year from our strategic initiatives and our Funding Our Future productivity program. In the second quarter, we delivered sales of $5.5 billion, an increase of 0.3% on an owned license comparable basis. As Jeff mentioned, we saw strength within all of our destination businesses. We experienced some softness in the home category while ready-to-wear continued to be a challenge. We saw our strongest performance in the North Central region and digital continued to deliver solid growth. International tourism sales were down approximately 9% in the quarter, accelerating the headwinds sequentially. It is encouraging to see that growth of total transactions continues to be a key driver of our positive sales comp and we are up 5.3% in the quarter. Average units per transaction were down 1.8%, as our platinum customers purchased fewer units on average when they transact with us, but importantly, continue to spend more with us in aggregate. Our average unit retail was down 3%, driven by the growth of Backstage, our heightened markdowns in the quarter, as well as a challenging comparison to a very strong AUR performance in the second quarter of 2018. We generated credit revenue in the quarter of $176 million, down 5.4% from last year and in line with our expectations. Our Star Rewards loyalty program continues to drive good momentum in our credit revenue, with credit card penetration up 10 basis points to 46.7% in the quarter. However, there were slight upticks in fraud and bad debt. We monitored these metrics…

Thank you. [Operator Instructions] We will take our first question from Matthew Boss with JPMorgan.

Thanks. So, Jeff, you are seeing comp lifts from Growth50 stores and Backstage. You cited comps up mid-single digits at your six destination businesses and also commented that the consumer spending remains healthy today, despite some of the cross currents. I guess higher-level, what’s preventing better aggregate comps today at Macy’s and if consumer spending were to take a step down in the back half of the year or into next year, what’s your confidence in sustaining positive comps?

So, Matt, I think, you hit the headlines about what is good in our business right now. The one you didn’t mention was the digital overall is quite strong, really led by Mobile. But when you look at the other pieces of the business that are a challenge right now, ready-to-wear, particularly ready-to-wear sportswear and some of the soft home categories definitely depressed the strength of those winning categories to the comps that we are quoting. So when you look at the quarter-to-quarter definitely got off to a slow start and you see the combination of factors that we are quoting on that that led us to the decision that where we expected strong sell-through, stronger sell-throughs in seasonal product, that didn’t happen as we worked all the way through May and into early June. So we made the decision mid-June to take the appropriate markdowns. So that we entered the fall season with the right inventory levels on all of our spring and summer and we were able to flow all of our fall products that we have a lot of confidence that are going to get us ready for the fall. So we now have our inventory in line. We took the medicine. It did affect our overall gross margin by a full point in the second quarter. Now let me take you through why we are confident about the back half of the year. So, first off, we are entering the back half of the year with a comp above 0.5%. We guided the full year at flat to up 1. We just to mention what Paula just said, we do expect the fourth quarter is going to be meaningfully better than the third quarter. Third quarter last year we -- was our strongest quarter and that…

[Operator Instructions] We will take our next question from Kimberly Greenberger with Morgan Stanley.

Great. Thank you so much. Good morning. Jeff, I wanted to just ask about the store base and how you are thinking about it. You talked about the brick-and-mortar fleet being healthier. I’d love to hear what you mean by that. It would seem if the digital business is still growing double-digits, it would seem that the stores are still negative, but as you look at the fleet, what is it that you are seeing that’s healthier and do you need to take another look at your store base with maybe a potential eye towards some additional store closures? Thank you.

Yeah. Kimberly, so let’s just talk about stores in general. So just to repeat our store segmentation strategies. So we have our flagships, which include Herald Square. We have got our magnet stores which really are touched on by our growth initiatives. And then we have our neighborhood stores which are very important for fulfillment and convenience for our customers that live in those localized areas. So we really have a line of sight on what growth looks like for magnets and flagships. The growth strategy really led by our Growth50 gave us all the confidence in getting growth out of those buildings. We talked about how those Growth50 stores have outperformed the other stores in the Growth100 by 3 full points. Those stores are positive comping. The customer engagement in those particular stores is much higher than our other store fleet. So what we have done is we have applied all of those learning to the next 100 stores, which is what we call the Growth100 and what you are quoting, that Growth150, which will be complete by the end of October, touches about 50% of all of our brick-and-mortar sales. Separate from that is what you have many of our flagships that are classified differently that add to that 50%. Clear line of sight about what we need to do to make those better so we have got a lot of initiatives with what we are doing with new experiences like Beta and market and STORY, trying new concepts like thredUP that are all adding new opportunities in these stores, many of these stores are touched by Backstage. The neighborhood stores, I would expect those to continue to negatively comp, but they are becoming more profitable, because we are operating them more efficiently with less square footage. The customers are really using them big for fulfillment, a higher percentage of their sales are moving through fulfillment, so we are handling their expectations in those particular stores. We are always looking at our portfolio to look at does it make sense. We are never going to say we are done. But we do believe this national footprint that we have we are servicing a national customer. We know that when we close the store. We are firing customers. We lose their business online. We will make all those decisions very carefully. So this segment’s dictation strategy really serves a customer that shops between our stores, satisfying her needs. It also satisfies how we are building the omni-channel business through digital and Mobile and so we will be very careful about any exodus that we do in future store closures.

Great. Thank you.

Your next question comes from Lorraine Hutchinson with Bank of America.

Thanks. Good morning. I wanted to follow-up, Jeff, on the comment you made about the consumer not wanting to see price increases.

Yeah.

And can you just give us a little bit more information on your expectations around the tariffs? What are the mitigation strategies?

Yeah.

And are price increases off the table for you or will you try to do some selectively?

So let me just tell you what our experience has been. So, obviously, tranche one and two, there was no significant impact. And tranche three, there was very limited impact when it was at 10%, but on May 10th, that went to 25%. And so we did play with selective price increases in categories like luggage, in housewares and in parts of furniture, and we learned from that experience that the customer had very little appetite for those cost increases so we had to make adjustments. So to answer your question, Lorraine, I think, when you are talking about tariffs going to 25% then you get into what do you do? How are you working with your vendors? How do you get more make and value into those products that gives you the permission from a customer’s perspective because of how they are looking at the value of those goods to raise prices? So when we are thinking about tranche four, we have had some time to digest this even into this morning, we are looking at which of the remaining pieces that are touching our business that come in from tranche four are being effected as of September 1st versus December 15th. I would tell you that we are looking at no price increases on any content that is touched by tranche four. So we are looking at then what is our risk for the way that its now been, because you have got some categories based on one fiber that’s being taxed or by on September 1st for the other same category, but different fiber that is being effected as of December 15th. So looking at all of that and I think we recognize that our risk to annual guidance in 2019 would be no more than one nickel. I think on a long-term basis, we believe that we will work through solutions on 10%. We are working closely with our manufacturing partners. We are leveraging our scale and our strong relationships with our sourcing partners, as well as our vendor partners, who source out of China. So I think that 10% is manageable in the short and long term. I think when it goes to 25%, you are dealing with a whole other series of dynamics that I would not say we wouldn’t have to raise prices.

Thank you.

Our next question comes from Paul Trussell with Deutsche Bank.

Good morning and thank you for taking our question. I wanted to circle back on to the digital business, which is performing well. You mentioned that the Mobile business did over $1 billion last year. Just curious on any update on the total size that you are driving now through e-commerce? And also on Vendor Direct, maybe discuss in a bit more detail the type of product and SKUs that you have been adding to the website as you expanded the assortment and now that Vendor Direct is 10% of sales, I mean, help us understand how much the Vendor Direct business is driving the e-commerce growth and also how you are accounting for that in terms of taking on the whole sale versus a take rate in your top line? Thank you.

All right. Hi, Paul. So let me take you through Mobile first. No surprise Mobile is our fastest-growing channel so what we told you last year, $1 billion in sales we expected it to grow 50% in 2019 and we will get to $1.5 billion. We are on track for that when you think about our performance in the first half of the year. So when we get into Vendor Direct, on this one, we are on track, what we said is we have a goal of adding 1 million SKUs. We are halfway to that goal so we have added 450 new vendors, $640,000 of new SKUs, of the 640,000 new SKUs. So we started really primarily at home and we are now implementing more broadly. We are expanding to the full catalog of our brand partners. We are also adding new categories that we look at failed searches and really what our customers expect of us. We always look at what our competitive set is, and as we mentioned, our peers have a larger ratio of SKUs online to SKUs in store, so we have a ways to go. But I think the benefit of this is it’s giving our customers an endless aisle. This is all really driven by data driven personalization, and it’s given us we have to make sure that we are hitting Macy’s high standards of quality and customer satisfaction. I think in aggregate I see nothing but upside with Vendor Direct. I don’t -- I am not going to speak to where we see it going over the long-term. I will tell you in kind of yearly increments. But we are on track to achieve all of our objectives. I think that it adds sales, it adds profit, it increases satisfaction and traffic to the site. There’s minimal capital and no inventory investment, so it really makes for a high ROIC rate. And so when we quote our digital business as being up double-digit, that includes what we are doing with Mobile. That includes what we are doing with Vendor Direct and we can see continued growth in the entire digital channel with Mobile and Vendor Direct being two of the big accelerants.

And so just to clarify on the accounting, Paul, to your question as well. This is a wholesale model from an accounting perspective so it adds sales, it adds gross margin. As Jeff said, there is no inventory, no capital, so it’s really quite good in comparison to say owned. It’s similar gross margins. It just depends on the categories that you select in terms of what the actual gross margin is. But again, no inventory, no capital makes for a very strong ROIC and so this is all good.

Thank you.

Our next question comes from Chuck Grom with Gordon Haskett.

Hey. Thanks. Good morning. Just wondering if you could impact for us the oppression in gross margins in the second quarter, I think, it’s around 100 basis points for markdowns and 60 basis points for delivery, just wondering if that’s correct. And I guess, if you could just hold our hand for the third quarter and fourth quarter, what offsets you could have against that 6-basis-point delivery headwind? Thanks.

Yeah. So just again just to step back a little bit on gross margin, when we last talked to you in May, our margin guidance factored in our expectations around the delivery expense, the pressure from that related to our growing digital business and the Star Rewards program, as well as the clearance of the excess spring stock that we had at the time. As we moved deeper into the quarter, it became clearer, as Jeff mentioned, due to the factors that he mentioned, the fashion miss in key women’s sportswear, private brands, the slow warm weather product sell-through the accelerated decline in international tourism that we needed to take the fast action to put us in good shape for the fall season. And then just keep in mind that this was fashion apparel that had in and out dates that we really needed to hit and so when the sell-throughs did not improve as the quarter went on, we took these additional markdowns that got our inventory down to nearly flat on a comp basis, which is a really good place to be, as we head into the fall season. So just a little bit on the numbers. Gross margin as you noted was down 160 basis points. Again that’s about 90 basis points, almost a full point. That was related to the additional seasonal markdowns. And the rest of it relates primarily to delivery headwinds, which is consistent with what we saw in the first quarter, and was consistent with our expectations. So we took the markdowns thoughtfully and as we are entering the fall season, our inventory levels and mix are in line with what we expect our customer demand to be. Then just while we are on the topic, let me give you the thoughts on…

Thanks a lot.

Next question comes from Jay Sole with UBS.

Great. Thanks so much. Jeff, I asked about your comment that, I think you said that, you see the risk to the annual guidance for 2019 to be no more than one nickel from tariffs. Could you talk about the algorithm to get there that if you don’t change prices the vendors basically absorb all of the price increases or is there an element of maybe gross margin being a little bit under pressure, but you can offset it with SG&A, any help around that would be great. Thank you.

Yeah. So on that, Jay, we have got -- we are looking at our own private brands where we are bear the full risk of any changes that we make and so we looked at that. We are obviously talking very intensely with all of our vendor partners and have been really on the whole subject of tariffs for some time now. So we have gotten into a good place in terms of what price increases they are going to hoist on us, what they are absorbing themselves or what they are believing they are getting concessions from their own sourcing partners. So I think those are kind of in the, we are looking at that in three parts. We are looking at what we are doing in our own private brands, what that means. And as I mentioned, what we have found is there’s no customer appetite for price increases, so what are we going to do to mitigate that. And so in the short run, where we have already taken our mitigation strategies, we believe that we might have additional risk of up to a nickel when you look at between our brand partners and our private brands, based on what we learned yesterday. That would be for the balance of 2019. We are hard at work that if we continued with all of the 10% tariffs that are landing as of mid-December onward. We are looking at opportunities to mitigate that in 2020 and beyond, and we will keep everybody posted as we work through all those scenarios.

Got it. Thanks so much.

Thanks, Jay.

Next question comes from Paul Lejuez with Citi.

Hey. Thanks, guys. Can you talk about how big Vendor Direct was as a percentage of e-comm sales this quarter versus what it was in the second quarter of last year? Also what the plan is for the second half, how much of a growth driver that can be due to the comp? You did mention just secondly that second quarter results got off to a slow start. I am curious if you could make any comments about how 2Q finished and how 3Q started? Thanks.

What I’d say on, Paul, we are not quoting what Vendor Direct is through the first half of the year. We will definitely give you guide at the end of the year. As mentioned with the previous caller, it was about 10% of the business for 2018. It is growing at a rate bigger than the average of overall e-comm which is double-digit. So we don’t break that out in kind of midstream on that. As to how I characterized the sales flow within the quarter, it started out very slow in the month of May. And so the month of May was we don’t often talk about weather, but in the month of May it was particularly cold and it was particularly wet and it was across the entire country. So generally with weather, you get some pockets of the country that are experiencing warmer weather than others and they kind of cancel each other out. In this particular month, it was pretty tough across the Board. So that’s really the whole conversation about those are really important weeks in sell-through, in seasonal goods, like, spring and summer fashion deliveries, particularly shorts, tanks, tees, those types of deliveries. So very important that we responded to that. It did get better in the month of June and the positive continued into the month of July. So what I would tell you is tough May, got better through the course of the remaining two months, which led to our positive comp for the total quarter.

Thanks. Anything on 3Q?

I am sorry?

Can you talk about 3Q?

Yeah. We don’t comment on in quarter results as you know, Paul.

What I’d say, Paul, is that we said earlier that we do expect that the four quarters can be meaningfully better than the third quarter from a comp perspective.

Thank you, guys. Good luck.

Thank you.

Next question comes from Alexandra Walvis with Goldman Sachs.

Good morning. Thanks so much for taking the question. I had a question on tourism. You mentioned that sales to foreign tourists are down 9% in the quarter. I wonder if you could give a little more color on that and whether the shape of that tourist spend has been changing over the last few quarters? Is it more a function of traffic or more a function of basket size there and how are you expecting that to trend?

Hi, Alex. Let me give you some context on international tourism so and how it affects our business. So it is a significant driver of volume in 40 of our Macy’s and Bloomingdale’s stores. So it’s the gateway cities. In many of these stores, virtually all of them are really touched by our growth initiative. So we are built and ready in both Bloomingdale’s and Macy’s for those markets. When you look at these international tourist sales, they are really some of our best transactions, because they are high AUR, more apt to buy full price and there’s virtually no returns. So it’s a very high margin sale that you are dealing with here. So as we mentioned, our business across Bloomingdale’s and Macy’s was down 9% in the second quarter and that was an acceleration from our trend from the first quarter where we were down 3%. Now we are lapping four now consecutive quarters of negative comps, so we are going up against an easier fall compare than what we were up against in spring. And as I think, we get -- we are pretty good at this. We see that international tourism always has its ebbs and flows. This decline is not unprecedented. We have navigated through this before. But just to be on the prudent side, we took our comp from the second quarter and we pulled that all the way through our fall expectations, just to be prudent. So even though we are up against a negative, a much easier comp in the back half, we did pull that through, just to be prudent. And then what we are really focused in these 40 stores is what can we do to offset that international tourism. So we are really focused with those teams and our corporate teems on how we get more domestic tourists and how we really win more local customers in these very important doors. So, then when you look at the composition by country, certainly Brexit is affecting us, China is depressed, there’s always ins and outs depending on what country. But I am calling it as I see it right now. We are taking the trend from the second quarter and carrying that through the back half.

Great. Thanks. That’s super helpful. And then one more here for you in ways that it’s related, I wonder if you could comment on trends in the New York market. I am sure that tourism is having an impact there. But I wonder if you could also comment on the incremental supply in this market as there’s been a few new openings of retail areas, there’s some more coming up, how are you thinking about the New York market in that context?

As expectations, I am sorry, if you look at the Manhattan, we have seen little change in our business in Bloomingdale’s and Macy’s as a result of the new competition coming in there. We have some of our best performing stores are in the metro area and I would attribute that to customer satisfaction scores being up, growth initiatives being in place. So we have fought hard in those communities we are winning and that’s not different in New York City or New York Metro versus other parts of the country. So Bloomingdale’s is while they had a more difficult quarter, where they are making investments you see it in New York City, they are having great strength in all the areas of the Bloomingdale’s 59 Street store that they renovated, very happy that we have seen very little effect with the competition increasing in Manhattan with Bloomingdale’s 59 Street. So I would say the metro area is unaffected by what you are describing.

Thanks so much.

Next question comes from Omar Saad with Evercore ISI.

Good morning. Thanks for taking my question. I wanted to ask some follow ups on inventory, but maybe a little bit more from a structural standpoint. Jeff, could you talk to and following another build up in inventory they need to markdown to clear it, could you talk about why Macy’s maybe hasn’t seen more benefits from technology -- using technology to run the business with less inventory, omni-channel capabilities, is that something we can look forward to in the future around inventory? And then you also mentioned Vendor Direct, the returns efficiency of that model where you don’t have to own the inventory. As you think about your physical business as well, is there an opportunity to do more concessions, marketplaces at least with some of your big vendors where you can run, they can run the business owning the inventory and create working capital opportunities for Macy’s in that way as well. Maybe you could address those things. Thanks.

So I will go ahead and start on this question, Omar, and then, Jeff, if he wants to add, can do so. One of the biggest things we are doing with funding our future is developing more tools to manage our inventory and our supply chain in a much smarter, more efficient way. So it’s very much powered by technology. And we already use advanced fulfillment logic to get our customers their products in the quickest amount of time at the lowest-cost for us and with the most effective inventory strategy. We use a combination of our mega centers, stores, vendor partners, to offer the customers the best experience, while allowing us to move inventory efficiently and cost effectively. And we are taking that a step further by taking inventory position and markdown risk into consideration as we make fulfillment decisions using data analytics. So we are really excited about our supply chain and the transformations that we are seeing. We are also getting ahead right now of the peak holiday season by allocating more of the high volume inventory and distribution centers to operate at full capacity and using our store fulfillment logic and options more effectively. And we are also sort of efficiently consolidating box shipments to stores to reduce shipping costs. So when we think about the supply chain transformation and Funding Our Future productivity there are a lot of different initiatives that sort of fall under that. In addition, in terms of inventory management, we are applying data science and data analytics to our markdowns in pricing, so that we can really measure the price velocity, how the inventory is moving at what prices and really get very, very smart -- smarter about how we manage our inventory. So this is a really big opportunity for us.

And just to add one thing, Omar, to what Paula just said. I think the thing we are most excited about with markdown optimization is the ability in fall season to do that at a store level. So we have been doing it at the zone level. We have tested it and we are now ready with all of our technology to be able to do that at a store level which is really going to help take markdowns on certain SKUs where you don’t need to or you go to different levels where that’s prudent. So that’s going to help us with overall margin both in sales as well as gross margin improvement, with markdown optimization. And then the second part of your question about, what are you learning from Vendor Direct and shifting some of the economic burden into lease or hybrid models. That is definitely always -- we are always looking for opportunities with that. And so when you look at what we learned from the market, kind of retail as a service, we don’t own any of that inventory. We basically are renting space and we are doing that through our partnership with Beta and so that platform is really running all the kind of different retailers that are coming into that space. They basically pay a fee, basically to be a part of that and that’s giving customers new opportunities, new things for them to see, but with no risk to us. When you think about lease, always looking at different lease options, the Bloomingdale’s lease percent of their overall business is higher than Macy’s. I know that Macy’s will go higher over time, and we are looking for opportunities there. We definitely, although, always want to make sure, that whatever we are doing with lease gives us the opportunity to make shifts where customers go, and so making sure that we are not tying ourselves into long-term commitments, that may not be customer focused. So we are always looking at this and expect this to continue.

That makes a lot of sense. Thanks.

The next question comes from Oliver Chen with Cowen and Company.

Hi. Thank you. You have been really innovative, Jeff, in thinking about e-commerce and subscription. You have done a lot of work with thredUP. Why is now the right time and what are your thoughts on balancing your relationship with thredUP and Castle against your vendor Matrix and also thinking about consumers looking for new items and the cannibalization risk balancing that against the opportunity? And Paula, just a quick follow up, the precision and the fall promotions and thinking about that, sometimes the challenge can be in making sure you still get your fair share of traffic when you alter promotions, would love your thought on how you are balancing the precision against the traffic risk? Thank you.

So, hi, Oliver. Let me go first on your questions about kind of e-commerce and rental. This is a -- when you think about that kind of acquisition strategies, we have a very developed core customer who loves our brand and basically we just got stickier with her decisions about shopping with us with our loyalty program. We have got a customer base in what I would call bucket two, which is an occasional customer that we are trying to get them to migrate up in our spend and then we have got an entire acquisition strategy. And when you look at acquisition, e-commerce and rental is really at the heart of that, and so there is many customers that love from a sustainability perspective, as well as just having new content at great prices, they love what the real world is doing or in the case of our customer, what thredUP has been doing for some time. And so when we met with James and really said, okay, what’s our opportunity, he was looking at opportunities with brick-and-mortar and his own or partnerships and this was a good connection for us to come together. So we are doing it now. It’s rolling in. We are doing it for the back-to-school time frame and 40 doors is really when it’s starting. And I will tell you that with the products that are selling best are those that we don’t turn carry. So to your question or concern about how do you in-line vendors feel about it, it’s just giving these customers additional brands that we don’t carry at great prices. So I am very encouraged. We are testing it in different parts of the store, where it’s best, how it’s best received. So we are going to be -- we will have a full analysis of it as we get through the fall season, but I am very encouraged by this. As it relates to rental and what you see with what Bloomingdale’s just announced, which is My List and our partnership with Castle, we needed to play in this game. I am really happy with what Tony and Denise, and their teams created here and this has been under development for about a year and a half. I think it’s got some unique characteristics. But it takes the full complement of strengths of contemporary vendors at Bloomingdale’s. The vendors themselves are thrilled to be a part of this. So and then the broader play would be what does this do to inform a similar opportunity in Macy’s future. So staying on kind of the acquisition, we are really focused on digital-first strategies. What that means with influencers. What we are doing with our own colleague population with Style Crew, reinventing beauty with respect to Instagram. So these initiatives I think really help us with acquisition.

And so, in terms of your question regarding balancing precision and traffic risks. So what I meant by that is that we are really using better tools, better data to understand all of our promotions in terms of what’s working and what’s less effective. And so we are simplifying our promotions, we are measuring how effective those are, what kinds of results and outcomes they deliver, we are delayering where it’s appropriate our promotions, we are partnering to get better data around the outcomes of our promotion, we are segmenting the customers in looking at how we target different customers with different promotions. So that’s a piece that I mean when I say we are doing this with greater precision and we are balancing that with the outcomes. Outcomes like traffic, and ultimately, what sales these promotions drive. So we are getting better at that. It’s just another way of how we are using data and data analytics to support our decisions.

Thank you. Best regards.

Thank you.

Thanks, Oliver.

Our next question comes from Bob Drbul with Guggenheim.

Hi. Good morning. Just a couple more questions, on the thredUP relationship, how much square footage are you allocating in the 40 stores that you are doing. And the overlap with Backstage versus thredUP and I guess if you could talk about that? And then, just the question on national brands, like you had some pressure in your private brands, but I was just wondering if you would comment on national brands and maybe even denim a little bit as a category? Thanks.

Okay. Thanks, Bob. So square footage in thredUP is approximately 500 square feet in each of these 40 stores. Very little impact, it’s when you look at the content of Backstage, the content of Macy’s, the content of thredUP, is mostly discrete. So when you look at thredUP, we obviously gave them a list of vendors that we don’t need products because we have either got them expressed and Backstage or in last act or as part of our regular portfolio. So really we are merchandising into where we sell holes in our inventory with this e-commerce play and this idea that it was pre-owned is very attractive to many customers, not just because of the price, but also because of the sustainability, so that’s how we approach that. When you talk about national brands, like, anything, you have got some national brands that are totally on the pulse of their customer and they have made all of the right decisions from a value and a content perspective, and they are winning and others that are finding their way or their customer shifted and they are having to make adjustments. So I wouldn’t characterize one seer it of vendors one way or another. It really depends upon the business that you are in and where they are in their own evolution and so that’s how I would -- and then with respect to denim. What I’d tell you is that when I look at denim from the second quarter there were really positions of strength in a number of areas. When you look at our kids business, our kids business is one of our stand outs in the first half of the year and some of that was a result of denim and then denim is mixed in the women’s apparel area and doing quite well in men’s.

Great. Thank you very much.

Your next question comes from Michael Binetti with Credit Suisse.

Hey, guys. Good morning. Thanks for all of the detail here. Can I just ask, on the categories that you guys spoke about, what confidence is there in, I guess, what’s different between the spring and the fall women’s apparel trends and I know you said that you are confident you are clean on inventory. I am trying to figure out what you see that helps boost your confidence the new assortment can drive improved traffic? And then just sticking with the topline for a second, I want to ask about the comps again, Paula. Should we think about 3Q comps within the full year range of flat to up 1 or should we be thinking more like 3Q comps negative switching to positive in 4Q, just to help us understand some of the dimensions.

Michael, let me start. So what I tell about ready-to-wear is that ready-to-wear is really in kind of two pieces. There’s the classifications piece which is dresses, suits, activewear, coats, swim, those in aggregate are showing really healthy growth and they have been strengths of Macy’s. We see those continuing all the way through the back half of the year. When you look at sportswear, which is where we had our problem with private brands of sportswear which is the bulk of that business, the bulk of sportswear business is private brands. What I’d tell you is that we are in a really good inventory position for the right expectation for fall season. So what I would expect this is not a rapid turnaround. I would expect that the trend that we have experienced in the sportswear business would continue through the back half of the year without the inventory overhang that’s going to create a margin problem for it. So that’s how I would characterize ready-to-wear.

And so what I’d say about the quarters, Mike, is that we don’t guide the quarters, as you know. But as I said earlier, we do expect the fourth quarter to be meaningfully better than the third quarter and so Q3 could be outside of our annual guidance range, so I would think about it in that way.

Okay. And if I could just ask a follow up maybe an easier one on the SG&A leverage in the second half. I know you have got some cost initiatives flowing through, have a little better control over that after some investment in the first half. So I guess if sales do come in above the plan, how should we think about SG&A relative to your guidance and if sales come in light, do you have more room you can pull back on SG&A or are there other still some fixed costs from the initiatives running in there that make it a little bit inflexible if sales are to the downside of the plan? Thanks.

Sure. I would just repeat at -- our guidance. In terms of SG&A at the high end of our guidance, we would expect the performance to be better in the fall than in the spring. And again as you know our expenses are weighted more heavily to the first half of the year, because we began our investment earlier in the year and will benefit from expenses later in the year. Sales are higher, then that you would see that in our SG&A leverage. If sales are lower, yes, we always manage our expenses prudently and think about different sales scenarios and what we would do there. And so, we have demonstrated that we can flex our sales in different sales environments or flex our expenses in different sales environments.

Thanks for all of the help and detail there.

Thanks, Michael.

Thank you.

And our last question comes from Brian Cowen with Bank of America.

Hi. Good morning. Thank you. I just wanted peel back on your perspective on balance sheet health. Debt reduction has been strong, but 2019 leverage looks like it could be at or above the high end of your target range, so what options should we consider being available near-term to keep the balance sheet in line with investment grade ratings, you don’t seem to be getting credit for the, I guess, 10% dividend yield, so would you consider altering that dividend payout?

So, again, I would just reiterate our capital allocation strategy, which hasn’t changed. We do continue to generate strong cash flows and we use that cash flow prudently. And so just to reiterate what our priorities are, first and foremost is to invest in the business and so we have guided that we will invest about $1 billion this year. Second is to maintain a healthy balance sheet so we are significantly -- we have been significantly reducing our debt. We plan to use excess cash in 2019, as we said before, to further reduce our debt, to be well within our target leverage range of 2.5 times to 2.8 times and we look at that with and without asset sale gains and that’s important as we face into any economic environment and being in this range gives us flexibility as well. And next we will continue to return a competitive cash dividend to our shareholders. We are doing that and we are committed to continuing to do that. And then the last thing is that as our cash position warrants, we will consider along with our Board resuming our share repurchase program. So that’s how we think about our capital allocation strategy and it hasn’t changed.

Thank you.

It appears there are no further questions at this time. I’d like to turn the conference back to your host for any additional or closing remarks.

Thanks, everybody.

Thank you, everyone.

Thank you.

That concludes today’s presentation. Thank you for your participation. You may now disconnect.