Ladies and gentlemen, good morning, and welcome to Macy's Incorporated Fourth Quarter 2020 Earnings Conference Call. Today's 90 minute conference is being recorded. And I'd now like to turn the call over to Mike McGuire, Head of Investor Relations for Macy’s Incorporated. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us on this conference call to discuss not only our fourth quarter and full year 2020 results but also our update to our long-term strategy. With me on the call today are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO. Jeff and Adrian have prepared remarks that they will share, after which we'll host a question-and-answer session. While we’ve extended this call to 90 minutes, given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one. In addition to this call and our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com. The presentation summarizes the information in our prepared remarks and includes some additional facts and figures. I do have one housekeeping item to share. Jeff and Adrian will be participating in a fireside chat at the Bank of America Consumer and Retail Technology Conference on Tuesday, March 9 at 8.30 AM Eastern Time. This event will be broadcast on our Investor Relations website, so please mark your calendars. 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 our filings with the Securities and Exchange Commission. In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures, as well as others used in our earnings release and our presentation 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 2 hours after the conclusion of this call and it will be archived on our website for one year. Now, I would like to turn this over to Jeff.

Thanks, Mike. So good morning, everyone, and thank you for joining us today. So today we're going to share our fourth quarter and fiscal year results, discussing our outlook and near-term guidance, and reviewing our updated Polaris strategy. We also look forward to taking your questions in the Q&A session following our remarks. With the customer coming out of an unprecedented year, one that delivered a series of external challenges that would have seemed almost unimaginable not so long ago, let me start with this: when COVID-19 unleashed its challenges, consumer trends have shifted quickly, and we learned a lot about our strengths and opportunities. Our Polaris strategy designed to allow significant flexibility was tested profoundly, and approved durable, allowing us to adapt and innovate with great agility. Facing these challenges, only some of our results have shown improvement from 2019, but our business performed better than we might have otherwise had expected under these stresses, and we've shown that we are well positioned to adapt to customers’ needs and to new forces in the external environment. Against this backdrop, many of our fourth quarter results, sales, EBITDA and earnings per share exceeded the expectations that we shared with you at the end of third quarter, and we ended the year in a very good cash position. Sales for the quarter were $6.8 billion with all brands outperforming expectations in the quarter and the back half of the year. This solid performance has continued into 2021. Significant growth in digital sales supported these results as we took series of actions to win over new customers, while some of our core customers paused spending with us during the pandemic. We accelerated our focus on digital shopping, extended our assortment to help customers in expressing their unique styles through a growing number…

Thank you, Jeff. Good morning, everyone. Thanks for joining us this morning. As Jeff shared, we're pleased with our fourth quarter results as they reflect improvement in both sales and margins from the lows of the year. We're committed to updating and accelerating Polaris, taking the actions essential for Macy's to grow as a digitally led omnichannel retailer and delivering higher levels of profitability and free cash flow. I will start today by sharing the key drivers of our fourth quarter and fiscal year results. In particular, I will focus on Macy's five most important value creators; accelerating sales growth, improving gross margins, increasing inventory productivity, managing SG&A and reducing our debt. Later, I'll go a bit deeper on how our omnichannel businesses from stores to digital to credit are combining to help us meet our strategic goals. For accelerating sales growth, we saw comparatively strong holiday demand in November and December and that carried into January with sales totaling $6.8 billion for the quarter. With the pandemic upon us, this reflects a decline of 17.1% for the quarter on an owned plus licensed basis compared to 2019 and a drop of 18.1% for the second half of the year. We pivoted quickly to product categories with higher consumer demand, such as active, lounge wear and home. We benefited from new customer acquisition and we invested in the digital channel while improving our in-store experiences. We also benefited from the improvement in merchandise return rates and we increased engagement with our younger and more diverse customers, both by those segments. I'll spend a couple of minutes talking about each of these. In terms of consumer demand, our focus on the soft home category led by textiles and housewares was a big benefit during the fourth quarter as sales rose 11%…

Thanks, Adrian. So as I shared earlier, the Polaris strategy that we introduced last year has proven to be a critical enabler of our performance in 2020. Early actions dictated by Polaris help us broaden fashion offerings across categories and improve our digital experience. The cost control that we committed to last year was critical to weathering the pandemic. And this year, when we needed to make hard choices on our investments, Polaris gave us the clarity to focus first on the areas most critical to future growth. Now while we'll discuss mostly Macy's here, both Bloomingdale's and Bluemercury experienced a strong recovery in the fourth quarter, and we believe they are well positioned to outperform the market as the pandemic recedes. We plan to spend more time on these banners on a future call. In recent months, we have recommitted to Polaris. And we're find it to achieve our mission to accelerate growth while improving profitability and returning to growing cash flows. This will require us to deliver better fashion and style options for customers and an improved digital and omnichannel experience. We are also boosting our focus on delivering clear value to our customers and modernizing our supply chain to enhance our value proposition and our gross margins. Financial results further improved, with initiatives to unlock SG&A opportunities and boost the returns on our capital investments. Polaris also helps us reshape our footprint to meet customers where and how they want to shop, now and in the future. So the 6 pillars that underpin the Polaris strategy: winning with fashion and style; delivering clear value; excelling in digital shopping; repositioning our store fleet and enhancing omni experiences; modernizing our supply chain and technology infrastructure; and enabling transformation through data analytics and a performance-driven operating model. Given its importance…

Thanks, Jeff. As we look ahead to the rest of this year and beyond as we get beyond the pandemic and our business normalizes, we are focused on delivering on the metrics that will cement our position as a digitally-led omnichannel retailer. That means sustainable sales growth across channels, resilient gross margin and EBITDA margin, solid free cash flow and a healthier capital structure. Considering the profound changes over the past year and the lessons we have learned, we are today providing updated short-term guidance as well as some guideposts towards where we see the business moving longer term. These are based on our current strategic priorities, with a recognition of ongoing uncertainties in the marketplace, but they also reflect a more significant and faster lean into our digital growth efforts as well as the continued rightsizing of our mall-based stores within the highest quality malls, while testing new off-mall concepts. I'll first talk about our long-term objectives, then cover our shorter-term outlook for 2021, which we consider to be a recovery and rebuilding year. In the future, for Macy's, Inc., we target annual sales comps of low single-digits as the business normalizes past the full effects of the pandemic. We foresee digital penetration exceeding 40%, while for our stores channel, we acknowledge that malls in general will continue to face headwinds that will lead to low to mid-single-digit comp store sales declines after recovering from the pandemic in 2021 and 2022. We see gross margin as a percent of sales stabilizing in the mid-30s. This will be driven by improvements in delivery costs and merchandise margin, faster inventory turns and the ongoing shift to the digital channel. For credit, we are targeting this channel to stabilize at roughly 3% of sales. For adjusted EBITDA margin, we see continued growth…

Thanks, Adrian. So in closing, I'd like to leave you with a few thoughts. As we look towards a healthier economy in the coming months and years, I am optimistic about the way we are reimagining and repositioning our business in line with our Polaris strategy. We have a strong focus on our customer and market trends. We are building out our digitally-led omnichannel experience. And we are well positioned to better capture customer demand across the total market, from off-price to luxury and from offline to online. We know what's important to customers. We will empower them to find their personal style through curated and distinctive products, clear value, and enhanced digital and store experiences, optimized by a modernized infrastructure and performance culture. And we will be in a better position to be increasingly relevant to the next generation of customers. I am encouraged by the talent and focus of our teams across Macy's who persevered through 2020 and who are committed to our future growth. We have a diverse leadership team that includes a blend of new talent with outside perspectives, along with our tenured and best developed leaders. And I am confident that, together, we will build towards a sustainable, profitable future. This concludes our formal remarks. And now we'll take your questions.

[Operator Instructions]. And we will take our first question from Chuck Grom with Gordon Haskett.

Jeff, on the pace of recovery in '21, how are you planning the business by category, particularly areas that may take longer to recover, but also areas of the business that could see release of some pent-up demand? And then, Adrian, when we think about the gross margin structure in the '21 guide of 37%, with digital where it is, do you think you can get back to 40% to 41%? Or is the mid-30s the best run rate?

Hey, Chuck, good morning. So what we're expecting is that we're going to see much of what we saw in the fourth quarter going through the first half. So we expect that the home businesses are going to continue to be strong and elevated. And then when you look at some of the luxury businesses that customers have been spending on, like fine jewelry and fragrances, some on designer skin care, all those categories are strong. So when you look at the fourth quarter in those businesses, we were up about 14%. When you look at all of home, you look at fine jewelry, fragrances, sleepwear. And I would expect that those would continue. The AUR is up. The sell throughs are better on those particular areas. So we're definitely funding those. And that's across Bloomingdale's as well as Macy's. I would expect the negative categories to continue. So I think all of apparel remains challenged. While we are doing well in the casual categories, the dress categories remain depressed. Our inventory levels remain in line with our sales. We have a ramp-up strategy with all of the relevant vendors as well as our private brands if that -- if we start to see seeds of improvement as the vaccination starts to get scale and customers are starting to book events, weddings, you'll start to see those businesses improve for us. So we expect the first half is going to be very similar to fourth quarter. And that the back half, we'll start to see an improvement in apparel, but remain strong in the categories that have been strong, as well as the new brands and categories that we have added.

And Chuck, thanks of your question and thanks for joining this morning. To your point about gross margin, the thing that we would keep in mind is that we're targeting adjusted EBITDA margin moving towards the high single-digits range. In order to achieve this, we're driving both the top-line as well as efficiencies in both our SG&A and our gross margin. Now Chuck, you're absolutely right. From a gross margin standpoint, we are planning to stabilize in the future as the business normalizes in the mid-30s in the future. But we're actually working diligently to improve merchandise margin as well as the delivery costs and getting efficiencies in our SG&A. So really elevating the profitability of the overall business. As we think about the merchandise margin, obviously, category mix will have an impact on our margin level, as the current pandemic mix tends to be geared towards our lower-margin categories such as home, as we discussed a little bit earlier. But at the same time, we do believe that as recovery happens, apparel sales will return, and that will also help offset some of the declines in gross margin rate due to the mix shift that I just mentioned. But we're also going after pricing and promotions. We're trying to minimize the unnecessary promotions and markdowns and discounts to achieve a higher full price sell-through, which will help our merchandise margins and ultimately help our gross margins. And we've gotten a lot of momentum from what we've seen in the fourth quarter of last year. We talked at length a bit about the delivery expense. It's all about better allocation of inventory where the customer wants to transact. It's reducing split shipments. It's improving our AURs. There are a number of levers we're going after. But as we think about the contribution margin piece that we talked about a bit earlier, we're really focused on not just gross margin hitting in the mid-30s in the future, but really elevating our EBITDA margin -- adjusted EBITDA margin closer to the high single-digit level over the longer term.

And we will take our next question from Paul Lejuez with Citi.

Just thinking about the contribution comments by channel that you laid out, and just leading up to the pandemic as digital penetration was increasing, your overall EBIT margins were going down. So I'm kind of curious what you think has changed that would reverse that as digital continues to grow in terms of overall penetration. And on the same lines, in that longer-term algorithm, the low single-digit top-line growth that you laid out, how does store closings factor into that? Are you talking overall sales? Is that a comp number? Just want to make sure I understand how you're thinking about stores long-term and how attractive into that top-line?

Great. Thank you very much for your question, Paul. So as we think about the contribution margin, it's important to understand this difference between the channels, right? And so as we are looking at contribution margin, we recognize that improving margins in the digital channel is all about elevating delivery expense -- or I'm sorry, improving delivery expense to elevate our digital gross margin. From a store standpoint, it's really just leveraging more of that asset for BOPS, for curbside, for BOSS, and a lot of the digitally-led initiatives that we have underway, while at the same time getting back to comp store growth. When we think about the low single-digit growth in the future, that's really on a comp basis. As you probably know, with regards to the announcement of the 125 store closures that we announced in January of last year, on a 2019 basis, that's about $1.3 billion in sales. So that provides a real headwind as we actually right-size our mall-based stores. But with the ambition to grow digital to $10 billion in the next 3 years, with the work that we're doing to reduce digital delivery expense and also the permanency of the $900 million of SG&A savings from the restructuring that we had in February and July of last year, we should be able to elevate those EBITDA margins relative to what you've seen pre-pandemic. So those are some of the major levers that we're focused on as we look ahead.

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

Adrian, I appreciate all the comments today. This has been extremely helpful and illustrative. I wanted to clarify or ask 2 things. On the 500 basis point differential in contribution margin between stores and digital, if you sort of reflect back over the last 5 years, can you give us some context around the performance just in your stores channel? And have you seen store margins fall over time? And then, secondarily, on the longer term financial targets, with gross margin in the mid-30s, I think this year, 2021, you're providing a preliminary gross margin outlook of 37%, if I heard you correctly. So should we consider that 37% target this year what -- where you would expect gross margin to be sustained at?

Thank you, Kimberly. Thanks for your question. So in terms of the contribution margin, the mid-single-digit and -- the mid-single-digit profitability contribution for our digital channel relative to our stores, is actually quite real, and that's based on our 2019 numbers. The thing to keep in mind is, over the last 5 years, we've been -- built tremendous scale in the digital channel. So when you think about the leverage of the technology infrastructure and the improvement of scale, we're really seeing increased benefits in terms of the profit contribution in the digital channel. In contrast, we've actually seen, with a large fixed asset base in stores, our store sales is declining. So what we're working to do from an omnichannel standpoint is really leverage our store assets for the digital experiences around BOPS and curbside and store fulfillment and those capabilities. But what we do see very clearly is that as our business on the digital side scales, we have great opportunities to continue to improve the profit contribution margin of that business. Delivery expense is a real focus for us as we think about ways to reduce packages, encouraging customers to pick up from our stores, improving our AURs, even with the pricing and promotion work that we've done where really good gains, that will all continue to contribute to an even healthier and more profitable digital business, while also taking advantage of the physical assets that we have within the business. Now as we think about Q1, we're only sharing our expectations around the sales and adjusted EPS. But as we think about the first quarter, we're very comfortable with our inventory position going into 2021. So we do expect to have a healthy level of gross margin as we think about the first quarter of the year. So we're starting the year with really healthy inventory. As you know, we are down 27% over the last year in terms of our inventory going into the first quarter. We're really happy with our stock to sales ratio. We've planned receipts conservatively because of what we described as kind of a pandemic like activity we expect in the first half. And for our stores, providing clear value with simple, easy to understand pricing and promotions that allow us to maintain a strong margin, those are the kinds of things that we're actually focused on. So we do expect to move into the first quarter in a healthy position, but at this time, just really providing Q1 guidance around the sales and the adjusted EPS level.

And we will take our next question from Matthew Boss with JPMorgan.

So Jeff, your sales guidance for this year, I think, stands 17% to 18% below the pre-pandemic base at the midpoint. So as we think about potential consumer recovery in the back half, and I think you've laid out $10 billion or more in competitor revenues up for grab, what's your flexibility to chase sales in key categories? And then, secondly, as we think multiyear, how should we think about your ability to recapture that $4 billion to $4.5 billion in revenue to potentially get back to your 2019 revenue base over time?

So we have a lot of flexibility with -- obviously, we're in a very good liquidity position with our inventories right now. And so as we were when you saw how we came out of the second quarter and our opportunity with our inventory position for third and fourth quarters. So those categories that we're really tracking and trending for us, we were able to respond to. There were some supply chain snags in certain businesses like Home Store, where we had -- we didn't have as much flexibility on that. But we're certainly looking at the front half of the year and really the full year based on where the consumer goes on this. So we have the seeds of where we see that -- those runways. But as things -- as I mentioned in my first answer to Chuck's question, that as those things start to pick up. So if you think about the dress, in the suit business, the clothing business, as people go into more occasion based dressing, we'll be ready with our main wholesale partners. So those would be where I know we're going to be able to react based on -- and we have longer lead time businesses like Home Store. We're placing those bets. So as an example, if you look at our textiles business, which is mostly private brands, we expect those great trends to continue all the way through 2021. And so we placed those bets based on what we were seeing through the second and the third quarters. And we've been -- when you think about our overall inventory levels from before, we had opportunities for better sell-throughs. We had opportunities certainly for faster inventory turns. And so even though our inventory levels are down and our sell-throughs are really way up, and particularly in our regular price sell-throughs, that's obviously helping our margins. So I think we have opportunity to do more with the inventory than we have than we've done historically. So it's not just buying into kind of lag, if you will, future markdowns and sales of a quarter and how we plan our receipts, but it's also getting better sell-throughs. And so with the markdown optimization that we have, the ability to mark goods at a store level to decrease our POS, saying that we're doing based on having more hyper localized offering through our personalization engine with customers, that's all helping us on the margin conversation. And having the liquidity in our inventories is giving us the opportunity to respond to all customer needs by going after categories that there's always stock available in virtually everything that we sell. And we can also go into new categories, new brands, new categories. And we're doing that through either VDF or we're doing that through our owned inventory. So that's our -- that's what we've been doing, and I expect all those trends to continue.

We will take our next question from Omar Saad with Evercore Partners.

I wanted to ask about the 7 million new customers. It's great that you guys are attracting a lot of new fresh faces to the franchise. Do you have a sense from where they're coming from and why they're discovering Macy's at this point in time? And then I also want -- if you could also address the existing customers. So many new customers kind of implies the existing customer base is spending a lot less year-over-year. Is this predominantly older customers, who aren't necessarily digitally active and haven't felt comfortable to go back to the stores? And what are the strategies for bringing those existing customers, historical customers back into the franchise while keeping a lot of these new entrants you've attracted?

Hey, Omar, happy to take this question. So let's just talk about the -- in the fourth quarter, the number that you're quoting, the 7 million new customers, this was a good quarter for us because this new customers that came into the brand, that was a 2% increase over what we had in 2019 levels. So it was really good to see that. So in a quarter that we were down 17% in sales, to have the customer base increase, that gives us some momentum going into the new year. So the new customers that have been coming into the brand has been steadily improving. Each quarter, fourth quarter was our best performance. And when you look at those customers, they are much more young and more diverse than what we've had historically. 4 million of those 7 million came in through digital. So obviously, with the digital engine that we have, that has opened up lots of new customers to us that are shopping more on digital or now experiencing new brands digitally. So when you think about the 4 million new customers that came in through digital, that was a 36% increase versus the previous year. So we're encouraged by those trends for new customers coming in. To your -- what you talk about on an annual basis, because when you look at the full annual profile, one of the things that we're proud of is that we had 4 million new customers come to us because of what we changed with our Star Rewards Loyalty program. We added a Bronze tier 2 years ago, and that's starting to get some real traction for us. So in 2020, we had 4 million new members join us on that. That was the 50% increase. And again, those are…

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

Maybe just, Jeff, ask you about the inventory comments. You mentioned you have a plan to ramp inventory in some of the categories. As your indicators start to improve, could you offer a few thoughts there? Are the vendors going to be holding inventory? What's making them more comfortable holding that inventory before you're comfortable? And then maybe just as you look at the shape of the year for inventory, maybe you could help us triangulate around your sales growth plan and how you think about the base case of where inventory will grow in the first half versus the second half of the year as you see it today.

Yes. Hi, Michael, so we're really -- just to restate, we're happy with where our inventory position ended the year. And so looking at the stock to sales ratio and where we stand, and just having the liquidity that's built into where we believe customer demand may or may not go, we're going to be ready with putting receipts against that. We have not seen an issue in vendors predominantly in the categories that are dormant right now. They'll have -- they do have inventory ready for us if we were to buy it. And so I -- that -- when you look at all of the kind of dress up categories, there's predominantly a couple of very strong wholesale partners that we have deep relationships with, and they're ready with us across multi-brands across those categories. So -- and those are the big engines of suits on both men's and women's as well as all the dress-up categories, the dress-up accessory categories, dress shoes, more in the bags that work with it. So those are categories where we have worked with our vendor partners on that. So we're very focused on -- when you look at the back half of the year, we had an 18% improvement in inventory productivity. That was a number that is -- we're looking at that continuing to really hold in terms of improving that productivity for the first half of '21. So as mentioned, I think that where we're most focused right now is, can we get the home inventories that we need? We've made all the adjustments that are required in our private brands, but making sure that we have that in the housewares categories. We clearly have a supply chain and have had a supply chain issue in both furniture and mattresses. The mattress is one -- is largely behind us. The furniture one, it persists. The demand is quite high. The supply, we're still having some issues with some of the categories there coming out of Vietnam and in China. So -- but we expect that all to be behind us by the end of the first quarter. So when I look at the inventory levels, we're planning those to definitely be below where our sales are going to be. We're planning to lag. We're planning for higher sell-throughs. We're planning for less markdowns. When you look at the composite of our business and our inventory on regular price inventory versus markdown, it's dramatically lower in markdown inventory. It's basically still below last year in regular price inventory, but been a much healthier position than where we are with markdowns, which is planned. So I think we're in a good position the way we're thinking about our inventory moving forward.

If I could ask one follow-up. On Vendor Direct, I know that that's been a bigger focus around the space. I think you said it was -- I think you said it was 20% of digital. Can you speak to the unit economics there? Maybe just an update on the unit economics. And is there an opportunity to increase that program as you talk to the vendors going forward?

Yes. I think the big thing -- Vendor Direct has been quite strong for us. One of the things that we're always balancing is the customer. And when you have a customer that's coming into your brand, and are you -- does that vendor going to be shipping it in exactly the time? Do they put it on the right -- is it in the right condition? So we're always watching with the customer reaction to all Vendor Direct. And we've done a very -- a good job. Our merchants have done a good job with all of our Vendor Direct partners in really improving that level of service. So we're pretty pleased with it. You get down to whether or not these orders don't come in, where it's a pure Vendor Direct order versus owned inventory, so oftentimes, that does increase split shipments, which can be a customer inconvenience. So we're always watching that. When you look at a lot of our Vendor Direct, we're looking at single category, single purchase. So when you look at a lot of the home categories where a customer will purchase that single item, it will be shipped directly from that vendor. That's been a very positive experience. When it ends up being a split between a Vendor Direct apparel order or an accessory order and they're ordering something else that's in our owned inventory, it's coming from 2 different. It's either coming from a store, it's coming from a warehouse and it's coming from the Vendor Direct warehouse. That can be an experience that we're very watchful of to ensure that it matches the customer expectation. But I do expect Vendor Direct to continue to grow in the right times. Certainly, when you look at the level of peak that we have between kind of Black Friday and Cyber Week, looking at Vendor Direct to kind of alleviate some of that -- some of those peak pressures, that's always a factor for us. But when we're going forward with a $10 billion strategy, we're looking at all elements to be able to satisfy the customer. When you look at the number of new brands we brought in, we had a number of expanded categories, the -- and just the continued number of failed searches we had to guide us to where the customers are looking for the Macy's and Bloomingdale's brands to play, we're going to look at all avenues to be able to satisfy that, and Vendor Direct is part of that engine.

We will take our next question from Dana Telsey with Telsey Advisory Group.

As you talked, Jeff, about new partnership models with vendors, can you expand on that and tell us exactly what you're meaning? And then the tourist impact, which I think was 290 basis points of a headwind in the third quarter, 210 basis points in the second, what did you see in the fourth quarter? How are you planning it for 2021? And just lastly, it sounds like you're seeing good results on Backstage. How you're planning the growth there?

Dana, so let's start first about vendors. So what we're working with is we've got a brand new Chief Merchant who basically was a Macy's veteran and did great stuff for us in the beauty and the center core worlds. So she's taken over the reins. And so it's always a great opportunity to work with our top partners. And so we're working with those. And things that we're really looking at together, because, in many cases, we share the same customer, we're looking at -- we're kind of ticking through the opportunities. First off is just being really transparent about kind of our joint profitability and what are our investment decisions against the shared customer. So we're looking at that. We're looking at what are the brand experiences, both online and on store, where their brands can come really fully to life. We look at elevated fashion products that are balanced across wearing occasions. We definitely look at data and the customer data that we have for their brands and what they know about their brands that can help us. And so what do we do with data together that can help build lifetime value? Really getting much better with our own data analytics and looking at their opportunities with that. We look at marketing and brand opportunities to deepen the brand engagement. And we clearly look at all of our gifting and our special occasion opportunities that were brands -- were a high consideration set for those occasions for our customers, and how do our brands play with that? So we look at that. Obviously, we have our base of our private brands. We look at our national brands. And then we look at our new emerging brands on that. So those are kind of the new partnerships…

We will take our next question from Steph Wissink with Jefferies.

I have a follow-up to Paul's earlier question on gross margin optimization. Could you talk a little bit about what you're assuming in your $10 billion digital target in terms of the percent that's fulfilled from stores? I think in the fourth quarter, it was around 25%. What should we think about the optimal penetration of store fulfillment in that $10 billion target?

God morning, Steph. So you're absolutely right. About 25% of our digital demand was fulfilled from stores. And that includes store fulfillment, BOPS, curbside and same-day as well. The reality is that we're keenly focused on inventory placements so that we can actually leverage our stores asset to continue to allow us to meet the expectations on cost and speed and efficiency for our customers and for our business. As you remember, earlier in the year, we had actually turned on curbside within just a couple of weeks, and we are already in our Curbside 2.0. So we believe from a convenience standpoint that the idea of continuing to leverage our stores for store fulfillment, for BOPS and curbside is an important kind of target for us. So we hope, as we think about the 25%, we want to figure out, are there ways to increase that where it makes sense? And also think about our upstream fulfillment choices as well. Because from our perspective, it's really about how the customer wants to shop us. The customer may want to have the delivery sent to his or her home or the customer may want to pick it up at a nearby store within an hour or two. And so we just want to make sure that we have the flexibility to meet that demand and respond to where the customer is taking us from a digital and an omni standpoint.

That's great. Jeff, could I put one more question out? Just on your inventory plans for the second half and as you're working with your vendors, how are you thinking about the trend cycle and the inventory composition? Are you seeing vendors presenting you with stronger trend in fashion, maybe taking a bit more risk on newness in the back half as consumers come back to stores and back to retail?

Yes. That's a good question, Steph. I think that when you think about our merchants and where we do really well is where we have great fashionable product in categories that customers want, be it trend products or trend categories or otherwise. And so -- and we found our vendors very receptive to that. We're aligned with our vendors about building AUR, by putting more value into those products. And that's our sweet spot, is really -- is pushing the edges of that. So even in our brands that are more widely distributed, in many cases, they've got great premium pieces of their lines that we really like to dive into with them, our customers expect that, and they love it when we get it right. So we found good receptivity from vendors on that subject.

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

This is Gaby Carbone on for Paul. I was wondering if you could dig a little bit deeper into the work you're doing around enhancing the digital experience. In one of your presentation, you mentioned an online business model for Bloomingdale's outlet. So I was wondering if you could share any details around that initiative.

I'm sorry. Could I -- your question was a little garbled. Could you just repeat the first part of the question? I heard the second part.

Oh, yes. I was just wondering if you can talk about the work you're doing around enhancing the digital experience.

Oh, sure. So let me take that. So obviously, when you think about what we -- let me just talk about what we've got planned for '21. So when you -- we have 2 big initiatives within digital. One is to continue to improve the functionality of the site, remove all the friction. And the other is to be much more experiential and then really look at the fullness of our ability to tell stories and brand stories. And so when you think about -- expect increased beauty enhancements that Adrian talked about earlier on the site in the first and the second quarter. We're also going to be layering in other categories like some of our lease businesses, some of the luxury businesses as well as sunglasses and eyewear. When you think about the back half of the year, a lot of it is going to be customization tools for products. Live stream shopping experiences, that's something that we've been experimenting with. Bloomingdale's has been a great pace car for us on that. That's going to continue across the Macy's brand. Really looking at kind of the adviser shopping experience is going to be an add-on that. And as you just mentioned or you asked in the second part of your question, testing and developing off-price online with Bloomingdale's as our pace car on that. We're also going to be having a total site redesign. That is a multiyear project, but the first incantation of that is going to be launched for the fourth quarter. So that's also going to be in time for the holiday. We've got other plans that are looking in the future years, but those are the ones that are on the docket in experience for 2021.

And we will take our next question from Lorraine Hutchinson with Bank of America.

I wanted to follow-up on your comments around credit, that business outperformed sales nicely in 2020. So I was a little bit surprised to see the 2021 guidance calls for a drop. Can you speak a little bit about your assumptions behind the 3% of sales guidance and where there could be upside or downside?

Hi, Lorraine, it's Adrian here. As you described, our guidance for credit card revenue is about 3% for 2021. And also, as we think about the normalization of the business, that's our guidance as well. If you think about 2021 specifically, our guidance is really reflective of an expected increase in bad debt and delinquencies. What we didn't realize from bad debt and delinquency levels in 2020 as expected will effectively show up in 2021. If you look at the presentation we posted on the website, what you see fundamentally is an elevation of credit card income as a rate of sale in 2020 relative to prior year. So we're effectively getting back to more normalized levels, but also recognizing that we do expect some degradation to happen because of bad debt and delinquencies. There's also some degradation in lower account balances driven by simply the lower sales level in 2021. We do expect in the first half of the year to be more pandemic like activity. And so that will certainly suppress some of the sales opportunities that we do see, especially, as Jeff mentioned earlier, around some of our higher tier credit card users. So that's really kind of how we're thinking about it and how we are actually projecting credit card income for this year.

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

We were curious about the opportunities ahead with price clarity and how you'll balance price clarity relative to promotions and offering good value, yet maintaining some nice merchandise margins. I would also just love your take on speed, the concept of speed, and how that may be an opportunity as you think about supply chain and/or delivery to customers. Where you see most opportunities at speed?

Good morning, Oliver. So you're absolutely right. We're focused on simplifying our pricing, promotions and discounts for our customers, so that we can really just deliver value of our product in a much clearer way. The key to this work though is that we reduce promotions that customers are just not responding to, which will allow us to reinvest in those categories that can actually help us accelerate growth. So as you look at 2020...

I think we lost Adrian. Adrian, are you back on? Yes, maybe you're garbled. Adrian, can you hear?

Yes. Sorry about that. So during the holiday, we were focused on increasing our full price sell-through and protecting our margins. And that allowed us to actually reduce our POS promotions. As we think about permanent markdown cadence and the launch of our new markdown tool, we believe that, that will enable us to have more location level markdowns at scale as we move into 2021. And that initiative alone, we believe, is about a $90 million opportunity. So as we also think about our pricing and promotion and markdowns, it's also important for us to be very conservative with our buys. So combined with being just more surgical with our pricing promotions and markdown activity, we want to make sure that we're very measured in the buys that we're making going forward. And so that will certainly help us on from that standpoint. As it relates to shipping speed, a big part of what we're focused on is just being competitive on delivery speed by providing our customers with convenient options they want to choose, whether they're shipping to home quickly or picking up from a store within a couple of hours. And so we're keenly focused on building a supply chain that will really help us handle more sales volume, increase delivery speed, reduce the cost of fulfillment and also reduce a lot of friction that may exist today in our returns process. So we're leveraging our stores to be a big part of that. We're rebuilding our network. We're investing in the technology needed to do that, with predictive analytics to help us make sure we have the product in the right amount, in the right place. So we're making a lot of progress on the speed dimension as well. But we're really following the lead of the customer and taking advantage of the customers to digital, where we feel we have a strong advantage.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.