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Macy’s Inc. (M) Q3 2020 Earnings Call Transcript

M Earnings Call - Final Transcript

Macy’s Inc. (NYSE: M) Q3 2020 earnings call dated Nov. 19, 2020

Corporate Participants:

Mike McGuire — Head of Investor Relations

Jeff Gennette — Chairman & Chief Executive Officer

Adrian V. Mitchell — Chief Financial Officer

Analysts:

Matthew Boss — J.P. Morgan — Analyst

Tracy Kogan — Citigroup — Analyst

Robert Drbul — Guggenheim — Analyst

Paul Trussell — Deutsche Bank — Analyst

William Reuter — Bank of America Merrill Lynch — Analyst

Omar Saad — Evercore ISI — Analyst

Carla Casella — J.P. Morgan — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Oliver Chen — Cowen and Company — Analyst

Alexandra Walvis — Goldman Sachs — Analyst

Garrett Greenblatt — Gordon Haskett — Analyst

Dana Telsey — Telsey Group — Analyst

Jay Sole — UBS — Analyst

Presentation:

Operator

Good morning, and welcome to Macy’s, Inc. Third Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Mike McGuire, Head of Investor Relations. Please go ahead, sir.

Mike McGuire — Head of Investor Relations

Thank you, operator. Good morning, everyone, and thanks for joining us on this conference call to discuss our third quarter 2020 results. With me on the call today are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO. Jeff and Adrian has several prepared remarks to share, after which we will host the question-and-answer session. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one. In addition to this call and our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com. The presentation summarizes the information in our prepared remarks and include some additional facts and figures.

I do have two housekeeping items to share. First, Jeff and Adrian will be participating in a fireside chat at the Morgan Stanley Virtual Global Consumer and Retail Conference on Tuesday December 1 at 8 o’clock AM Eastern Time. This event will be webcast on our Investor Relations website. So please mark your calendars for that. Second, we will not be providing a holiday sales update in January. We’ll be discussing our holiday performance as well as our 2021 outlook during our fourth quarter conference call on February 23.

Keep in mind that all forward-looking statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in the company’s filings with the Securities and Exchange Commission.

In discussing the results of our operations, we will be providing 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 located 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 & Chief Executive Officer

Thanks, Mark, and good morning, everyone, and thank you for joining us. With me today is Adrian Mitchell who joined Macy’s, Inc. as Chief Financial Officer on November 2. I’m thrilled to have Adrian onboard, and you will hear from him in a few minutes.

As you have seen in the press release this morning, we delivered a solid third quarter. Comparable sales declined approximately 21% on an owned basis and approximately 20% on an owned plus licensed basis. Operating results came in somewhat better than we had anticipated based on cost management, strong execution by the team and an early start of the holiday shopping. We also returned to positive EBITDA a quarter ahead of our plans and didn’t draw on our asset-based facility. So we entered the fourth quarter in a stronger than expected financial position.

I want to thank every colleague on the Macy’s Bloomingdale’s and Bluemercury teams for their hard work, not only in the third quarter, but also throughout the pandemic. Their dedication to our customers has been a tremendous asset. And because of them, we are well positioned to deliver a successful holiday 2020. I also want to thank our market brands for their partnership as we work together to serve our shared customer.

This morning, I will start by providing some high level commentary on the third quarter. Then I’ll hand it over to Adrian, who will take you through the quarter in more detail. I will then share some insights into holiday 2020 before we open the line for your questions. We gave an update on the Polaris strategy last quarter, so we won’t go into the details today. But to sum it up, the Polaris strategy continues our work to strengthen customer relationships, hones our merchandise strategy to focus on categories that matter most to customers today, aggressively accelerates digital, optimizes all aspects of our network to deliver the best customer omnichannel experience and delivers profitable growth on a re-wired cost base.

I want to take a few minutes now to dig into some of the contributors to our third quarter performance; our customer franchise, category performance and our omni approach to business recovery. Starting with our customer franchise. We continue to make progress with customer acquisition and retention. As an update on the 4 million new customers that came into macys.com in the second quarter, we are seeing good retention rates with many having made repeat online shopping visits. We’re targeting these customers with personalized messages and intend to keep them engaged throughout the holiday season. We continue to see a good flow of new customers through our digital business; customers who are younger and more diverse than our typical core customer.

Our Star Rewards loyalty program continues to attract new customers to the brand, while strengthening our relationship with existing customers. In the third quarter, more than 1 million new customers signed up for the Bronze program, our tender-neutral tier, taking our Bronze enrollment to 9 million members since we launched this option. Total loyalty penetration improved sequentially to more than 56% in the quarter.

Next, turning to category performance. I’m encouraged that all four of our Polaris-focused categories; fine jewelry, beauty, furniture and backstage performed very well in the quarter and outpaced the business. In addition, we’re continuing to emphasize the categories our customers increasingly value as they spend more time at home, such as textiles, housewares and home entertainment and decor, all had double-digit sales increases in the quarter.

We had strong performance at both ends of the value spectrum. The luxury trend continues across Macy’s and Bloomingdale’s as customers shift their spending from experiences to products. In off-price, our new and existing backstage store within store locations performed well. And while overall apparel is still down, we have been able to shift effectively into casual and active categories where the customer is shopping.

And last, our response to COVID-19 has heightened our focus on the omni customer. We are redefining the experience our customers are looking for today and are improving all legs of the omni experience; stores, digital and fulfillment so our customers can shop when, where and how they want, safely and without friction.

In the third quarter, our customers continue to respond well to our expanded fulfillment options, allowing them to shop safely and conveniently in store or online. Our same-day delivery partnership with DoorDash is fully rolled out across Macy’s and Bloomingdale’s stores. DoorDash gives customers another convenient way to shop from the comfort of their home and get their deliveries quickly. This will be especially important as we get closer to the holidays and customers have a more urgent need for their purchases. It provides a fast reliable way to deliver gifts to last minute shoppers.

And curbside pickup. We launched Curbside Quickly last spring to meet immediate customer need at the onset of COVID-19. We recently completed a significant upgrade to our curbside offering, which includes an improved digital check-in experience and a new colleague app to quickly process curbside orders. Customers are responding well to the enhanced experience.

Digital continues to thrive and is a healthy component of our business. We’re pleased with the performance across all metrics, including traffic, search and conversion. Importantly, our growing digital business continues to contribute to profitability, and we’re making constant improvements to our mobile and dot-com experience. We launched our partnership with Klarna, our buy-now-pay-later partner in early October, and we’re especially excited about this relationship because their customer tends to skew younger.

On the store side, I’m encouraged that our stores are showing a gradual steady recovery across all three brands; Macy’s, Bloomingdale’s and Bluemercury. I’m proud that much of our enhanced productivity is driven by our colleagues who are showing improvements in conversion, service and customer satisfaction. We’re seeing that when customers makes the decision to come to our stores, they are doing so with the intention to purchase rather than browse and discover, and our colleagues are ready to serve them.

We will also see any positive impact from improved receipt flow, and we will continue to watch the resurgence of COVID-19 closely, but have shown that we can operate responsibly and safely. Customers continue to respond well to our enhanced health and safety measures in stores. And safety and cleanliness are consistently our top NPS scores.

So now I’m pleased to introduce you to Adrian Mitchell. Adrian joins us from the Boston Consulting Group, where he was Managing Director and partner in the Digital BCG and Consumer Practices. He has worked with many retail brands, including REI, Arhaus, Crate and Barrel and Target. While Adrian has deep financial and operational experience, he has also held leadership roles in strategy, innovation and transformation. So he really adds depth to our bench. So Adrian, over to you.

Adrian V. Mitchell — Chief Financial Officer

Thank you, Jeff. It is a pleasure to be with you all this morning. In the moments we have together today, I’d like to share with you why I joined Macy’s, our focus looking forward and my reflections on our Q3 performance and the outlook for Q4.

So why did I join Macy’s? The first reason is that Macy’s is an iconic brand. Our brand has a long 162-year history of providing delightful and innovative shopping experiences for our customers, and I believe that Macy’s will continue to do this for years to come. And what really excites me is the opportunity I now have to be a part of the reinvention of this iconic brand. Like many retailers, we have been impacted by the acceleration of digital sales and the shifting customer expectations, particularly among our younger customers. I joined Macy’s at a time where the company is reinvigorating our focus on innovation in order to better address this evolving marketplace and ultimately strengthen our business.

The company’s Polaris strategy, introduced earlier this year, is a compelling multi-year journey that aims to drive both top and bottom line growth, and I wanted the opportunity to be a key contributor to the success of this journey. I’ve been impressed with what Macy’s has accomplished during the pandemic; moving with speed and agility to respond to the cost of a changing market as we work to redefine the role of the department store. I’m confident given what I’ve learned in recent weeks and months that we have the energy, the focus and the capacity to completely transform our business into the modern omnichannel retailer that it needs to be to successfully compete.

The other reason I joined Macy’s was because of the great quality of our team. Our colleagues are talented, focused and excited about the journey that’s ahead of us, and they are very committed to the success of our iconic business. So I’m thrilled to be a part of this experienced team. I’m excited to contribute to the work of re-imagining how to best serve our customers. Through our Polaris strategy, we will continue to positively contribute to our communities as a thriving and relevant retail business for years to come.

Now, let me be clear on our focus looking forward. We are laser focused on delivering strong and sustainable returns for our investors over the long-term. At this moment in our history, we have the unique opportunity and the capacity to invest in transforming and modernizing our business. As we said when we introduced the Polaris strategy back in February, we will create shareholder value by returning Macy’s to long-term sustainable growth and clearly tracking our progress with well defined KPIs, milestones and the line incentives.

In my former roles, I’d led work with a wide variety of retailers, helping them solve their toughest challenges in an increasingly competitive and disruptive environment. As I reflect on the strategic, operational and financial experiences I’ve gained through this work, being able to achieve consistent and sustainable growth in a more digital and analytically-driven world is paramount. At the same time, maintaining a healthy balance sheet, generating strong free cash flow and being disciplined stewards of capital, prudently deployed in projects that generate strong returns remain our priorities. And we are fortunate to have the capacity to invest in our customer value proposition, our omnichannel shopping experiences and are supporting infrastructure to once again take on the mantel of the leading retailer. As Jeff has shared, we continued to evolve our Polaris strategy to be competitive in the new retail normal in the years ahead, and we will share with you our progress as we move forward.

Now, let me turn to our performance. We are pleased with our Q3 results and are cautiously optimistic about the outlook for Q4. However, we remain conservative given the uncertainty and recent surges in COVID cases across the U.S. As Jeff mentioned, we are pleased to have delivered not only positive adjusted EBITDA in the third quarter, but also positive unadjusted EBITDA. Given the strong performance throughout the income statement, especially SG&A, our teams were able to accomplish this a quarter earlier than we had originally expected, generating $159 million in adjusted EBITDA and $113 million in unadjusted EBITDA in the quarter.

We know we have a lot of work in front of us to grow profitably, but this is a significant achievement given what the business has endured during the pandemic. Notably, given this overperformance in cash generation and our continued disciplined inventory management, we finished the quarter without drawing from our asset-backed credit facility as we had previously anticipated. This is also a significant achievement and underscores our ample liquidity and financial flexibility. And while unknowns remain through the end of the year, we currently anticipate having to draw very little, if any, from the facility as we head into the first quarter of next year.

Third quarter sales finished better than what we had anticipated a few months ago. The industry experienced earlier than normal holiday demand in October, as did Macy’s, and this benefited our top-line. Combined with a shift in the start of our friends and family event from November into October, these helped to pull some sales forward into Q3. Overall, we delivered omnichannel sales of approximately $4 billion, a decline of 20.2% on an owned plus licensed comparable basis. Remember that we were expecting omnichannel comps of down low-to-mid-20s for the entire fall season, so we delivered sales in the quarter in line with those expectations, albeit at the better end.

Our digital business as an omnichannel retailer remained strong in the quarter, growing by approximately 27%. As expected, with all the stores opened during the quarter, digital penetration moderated to about 38%, up significantly from last year by more than 14 percentage points. Store sales decline improved to about 36%, slightly better than expected, again, largely due to the pull forward of sales.

Omnichannel gross margin was 35.6%, down 440 basis points from last year in line with our expectations for the fall season and up significantly from the second quarter’s 23.6% rate. Retail margins benefited from disciplined inventory management, better sell through of both full price and clearance merchandise and lower clearance markdowns. Importantly, we ended the quarter with balance sheet inventory down 29% year-over-year, and we again are entering the next quarter with clean inventory and an appropriate stock to sales ratio, including the fresh fashion and gift giving to support the holiday time period.

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We recorded approximately $1.7 billion of SG&A expense, an improvement of 22% or $476 million from last year’s third quarter, which is better than what we had expected. This was driven largely by strict expense management. As a percent of sales, SG&A expenses deteriorated by about 70 basis points in the quarter from last year to 43.3%. Sales deleverage was the major driver of this increase, offset by the reset of our cost base in February and our restructuring in July. Overall, this quarter will continue to be very disciplined with our variable costs, and we expect that to continue through the end of the year.

We earned credit card revenue in the third quarter of $195 million, up $12 million from last year and ahead of expectations. Our profit sharing from our Citibank arrangements has performed better than anticipated in recent months as customers are evolving and maintaining their credit spend with us. Potentially influenced by the broader macro observations in savings rate, industry COVID relief efforts and figuring new customer acquisitions in the near-term, we do not see an increase into delinquency at this time. Our proprietary credit card penetration was down 330 basis points in the quarter at 45% this year compared to 48.3% last year. That is a sizable improvement from the second quarter, which was down 590 basis points to its prior year period.

We incurred net interest expense of $80 million, an increase of $32 million to the prior year period, driven by the additional long-term secured debt we took on during the second quarter. We recorded a tax benefit of $126 million, representing an effective tax rate of 58.1%. This high rate reflects the impact of the carry-back of net operating losses as permitted under the CARES Act. In total, we saw $60 million of adjusted net loss in the quarter versus adjusted net income of $21 million last year. Adjusted EPS was a loss of $0.19 in the quarter compared to adjusted EPS income of $0.07 last year. Notably, we again finished the quarter in a strong liquidity position with approximately $1.6 billion in cash and approximately $3 billion of untapped capacity in the new asset-backed credit facility.

As you’ll recall, we withdrew our 2020 guidance in March. Given that there still remain many unknown and uncontrollable factors impacting consumer behavior and the retail landscape, we are not providing new guidance at this time. However, as we have done in the last couple of calls, I would like to update you on our current thinking as it relates to the rest of the year.

We continue to model various scenarios for the last quarter of the year, and ultimately, we continue to take a conservative approach to our forecasting. While we closed out the third quarter strong, our performance was within our overall expectations for the fall. COVID is surging again across the country, and that continues to impede our recovery and international tourism and urban areas. And the supply chains have opened up, yet bottlenecks remain. Many of the expectations we’ve laid out on our last call remain the same, and you can view those within the slide presentation posted on our website.

Now to briefly summarize, we expect total company comps to be down in the low-to-mid-20s range for the back half of the year. Gross margin expectations have not changed. And we continue to expect third quarter margins to be slightly stronger than margins in the fourth quarter due to the digital growth and holiday surcharges from our shipping partners. We continue to expect SG&A as a percent of sales to be low-to-mid single-digit percentage points higher than last year for the fall.

Our outlook on credit revenues has improved, thanks to the reasons I mentioned earlier. However, unlike what we earned in the third quarter, we expect them to be down year-over-year in the fourth quarter. However, as a percent of sales, we expect to see a modest improvement from what we generated in the fourth quarter of 2019.

Finally, we continue to expect our capex spend this year of about $450 million. Overall, we are pleased with the performance in the third quarter. And I’m particularly happy with the solid progress the business is making as it comes back. We continue to plan the year conservatively, but have great confidence in our ability to execute well during the holiday season. I’m excited to be joining the Macy’s team at this critical point in our company’s history. And I look forward to meeting and talking with everyone in the weeks and the months ahead.

With that, I’ll turn it back over to Jeff.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Adrian. So looking to holiday 2020, we know this season is different as our customers continue to spend more time at home. But the holidays are when Macy’s shines, and this year will be no exception. We’re already celebrating with local community events around the country. For the holidays, America comes to Macy’s and Bloomingdale’s and for gifting. And we have the right gifting assortment from gifts under to luxury, bringing the best national and private brands to our customers, 50% of the content is new.

Our expanded fulfillment options, including curbside pickup and same-day delivery allow customers to shop safely and without friction in store or online and to shop right up until December 24. We’ve elongated events and put an increased emphasis on digital to even out the flow of traffic in our stores through the holiday season to maintain health and safety for our customers and colleagues. [Indecipherable] are dressed for the holidays and our digital platforms are ready to go. Our teams are 100% focused on executing holiday and we are confident in our plans. So like all of 2020, we know unexpected challenges and opportunities will come our way and our team is prepared to tackle them.

So looking to the future, while this has been an extraordinarily disruptive year, we feel good about the health of our core business. And there are other things that we learned about our business in 2020 that gives us confidence in the future. We’ve successfully managed the channel shift to address customer demand for a true omnichannel experience. We have new customers coming into the brand via digital and loyal customers that continue to be attached to the brand. We’ve shown that we can flex categories and price points as customer needs and demands change. We are early enough in our supply chain redesign that we were able to adjust our plans for a more omni future.

We’ve been incredibly focused on how we manage our cash. We have market share to gain and an aggressive and intentional plan to go after it. And our teams are more agile than ever. They listen to our customers, follow the data and pivot quickly. And importantly, we have a flexible business model that enables us to remain relevant to our customers. We can adjust formats, channels, categories, brands, services and price points to meet our customers wherever and however they’re shopping.

In closing, we’re pleased with our third quarter results, particularly as we got back to positive EBITDA a quarter earlier than anticipated. We’re watching the resurgence of COVID-19 closely. Despite the uncertainty, we’re ready for holiday. And we’re confident in our future and our ability to invest in becoming a healthier business based on how our customers are shopping now and in the future.

And with that, we’re going to open it up for questions.

Mike McGuire — Head of Investor Relations

Before we go to Q&A, I want to remind everyone that there are time constraints given multiple industry calls this morning. So please limit your questions to one, so we can get to as many people as possible. Thank you. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Matthew Boss of J.P. Morgan. Please go ahead.

Matthew Boss — J.P. Morgan — Analyst

Great, thanks. So Jeff relative to comps down low-20s this quarter, near-term and based on what you’ve seen in November, is it best to think about similar performance in the fourth quarter? And then the second part of my question is larger picture and looking to 2021. What gives you confidence that post the vaccine when demand returns to your core categories that Macy’s will be the primary destination and that you’ll be able to regain your overall share?

Jeff Gennette — Chairman & Chief Executive Officer

Hey, Matt. So let’s just first talk about the fourth quarter question. I do believe that the trend line that we showed in the third quarter is safe to pull that into the fourth quarter. That’s assuming no significant regional or national shutdowns in stores. So — and our digital business, we expect to continue to grow at a very aggressive rate based on all of our plans and I have a lot of confidence in that. That will obviously continue to grow even faster if depending on what any shutdowns might look like in stores. So we are taking a conservative view to the fourth quarter, but I really feel good about where we stand right now.

As it relates to vaccination, a safe scalable vaccination is obviously on everybody’s mind. And what I’d tell you is that there is a — how do people return to their old normal, if you will, the work that they did as well as occasion-based activity, so that’s weddings, proms, just going out. And when you look at those particular categories, I think the customers are going to be — there is going to be a surge of demand when that happens. And there is going to be customers that have been wearing the same clothes, have been lounging in active and in casual sportswear and they’re going to want to dress up. That fits squarely in our strengths.

I’m very pleased with the way that we’ve controlled our inventory. And we’ve gotten our inventories down in those dressier categories that are very appropriate to the demand we’re seeing right now, but we will ramp that up very quickly with all of our partners and our private brands as the vaccination becomes more apparent. So I feel very strongly that we will reap the benefit of that when we do go back to a new normal, if you will.

Matthew Boss — J.P. Morgan — Analyst

That’s great. Hopefully sooner than later. Best of luck.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Matt.

Operator

Thank you. We now move to Paul Lejuez of Citigroup. Please go ahead.

Tracy Kogan — Citigroup — Analyst

Thanks. It’s Tracy Kogan filling in for Paul. I was wondering if you guys could talk about the private versus national brand performance in the quarter. And then how your private brand performance and penetration compares in the digital channel versus in stores. Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

Yeah. Let me take that. So clearly, when you look at the quarter and you look at the composition of our business, private brands played a significant role in those categories that are trending. And so when you look at the home categories, our home business was across all of home furnishings as well as big ticket was up double-digits in the quarter and private brand was a big piece of that, particularly in textiles. When you look at the big ticket, much of what we do there is exclusive content that in effect is made exclusively for us. So that part is private brand played a big role.

As you get into the apparel categories, definitely when you look at the active, you look at sleepwear, you look at those categories with private brand being a big component of them, those does did very well. And when you look at the other categories in the sportswear areas, kids performed better than women’s and men’s. And men’s is, when you look at the private brand that was a better penetration than we were historically. And in the women’s area, that is our most depressed overall category, private brand is a big piece of that. But what I’m really excited about is the work that the team has done on reinventing these private brands, which we’ve talked about back in February with the Polaris strategy. All that content is now in stores and those are getting excellent sell throughs even with business that has been challenged.

So as Adrian mentioned in his message, in his comments, regular price sell through is up sharply. So when you look at the new content that customers are voting on, which includes many of our private brands across all categories, I’m really liking the signals that we’re seeing.

Tracy Kogan — Citigroup — Analyst

Great. Thank you.

Operator

Thank you. We now move to Bob Drbul of Guggenheim. Please go ahead.

Robert Drbul — Guggenheim — Analyst

Hi. Good morning. Just couple of questions on the 4 million new customers. Can you give us a little bit more color in terms of, I mean the characteristics and dynamics of who you’re tracking in? And I’m just curious if you could talk a little bit about sort of backstage and how that’s performing and the inventory procurement in the full backstage a little bit? Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

So Bob, let me — first on the 4 million new customers that came in in the second quarter, they were much younger and more diverse than what we’re seeing in our core business. And so the thing that we were excited about was their behavior in the third quarter. So a nice chunk of those have already gone on to a second purchase, mostly online, but a number of them have also come into our stores. We’ve also seen that trend of new customers, again, more diverse and younger. 3 million new customers came in during the third quarter. And so really our full focus is ensuring that these customers are seeded with the right content to get another purchase.

We’re trying to get them into our loyalty programs. A number of them have converted into the Star Rewards program. Most of them are coming into the Bronze tier, which is gender neutral, and it gives us the opportunity to attract them very carefully, look at the cohorts that they might behave like and look at their signals and then feed them personalized content based on that. So we’re — with everything that we have been talking about in terms of personalization and our ambitions with customer acquisition, this was the 7 million new customers that have come into the brand has been a great opportunity for us to make — to build on their lifetime value with us.

So as to backstage, to your other question, backstage performed very well in the quarter both at Bloomingdale’s and Bloomingdale’s outlet as well as Macy’s backstage. And it’s basically about twice the trend of what we’re seeing in the balance of the store. The same categories that you’re seeing in the store, comp stores off the hook, some of the beauty area is doing quite well, the apparel areas are more slow. But at those price points, we’re seeing great sell through better than what we were up against from last year. The supply chain is in very good shape on that.

So we remain committed to this business. We’re obviously looking very carefully as we have in times past at the crush sale that’s going on for Backstage. How they continue to purchase in Backstage and how they’re also migrating to the Macy’s and the Bloomingdale’s mother brands on both online and in store. And that behavior continues through the last two quarters.

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Robert Drbul — Guggenheim — Analyst

Great. Thanks, Jeff.

Operator

Thank you. Paul Trussell of Deutsche Bank has our next question. Please go ahead.

Paul Trussell — Deutsche Bank — Analyst

Good morning.

Jeff Gennette — Chairman & Chief Executive Officer

Paul, are you there?

Paul Trussell — Deutsche Bank — Analyst

Yes, hopefully. Can you hear me now?

Jeff Gennette — Chairman & Chief Executive Officer

We can hear you now.

Paul Trussell — Deutsche Bank — Analyst

Great, great. Good morning, and thank you for the detail. Wanted to ask about the margin performance. Maybe a little bit more color on the puts and takes in GPM in 3Q and how we should think about area as well as markdowns, the digital mix, inventory, our position into 4Q? And maybe the savings obviously on the SG&A side were very meaningful. And so just help us understand what’s within that is really sustainable from here versus more of temporary invention? Thank you.

Jeff Gennette — Chairman & Chief Executive Officer

So let me start with the margin question. And then, Adrian, I’m going to throw it to you for SG&A. So Paul, on margin, is that we’re very focused. First off, margin is definitely benefited by having our inventory in great shape. And so to — as you’ve seen in the last two quarters, to have our inventory below where our sales line is, to be down 29%, we’re able to react in season to any demand that’s coming our way. And you can see that in our regular price sell throughs, you can see that in AUR. So our maintain mark on is continuing to improve. We’re getting faster sell throughs. We definitely are dealing very aggressively with anything that customers are not signaling demand for taking those markdowns. And our inventory is in as good a shape as it has been in a long while, very pleased with that.

And even in those areas where the demand is off and even in those areas where the demand is quite high, we had been able to react very quickly and season to that, been able to get the receipts in those categories that customers are showing strong signals to. So when you look at the home textiles area, you look at fine jewelry, you look at fragrances, being able to get that inventory in to meet that customer demand. Those sell throughs are great. Those margins are growing.

When you look at the overall — the headwind on margin is really about delivery expenses. So we’re very focused on the omnichannel strategy of that. How much of our digital demand is going to be fulfilled out of our stores, which obviously decreases shipping expenses. And when you look at what that’s going to look like in the fourth quarter, obviously, shipping goes up. We’re expecting robust growth online. We’re anticipating that in what our shipping charges are going to be. What we’re going to fulfill out of stores. The surcharges that we have from some of our carriers. So all that is built into our fourth quarter planning. And we have a clear line of sight on that and a clear line of sight on how we’re improving margins.

And I’d love to assert it over to Adrian to kind of talk about some of the things that we’re doing to improve margins as well as to address your SG&A question. So Adrian ticket to you, take it away.

Adrian V. Mitchell — Chief Financial Officer

Yeah. Thank you very much. And Paul, pleasure to meet you. As we think about our expectations on gross margin, we have not changed kind of how you view gross margin for the rest of the year, relative to your question as we look to Q4. The improvement in gross margin in Q3 compared to Q4 was really driven by a lot of what Jeff described around strong inventory management, better sell through of our full price includes merchandise as well as our lower markdowns.

And what’s really nice as well is that we’re getting a tremendous amount of credit for the progress that we’re making as we think about managing our inventory down, which was down 29% from last year coming out of the quarter. As we go into the fourth quarter, the thing we have to keep in mind, Paul, is that we recognize that there will be significant stripping surcharges in Q4, in the fourth quarter. And so we’re working pretty diligently to figure out how to offset some of those headwinds. Going into the quarter with lean inventory will be helpful to help us manage some of those markdowns and hopefully help us also drive some higher sell throughs.

Now you also asked about SG&A. And as we spoke about a bit earlier, our SG&A came in at about $1.7 billion, which was down $476 million in the third — relative to the third quarter of 2019. What I would say there is, there are three things that we’ve been quite focused on. The first is just our colleagues’ productivity in our stores. They’ve been doing a terrific job in terms of driving great customer experiences, driving conversion and our teams are doing a terrific job just managing the productivity of our labor hours in those stores. The second thing is, through our Polaris strategy, we’ve been very, very diligent in mitigating good expense control within our SG&A. So we have a number of initiatives that we have put in place that we have benefited from for most of 2020. And so we’ll continue to have that as a big focus for us as we look forward as well. The third thing I would speak to, Paul, is really our credit revenue. So when I think about the health of our Macy’s customer and our credit portfolio, we continue to see pretty healthy performance and pretty solid profit sharing on the credit side of the business.

So credit from what we saw in Q3 was at $195 million, up $12 million over last year despite the expectations of depressed credit that we were hearing in the marketplace. So overall, we feel very good about Q3 performance. As we get into Q4, we’ll manage the headwinds on margin and we’ll continue to be very disciplined in our SG&A management.

Paul Trussell — Deutsche Bank — Analyst

Thank you, and best of luck.

Adrian V. Mitchell — Chief Financial Officer

Thank you.

Operator

Thank you. William Reuter of Bank of America has our next question. Please go ahead.

William Reuter — Bank of America Merrill Lynch — Analyst

Hi. My question is just around performance by geography or by store attributes. So thinking about how you’re urban stores were doing versus your more suburban ones, and if this is going to have any impact on your expectations for store closures over the next three years.

Jeff Gennette — Chairman & Chief Executive Officer

So early the stores that are performing, the worst are the ones that are in our downtown locations. So when you look at Herald Square, you look at 59 Street at Bloomingdale’s, State Street, Union Square, they are our most challenged. And there is the two biggest factors on that is basically what’s happened to the transient work population, the office workers as well as tourists.

So I’m actually very heartened by the performance of what’s going on in those buildings with the local customers. And those teams have been very focused on giving great experiences, inviting those customers into those buildings. So we’re seeing those purchasing is up. But when you look at the transient population and the tourist business, that’s been most challenged. So those are our most difficult urban flagship stores.

When you get into suburban population, what we’ve used to call our magnet stores as well as our neighborhood stores, they are pretty consistent depending on what part of the country it’s in. When you were in the — obviously, when you had — in the heat of the pandemic, there were certain regions of the country that were either closed or they were reopening and the customer didn’t have confidence to return to brick and mortar shopping.

So you saw those kind of those highs and lows. Right now it’s pretty consistent. And what we are seeing is that our neighborhood stores are great convenient locations. Customers are very comfortable shopping in them. And they are completing their shopping journeys, they’re very intention-based when they go into these stores. They are not browsing. They have a mission. They know what they want. They’re either having that fulfilled at the extra service stations, which are in every single one of our stores or they are in the store at a long — at a shorter period of time. Conversion is way up. They’re — the UPL or what we call the NPS scores are quite high. They’re very satisfied about what they’re seeing in our stores. And I’d say it’s a pretty consistent trend between the magnets and the neighborhoods, at this point, across all regions of the country.

William Reuter — Bank of America Merrill Lynch — Analyst

Great. Thank you.

Operator

Thank you. Omar Saad of Evercore ISI has our next question. Please go ahead.

Omar Saad — Evercore ISI — Analyst

Good morning. Thanks for all the information. Great update. You guys mentioned you’re watching the COVID surge in the release and a few times on the call. Are you seeing an impact at all from that? How concerned are you about this resurgence? Do you think there is a chance we could go into lockdown again with store closures? And if we do end up in that sort of scenario, how do you feel about your chances this time around having kind of gone through it versus back in March and April? Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

So Omar, that’s — I think it’s a great question. Look, we’re — we definitely believe that we can operate through COVID and keep every one of our stores open. And I think we’ve clearly shown that we know how to keep our colleagues and our customer safe. And so that’s what we’re clearly pushing through the NRF and we were working with all of our municipal leaders as well as governor’s. We don’t believe the designation of essential and non-essential should play in retail. We believe that you have a safe environment or not. We should be held accountable to health and safety standards, and we standby those. And based on how we performed and based on how our customers have that signal to us, we’re doing a great job of that.

So when you look at — the first part of your question, there are places like in El Paso, Texas, which everybody knows about. Well, that particular store is closed right now. But all of our stores are opening. And even in California where they have laws right now that basically are talking to 25% occupancy. We have some stores in which we are adhering to strict line control on those because we were very aggressive about going after in store fulfillment, we went after making sure that we had curbside that we had same-day delivery, all of that has been built.

So even if a store may close in the future, we believe that we’ll be able to — that will not be orphan inventory and we’ll have lots of colleagues who will be ready to satisfy the demand in those particular areas. So we’re working hard to ensure that we’re operating safely. We modeled our closures. I don’t anticipate them. But if they were to happen, we’ll be ready. And so it’s heartening to hear about vaccines, but when we look at the surging that’s going on right now in the country, we’re mindful of that. So we have a dashboard that looks at all of those metrics. What that means in terms of the customer sentiment. How confident they are to go into those buildings. What that means in terms of our staffing levels or what we need to do with our services. So we’re getting expert at this, and we’re ready to go no matter what comes our way.

Omar Saad — Evercore ISI — Analyst

Thanks, Jeff. That’s a really helpful explanation.

Operator

Next we move to Carla Casella with J.P. Morgan. Please go ahead.

Carla Casella — J.P. Morgan — Analyst

Hi. I had balance sheet questions. You — your working capital was a lot better than expected. I’m wondering if some of those deferrals will you have to pay down more of the payables or the deferrals in the fourth quarter or is that something that has been deferred to ’21? And then on the real estate front, if you’re sitting on any — I wonder if you’re sitting on the balance sheet on anything — any real estate where you’ve sold it — I’m sorry, not sold it, closed the stores, but not yet sold them?

Adrian V. Mitchell — Chief Financial Officer

Yes, I can speak a little bit to that. I mean the thing that we’re pretty excited about as we think about our current position on inventory is that we’ve been very good in terms of managing our clean inventory. So a big part of that is just making sure that as we look at our sales expectations going forward that we’re managing our buys. We’re very fortunate to see that our inventory is coming in, but we do feel that we’ve been very diligent and planful in looking ahead of our expectations around sales and managing that inventory appropriately.

We continue to pay for our inventory on good terms with our vendors. And so we feel really good about that. But you know, Carla, as I take a step back, the thing that we’re really excited about is just really the strong cash position that we have within the business, which was one of the things that’s very pleased to see coming into the business as CFO. We came out of the quarter with $1.6 billion in cash. We plan to pay off our maturities coming in the year at $530 million in January and $450 million in January of 2022. So just continue to be very focused on cash generation through managing expenses, managing very healthy our working capital, but also making sure we’re using any excess cash to really invest in profitable growth initiatives as we navigate through the pandemic.

Carla Casella — J.P. Morgan — Analyst

Okay. On the real estate front, are you sitting on any owned stores that you — that are closed?

Jeff Gennette — Chairman & Chief Executive Officer

I do want to reference. We do have like two stores that as you know that we have that are closed, that basically are operating as fulfillment centers. And so what we have on those, we call them the dark stores and we’re experimenting with that. I note that we are looking at the omnichannel customer. It’s having inventory that is available at wherever the customer is demanding it. And so to have — and to have inventory that is available to go, we are looking at some of our real estate to test into that to see how do we — particularly with the demand and the spike that we get during the holiday purchasing from our customers. So we are looking at our real estate with that in mind as well.

Carla Casella — J.P. Morgan — Analyst

Great. Thank you.

Operator

Thank you. We next move to Kimberly Greenberger of Morgan Stanley. Please go ahead.

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Kimberly Greenberger — Morgan Stanley — Analyst

Great. Thank you so much. I wanted to ask about credit revenue, it was obviously up very, very nicely. And I guess intuitively, we would expect credit revenue to move with total revenue, perhaps on the light basis. So can you just talk to us about why the divergence in the trends this quarter? And perhaps, how we can better think about credit revenue going forward? And then I just wanted to follow-up on the buy-online-pickup-in-store and the curbside capabilities, in particular, that you rolled out this year. In the third quarter, what sort of uptake or consumer response to those programs? Was it a quarter of your e-commerce orders through either the vehicles or something higher than that? Just any color you could give us on the success of this program. Thanks so much.

Jeff Gennette — Chairman & Chief Executive Officer

Adrian, why don’t you take the credit question, then I’ll take curbside?

Adrian V. Mitchell — Chief Financial Officer

Terrific, terrific. So Kimberley, overall, we’ve been very pleased with the help of the Macy’s customer and also the credit portfolio. And the performance of our profit sharing in recent months has actually been better than expected. And we are hopeful that this performance will actually continue through the pandemic. As I shared in the opening remarks, our earned credit revenue in Q3 was about $195 million despite expectations for depressed credits that we were expecting to experience as we went through the third quarter. We did observe that our new accounts were down compared to last year.

Now in terms, Kimberly, if you’re out — to your question about the outlook, our outlook on Q4 credit revenue has improved, but we expect them to be down year-over-year. We do however, expect to see a modest improvement from what we generated in the fourth quarter of 2019. And more broadly, we know that over time as macro conditions change that Jeff spoke to at the beginning of the call, it will have an impact on our portfolio, but this is just simply something we’re watching quite closely.

Jeff Gennette — Chairman & Chief Executive Officer

And Kimberly, on curbside, so we don’t know how this is going to play out yet. I will tell you that when we went to curbside, we launched this, as we talked about in the previous call in about 18 days across Macy’s and it was kind of — it was — we cobble that together very quickly. We’ve since launched what we call Curbside 2.0, which we’ve really improved the app experience and the speed of this. The colleague response to this has been quite strong and customers are really signaling highs. They’re liking what they’re seeing on this. We’re getting very high NPS scores on this.

So what does this mean for the holiday season? It’s going to be a great question for us when we talk about the holiday season in February. We expect this to dramatically go up. We’ve really focused on deployment inventory and all of our key items and our giftables ready to go for same-day delivery or through curbside. So it’s ramping up as we expected. It really is going to spike over the next number of weeks. When you look at our digital experience on this, how we’re signaling this online or on the app and our ability to respond to the customer when they signal it or need it, we’ll be there.

So more to come on that. We do expect it to be a significantly higher percentage of our overall digital demand through the combination of curbside BOPS, BOSS and same-day delivery and where we were last year, and I’ll be able to update the group on those four elements of our digital demand when we talk again on February 23.

Kimberly Greenberger — Morgan Stanley — Analyst

Thank you, both.

Operator

Next we move to Oliver Chen of Cowen. Please go ahead.

Oliver Chen — Cowen and Company — Analyst

Hi. Thank you. Good morning. On the younger customer acquisition, that’s very encouraging. What do you see ahead as the bigger opportunities across categories and/or execution to attract and retain younger customers? Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

Oliver, this is the shortest question you’ve ever asked. Let me just save it on and say it’s a multi-pronged question. The first thing with the younger customer is really looking at the content. So we’ve been hard at work at this for the last year and really looking at first half in our private brand portfolio, what adjustments we need to make. So we have repositioned brands, we have retired brands, we’re adding in brand in 2020-2021 on this. We’ve actually really played the value from ticket to promotion to loyalty. We looked at experiences and how we merchandise it, how we showcased it online in experiences.

So if you look at our website right now and you look at some of the big changes that we’ve made in the experience on our website, it was with the under 40 customer in mind in certain brands and categories. How we’re marketing to them, it’s just — it’s all interrelated. So we’ll give everybody an update on that again in February about where we stand with the under 40 customer. In some categories we’re quite strong with them. We’re their — we’re one of the top retailers in the country. And there’s other areas in which we have strong ambition to get much stronger with and market share that we see that we can gain. And so we will detail all those plans when we talk next.

Oliver Chen — Cowen and Company — Analyst

Thank you. Happy holidays.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Oliver.

Operator

Next we move to Alexandra Walvis of Goldman Sachs. Please go ahead.

Alexandra Walvis — Goldman Sachs — Analyst

Good morning. Thanks so much for taking our questions here. I wanted to ask a question about the e-commerce growth rate. The growth rate for the quarter was slower than in the prior quarter. You mentioned that was as the stores have reopened. Can you comment on the cadence of e-commerce growth through the quarter? And any thoughts on how we should be thinking about e-commerce growth into the fourth quarter and into next year? What’s the right run rate? And guys, should we be thinking about penetration as we move into 2021?

Jeff Gennette — Chairman & Chief Executive Officer

Hey, Alex. So what I’d say on this, we definitely will continue to have strong robust growth in digital. So when we look at it, we expect that we’re lapping, obviously, a high penetration of digital is in the fourth quarter always for us, but we’re ready. And so when you look at the — let me just kind of back up and just say, we’ve really focused on everything that we can do to improve this.

So when you look at what we’ve done to re-platform, we’ve gone after Google search, we basically have really improved the browse and filter features. We’ve enhanced all the product pages. We’ve tested and scaled product recommendations. We’ve added monetization then we’ve added like Klarna, which is a huge component of the under 40 customer. The whole curbside experience what we’ve done with DoorDash because as much about what we do in digital is also what we can do in fulfillment. So we’ve really focused on all this.

And so I think when you look at our website and our app today, it’s in far better shape from where it was a year ago. And all those enhancements just continue into 2021. Very happy with the product, the plans that we have for all the product upgrades coming up. So we expect robust double-digit growth of digital going all the way through 2021, and that’s what we’re planning for.

As a penetration, what you saw in the third quarter was about a 38% penetration of the total business. It’s always going to be I think with either a three or a four in front of us as it builds. It’s going to continue to grow as an important penetration in our overall business. We were at 25% in 2019. Obviously, with the stores closed for three months, it’s going to be higher in ’20 than I expect it’s going to be in ’21, but it’s still going to be in the mid-30s. So expect double-digits continuing.

Alexandra Walvis — Goldman Sachs — Analyst

Thank you so much, and all the best.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Alex.

Operator

Thank you. Our next question comes from Chuck Grom of Gordon Haskett. Please go ahead.

Garrett Greenblatt — Gordon Haskett — Analyst

Hi. This is actually Garrett Greenblatt on for Chuck. I just wanted to ask about, if you guys can pull forward sales cadence throughout the quarter as well as kind of quantify what the impact of the shift from friends and family have been to us? And maybe if you could elaborate on what you’re seeing closing date regarding the spike in COVID cases if that’s having any impact on store traffic? Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

I apologize. I could not understand your question. Could you just say that more clearly, please?

Garrett Greenblatt — Gordon Haskett — Analyst

Yeah. My apologies. Can you pull forward sales cadence of the third quarter as well as kind of quantify the shifts of the friends and family have been for us? Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

Yeah. We obviously like other retailers have responsibility to elongate holiday demand if we can. And so in the month of October, you saw what all of us did to try and start that early. So we did that by basically bringing up the friends and family events into the third week of October. And you can see what we’re doing now with the Black Friday specials, kind of drawing those off of the Black Friday event and bringing that earlier into the month of November.

We did have some volume at pull forward, we’re not quantifying what that is. But it is a — we are trying to see how the customer response to it. And so far, they’re buying and liking what we’re seeing on that. We’re making — we made the decision to close on Thanksgiving Day. We’re definitely expecting that we’re going to bring down the traffic in brick and mortar on Black Friday itself and getting that demand earlier. But also, if the customer decides to shop in the last 10 days or during Cyber Monday, we’re going to be ready for that. So you can see what we’ve done with our events. If you look at our calendar, we’re just elongating the demand as are our competitors. Some of that did come into the last two weeks of October based on the actions that we took.

Operator

Thank you. We take our next question from Dana Telsey of Telsey Group. Please go ahead.

Dana Telsey — Telsey Group — Analyst

Good morning, everyone. As we get past 2020 and into 2021, Jeff, how are you thinking about the first half of the year and planning, whether it’s regarding inventory, marketing or how you’re thinking of the stores channel versus the digital channel moving forward with all the new customers that you’ve gained from this time period? Thank you.

Jeff Gennette — Chairman & Chief Executive Officer

Hey, Dana. So two big factors here that are going to affect first half. It’s going to be what is the scalable vaccination look like. And does that come in at in the second quarter, does that kind of — we’re anticipating that it’s going to be in the back half of the year where it’s scalable. But the first half, we are looking at some level of stimulus package that Congress would put through, and that certainly can motivate certainly consumer confidence in what that would look like.

So when you think about the first quarter, we’re kind of pulling our trend from the fourth quarter forward. And we are expecting gradual improvement as we get into the second quarter and that improvement in which we get into the back half based on the potential vaccination. We do have another scenario that would suggest that we don’t have the vaccination that’s scalable, we’ll be ready for either, but we’re looking for signals on that.

In terms of the composition of the business depending on the vaccination, it could be as is or it could be as people return back to normal occasion. We have started to amplify those categories and we’re ready to go. From an inventory perspective, we’re being conservative. We know we can chase demand. We know we have more room and regular price sell throughs. We’re not going to get ahead of ourselves. We’re going to keep our inventory lean and ready to react to customer signals and n demand. As a fashioned retailer, that’s an absolute must, and we’re committed to it. So the more we’re doing that, the better sell throughs we’re getting, the more natural margins will improve, it puts us in a good position to be flexible to wherever the customer goes.

Dana Telsey — Telsey Group — Analyst

Thank you.

Operator

Thank you. We next move to Jay Sole of UBS. Please go ahead.

Jay Sole — UBS — Analyst

Great. Thank you so much. Jeff, it sounds like you’re really pleased with the jewelry business and the jewelry strategy overall continues to be something that really works. I know you’ve tried it in different categories, but could you just tell us any thoughts you have to try to extend that strategy in other categories, in other areas of the business just to try to continue to leverage those learnings in other areas?

Jeff Gennette — Chairman & Chief Executive Officer

Yeah. So Jay, clearly when you looked at the jewelry business that really is the combination of value, product, service, marketing and in-store experience. And there is definitely other businesses and we’re clearly doing that right now in the big ticket business, women’s shoes. You look at the entire beauty business. Those are all categories that we’re doing that very carefully with. When you look at home textiles, because of the price points we sell. We’ve learned a lot from Bloomingdale’s. And Bloomingdale’s does that in more categories. They do it through a combination of different partners that they use, some of those are leased. But we look at their category management and their customer, how they attract and hold customers and that gives us a lot of learnings about what we do in our businesses.

When you look at — when we get back to the new normal, when that does happen, you look at the clothing business, the men’s clothing business, the women’s clothing business, those are all categories that will benefit from the learnings that we got from the jewelry category. So jewelry is an interesting — because when you think about our market share, when you look at where our competitors are, frankly, that is a — the apparel is a much more crowded playing field. So it doesn’t always translate directly into apparel, but there is enough learnings there in the categories that we have strengthen in that it does. So we look at Bloomingdale’s, we look at jewelry, that certainly informs the answer to your question.

Jay Sole — UBS — Analyst

Got it. Thank you so much.

Jeff Gennette — Chairman & Chief Executive Officer

You bet.

Operator

Thank you. And over time we have no further questions at this time.

Jeff Gennette — Chairman & Chief Executive Officer

Okay, everybody. Thank you. Happy holidays.

Operator

[Operator Closing Remarks]

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