Good morning, and welcome to Macy's First Quarter 2021 Earnings Conference Call. Today's hour-long conference is being recorded. I would now like to turn the call over to Mike McGuire, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us on this conference call to discuss our first quarter 2021 results. 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. 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 Web site, macysinc.com. The presentation summarizes the information in our prepared remarks and includes some additional facts and figures. Also note that given the pandemic impact on 2020 results, most of the comparisons that we’ll speak to this morning will be versus 2019 as we feel that benchmarks our performance more appropriately. I do have one housekeeping item to share. Adrian will be participating in a fireside chat at Cowen’s New Retail Ecosystem CEO Summit Conference on Wednesday, May 26 at 8.15 am Eastern Time. This event will be webcast on our Investor Relations Web site, 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’ll 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 Web site. As a reminder, today's call is being webcast on our Web site. A replay will be available approximately two hours after the conclusion of this call and it will be archived on our Web site for one year. Now, I would like to turn this over to Jeff.

Thanks, Mike, and good morning, everyone, and thank you for joining us. Adrian and I will share details today about our first quarter financial and operational results and discuss our revised guidance for 2021. The consumer is healthy with lower debt and strong household savings. After a year of reduced activity, consumers are ready to get out, reconnect with family and friends and celebrate life. Our customers are ready to spend and demand is rising in categories we are positioned to win in. We began 2021 in a healthier position and our first quarter financials were strong. We exceeded our expectations on both top and bottom lines. Inventories were clean, merchandize margin was improving, and we were more efficient with our SG&A. Our gross margin rate increased 40 basis points and SG&A was 17% lower than the first quarter of 2019. All three of our brands, Macy's, Bloomingdale's and Bluemercury built on their fourth quarter momentum. As you saw in our press release this morning, we're comparing our first quarter of 2021 with the first quarter of 2019 to more appropriately benchmark our performance given the impact of the pandemic last year. We'll also show the momentum from last quarter of 2020 into the first quarter of the year. Starting with sales, we delivered a comparable owned plus license sales decrease of 10% versus Q1 of 2019, a trend improvement from the 17.1% decrease in the fourth quarter of 2020. Adjusted diluted EPS was $0.39, significantly outpacing our prior guidance and minus asset sale gains, exceeded Q1 of 2019. In addition to the continued execution of our Polaris strategy, the U.S. stimulus package and vaccine rollout certainly contributed to the momentum. The stimulus encouraged more customers to use cash and debit cards instead of credit, and the increased level of…

Thank you, Jeff. Good morning, everyone. Thanks for joining us this morning. As Jeff shared, we are pleased with our first quarter results, including adjusted EBITDA and adjusted net income that exceeded guidance we provided on February 23, and we have raised our outlook for the remainder of 2021. The momentum we had coming out of 2020 built throughout the first quarter and has carried into the second quarter. The solid results and our improved outlook reflect the benefits from the rapidly improving macroeconomic conditions driven by the government stimulus program, as well as heightened consumer confidence resulting from the rollout of the COVID-19 vaccinations. Importantly, the results in outlook also reflect the early returns of our enhanced Polaris strategy, and we're pleased with our progress and readouts as we take the essential actions to grow profitably as a digitally-lead, omni-channel retailer well beyond the COVID recovery. To start, I will walk through our first quarter results, focusing on our most important value creation metrics; sales, gross margin, inventory productivity, expense management, and debt management. I will then walk through our revised expectations for the remainder of the fiscal year and provide our second quarter guidance. As a reminder, given the pandemic's impact on 2020 results, most of the comparisons I speak to will be versus 2019 as we feel these benchmark our performance more appropriately. First, improving sales trend across categories. Sales totaled $4.7 billion for the first quarter. As Jeff noted, our comparable sales trend meaningfully improved from the fourth quarter, consuming the upward sales recovery that began in the second quarter of 2020. This was broadly driven by the strength in each of our brands, the continuation of new customer acquisitions, including the reengagement of dormant customers, and the sales strength across merchandize categories. Beginning last March,…

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

Great. Thanks. So maybe, Jeff, could you just elaborate on the sequential improvement in the business that you've seen as the first quarter unfolded? Maybe what have you seen now in the first couple of weeks of May so far relative to the first quarter? And just any notable changes in category leadership, maybe if you could elaborate on that you're seeing that you think is tied to recovery of the underlying consumer?

Hi, Matt. I’m happy to do that. So definitely the trend that we saw from the fourth quarter, we had momentum coming into the first quarter, and it got better each month. And that positive trend momentum continues into the second quarter, so a very strong Mother's Day. Clearly America loves their mothers. So that has been the trend of the overall business. And it's been good to see that digital has really held up quite strongly as just dramatic improvement in stores. When you look at kind of the categories, home store just continues. So that was very strong during the pandemic for us. Those trends continue to hold up really well. When you look at big ticket all the way into the soft home categories and the new categories we added in home as a result of opportunities we saw during the pandemic, all strong, all very positive signals. When you look at the center core areas, those have dramatically -- those have improved. And so when you look at the strong business that we had in fragrance and fine jewelry, those continue, had very strong Valentine's Day going into the Mother's Day timeframe. A big change has really been the apparel areas. And you really see that in some of the categories that are just indicative of customers. Their confidence level changing, wanting to get back to kind of normal activity. So when you look at dresses, so dresses had a 29 point trend shift from fourth quarter into first quarter. Swim was up 45 points. Men's clothing up 13 points. And as mentioned, you have some of these standby categories that have just been strong. And then in the emerging categories, they are -- just by us going after new brands and categories that are really working for us, those have been quite strong. So look, we expected with the stimulus that the trend increases that we got, and we definitely saw that in the spend from our credit portfolio moving more into debit platforms as well as into cash. What we didn't expect was the speed of the vaccinations and how much that affected customers buying behavior. So we believe that those are pretty indicative of where customers are going to go for the balance of this year. And as mentioned in the comments earlier, we expect that tourism will gradually return but international tourism won't return until '22 and beyond. So we don't believe this is a short-term pop. We do believe this is momentum that can sustain us through '21 and going into '22.

We will now take the next question from Lorraine Hutchinson from Bank of America.

Thanks. Good morning. I wanted to follow up on the gross margin. Clearly one of the positive surprises of the quarter, but then the guidance of up 8 points assumes that this gross margin goes back below 2019 levels for the full year. Can you just parse out how you're thinking about the next three quarters in terms of both delivery expense and merchandize margin?

Absolutely, Lorraine. I can take that question. And thank you very much for your question. So we continue to expect headwinds on gross margin from delivery expense, particularly as we look to the back half of the year in conjunction with holiday, where we actually expect our digital penetration to be at its highest point of the year. This quarter, as we mentioned earlier, we observed a margin degradation of about 250 basis points compared to Q1 of 2019. Now that being said, we're pleased with our stock to sales ratio at the end of Q1 as our inventory position was 23% compared to 2019 and down from a sales standpoint 14.5%. So we really feel good about that stock to sales ratio. We do expect to build inventory later this year for holiday, but we remain conservative on our approach as we look to chase sales in the back portion of the year and the rest of Q2. Now from a merchandize perspective, we're optimistic about our achievement. Thus far, where we have really leveraged predictive analytics applied to different parts of our operation, whether it be inventory allocation with demand forecasting, whether it be promotional efforts or personalization efforts. So in conjunction with this, we are seeing really early signs as well of a dressier power categories really beginning to return, whether it be back to school, back to work. And this also gives us a bit of encouragement as we think about the merchandize mix for the back half of the year. So I think as we’re looking at margin, we're very pleased with what we've been able to achieve in the first quarter. But we do recognize the headwinds that are ahead of us. And we also have a bit of confidence in how we're actually managing that as we go forward.

We will now take the next question from Jay Sole from UBS.

Great. Thank you so much. Jeff, asset prices are rising across many asset classes. How does that make you feel about your real estate portfolio right now? Does it increase your interest in selling some of your assets? At the same time, with the surprising influx in cash flow that you had this quarter and probably continues the rest of year, how does that change your perspective on what opportunities might become available to you, whether it’s balance sheet or other strategic opportunities to improve the business fundamentals? Thank you.

So let me start, Jay, with the real estate. And I'm going to turn it over to Adrian to finish the real estate question and also talk about the cash flow and opportunities that we see. Look, we've been hard at work in looking at our real estate for a number of years now. And when you look back and look at the asset sale gains that we've achieved over the past five years of almost 2 billion, we have many irons in the fire with respect to looking at our extensive portfolio and how best to advantage that for shareholder value. So as you probably read, we just issued an RFP about 17 of our assets that look at full developments and a chunk of those look at managing developments that would be in our excess parking lots and then looking at out parcels. So looking at opportunities for developers on that, you probably have read about what we're doing with our ambition for Herald Square and really revitalizing by making a big chunk of investment into the infrastructure of rapid transit, as well as the above ground assets around Herald Square that would be funded basically through the proceeds that we would get if we were to construct the tower. So we're going through the ULIP process on that right now. We're always looking at opportunities on every site and doing that in conjunction of looking at how real estate influences our overall digital business and our omni-channel business. So that's our path. As you can see from our guidance, we expect asset sale gains to all be in the fourth quarter. It comes in a little lumpy through the course of the year. But we have a line of sight of how we're going to achieve that. The RFP and then the Herald Square projects would be the ones that are on the radar screen. So, Adrian, what would you finish on that? And then why don’t you to take the cash question.

Absolutely. So you shared that very well, Jeff. And the only thing I would add is that we do believe that the role of stores is very important for us. So we talk a lot about the right sizing of our stores, we talk a lot about the investment that we're making in stores really around the omni-channel dimension of our investment. But as Jeff shared, we're also actively and proactively looking at right now opportunities to monetize our real estate assets as we look over the next several years. Let me pivot a little bit now to kind of the cash question that you raised, Jay. As we look at our capital structure, we're just really intensely focused on creating as much operating flexibility as we can, while supporting profitable growth. As you mentioned, our cash levels at the quarter was 1.8 billion. And that really helps us maintain that level of flexibility that I just mentioned. Now we do anticipate in 2022, as an example, that our capital expenditures will be higher than 2021 but less than what we had anticipated in terms of pre-pandemic levels. Now in order to achieve this, and how we think about using our cash, we're just very much focused on investing in growth initiatives that continue to position us well to take market share, in addition to reducing our debt and paying down that debt as debt matures. So this combination will just really give us the opportunity to continue to improve the health of our business, as we accelerate growth, as we improve margins and as we generate more cash for the business, which ultimately will increase returns for our shareholders.

We will now take the next question from Omar Saad from Evercore. Please go ahead.

Thanks for taking my question and thanks for all the great information. Good morning. I wanted to ask a follow up on the kind of comments you've made around the returning and improving Platinum and Gold members. I'm assuming there's a lot of older customers there who probably were more cautious during the pandemic. Can you give us a sense of that customer behavior? And are they returning online? Are they coming back to stores? How are they behaving when they're back in stores? And really my line of questioning is around this idea of your core older Platinum customer who a lot of retail franchises have seen kind of act more cautiously during the pandemic coming back. In the meantime, you've also gained a lot of new customers, younger customers. So there's a potential to keep both sets I think is an interesting dynamic. I'd love you to discuss more. Thanks.

Yes. Thanks, Omar. So I think you set it up well. What we're looking for is kind of a balanced customer portfolio. So let me just start with your first one, which is kind of this older core customer. Think about our Star Rewards Program, many of our customers who are Silver, Gold, Platinum, and that definitely was the customer base that was dormant relative to what they had been pre-pandemic. What I would tell you is that the count is still down. So they're still down in the mid teens, but as we mentioned in our comments, an eight full point improvement of those returning customers in the first quarter versus where we were in the fourth quarter. And the ones that are returning are spending much more. So their spend is up 10% where it was basically flat in the fourth quarter. So we expect them to continue to join us. And to your question about, hey, how they come into your brand? It's interesting. They are coming in kind of more in stores than in digital at slightly higher rates than our overall penetration. So digital is about, let’s call it 37% of our overall total. They're coming back to stores at about 65%. So that's how they are. When you look at the new customers, look, we had very strong results with new customers. It was up 23% versus the first quarter of 2019. And their spend was up 8% versus that same measurement in momentum from there, because we were up 2% of new customers in the fourth quarter, and their spend was up 4%. So very excited about the new customers. So we had about 4.6 million new customers come into the brand. And about half of those came in via digital, about 47%. And what they're spending has been quite strong. So 3 million were brand new to the brand and 1.6 million were dormant customers that we hadn't seen for over 12 months. So the new customers are spending more, they're coming in equally between digital, or more in digital than in stores and the core customer is returning. It’s still down double digits, but we expect that to continue to improve with the vaccinations improving.

We’ll now take the next question from Dana Telsey from Telsey Group.

Good morning and nice to see the progress. As you think about inventory levels and the port congestion that's out there, how do you see inventory levels coming back into the fold as we move through the year? And then you had mentioned SG&A and frankly the productivity enhancements that you've seen. But as you hire labor, that doesn't continue at the same rate. What's the balancing act of the two? And how do you see labor coming back in? And do those wage rates differ from what you had previously? Thank you.

Hi, Dana. I’m going to take inventory and then I'll throw SG&A to Adrian. So with inventory, as you can see, we're starting to build our inventory back. We were down 23% at the end of the first quarter versus being down 27% at the end of the fourth quarter. I think as you know, we've got opportunity to turn our inventory faster. We're hyper-focused as a fashion retailer of basically getting higher regular price sell-throughs, getting higher AURs, that's working. Getting our markdown complement of our overall inventory down, marking things down faster as soon as we're starting to see signs if it needs some stimulus, if we need to take a markdown on it. We're taking this much faster than ever before. So I think that the inventory levels are certainly improving. We're really focused on replenishment areas. There are categories that we're continuing to chase. So those are categories that continue to have supply chain issues. So when you look at categories like big ticket, that's been particularly strong for us. We continue to have some supply chain issues with that. There's categories like in some of the casual assortments, some of the denim categories, because we're back into a denim cycle. Those are -- some products we are chasing on that. But we're working very hard with our manufacturing partners and our own private brand suppliers to get our stock in line with where we anticipate sales. We're aggressively going after an aggressive Father's Day timeframe based on how well Mother's Day performed. We're going after a very strong back to school. And of course, with Macy's and Bloomingdale's, you can expect a really good gift strategy for holiday of '21. So we're working with all of our partners to get that. So I think we're hyper-focused on our stock to sales ratio that is really giving us full flexibility to react in season, get higher average unit retail, and get better sell-throughs of regular price. So that discipline will continue. And we're really chasing stocks in some categories, but they've got very strong strategies that we're leveraging with our manufacturing partners on getting stocks back in line in other categories. So, Adrian, why don't you take the SG&A question?

Absolutely. Good morning, Dana. With regards to the topic of wage rate in SG&A, as we looked at the first quarter, what we effectively saw was that customer demand accelerated faster than we'd anticipated back in February. And this was really driven by the improved economic environment as well as a number of initiatives that we've executed within Polaris. Now we do recognize that we have a number of open positions, particularly within our stores and our distribution network that we're currently actively working to fill and address. So we're effectively focused on bringing in great talent and retaining that talent. And what we've done recently is made a number of investments in our pay structure to achieve pay equity, make investments in terms of our store compensation. So our pay structure is locally competitive, and it takes into consideration any market and regulatory changes that we see and gives us the ability to act very quickly. But as you think about our guidance that we provided this morning, our guidance does contemplate the fulfillment of our open positions at competitive wages within the markets that we're operating in.

We will now take the next question from Jenna Giannelli from Goldman Sachs.

Hi. Thanks so much for taking my question. I'm curious. Of those new customers that you're starting to see come in and familiarize themselves with the brand, I'm curious if they're shopping more heavily in certain categories, if their profile differs from some of the legacy customers? And then similarly, where do you think you're picking them up from? Is it from other existing retailers or perhaps more so because of some of the supply rationalization that we've seen over the past year? Thanks so much.

Yes. So the new customers are -- there's a lot of on-ramp categories that they have. So fragrances, women shoes, big ticket, fine jewelry, men's clothing, those are all kind of on-ramp categories for us that a lot of these younger customers transact with us on. And when you look at -- again, these new customers are spending at much better rates than they have in the past. I think the thing that we're most proud of is that when you look at these new customers that we added in 2020, how many of them came back for a second, third or fourth purchase in the first quarter of 2021? So we had about 17% of them come back. That's been about the trend that we're seeing. So our opportunity to make sure that they're not a one and done, that they're not coming in for a single purchase. But based on their data and based on what they signaled with us and what they're shopping for, gives us an opportunity to reach back to them. So all of what we're doing with data analytics, everything that we're doing with personalization is really helping us make sure that these customers that we're moving them through our loyalty channel. And if you can get them into -- they start with us, can they become a Bronze member? They start on Klarna, did they go into the Star Rewards Program? So that's what we're very focused on. And so the momentum on new customers and their behavior and then staying with us is really improving. And so that's momentum that we're going to build from.

We’ll now take the next question from Carla Casella from JPMorgan.

Hi. Thank you. You talked a bit about the debt reduction last quarter and how it's got some tax refunds coming. I think you said third quarter. I'm just wondering your priorities for free cash flow. And at what point do you -- can you look at shareholder activity versus further debt paydown?

Absolutely. I can pick that question. So we do expect about $520 million of the refund from the CARES Act expected in the first half of 2022. So in terms of timing, that's when we're actually looking at receiving those payments. Now I think the second question you raised was how do we think about debt with regards to other things, for example, dividend and share repurchase? What I would say in terms of dividends is that we're committed to getting back to reissuing dividends at the appropriate time. Yet, before we do that, we're really targeting our ability to achieve a higher level and a sustainable level of sales, margins and cash flow. So we continue to monitor the progress here and really will engage with our Board on the appropriate time to think about the dividend. But as we've spoken to on the last earnings call, and on this earnings call, we're really targeting to get back to investment grade performance metrics. And for us, that's defined at around less than 3x leverage ratio and greater than 6.5x interest coverage ratio. So we're really kind of focused on getting back to those level of metrics, but we're certainly spending the time and looking at our options with regards to dividends, share buyback and other things, but really with a focus on really the health of the business overall.

We will now take the next question from Paul Lejuez from Citi. Please go ahead.

Hi. Thanks. It’s Tracy Kogan filling in for Paul. I was hoping you guys could talk about your marketing spend in the quarter and also where you expect it to be for the year? Thanks.

Yes, we don't quote what our marketing spend is during the quarter. We're forecasting it for the year. But obviously, the mix of our marketing has changed dramatically over the years from the mix from print into digital, what we're doing with personalization, what we're doing with affiliates. And so that is -- we feel like we've got the right mix and we feel like we've got the right approach. We're obviously going after new customers in an aggressive way for all of our expanded categories as well as making sure that we've got the right offerings, and we're communicating the right offerings to our core customer.

Thanks. And the CapEx, I know you haven't changed your expectations for this year. But wondering if your results continue to exceed your expectation, might you consider investing more maybe in stores or in omni-channel initiatives? Thanks.

Thank you, Tracy, for your question. As we've mentioned a bit earlier, our capital spend or projection for capital spend this year is about $650 million. But from the initiative standpoint, we're really focused on investing in growth initiatives. And we've talked a lot about the several Polaris initiatives that we believe will really strengthen our business in the near term, in the medium term and in the long term. Our investments, as we described, are really heavily focused on digital, supply chain, technology initiatives, including a lot of predictive analytics across our operation from inventory allocation to demand forecasting to promotional optimization and personalization. We're just really excited with the momentum that we're seeing in these initiatives. And that's really what's necessary for us to really increase our competitiveness in the marketplace. And we believe that those investments are the type of investments that really give us the highest return. So we will continue to remain flexible with our liquidity to be able to fund these high priority initiatives while in parallel, bringing ourselves to more of an investment grade profile by deleveraging the balance sheet over time.

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

Hi. Good morning. This is Gaby Carbone on for Paul. Congratulations on the strong quarter. So you're off-price content Backstage continues to deliver strong results, I believe you said a sales lift of 3% to 7%. But was wondering if you can talk about the off-mall opportunity for Backstage and the potential digital opportunity? Thanks.

Hi, Gaby. So just to remind everybody that when we looked at price and how it started under the Backstage banner, it started back in the fall of 2015 and it started with a full -- it started with a freestanding concept. Those stores are still up and operating and they're still giving us strong returns, strong comps, strong customer satisfaction. But based on just the challenges that we had in our mall-based fleet, we moved the Backstage concept into a store within a store concept. And so we built that out. And as we mentioned on the call, we'll be into about 270 locations by the end of '21. And that's what is, as you mentioned, is lifting the overall business of the store by three to seven points. So that is a work in progress. We're continuing to push that. You've heard me say in the past that I believe that Backstage -- we have the ability to put it in every one of our stores. And over time, you might see us do that. But it was time for us to get back into kind of the freestanding conversation and looking at off-mall. And so that's what we're going to start to experiment with. And these new off-mall Backstage locations will be anywhere from about 25,000 to 30,000 square feet. And they will have full omni capability across the enterprise. So if you want to buy something from the Macy's brand and you want to pick it up in one of these locations, because it's more convenient to your house, or you want to return something, you'll have full capability to do that. So our intent on this is really to kind of build out an ecosystem and to have both off-price and full price small door…

We will now take our next question from Chuck Grom from Gordon Haskett. Please go ahead.

Hi. This is actually Garrett Greenblatt on for Chuck. I was wondering -- just piggybacking off that last question, as we think about the 3% to 7% comp lift, how should we think about the maturation of this over time in let’s say first three to five years?

So, Garrett, as we look at the history of Backstage in Macy's stores, it just continues to give us positive comps year-in, year-out. So higher those comps go the more it has the potential lifting the individual stores. So we're very pleased with the strategy and how it's working. When you look at the top side comps, when you look at the gross margin, it’s in really good shape. As the business starts to scale, the logistics costs coming more in line with some of our larger competitors. And then really looking at the profitability swell as a result of that, looking at the cross behavior that goes on between the full price and off-price. I think one of the biggest concerns from vendors and analysts had been that they expected to see more cannibalization than we have witnessed or experienced. When you have an off-price, full price customer, they're our best customers. So we expected it's going to continue to grow at the rate that we've seen in the past five years.

We’ll now take the next question from Oliver Chen from Cowen & Co. Please go ahead.

Hi. Thank you. Jeff, what do you see ahead in thinking about Macy's as a platform in terms of vendor managed inventory, data piece and/or the marketplace model and how may that evolve with respect to the financial model longer term? And then Adrian, I'd just love your thoughts on store closures and anything you're seeing as this evolves with transfer rates as well as how you're thinking about the next stage in blending stores plus digital, what is still lower hanging fruit on the changes that will happen there over time? Thank you.

Hi, Oliver. So, obviously, we're working very closely with all of our key vendors as we do share a common customer and much more fluid about data sharing than ever, and ensuring that when you look at our respective assets we put against the share customer, how best are we spending it together to make sure that we're reaching the right customers, with the right products, and that we have joint profitability, visibility to that. So data sharing has been very, very high for us. When you look at the Macy's Media Network, I think that's just a case point of how we're working with our vendors, and really using just the power of our Web site to expand their brands to new customers in mutually beneficial ways. So we're in the nascent innings of that, and watching that expand over time I think is going to be quite exciting. We have a lot of our competitors that do this quite well. So there's good roadmaps out there and we're making our version of it our own that works for both Bloomingdale's and Macy's. To your question about marketplace, clearly that's something that when you're thinking about a business it's going to be 8 billion in 2021 with sights to get to 10 billion, we know we can do it. We have a good line of sight on that. Certainly, we have looked at marketplace in the past. We’re going to make sure that it works for us. And that what we would do if we were to do it, it would need to be curated, it would need to work with respect to being a style and fashion destination for our customers. So something that is under consideration. And Adrian, I'll turn over the other question to you.

Thank you, Jeff. Good morning, Oliver. There are a couple of context points as we think about the role of stores, especially in terms of driving our digital strategy. The first piece is that we recognize that the role of stores is evolving. And so we've made and are making investments to really support that omni-channel capability within the store. The other piece is that we know that our digital sales from the math that we've done is that our digital sales per capita is 2x to 3x higher in markets where we have stores today versus markets where we don't have stores. So we recognize that in terms of the integration of digital and stores in this omni ecosystem that we have to be exceptional on things like BOPS, curbside pickup and same day service. As we think about our store fleet more broadly, we're really focused on four priorities. The first is really around right sizing the number of stores. We spoke last year about closing 125 stores. We have about 60 more stores on the list to close. But this is something we're constantly looking at in a post pandemic world to really understand what that right sizing number is, especially as we progress our strategy over time. As I mentioned earlier, we're also as a second priority making really deliberate omni-channel investments in our stores, including how we think about our supply chain end to end. So that's a pretty exciting dimension for us. We are testing as a third priority the potential productivity and profitability of the smaller format that Jeff mentioned that we're focused on in Dallas as well as in the Atlanta markets, and really trying to understand the level of productivity, the level of profitability, and how it allows us to gain market share in a market as we think about the full breadth of our assets from off-price to luxury and our off-mall as well as on-mall assets. And then the last piece that we're very focused on is really around monetizing the real estate assets wherever we have the opportunity. So getting this mix of on-mall and off-mall right, thinking about the role of real estate monetization in this full ecosystem around markets is an important dimension for us. But that's how we're thinking about all of these activities as it relates to supporting our digitally-led strategy.

We will now take our next question from Stephanie Wissink from Jefferies. Please go ahead.

Hi. This is Corey Grady on for Steph. I wanted to ask about your emerging categories. Can you share more about your plans and opportunity in toys, health, wellness, home décor and pet?

So I think when you look at all those categories, our big focus on new and emerging categories is making sure we've got the right portfolio for this under 40 customer. And so we have been hyper-focused on that with respect to toys, recognizing the millennial mom. We had a small toy business and huge market share opportunities with respect to that. And then just kind of expanding when you look at hair categories. When you look at our beauty business and the extent of it and you look at hair and nail, you look at food and gourmet has opened up new customers for us. Clearly, during the pandemic, there were opportunities for home office, there was health and fitness. When you look at the extended dial that we're able to do through VDF, that's where you've seen a lot of the extension of those categories, really responding to the new customer and really responding to what customers have signaled for us, where failed searches are, how we've been able to add that? So we're going to -- we would continue to do that through the course of 2021 with a real focus on the under 40 customer. And we're really looking at how we attract them. If you look at our Web site today and you look at our new contemporary site let that we just launched, you look at what we're doing and starting in the beauty categories and if you go in there and you start to see some of the new brands that we're adding, that's our objective is really how do we be more attractive to the under 40 customer. We're starting on digital. And then by the end of the year, you're going to see a curated level of products and services that will be in a number of our stores. That will be the physical expression of the under 40 strategy in our brick and mortar. I think, operator, we might have time for one more question if there is one.

There's no further questions in the queue, sir.

Okay. Thank you, everybody.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.