Macy’s Inc (M) Q1 2021 Earnings Call Transcript

Macy’s Inc  (NYSE: M) Q1 2021 earnings call dated May. 18, 2021.

Corporate Participants:

Mike McGuire — Head of Investor Relations

Jeff Gennette — Chairman and Chief Executive Officer

Adrian V. Mitchell — Chief Financial Officer

Analysts:

Matthew Boss — J.P. Morgan — Analyst

Lorraine Hutchinson — Bank of America — Analyst

Jay Sole — UBS — Analyst

Omar Saad — Evercore ISI — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Jenna Giannelli — Goldman Sachs — Analyst

Carla Casella — JPMorgan Securities LLC — Analyst

Tracy Kogan — Citigroup — Analyst

Gabriella Carbone — Deutsche Bank — Analyst

Garrett Greenblatt — Gordon Haskett Research Advisors — Analyst

Oliver Chen — Cowen and Company — Analyst

Corey Grady — Jefferies — Analyst

Presentation:

Operator

Good morning, and welcome to Macy’s First Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Mike McGuire, Head of Investor Relations. Please go ahead.

Mike McGuire — Head of Investor Relations

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 constraint to 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 www.macysinc.com. The presentation summarizes the information in our prepared remarks and includes some additional facts and figures. Also note that given the pandemic’s 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 New Retail Ecosystem CEO Summit Conference on Wednesday, May 26th at 8:15 AM Eastern Time. This event will be webcast 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 two hours after the conclusion of this call and it will be archived on our website for one year. Now, I’d like to turn this over to Jeff.

Jeff Gennette — Chairman and Chief Executive Officer

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 are strong. We exceeded our expectations on both top and bottom lines. Inventories were clean, merchandise 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 licensed 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 vaccinations boosted store traffic, all encouraging signs as consumers move towards a post pandemic lifestyle and start to spend more for in-person activities, travel and events. One of our most improved categories in the quarter was luggage, clearly our customer is ready to get on with life.

With these encouraging macro trends, with stronger-than-expected Q1 performance and with positive results from our Polaris strategy, we are raising our full-year 2021 guidance. We don’t see this as a short-term pop. There are pent-up demand opportunities in our categories that give us confidence for accelerated profitable growth in 2021 and beyond. We are now expecting full year 2021 sales of $21.7 billion to $22.2 billion and adjusted EPS of between $1.71 and $2.12. Adrian will go into deeper detail about the revised guidance and our financial results.

But first, I want to give an update on the enhanced Polaris strategy that we outlined on last quarter’s earnings call, which is our blueprint for transforming Macy’s. Polaris is helping us improve the broad fundamentals of our business and helping us build a stronger Macy’s for the future. It will help us deliver a seamless experience for our customers as they shop online and in store from off-price to luxury.

Looking at our customer base, we’re seeing our core customers coming back to shop and they’re spending more. We’re also accelerating customer acquisitions, bringing new customers into the Macy’s brand and re-engaging customers who’ve returned after being dormant during the height of the pandemic. Behavior is improving among our credit card Star Rewards Loyalty customers: Platinum, Gold and Silver. While active customers in this group remain down in the mid-teens versus Q1 of 2019, the average customer spent 10% more in the first quarter compared with the same period in 2019 and 11 percentage point trend improvement from the fourth quarter, and these customers are shopping more frequently with the average number of visits per customer up and the average unit retail up 7% compared with the same period in 2019.

We benefited from strong customer acquisition trends which continued into the quarter reflecting the re-engagement of our core customer base as well as the acquisition of new customers to the Macy’s brand. In the first quarter, we welcomed a total of 4.6 million new customers. This reflects a robust 23% improvement versus 2019 and shows a significant trend increase from the fourth quarter of 2020 which was up 2% from a year earlier.

Customer spend in the first quarter was up 8% versus the plus 4% in the fourth quarter of 2020. Of these new customers, 3 million are brand new to the Macy’s brand, while the remaining $1.6 million were dormant customers who have reengaged. Encouragingly, of the new customers acquired last year, 17% returned for additional purchases in this year’s first quarter.

Our digital channel is fueling much of this activity; 47% of our new customers in the first quarter made their initial transaction through digital, an increase of 74% compared to Q1 of 2019. And even more encouraging is that 82% of digital orders in the first quarter came from repeat customers, the highest penetration of repeat orders we’ve seen in a single quarter.

I’ll speak more about our digital platform in a few minutes. We’re also happy to see a 5% increase in the number of new customers coming into our stores compared to Q1 of 2019, which was largely driven by the re-engagement of our dormant customers. The Bronze loyalty category continues to be one of the best customer acquisition tools. It is our youngest and most diverse group with approximately 25% under the age of 40, and more than 50% ethnically diverse. 1.7 million new bronze members enrolled in the first quarter and our active bronze customers are on average spending upto 14% more compared with the first quarter of 2019, 4 points better than the increase we saw in the fourth quarter.

Expanding customer’s payment options is another way we are continuing to attract new customers. We launched Klarna on the Macy’s website in October and we’ve since scaled it across Macy’s, Bloomingdale’s and Bluemercury both online and in stores. With Klarna, we continue to see higher spend per visit and an increased acquisition of new younger customers, 45% are under 40. Our goal is to convert all of these new customers to Macy’s loyalty customers who return for future purchases.

For a full breakdown of our Star Rewards loyalty members and new customers, please refer to Slide 9 of our earnings presentation, which can be found on our website. Moving on to merchandising, a key tenet of the Macy’s brand and specifically of our Polaris strategy is that we are our customer’s fashion and style source. From off-price to luxury, we generated strong sales in the first quarter. We also saw higher AUR and stronger regular price sell-throughs across the bulk of our business, including beauty, home and kids. This gives us continued flexibility in our inventory position.

Through the fashion and style pillar of Polaris, we are hard at work on reconstructing our private brands and working closely with our national brands, premium brands and emerging brands. As a partner of choice for many premium brands, we are delivering more collaborative and profitable relationships with vendors who are leaning into our distribution channels, enabling us to do more business together with our shared customers.

As a fashion retailer, we are constantly adding and re-prioritizing brands in our assortment to address our customers’ style needs. As customer’s trends shift, continued flexibility in our inventory allows us to respond to these needs. Looking at what worked in the first quarter, it is best explained in three buckets. First, our products and categories that were strong during the height of the pandemic and remained strong. Second, our improvements in dormant categories that are showing life again. And third, our emerging opportunities where customers have signaled interest for us to expand our assortment.

First, many of the categories fueled by the pandemic haven’t slowed down. Our Home Store continues to deliver growth across textiles and furniture. Sleepwear remains a standout and that’s a category that is more than half private brand product. This is reflected across the full value spectrum from off-price, backstage shoppers continue to shop home, kids, designer handbags and casual apparel, led by warm weather. Customers are still demanding luxury items like fine jewelry and fragrance, and we continue to see strong performance in sunglasses and watches. At Bloomingdale’s, luxury handbags are particularly popular.

In our second bucket, we’re seeing renewed life and categories that were underperforming during the height of the pandemic. During the first quarter of 2021, Macy’s apparel saw an 8 percentage point improvement from the fourth quarter of 2020 as well as sequential improvement throughout the first quarter. As the weather warms up, and vaccines are more readily available, customers are feeling increasingly confident to get dressed up and venture outside. They’re also starting to attend events again. Accordingly, we’re seeing an improvement in dresses both special occasion like proms, mother of the bride and casual. At Bloomingdale’s we see signs of improvement in dresses and Dressy Sandals. We’re also experiencing a similar increase on the men’s side of the business in tailored clothing.

We are ready for the shift and we will continue to take a balanced approach in our assortments. Denim is another area that is improving across styles and price points. We also saw an improvement from the fourth quarter in kids driven by Easter and a return to in-person learning at many schools. Across Macy’s and Bloomingdale’s, we are continuing to see trend growth in shoes and handbags. As consumers start to travel again, they’re shopping our brands to prepare for their trips, including warm weather standout categories like sandals, swim and luggage.

And in the third bucket, categories that are starting to emerge. We have the liquidity and flexibility in our inventories to respond to customer needs in categories like toys, pet, food and wine, health and fitness either through vendor direct or our owned inventory. We’ve added hundreds of new brands and categories in apparel, home and beauty over the past year, allowing us to capture additional spend with new and existing customers.

Another strategic pillar of Polaris is delivering clear value, across products and categories. Through our pricing science and reduced promotions, we are driving stronger regular price sell-throughs and higher merchandise margins. To ensure we have products and stock in the right locations and to better meet customer’s desire for speed and convenience, we continue to update our supply chain infrastructure and network while leveraging improved data analytics capabilities in our fulfillment strategies.

The continuing supply chain disruptions across the entire retail industry are impacting our inventory levels and causing delays across some categories. We’re navigating the disruption by adjusting our freight strategies, working closely with our overseas carriers and brand partners and pushing for earlier deliveries. We are cautiously optimistic that the port delays will improve this summer.

Now, let me get a little deeper into the strong performance of our digital platforms. As we stated last quarter, we intend to generate $10 billion in sales from digital by 2023. As you recall, we began to reorient our business as a digitally-led a year ago when we started consolidating our digital team into New York.

Today, it’s fully integrated with our merchandising, marketing and supply chain teams. Collectively, they’re working to enhance the customer experience on our websites and apps by constantly improving our digital platform and launching new offerings. This work is delivering results. In the first quarter, digital outperformed our expectations. Sales were $1.7 billion, accounting for 37% of total sales, up from 24% in 2019. We saw an 11 point trend improvement from the fourth quarter in digital sales growth. It is also worth noting that mobile devices delivered approximately 60% of digital demand sales.

We’re also seeing a sequential improvement in average order value and units per transaction. As we shared in our last call, under our Polaris strategy, our digital focus is bifurcated into fundamental improvements and new differentiated experiences. As part of our fundamental improvements, we’ve re-platformed our search function and redesigned our product detail pages for a clear, more curated experience.

These actions helped us increase conversion by nearly 9% in the first quarter compared to 2019. After the successful launch of curbside pickup last year, we are now focusing on providing more specific delivery dates and launching an improved returns experience within our app. We believe our initiatives will continue to drive conversion and incremental sales across our platforms with increasing customer satisfaction.

As we further strengthen our digital platforms, we have an opportunity to increase meaningful customer experiences and explore new sales channels as a way to deepen our competitive moat in key categories and best position our brands to serve customers. Accordingly, we are enhancing our focus on differentiated experiences across three main areas: Immersive categories, expanding our shopping channels and redesigning the overall digital experience.

With immersive categories, Beauty is one category where we are doubling down. We are building out experiences that will enhance our makeup, skincare and fragrance businesses including virtual trialing. We are also allowing customers to access the experience through social media channels, including a test on Instagram. Live video shopping is an emerging channel that we are currently developing to enable our vendors and store colleagues to host live events. Our goal is to create the best of our store experiences virtually to make online shopping just as social and fun as in person. We are also beginning a multi-year redesign of the Macy’s website to modernize our brand presence and elevate our image as a source of style, guidance and inspiration. We plan to launch some of the refreshed shopping experiences on the site and app before this holiday.

We remain hyper-focused on attracting the younger customer, ensuring our product shows up in the right way for them. For example, during the first quarter, we launched a contemporary site within macys.com, a key initiative in our redesign. Targeted to women and men under 40, it highlights the latest trends, offering our younger customers inspiration from future brands and trending categories in apparel, footwear and beauty.

We’re already seeing positive response from these customers online, and we will expand this under 40 merchandising strategy. Personalization is one of the biggest digital opportunities for the Macy’s enterprise. Through personalization, we can develop a true understanding of a customer’s style. We can help our customer symbol [Phonetic] outfits and design rooms with products that inspire them. We can suggest the right sizes and colors and even customize the entire browse experience around what we know about our customers.

In February, we shared with you the successful launch of the Macy’s media network, which monetizes our digital traffic and creates a new income stream. We’ve seen immense support from vendors across categories. Leading up to Mother’s Day, the network ran 130 vendor funded advertising programs. In the first quarter alone, Macy’s media network delivered more than 300 million offsite media impressions, resulting in a traffic increase of more than $3 million to the Macy’s website.

We’re seeing strong revenue generation from this and are well on our way to achieving our 2021 goal of $60 million in revenue from the media network. We are pleased with the results to date which are helping us to create value for our customers, partners and our e-commerce business. So we have an exciting digital roadmap for 2021 and the future and we are well on the road to $10 billion by 2023.

Turning to Stores which remain a key piece of our strategy as a digitally led omnichannel retailer. Our stores outperformed across all metrics in the first quarter and continue to show signs of recovery earlier than expected with a sequential improvement in comparable sales from the fourth quarter of nearly 890 basis points. As expected, in states with stronger vaccine rollouts and in areas where restrictions have loosened, we’re seeing a corresponding increase in foot traffic.

As our customers returned to shop in stores, they are seeing cleaner, safer stores with improved layouts for easier navigation. By keeping our inventory levels lean, we’ve been able to remove the clutter to provide our customers a more streamlined shopping experience. And most of our colleagues are now trained across our categories with new technology tools to deliver a better shopping experience.

At our flagship stores, traffic is slowly improving as local customers return to shopping in store. As travel restrictions lift, we’re anticipating tourism levels to pick up gradually. As a reminder, we don’t expect international tourism to improve until 2022, which historically has been 3% to 4% of our Macy’s and Bloomingdale’s annual business. And we know based on our customer experience scores that our customers are excited to return to our stores. First quarter NPS scores improved 4 points versus 2019 and were in line with the fourth quarter. The increase in customer satisfaction is driven by the measures we’ve taken as part of Polaris to ensure stores represent the best of our brand. And we are making investments in stores to ensure they are the nexus of convenience and discovery.

Bloomingdale’s not only provides us with access to higher price points, but it is a test platform for innovation, sharing and the application of lessons learned across our brands. Bloomingdale’s comparable sales were down 7.1% compared to 2019. That was an 11 point trend improvement from the fourth quarter as we continued to see strength in luxury businesses across all categories. And Bloomingdale’s continues to have the highest net promoter scores across our brands with significant strength in stores.

Bluemercury continues to provide an important venue for us to test and learn for our beauty strategy. The brand’s comparable were down 15.4% versus 2019, but a 6 point trend improvement from the fourth quarter. Backstage, our on trend, off price nameplate continues to deliver. We’ve increased our planned store within Macy’s store openings for 2021, up 12 additional locations for a total of 47 locations this year. We opened 33 locations in the first quarter and now have 250 locations. We expect to end the year with 270. These stores within stores provide a healthy sales lift for the entire store ranging from 3% to 7%.

We are also continuing to test and expand the off-mall presence in our omni market ecosystem. At the end of this month, we’ll be opening a freestanding Backstage store in the Dallas-Fort Worth area, the first of two freestanding Backstage stores in 2021. Later this year, we will open three new off-mall market by Macy’s locations in the Atlanta and Dallas areas, and our first small-format, Bloomie’s location in the DC metro area. Together with our existing off-mall formats, these stores will allow us to test and iterate on new strategies to drive omni sales and convenience for our customers, while attracting new shoppers.

As a reminder, our ecosystem strategy is being tested in these three markets because they’re growing metropolitan areas and had a strong digital presence and store base, but also have gaps in our current store coverage. As we shared last quarter, we plan to discuss the results from these off-mall locations on a future call. Critical to our Polaris strategy is how we enable our transformation by accelerating the pace of change through a modernized, technology platform and revamped data and analytics capabilities in our performance driven operating model.

While data informs everything we do, we’re putting particular emphasis on advancing our data led initiatives in such areas as merchandising, pricing, allocation and personalization, as we see these as areas of competitive differentiation. We are seeing early wins including markdown and promotion optimization that contribute meaningfully to our strong AUR and margin performance in the first quarter.

To support these efforts, in April, we welcome Laura Miller as Macy’s new Chief Information Officer. Laura brings strong experience, driving technology transformation in consumer focused businesses and is bringing a customer-focused lens to all of our technology investment decisions. She is continuing our pre-pandemic efforts to modernize our technology foundations and boost our ability to react to customer and market shifts, regardless of channel.

Before I turn this over to Adrian, let me say that I’m very pleased with our fast pace of enhancements across our digital platforms and in our stores, where we are seeing encouraging signs of recovery and our resulting performance in the quarter. Macy’s Inc., is a healthier business coming out of the pandemic than we were going into it.

And moving towards the post pandemic future, we envision a fully integrated experience for our customers as they shop online and in store. That goes for our full product spectrum from off-price to luxury. Our team is laser-focused on key initiatives in Polaris to meet customers’ demand for curated, stylish products coupled with speed and convenience. It’s all about delivering on the omnichannel experience in which the customer journey increasingly begins in digital.

Our work isn’t done certainly, but I’m extremely proud of the entire Macy’s team for executing during this crucial recovery quarter and for staying focused on our shared mission. Everything we’re doing as a team is about transforming Macy’s Inc, into a digitally led, omnichannel retailer that wins with fashion and style. Our accomplishments in the first quarter and the resulting momentum are clear signs that we’re making significant progress in our transformation. And all the positive signals in the macro environment further fuel our confidence.

Now I will hand it over to Adrian to walk through more of the financial details.

Adrian V. Mitchell — Chief Financial Officer

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 the guidance we provided on February 23rd 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’s stimulus program as well as heightened consumer confidence resulting from the rollout of the COVID-19 vaccinations.

Importantly, the results and 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 led omnichannel 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, continuing 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 merchandise categories.

Beginning last March, the temporary closing of our store locations accelerated the ongoing change in the trajectory of our business strategy and we leaned heavily into our digital channel to support our customers. Fortunately, our digital business has already benefited from years of investment leading up to 2020, and we were prepared for this acceleration of growth in the channel.

We have continued to advance our focus on digital as our pathway to profitable growth. As Jeff shared earlier, the growth here has been significant and we continue to gain momentum as first quarter digital sales were up 32% from Q1 2019 levels. And while we were certainly benefiting from the improvement in macroeconomic environment, the strength of the business during the first quarter was also underpinned by successful execution of many of our digital improvement projects within Polaris. In store sales also benefited with owned plus licensed comp sales down 24% compared to 2019, an improvement from the decline of 33% we saw in the fourth quarter and up 35 percentage points from the first quarter of 2020.

Moving to improving gross margins. Our rate of 38.6% in the first quarter was certainly above Q1 2020, but even when we compare against first quarter 2019 and despite higher penetration of digital sales, gross margins were up 40 basis points. This represents a significant acceleration in the improvement of gross margin trends versus 2019 driven largely by improvement in merchandise margin. Here are some of these numbers. Merchandise margin was approximately 325 basis points better than Q1 2019 which we achieved largely through higher full price sell-throughs and higher full price AURs combined with a lower markdowns.

For the Macy’s brand, full price sell through improved by nearly 19% compared to Q1 of ’19 while full price AURs increased by 7%. We drove these results in three ways. First, we began fiscal 2021 in a clean inventory position. Recall that we ended fiscal 2020 with merchandise inventories down 27%. Second, we’re seeing a pay-off from the investments we’ve made in our pricing strategies with the enhanced use of data and analytics. These include, improving and expanding location level pricing and strategically shifting our markdown cadence.

With regards to location level pricing, we are exceeding our performance expectations, and we will be live and at scale in more than 500 departments by the end of Q2 compared to the handful of departments we were piloting in Q4. Our teams are embracing the advanced analytics that are empowering our decisions. Through these analytics, we have already successfully executed several meaningful improvements to our markdown algorithms this year and we have several more planned for the second quarter.

We are accruing benefits from this in real time. When we make incremental improvements in the algorithms, we realize immediate sales and margin benefits. With regards to markdown cadence, we have effectively adjusted our markdown flow both by week and by month to optimize sales and margins, which has resulted in improved store workload efficiency. These changes started in 2020, but we’ve made a meaningful improvement in markdowns by month this year versus 2019.

We have driven this by making strategic adjustments to the timing of permanent markdowns. So, that’s our take on pricing and its impact on merchandise margin. The third way, we are improving merchandise margin relates to our tests of simplified promotions for our customers essentially testing the impact of promotions that are not as deep. These are showing encouraging early results. We performed one such successful test during the quarter in men’s, in which we leveraged product elasticities driven by advanced analytics to simplify our pricing and improve the value perception with the customer.

As a result, we saw higher AURs, greater top line sales and improved gross margin. We will continue to test and iterate these types of changes to our promotions throughout the year. These efforts to improve merchandise margin, inventory management, better pricing, simplified promotions helped to offset the negative margin impact of our merchandise mix during the quarter, which was caused by higher sales penetration in lower margin merchandise categories such as housewares and toys. Partially offsetting the improvement in merchandise margin was the rising delivery expense caused by the increase in digital penetration.

In the first quarter, delivery expense accounted for 480 basis points of the drag on gross margin compared to 250 basis points in the first quarter of 2019. To address this, we are focused on making deliveries more efficient. We’re doing so by increasing our use of regional carriers, which allows us to spread volume across the carriers, improving our delivery success rate, while avoiding surcharge fees.

We’re also piloting a new transportation management system for customer delivery that improves our carrier networks and enhances customer order visibility, in turn helping us improve customer communications. We’re also partially mitigating the impact of high digital penetration by continuing to shift customers to the lower cost, store pickup channel and increasing store fulfillment of digital orders.

In the first quarter, approximately 22% of Macy’s digital sales were fulfilled in our stores. We are also acutely focused on improving our inventory allocation while using data and analytics to better place inventory at our stores and distribution centers as well as across our markets. So we will continue to become more efficient as we get smarter on allocation, which brings me to inventory productivity, the third of our five key value creation metrics. We started the year with a healthy stock to sales ratio and maintained it through the first quarter ending with balance sheet inventory down 23% compared to the first quarter of 2019 against a net sales decline of 14.5%.

As Jeff mentioned, while some of this decline is attributable to the challenges we’re experiencing in our supply chain, it is most reflective of our approach to inventory and chasing sales as opposed to winning every sale at any cost. As a result, the first quarter trailing 12-months inventory turn improved 8% compared to the same period in 2019, while the trailing six month inventory turn improved nearly 16% versus the same period in 2019.

So, we are pleased with how well we’ve been managing our inventory and are confident in our ability to continue to do so for the balance of the year.

During the quarter, we continued to reduce the amount of our business driven by markdown inventory highlighted by a 4 point improvement in sales volume driven by regular price inventory compared to both 2020 and 2019. As I mentioned earlier, we drove a nearly 19% improvement in our full price sell-throughs.

Expense management is our next value creation metric. Our disciplined efforts to reduce SG&A expenses continued to generate benefits this quarter. We spent approximately $1.7 billion on SG&A, about 17% or $364 million lower than 2019 levels. As a percent of net sales, SG&A expenses in the quarter were better than our expectations. More encouragingly at 37.1%, expenses improved by 130 basis points over the first quarter of 2019, and that’s on 14.5% lower net sales.

This improvement reflects disciplined expense control and incorporates savings achieved as a result of the Polaris initiatives. We continue to focus on enhancing productivity, particularly with in-stores. For instance, in Q1, we further expanded our in-store technology to both provide customers with a more seamless omnichannel shopping experience and boost colleague productivity.

Our stores have continued to operate in the more streamlined structure that began in mid 2020 which gives us much more flexibility to move our colleagues to where they are most needed. Stores continued to receive elevated customer experience scores when compared to 2019, all while achieving unprecedented levels of productivity. And while our initiatives over the past several quarters are certainly driving greater efficiencies and cost reductions, we were impacted this quarter by a tightening job market, which led to a higher level of open positions across the business with the accelerated sales demand within our stores, leading to even higher expense leverage.

The productivity we saw in Q1 matched levels we typically only see during the holiday season as sales soared which is not sustainable. As we fill positions to match increasing demand, the benefit will wane and as a result, we don’t expect to realize this level of productivity in future quarters this year.

I’d also like to touch on one other contributor to our results; credit card revenues, which outperformed expectations on both in actual dollar basis and as a percent of sales. We generated $159 million during the quarter, down $13 million from 2019, but ahead of what we expected.

As a percent of net sales, credit card revenues was 3.4% compared to 3.1% in 2019 trending ahead of our annual guidance of 3%. We continue to see good credit health in our customers despite the decline from last year, which is largely attributed to our lower account balances in 2021 due to the drop in sales last year.

Given that most new account openings are generated in-store, new accounts were down in the quarter compared to 2019 by approximately 33%. However, new accounts opened digitally were up 30% driven primarily by stronger approval rates, consistent with the healthier credit customer. As part of our Polaris initiatives, we have been focused on driving more engagement with our credit card and loyalty programs online, especially as our business shifts more to digital.

For the quarter, credit card penetration was 42% compared to 46.3% in the first quarter of 2019. One big factor here is the government stimulus, which has fueled consumer cash flow prompting more people to use cash and debit products for purchases. We continued to pursue personalization initiatives encouraging shoppers to use our proprietary cards by providing differentiated offers to our most loyal customers. We still have work to do here and further value to generate from this very profitable part of our business.

Now let’s look at the bottom line numbers. Given our strong performance in the key areas we just talked through, we generated positive unadjusted EBITDA in the first quarter of $454 million. Adjusted EBITDA was $473 million. This exceeded our February expectations by more than four times. In fact, our adjusted EBITDA margin of 10.1% exceeded the margin in Q1 of ’19 by 200 basis points. And when you remove gains from asset sales from both years, the first quarter 2021 margin exceeded first quarter 2019 by approximately 255 basis points, even with a lower contribution from credit card revenues.

We are extremely pleased with this trends in our EBITDA. After accounting for interest in taxes collectively, these results helped generate quarterly adjusted net income of $126 million versus $137 million in 2019. Adjusted diluted EPS for the quarter was $0.39 compared to $0.44 in 2019. This significantly exceeded our expectations and even more is that, when we exclude gains from asset sales, adjusted diluted EPS during the quarter actually exceeded Q1 2019 by $0.04.

Now, onto our fifth and final key value creation metric, debt management. On capital allocation, we continue to derisk the business by lowering the debt maturity towers for the next four years. This includes completing a Q1 issuance of $500 million in eight-year senior unsecured notes and our equally successful $500 million tender for portions of our maturities in ’22 to ’25. With these actions to deleverage the balance sheet, we believe we are well on the path to returning to investment grade metrics.

Additionally, we completed the quarter without having to draw on our $3 billion asset backed credit facility. We ended the quarter with $1.8 billion in cash. We generated approximately $403 million of free cash flow, which represents a significant increase compared to the first quarter of 2019, as well as a sizable beat to our expectations. The comparative strength versus 2019 was driven by our EBITDA growth, as well as lower payables driven by longer payment terms, lower spending levels and the extended timing of the payments.

Capital expenditures in the quarter were $99 million and we are benefiting from the more efficient use of capital as a digitally-led omnichannel retailer. This efficiency is allowing us to continue to keep capital spending below pre-COVID levels for the foreseeable future, with our priorities being investments in the digital channel, in data and analytics technology infrastructure, and in stores to leverage them for an efficient supply chain experience.

So with that walk through our financials, I now want to update our thoughts on expectations. Our achievements this quarter driven by the momentum we are seeing from our Polaris initiatives, combined with the faster than anticipated economic recovery, gives us the confidence to raise our expectations for the year. Specifically, our digital business continues to perform well. We are on track towards our goal of $10 billion in digital sales by 2023. As we continue our work to reshape how we engage with customers as an omnichannel retailer, our Polaris strategy is leading to improved revenue and profitability.

Given these improvements, we are now updating our full year 2021 guidance to reflect the increased certainty we have in scaling the Polaris initiatives as well as our cautious optimism in the resilience of the recovery. Customer satisfaction is top of mind for us and our guidance reflects our consideration not only of continuing elevated consumer demand, but also of possible further supply chain disruptions.

Here are the highlights. We expect Macy’s Inc., 2021 net sales to be between approximately $21.7 billion and $22.2 billion with digital contributing about $8 billion of sales to the total. This is a significant increase on our top line of more than $1.7 billion at the midpoint compared to our prior fiscal year guidance. We expect our gross margin rate to improve up to 8 percentage points from 2020 levels.

We remain confident in our ability to drive clear value and execute effective pricing strategies and are keenly focused on managing delivery expense. We continue to expect SG&A expense dollars to be lower than 2019 levels. Additionally, as a percent of sales, we now expect them to improve from 2019 levels by approximately 135 basis points. We expect our adjusted EBITDA margin to come in between approximately 9% and 9.5%, that’s 2 percentage points better than we previously guided. This improvement reflects a combination of updated outlook on gross margin as well as improved SG&A rate as we continue the disciplined expense control we’ve illustrated over the last year.

And we expect our adjusted diluted EPS to be between $1.71 and $2.12. That midpoint is nearly three times better than that of our prior guidance. You can refer to our slide presentation for the complete full-year guidance metrics. For the second quarter, we expect net sales to be between approximately $4.9 billion and $5 billion with adjusted diluted EPS in a range of $0.03 to $0.12. Given the strength we are forecasting in the first half of the year, we expect to generate approximately 40% of adjusted EBITDA, excluding asset sale gains in the first half, an increase from 25% we previously guided to.

However, the magnitude, speed and longevity of this current macro shopping enthusiasm remains a moving target and we expect that sales and profits could shift between quarters. This guidance represents our best estimate of how this plays out over future quarters. As a reminder, during the first quarter of 2022, we are expecting to receive an income tax refund associated with the carry back of 2020 net operating losses permitted under the CARES Act currently estimated at $520 million.

Our goal, as we look beyond 2022 is to achieve low single-digit long-term comparable owned plus licensed sales growth while maintaining high single-digit adjusted EBITDA margins. We plan to continue to monetize our real estate assets which play a key role in funding our growth initiatives. At the same time, we will continue to maximize the value of our core assets and support our communities. Our recent unveiling of our vision for our flagship Herald Square location, which leverages the underlying real estate to build a commercial office tower above this iconic store shows this plan at work. We expect our Herald Square plans to unlock a significant amount of cash to support future initiatives.

So in summary, we are confident that we are on the right path to achieve topline and bottom line sustainable growth. We are working diligently on the Polaris initiatives investing in growth areas that generate the highest returns, working to achieve a healthier capital structure and progressing towards investment grade metrics. As we take these actions, we remain keenly focused on delivering strong return to our shareholders over the long term.

With that, I’ll turn it over to the operator to begin Q&A.

Questions and Answers:

Operator

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

Matthew Boss — J.P. Morgan — Analyst

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?

Jeff Gennette — Chairman and Chief Executive Officer

Hey, Matt. 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.

Now 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 — has been strong.

And then in the emerging categories, they are — those 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 a 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 customer’s 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 with — that can sustain us through ’21 and going into ’22.

Operator

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

Lorraine Hutchinson — Bank of America — Analyst

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 merchandise margin?

Adrian V. Mitchell — Chief Financial Officer

Absolutely Lorraine, I can take that question. And it’s — 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 are 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 merchandise perspective, we are optimistic about our achievements. Thus far, where we have really leveraged predictive analytics supplied 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 apparel 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 merchandise 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.

Operator

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

Jay Sole — UBS — Analyst

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 through the rest of the 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.

Jeff Gennette — Chairman and Chief Executive Officer

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 issue 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 outparcels, 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 transits, as well as the aboveground assets around Herald Square that would be funded basically through the proceeds that we would get if we were to construct a tower, so we’re going through the Euler [Phonetic] 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 brick — our overall digital business and our omnichannel business. So that’s our path. We — 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 — 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, why don’t you finish on that, and then, I want you to take the cash question.

Adrian V. Mitchell — Chief Financial Officer

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 rightsizing of our stores, we talk a lot about the investment that we’re making in stores really around the omnichannel 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 debts 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.

Operator

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

Omar Saad — Evercore ISI — Analyst

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 made around the returning and improving platinum and gold members. I’m assuming there is 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 are back in stores? And really my line of questioning is around this idea of your core older platinum customer, who 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 is a — the potential to keep both sets, I think is interesting dynamic, I’d love you to discuss more.

Jeff Gennette — Chairman and Chief Executive Officer

Yeah, thanks, Omar. So I mean I think you set it up well, I mean 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 were 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 it’s — as we mentioned in our comments an 8 full [Phonetic] 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 how they’re coming into your brand, it’s interesting. They are — they are coming in, kind of more in stores than in digital at slightly higher rates in our overall penetration, so digital is about, it’s called 37% of our overall total, they’re coming in — 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% in 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 so, 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 — more in digital than in stores, and the core customer is returning still down double-digits, but we expect that to continue to improve with the vaccinations improving.

Operator

We will now take the next question from Dana Telsey from Telsey Group.

Dana Telsey — Telsey Advisory Group — Analyst

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.

Jeff Gennette — Chairman and Chief Executive Officer

Hi, Dana, why don’t I 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 — excuse me, we’re 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 on 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 there — as we’re starting to see signs of — if it needs some stimulus, if we need to take a mark down on it, we’re taking those much faster than ever before.

So I think that the inventory levels are certainly improving. We’re really focused on the 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 category 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 stocks 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 in recourse 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 are 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 we’ve got very strong strategies that we’re — that we’re leveraging with our manufacturing partners on getting stocks back in line in other categories. So Adrian, what don’t you take the SG&A question?

Adrian V. Mitchell — Chief Financial Officer

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 had anticipated back in February. And this is 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 are 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.

Operator

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

Jenna Giannelli — Goldman Sachs — Analyst

Hi, yeah. 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 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.

Jeff Gennette — Chairman and Chief Executive Officer

Yeah. So the new customers are — there is a lot of on-ramp categories that they have. So fragrances, women shoes, big ticket, fine jewelry, those are — 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 the — 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, if 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 really focused on.

And so the momentum on new customers and their behavior and them staying with us is really improving. And so that’s momentum that we’re going to build from.

Operator

We will now take the next question from Carla Casella from JPMorgan.

Carla Casella — JPMorgan Securities LLC — Analyst

Hi, thank you. Just — you talked a bit about the debt reduction you’ve done [Technical Issues] in the quarter, and how it has 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 look at shareholder activity versus further debt pay down?

Jeff Gennette — Chairman and Chief Executive Officer

Absolutely. I can take 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 are actually looking at receiving those payments.

Now, I think the second question you raised was how do we think about debts 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 we’ll engage with our Board on the appropriate time to think about the dividend. But as we’ve spoken to you in 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 three times leverage ratio and greater than 6.5 times interest coverage ratio.

So we’re really trying to focus 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.

Operator

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

Tracy Kogan — Citigroup — Analyst

Hey, 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.

Jeff Gennette — Chairman and Chief Executive Officer

Yeah. We don’t quote what our marketing spend is during the quarter or 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.

Tracy Kogan — Citigroup — Analyst

Thanks. And [Technical Issues] 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 omnichannel initiatives. Thanks.

Adrian V. Mitchell — Chief Financial Officer

Thank you, Tracy for your question. As we 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, which is really exciting 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.

Operator

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

Gabriella Carbone — Deutsche Bank — Analyst

Hi, good morning. This is Gabbie Carbone on for Paul. Congratulations on the strong quarter. So your off-price concept Backstage continues to deliver strong results. I believe you set a sales lift of 3% to 7%, but I was wondering if you could talk about the off-mall opportunity for Backstage and the potential digital opportunity. Thanks.

Jeff Gennette — Chairman and Chief Executive Officer

Hi, Gabbie. So as you remind — just to remind everybody that when we looked at price and how it started under the Backstage banner, started back in the fall of 2015, and it started with a full — it started with a freestanding concept. And those stores are still up and operating and are still giving us strong return, 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 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 as you mentioned is lifting the overall business of the store by 3 to 7 points. So that was — is a work in progress, we’re continuing to push that. You’ve heard me say in the past that I believe that, the 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 look at it off-mall. And so that’s what we’re going to start to experiment with. And with these new off-mall Backstage locations, we’ll 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 concepts that are off-mall and to see how they work for the ecosystem in that trade area, and for the long term or for the customer lifetime value of those customers.

And so that’s what we’re getting, and that’s what we’re starting to experiment with building out Backstage in these new markets in both Dallas as well as Atlanta. In ’21, we’ve got our sights on more stores in the future. At the same time that we’re experimenting with the off-mall format for the reg price format, which we call market by Macy’s.

On the Bloomingdale’s side, we’ve already got Freestanding off-price which is the outlet by Bloomingdale’s as well as mentioned we are adding a new — a small door concept on the full price side called Bloomie’s which is going to open in Washington DC. So we will measure all of that. I expect that the off-price piece will do quite well. And I really want to, I’m curious to see what it does for the overall ecosystem of customers who shop between off price and full price. How many additional purchases they give us, what goes on with their lifetime value. So, as mentioned, we will give everybody an update on that probably in the beginning of ’22 as we get these things up and running and we have a better data to share with everybody.

Operator

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

Garrett Greenblatt — Gordon Haskett Research Advisors — Analyst

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 the, say, first three to five years?

Jeff Gennette — Chairman and Chief Executive Officer

So on that one, Garrett, it’s — when you look at the history of Backstage in Macy’s stores, it just continues to give us positive comps year in, year out. So, the higher those comps go, the more it has the potential lift [Phonetic] in 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 margins, 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 have been that they expected to see more cannibalization than we’ve witnessed or experienced. When you have an off-price, full price customer they’re our best customers.

So we expect that it’s going to continue to grow at the rate that we’ve seen in the past five years.

Operator

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

Oliver Chen — Cowen and Company — Analyst

Hi. Thank you. Jeff, what do you see as thinking about Macy’s as the 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 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’s — what is still a lower hanging fruit on the changes that will happen there over time. Thank you.

Jeff Gennette — Chairman and Chief Executive Officer

Hey, Oliver. So let me just — 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 that 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 a — that’s just a case point of how we’re working with our vendors and really using just the power of our website 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 to do this quite well. So there’s good road maps out there and we’re making our version of it, our own that works for both Bloomingdale’s and Macy’s.

Is 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 sites 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’ve got 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.

Adrian V. Mitchell — Chief Financial Officer

Thank you, Jeff. Good morning, Oliver. You know what, there are couple of contexts 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 omnichannel 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 two to three times 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 Bob’s 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 rightsizing the number of stores. We spoke last year about closing a 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 rightsizing number is especially as we progress our strategy over time. As I mentioned earlier, we’re also as a second priority making really deliberate omnichannel 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 this potential — 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 and 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.

Operator

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

Corey Grady — Jefferies — Analyst

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 employee’s health and wellness, home decor and pet?

Jeff Gennette — Chairman and Chief Executive Officer

So I think when you look at all those categories, our big — our big focus on new and emerging categories is making sure we’ve got a right portfolio for this under 40 customer. And so, we have been hyper-focused on that with respect to toys, recognizing the millennial mom, dad [Phonetic] and we were — we had a small toy business up, 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 was opportunities for home office, there was health and fitness. When you look at the extended aisle that we’re able to do on 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 get — 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 website today, and you look at our new contemporary site look that we just launched, if 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.

Operator

There is no further questions in the queue, sir.

Jeff Gennette — Chairman and Chief Executive Officer

Okay. Thank you everybody.

Operator

[Operator Closing Remarks].