Macy’s, Inc. (NYSE:M) Morgan Stanley Global Consumer & Retail Conference Transcript December 7, 2022 8:00 AM ET
Company Participants
Adrian Mitchell – Chief Financial Officer
Conference Call Participants
Alex Straton – Morgan Stanley
Alex Straton
Okay. Good morning, everybody. My name is Alex Straton. I am the co-lead for branded apparel, footwear and softlines retail here at Morgan Stanley. I lead this sector alongside Kimberly Greenberger. We are super happy you guys joined us for the second day of the conference and we are equally delighted to have Adrian Mitchell here with us from Macy’s, the CFO.
So before I formally introduce Adrian, I will just start with a brief overview of Macy’s itself. So as many of you likely know, Macy’s is the largest U.S. department store, generating about $24 billion in net sales last year across over 700 store locations. The company operates the Macy’s and Bloomingdale’s banners, as well as the luxury beauty retailer Bluemercury.
So as I mentioned, we are joined by Adrian Mitchell, Macy’s Chief Financial Officer, and he joined Macy’s in November of 2020 bringing vast and varied consulting and retail experience, strategic perspective and an operational track record to Macy’s leadership team.
He previously served as Managing Director and partner at Boston Consulting Group, Chief Executive Officer at Arhaus, and CFO and Interim CEO of Crate and Barrel. So thank you so much for joining us today, Adrian.
Adrian Mitchell
It is great to be with you and congratulations.
Alex Straton
Thank you.
Adrian Mitchell
Very exciting.
Alex Straton
Yes. For those of you who don’t know, I am taking over lead coverage of the space from Kimberly. She’s sadly retiring this year. So many of you may know that, but that’s the background for the contrast.
So for today we are going to start with some opening remarks from Adrian. Then we are going to move into a Q&A style format like you have seen in a number of the other sessions. We have also reserved some time for your questions. So feel free to build up that list as we go through.
So before I let Adrian kick it off, I do need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures.
So, with all of that cover a mouthful of the disclosures, Adrian, go ahead.
Adrian Mitchell
Great. Well, look, again, it’s great to be here with you and me here with everyone here today. I will start off by sharing a bit of a recap of our November 17th earnings. We have not released any new information since then and we won’t be sharing any new information today.
But at that time, we were really excited to share that we had solid topline performance, we had a strong beat to the bottom line, we had inventory that was about 4% above last year, but also 12% below 2019.
And again, as I mentioned, we won’t be able to comment on kind of how we are progressing through the holiday season. We clearly have a lot of runway left before Christmas and before we actually complete this kind of holiday peak.
But we are excited about holiday. We are ready for holiday. We are a gifting destination and there’s no better time to gift than the holiday season. So we are excited about what’s ahead for us as we think about the strategies with Polaris and just really excited to get into it.
We are in a very good position, given our inventory position, our financial health, our liquidity gives us a lot of flexibility and I am sure we will get into a little bit of that today. But great to be with you and look forward to the conversation.
Question-and-Answer Session
Q – Alex Straton
Yeah. Thank you. We will definitely dive into some of those topics later on in the conversation. But, perhaps, I will start with everyone’s favorite topic, consumer spending. So we heard from Macy’s, as well as a number of other the specialty retail and department store guys that there was definitely a slowdown in spending in mid-October that kind of bled into the early part of November. So, maybe with that in mind, how is Macy’s positioning itself for kind of this volatile consumer spending environment?
Adrian Mitchell
Yeah. For us, there are several factors that we look at, but the two that we really pay the most attention to is the pressure on the consumer, given the inflationary environment, but also the capacity to spend on discretionary items, which is the category that we are operating in.
We recognize that as you look at the late October period into early November, that weather was likely a contributing factor, it was a bit unseasonably warm at that point in time. But one other factor that I think is really important is the urgency around shopping, which is quite different this year than it was last year.
So you think about where we were last year with supply chain constraints, tremendous demand, tremendous potential and capacity to purchase, people are buying early and there was a prolonged holiday season last year.
But this year, we think it’s more pre-pandemic in terms of the shopping patterns. You would expect to have a peak around Black Friday, a peak around Cyber Monday and a peak kind of the two weeks leading up into the Christmas period.
But from our perspective, we are positioning ourselves for holiday very well. First and foremost, we are the gifting destination. So when you think about the holiday season, you think about jewelry, you think about fragrances, you think about gifts under, whether it’s under $50 or under $100, you think about toys with our collaboration with Toys”R”Us. We are really ready for the holiday season.
The second piece is that our inventory position we believe is a real strength for us. When you think about what we have done in terms of managing inventory, giving ourselves the flexibility to respond to consumer demand and trends in season, we believe that’s a differentiator and positions us well not only for this holiday season, but for the future as we maintain that advantage.
And when we think about holiday, we had 55% newness, which is 30 points higher than where we were back in 2019. So if you think about the right volume, the right mix of product, the right level of freshness, as well as the right value, we just feel really good about where we are right now.
The last thing that we would add is that, the holiday season is always competitive. But given the context we recognize that it may be higher level of competitiveness than what we have seen in previous years. But our commitment is to enter into the next year with a clean inventory position, healthy inventory controls and continue the discipline that we have built over the course of the last couple of years.
Alex Straton
That’s great. Hopefully, that quenches the need for some of the holiday outlook make sure everyone has. So maybe just pivoting slightly, I want to talk about Bloomingdale’s and Bluemercury. They have definitely been bright spots for you guys from a comp…
Adrian Mitchell
Yes. They are…
Alex Straton
… and customer expansion perspective, so maybe talk to us about what’s driving that success there, what’s different now versus maybe previously?
Adrian Mitchell
Well, what I would say just to start is, as we look at Macy’s being from off-price with backspace to luxury, as you said, with Bloomingdale’s and Bluemercury, we see the entire spectrum of the consumer across income spectrums. And what we will say is that, we have seen across different tiers that customers have responded differently with regards to the inflationary environment that we been — with that we have been in.
To your point, Bloomingdale’s and Bluemercury has been a real standout for us this year and we are very excited about the performance that we have seen. As you know, the healthy performance that they saw coming out of the third quarter versus last year and we think there’s a lot of growth opportunities ahead.
The luxury customer has been resilient. The luxury customers had more capacity to spend and they are looking for quality brands at a great value. And I think that’s a really key dimension of Bloomingdale’s and Bluemercury is high quality brands at great value.
Now if you haven’t been into a Bloomingdale’s or Bluemercury recently, we would encourage you to go in. This year, Bloomingdale’s is celebrating their 150th anniversary and they have over 300 exclusive brands. There’s a lot of energy. There’s a lot of excitement within the brand, both in the stores and the energy, certainly exudes itself online. And Bluemercury, very well positioned in beauty and a lot of growth prospects for us. So we would encourage folks to definitely get out there and check out that product.
Alex Straton
Yeah. I think the Bloomingdale’s is right up the street. So you probably don’t have to get — beg people to go there. So one other thing where we have seen some strength for Macy’s this year has been the AUR gains.
Adrian Mitchell
Yeah.
Alex Straton
I think it’s something like the eighth consecutive quarter of…
Adrian Mitchell
Correct.
Alex Straton
… strength there. So maybe talk to us about how you see AURs evolving in the future? What’s given you the opportunity to drive this result?
Adrian Mitchell
Yeah. So the AUR growth is really at the core of how we think about margin expansion for Macy’s and so it’s been a bit of a journey for us the last couple of years. So let me kind of walk you through a little bit of that journey and kind of articulate where we are right now.
The first step in the journey was to get — was to actually drive lower markdown and clearance sales for a level of sales for the brand. That’s about healthy inventory turn. That’s about less inventory by right-sizing our inventory control. So how do we reduce the volume of sales that are on a discount on promotion so that we can drive full price sell-through.
Once we kind of right-size the inventory, the second step was really around full price sell-throughs and this is about the quality of the product, right? So having good value, but also the quality of the product, the breadth of assortment and having the relevant assortment at the right time.
Once we are able to do that, we then transition into scaling our pricing signs and our pricing signs really de-average the business, right, for the consumer, where previously we would actually have major markdowns across regions at the same time, at the same level across every store.
But now what we are able to do is by store, by location, by style, we can actually drive pricing decisions based on the availability of inventory, the level of sell-throughs, when we actually end of season, so just much more sophistication. So that’s been a real key.
Now as we look at 2022, what we have seen is that we have had to make pricing — smart pricing changes around product price, given the inflation, but also what we have been able to do this year, excuse me, is we have been able to benefit from occasion based categories, which tend to have a higher margin profile.
So there’s just been a mix of things that we have been able to pursue. But what I would say is that, that all adds up to inventory discipline and me being able to make sure that our inventory is right-sized for the sales that we want to drive, the product assortment that we are carrying and just being very disciplined about pricing changes, as we are actually responding to the dynamics of the consumer.
The good news is there’s more to come. There’s more things that we are doing around the topic of inventory and so we are excited to continue to drive that topic and see the benefits across the business.
Alex Straton
Now a quick follow-up on that.
Adrian Mitchell
Yeah.
Alex Straton
On the AUR piece, how do you measure consumer kind of sensitivity to higher prices, are you seeing any of that now as you look ahead?
Adrian Mitchell
Well, we do see pretty consistently in this environment, particularly, but pretty consistently in our consumer research that customers care about buying what they want, but buying what they want with great value. So you think about a consumer that is buying a $5 item versus a $500 item, they are still looking for great value.
And so we do pricing science rates across our brands, digitally we look at what competitors are pricing. We look at what different specialty brands are pricing. So that we understand what the consumer sees when he or she goes shopping, when the consumer is out there online when they are in stores.
So just understanding how we are positioned relative to the competition for perfect match items, for like items and also where we can differentiate in terms of our private brands, those are the kinds of judgment calls we make with a combination of our pricing signs, and our planning and merchandising team.
Alex Straton
That’s great. Okay. Maybe pivoting slightly.
Adrian Mitchell
Yeah.
Alex Straton
Digital has been a top of mind kind of channel for people this year as we kind of see some giveback following the outsized spend last year.
Adrian Mitchell
Yeah.
Alex Straton
So while Macy’s is down, I think, in the last quarter, maybe 9-ish or so percent, it’s not dissimilar to what we have seen across others and it’s still above 2019 levels.
Adrian Mitchell
Yeah.
Alex Straton
So if you could just give us an overview of the strategy there, how you think about the trend and the size of that business, it would be helpful?
Adrian Mitchell
Yeah. At the core for us, we are agnostic as to where the sale shows up, right? So we are very much an omnichannel retailer, which means we are investing in both digital, as well as in stores. Now when we think about winning the customer every day, it’s about having the right number of on-mall stores with the right experience, expanding our off-mall footprint and making sure that ubiquitous across markets we have our digital platform that’s about investing in mobile, investing in the app, investing in the web experience, but also investing in omnichannel capabilities that benefit both the customer online and in-store.
We do recognize that discovery typically starts on digital, that the customer is grabbing their phone, they are jumping on their desktop to get inspiration and discover the products and brands that they want to go purchase, and the categories that they are excited about. So there is definitely a connection, but the key thing here is that we are agnostic as to where the sales comes from.
Now as you think about digital specifically, to your point, there is a market correction. What we saw at the peak of the pandemic was about 40%, 41% digital penetration and that’s coming out of Q3 down to about 30%, 31%. So there definitely is a correction there.
But we do believe that digital will continue to grow. As we get to a more normalized period, we do believe that digital is a growth vector for any retailer, and certainly, for us as well. So we are continuing to invest.
We are continuing to invest in all these different digital platform capabilities that benefits the broader ecosystem. It’s the right thing to do and we just believe that that’s how the customer is actually shopping.
Now there’s an additional capability we are very excited about, which is digital marketplace. So a couple of months ago, we launched digital marketplace for Macy’s brand. We expect to launch that for Bloomingdale’s next year and the response has been very favorable. So we are pretty excited about what we are hearing from the customer and what we are seeing, I am sure we will talk a bit more about that in this conversation.
Alex Straton
Yeah. So we will definitely touch on marketplace in a little bit. I think one thing that you have consistently harped on is the change in the approach to inventory and I think a big piece of the success has been the supply chain changes you have made. So walk us through kind of how you modernize the supply chain, what inning are you in, just a quick overview of that would be super helpful?
Adrian Mitchell
Yeah. With regards to modernizing the supply chain, it’s really about rethinking about how the supply chain serves the customer very differently in today’s environment versus, say, 10 years or 20 years ago.
And a core part of that is really operating the supply chain from an end-to-end view, which requires a combination of how the team works differently and how we apply data science to kind of the end-to-end flow of product through the system.
The way we have organized our team is really from understanding sourcing, all the way to inventory management and allocation, all the way to how we deliver the product to the customer, the channel, the market and how we actually deliver it to their home or whether they pick it up in store.
And what that has actually required is for us to really think and work very differently and something that we started very much in the pandemic. The early days of the shift was really around getting the basics around how we manage the flow.
So, for example, diversifying the countries that we source product from was a critical dimension, making sure that during the constrained period with the supply chain that we had smaller containers going to smaller ports to give ourselves flexibility, recognizing the signals around the pace of inventory through the system, we ordered things early and confirmed orders early last year.
But also working closely as a cross-functional team, our merchandising team, our planning team, our supply chain team and our finance team are tied at the hip every month, working through the signals, the anticipation, the trends in order to make sure we have good control around the inventory relative to demand.
Now as we think about where we were this year, we had to make some adjustments. When we think about where we were this year, the supply chain started to loosen. So we had higher fill rates. We are progressively watching the fill rates. So we have to really anticipate kind of what that would mean as we progress through 2022.
But strategically, as we think about where we are going in terms of the modernized supply chain, there are really three key dimensions that are critical; number one is around the analytics; number two is around fulfillment; and number three is around automation.
And so when we think about the analytics, it’s really about demand forecasting and allocation. One thing that’s really detrimental in retail is losing control of inventory and so when you think about the implications on cash flow, on margins, inventory control is pretty critical. So meshing human judgment with machine learning data science is really important.
The other piece that we have done is really around fulfillment, again, thinking end-to-end about the consumer and kind of the key thing here that we spent a lot of time thinking about is how do we increase capacity, increase speed and reduce the cost of fulfilling orders for a customer.
So as you know, we have actually retrofitted 35 of our stores, partially to have over 1 million square feet of fulfillment space that we built over the last year. That’s effectively a new mega-center that’s closer to the customer, that allows us to deliver product with speed and it’s more cost effective than where we were in previous years because of process improvements, changes that we have made to the operation.
And then the last piece is really just automation. When you think about automation in our existing fulfillment distribution centers, what we are able to do is increase capacity and expedite processing speed through automation and so we are putting automation into a lot of our existing facilities that are relatively dated, but modernizing them, so that we can actually address the needs of the customer, which is around speed and cost effectiveness as well.
So we are making really good progress. There’s still more to do. We are probably in the middle innings to your question, but we are excited about the path that we are on and our results are really showing some of the progress that we are making.
Alex Straton
So one thing you mentioned is that the supply chain has certainly loosened up throughout the year, is there any update you can give us, maybe even, perhaps, just what you said on your latest call, just so we…
Adrian Mitchell
Yeah.
Alex Straton
… understand where you guys sit in that?
Adrian Mitchell
Well, with regards to where we are, we feel that we are in a very good position. We expect to end this year’s inventory to be in a very good position entering next year. We don’t bring liability in for the next year.
As a fashion retailer, we don’t pack and hold anything like that, because freshness is really critical. Kind of the way we think about inventory is very much around making sure we have the right volume, the right composition, which is really a key this year in terms of we made — in terms of us making the shift from pandemic categories to occasion-based categories.
The right freshness, we talked a bit about that for the holiday season, but also making sure that as we think about the economics of our products in our inventory system, having the right value for our customers as well.
Alex Straton
So maybe if you could summarize how you have made inventory work so well for Macy’s this year. It’s been…
Adrian Mitchell
Yeah.
Alex Straton
… such a challenging environment in apparel more broadly. Macy’s has been a clear standout in terms of the management. If you could just boil it down for us to what were like the key things that you guys did differently.
Adrian Mitchell
Yeah.
Alex Straton
You have hit on some of them, but to really hit it home what those were?
Adrian Mitchell
Yeah. So culturally inventory is such a critical part of the ecosystem. So there’s two things I would share with you. The first is that we are buying more conservatively and we are building reserves into our buys. So that reserve gives us flexibility to be able to adjust in season. If demand picks up, we can chase. If demand slows down, we don’t bind to the reserves. So that gives us a lot of flexibility.
So it’s about the optimal level of inventory. It’s about having the right metrics like turn, and Jim Roy, which are very clear targets that we set and we track that every month. We had new reporting to create transparency, not just in terms of where we are currently, but actually where we are going.
We are forecasting out through the next season so that we have an understanding as to what the trends look like and making sure that’s really matched up with how we are thinking about demand and this is something that we review in depth every single month.
The second thing that’s different is we are fundamentally changing the way we buy. We have an integrated team. We are thinking about things end-to-end. We are literally in one room having the merchants, the planners, the supply chain team and the finance, all having discussion about where do we need to be, what trade-offs do we need to make in order to make sure that we are maximizing full price sell-through, minimizing our inventory liability and driving healthier margins.
And I think one of the kind of magic sauce for us that continues to be really key is the application of data science with human judgment. This really empowers the planners to make the appropriate inventory decisions. So that all really just adds up to the right amount of inventory, the right composition, we are able to distribute it to the customer more efficiently and in a more cost effective way.
Now as we enter next year, these disciplines will continue. Our strategy will not change. We will continue to be disciplined in the way that I described, and again, there are just some constraints around that discipline like we are not doing hack and hold.
We are making sure we are exiting aged inventory, old inventory in the season before getting into the next season and that discipline helps us quite a bit in terms of demand and having that freshness for the customer.
Alex Straton
That’s a super helpful overview. I think, maybe as you think about inventory longer term…
Adrian Mitchell
Yeah.
Alex Straton
… you have made a ton of progress, but where is there still room to run there?
Adrian Mitchell
Well, one of the things that we talk a lot about now is around inventory productivity. So, one of the things that we are excited about is marketplace, which gives us a very different way to think about inventory as an enterprise by nameplate, by category, by subcategory, by department.
So you think about the fact that we have owned inventory, we had vendor direct products, we have marketplace, marketplace where we don’t have the inventory liability, but we have the opportunity to have the sales demand, that gives us a lot of flexibility to really lean into the notion of SKU productivity.
So what do we need to carry through our supply chain versus what do we carry on a marketplace, which is actually fulfilled by our sellers. That’s a whole new generation of how we can think about inventory productivity and something we are going to begin to lean into.
Alex Straton
Now you have mentioned the marketplace initiative a number of times.
Adrian Mitchell
Yeah.
Alex Straton
Can you just give us an overview of what that is, I think, it just started in the third quarter?
Adrian Mitchell
That’s correct.
Alex Straton
It was launched. So give us an update, perhaps, on kind of the rationale behind it, the strategy going forward, any initial kind of learnings you have from it?
Adrian Mitchell
Yeah. The rationale starts with a customer. So in a very simple example, you just look at the searches that customers have on macys.com or bloomingdale.com or bluemercury.com. If you think about Macy’s specifically, there are products that we didn’t carry that customers were searching for on our website.
And so what we have been able to do in the third quarter with the launch of marketplace is we have been able to lean into categories that’s not really core to Macy’s, electronics, expansion into toys and electronics, pets, home, kids and maternity.
It gives us the opportunity to really see where there’s interest and demand, gives us the optionality to bring that into our stores if we see very, very high sell-throughs, but we are learning and testing new products, new categories without the inventory risk. Again, inventory is really key in terms of the health or not so healthy retailers.
So having that discipline on marketplace, but having one experience for the customer to see the breadth of products in a unified experience on macys.com, but not having all of that liability, it’s a huge unlock for us.
Now when you think about what we have learned in the last few months, it’s been pretty exciting. We are attracting a younger customer, we are actually having larger baskets and higher units per order for those customers that are tapping into marketplace products, 96% of marketplace customers are also tapping into broader Macy’s. So that’s a pretty significant stat and we are excited to do the same for Bloomingdale’s next year.
So we are hitting on a lot of our key objectives and as we get to a level of maturity, ending into this year going into next year, we will be able to share more kind of what the growth profile will look like. But right now, we are continuing to test and learn. We are adding categories, we are adding SKUs and the customer is responding well across the spectrum of categories that we have been pursuing.
Alex Straton
Now have you shared anything around kind of the financial implications of adding that wrinkle to the Macy’s model, whether it be — it sounds like you are still working through with the growth [Audio Gap]
Adrian Mitchell
Yeah.
Alex Straton
The impact in general.
Adrian Mitchell
We have not…
Alex Straton
We have got more of a curve ball so.
Adrian Mitchell
Yeah. No. We have not given anything specific. But if you think about how marketplace works, it’s a margin driver for us, right? So you think about the economics of an own supply chain, right? You have to have the staffing to price the product to move it through the system both in the distribution center as well as in the store.
There’s just a lot of operating expense with moving things through your own supply chain. So with their own supply chain, we have to have very productive products. High velocity products are very profitable on that side of the business.
In marketplace, you can have slow movers and it’s okay. The seller is your partner and they are the ones that are carrying the inventory, and so the fulfillment, the shipping expense, all those dimensions are carried by the seller.
So from our perspective, what we are able to then do is really have that holistic experience for the customer, but we can optimize the operating model in terms of sales growth and margin, and so that’s kind of the way it works.
So we have agreements with our sellers around kind of what our profit profile would look like for a sale on our platform, but it’s really a great opportunity for us to really monetize our traffic at macys.com. We are one of the largest digital platforms in all of retail. So how do we continue to build on that strength and build on that capability, marketplace is a great addition for us to do that.
Alex Straton
Yeah. It sounds like its super early stages.
Adrian Mitchell
Yeah.
Alex Straton
So it’s definitely an exciting opportunity. Maybe turning to capital allocation, Macy’s has done an excellent job kind of rightsizing the balance sheet, paying down debt. Talk to us about your capital allocation priorities going forward, where we can — how we can think about your leverage into the future?
Adrian Mitchell
Yeah. Absolutely. So our focus is, as you said, a healthy balance sheet and investment grade credit metrics. That’s been something we talked about two years ago, and as you have stated since the second quarter of last year, we have really executed on that.
We have well laddered maturities over the next several years. I have minimal debt due in the next four years, five years and we actually have a leverage ratio below 2 times, which is a critical metric for us to just maintain the health of this business.
But as we think about our strategy, first and foremost, is maintaining a healthy balance sheet. Liquidity matters, liquidity gives us a lot of flexibility. Controlling inventory gives us a lot of flexibility.
So that’s a really important dimension for us, because it gives us the capacity to lean into inventory when we are chasing business, but also to invest and fund the operation and invest in these kinds of initiatives like marketplace, like market by Macy’s and some of the other things that we are pursuing.
The other thing that — the other dimension of our strategy is investing in the business in ways that build capabilities. So we are a modern department store. Building a modern department store requires modern capabilities that’s relevant for the customer today.
Marketplace is new, the data fit in our pricing science is new, personalization is new. We are on the cusp of re-matching our loyalty program, which is one of the most scalable programs in retail. We are basically investing capital and building capabilities to continue to be relevant for the next generation of shopper.
And then the third piece is really making sure that we are using excess cash to return value to shareholders in the form of a dividend or buybacks. As you know, we have done buybacks last year when it was more appropriate, and so for us, returning capital back to the shareholder and driving healthy returns for our shareholders really big priority. But, fundamentally, the business has to win to drive returns.
Alex Straton
That’s a great overview. I think one question we are asking everyone at this conference, all of our companies that are participating is just around how they assess the health of the consumer, if you are seeing any signs of strain or stretching. You reviewed that Macy’s has exposure across household income level. So I think it’s particularly interesting to hear what you are seeing on that?
Adrian Mitchell
Well, the good news is that we see the customer across multiple income tiers. We have our off-price unit, which is Backstage. We have Macy’s brand. We have our luxury dimension with Bloomingdale’s and Bluemercury. So we are able to really see how the customer is behaving.
From our perspective, the consumer continues to be under pressure, right? We do recognize that inflation is abating, but the reality is that stuff is just more expensive and so we do recognize that there is pressure. And so we are watching very closely the capacity to spend on discretionary items. That’s the business we are in. We are not in grocery. We are in discretionary items.
Now what’s good for the consumer, what’s positive for the consumer right now, wages have stayed pretty resilient. It’s been pretty healthy. The mindset of the consumers that they are going to shop this holiday season. They are going to get out there. They were cooped up in the pandemic. They are kind of getting back — getting their lives back. They are going on trips or seeing family.
They have access to credit. That still remains pretty strong. We do see in the data in terms of spend on services, whether it be hotels or travel that still is pretty resilient as we approach the holiday season and people are going to see their families. So that’s definitely the positive, right? We do believe that even with all the pressures, those are positive signs.
The opportunities we see is, again, inflation is driving up essential goods. So depending on what income band you are in, your capacity to spend on discretionary maybe limited. So you may have to be more on a budget. So we are watching that pretty closely.
Interest rates are continuing to rise. That has real impact on mortgage rates on the cost of homes. So when you think about housing, that’s a real constraint and that’s typically a pretty big ticket in folk’s budget every month. Savings levels are down. Folks had a lot of money a year ago, put in their savings account. That’s certainly been dwindling. All the data that we are seeing is that’s definitely coming down.
And what we will say — what we would say is, we have seen a real challenge in terms of consumer sentiment. The consumer is concerned about kind of where things are, their ability to not just fund their essential purchases, but how much do they have left over to do other things.
So from our perspective, we have to be very disciplined around how we think that demand will materialize, because at the end of the day, it’s all about understanding consumer demand and how much we can get in terms of our fair share.
So, again, the right level of inventory, given the demand we see on the horizon being differentiated in terms of the freshness having products people actually want to buy and value matters, and value matters a lot in this environment more so than in an environment like what we experienced last year. So really important that we just understand the demand of the consumer, because that’s what all those indicators head up to.
Alex Straton
I think that’s a helpful overview heading into holiday. One thing we talked about post-earnings…
Adrian Mitchell
Yeah.
Alex Straton
…I thought you were really insightful on with how you think about January and a potential kind of consumer type of hangover. The way you talked about it…
Adrian Mitchell
Yeah.
Alex Straton
… so like I have been repeating it, because I thought it was such an interesting take, could you share that with the audience?
Adrian Mitchell
Yeah. So when we think about where we were in January of last year, there was Omicron. So there was a little bit of a depression that happened. As we think about where we are this year and we are going into next year, the question is, with all the constraints and opportunities that I described are folks going to hold back or are they going to lean and continue their purchase habits?
We do recognize that credit is available, but also credit balances are high, and so as we think also about the indicators that we are seeing on the credit side, we are monitoring the indicators of bad debt and so you are beginning to see us get to a more normalized environment.
So, look, folks are committed, have already committed to being with family for the holiday, but post-holiday when they look at the credit card bill and they think about, am I going to save, am I going to get back to savings, am I going to go spend more, am I going to use my credit card more? There’s going to be some real important choices.
So as we think about the next season into spring, we have to be thoughtful about where is the consumer and is the consumer going to continue the spending levels that we have seen in the past two years or are they going to pull back and be a bit more conservative, just given the like college of the environment that we are in. So, very important for us to think about that, especially with all that’s happening in the broader economy with employment levels and things like that.
Alex Straton
That’s great. So we have a couple of minutes left. I wanted to open it up to the audience, if there’s any questions out there before we wrap it up. So if you have a question, feel free to raise your hand. And if none, that’s fine, I can keep it going, okay. So maybe I will just — I will leave it with an open ended one. Is there anything today that we didn’t talk about or a key takeaway that you would like to leave the audience with?
Adrian Mitchell
Yeah. The one thing I would say is, we are excited about our modern department store positioning. It’s about multiple categories. It’s about serving a diverse group of customers. But it’s also about building capabilities that’s relevant for the next generation of shopper. So, all that adds up to the fact that our recent success is not an accident, so our recent success is not an accident.
When you think about our talent and our team alignment, we are executing very well on our Polaris strategy. When you think about our financial health, as you described earlier, we have really been deliberate since the second quarter of last year around paying down debt, about reinstating the dividend, returning value to shareholders. But more importantly, having a healthy business that we think has the resiliency to really weather the storm in good times and also in challenged times.
Inventory control is key, we harped on that quite a bit today, because fundamentally, you win or lose in retail based on how well you are able to control inventory and match that inventory to the demand of the customer.
Really excited about the capabilities we are building. Pricing science sets us really well the last couple of years. It continues to serve us well this holiday season given the heightened demand profile and the heightened competitive intensity that we see in the holiday season.
But also we have personalization that’s coming out. We have loyalty changes. We have marketplaces that’s continuing to grow and scale. So we are just really excited about the path that we are on and we are executing well and we have a team that’s engaged that’s excited and I think our results demonstrate that.
Alex Straton
Well, Adrian, thank you so much for joining us today and thanks everyone…
Adrian Mitchell
Thank you.
Alex Straton
… for joining this session. That’s great.
Adrian Mitchell
Thank you so much.
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