Macy’s, Inc. (M) Q4 2021 Earnings Call Transcript

Macy’s, Inc.  (NYSE: M) Q4 2021 earnings call dated Feb. 22, 2022

Corporate Participants:

Mike McGuire — Head of Investor Relations

Jeff Gennette — Chairman & Chief Executive Officer

Adrian V. Mitchell — Chief Financial Officer

Analysts:

Matthew Boss — JP Morgan — Analyst

Lorraine Hutchinson — Bank of America — Analyst

Omar Saad — Evercore ISI — Analyst

Kimberly Greenberger — Morgan Stanley — Analyst

Paul Lejuez — Citigroup — Analyst

Oliver Chen — Cowen — Analyst

Michael Binetti — Credit Suisse — Analyst

Unidentified Participant — — Analyst

Chuck Grom — Gordon Haskett — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Blake Anderson — Jefferies — Analyst

Presentation:

Operator

Good morning, and welcome to Macy’s, Incorporated Fourth 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 to discuss our fourth quarter and full-year 2021 results. With me on the call 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 will provide time for questions. Given the time constraints, and the number of participants, we ask that you please limit your questions to one. As a reminder, today’s call is scheduled for 90 minutes.

Along with our press release, we have posted a slide presentation on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes additional facts and figures to assist your analysis of Macy’s. Also note that given the pandemic’s impact on 2020 results, unless otherwise noted the comparisons that we’ll speak to this morning will be versus 2019 as we feel that benchmarks our performance more appropriately. We noted in our press release this morning that on Wednesday, March 9th at 9 o’clock AM Eastern Time, Adrian will be participating in a fireside chat at the UBS Global Consumer & Retail Conference. This event will be webcast on our Investor Relations website. So, please mark the 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 in our presentation on the Investors section of our website. And as a reminder, today’s call is being webcast on our website. A replay will be available approximately 2 hours after the conclusion of this call, and it will be archived on our website for one year.

With that, I’ll turn the call over to Jeff.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Mike, and good morning everyone. Thank you for joining us. As we kick off 2022, I’m proud to say that Macy’s, Inc. today is a stronger, more agile and financially healthier company than we were before the pandemic. We delivered strong results in the past quarter and year. We continue to make good progress on the transformation of our company and build momentum, and we are much better positioned for long-term success.

Our business has changed dramatically since 2019, when we began to lay the groundwork for our Polaris strategy. We stayed focused on that plan and we have delivered. We are now more digitally led and customer-centric in our planning and execution. We have also demonstrated the value of an integrated company meeting customer expectations for a more seamless shopping experience across digital and store offerings. Digital has been a particular priority for us.

This morning, I will walk through our 2021 performance highlights and Adrian will share the details of our financial results which exceeded our expectations every quarter. Then I’ll discuss the outcome of the Board’s recent review of our operating structure and how we are enhancing shareholder value. From there, I’ll review the specific initiatives we are accelerating to enable sustainable sales growth and strong and stable margins in the future. Adrian will wrap up with details on our financial outlook for 2022 and beyond.

Let me start with the performance highlights. Comparable owned-plus licensed sales for the fourth quarter increased 6.1% versus 2019. This performance reflects strong November and December holiday sales that exceeded our expectations as well as softer sales in January. Total company AUR was up 11.5% for the fourth quarter and for the full-year, it was up over 11%. For the year, comparable owned-plus licensed sales increased 3% compared to 2019.

For the year, we generated $984 million more in adjusted EBITDA than 2019, growth of 42%. Our full-year adjusted EBITDA margin was 13.6%, a rate we have not achieved since 2014. As a result, we achieved adjusted diluted EPS of $5.31 for the full-year, up 82% versus 2019. With reduced debt and ample cash, our balance sheet is healthy and we are in a stronger financial position. This enables us to navigate challenges that lie ahead while meeting our capital allocation goals to deliver shareholder returns through modest, yet predictable dividends, strong returns on invested capital and meaningful share repurchases.

We completed our current $500 million share repurchase program during the past quarter, and I am pleased to announce that our Board has authorized a new $2 billion program. Additionally, we have announced a 5% increase in our dividend after reinstating it during 2021. These accomplishments are the result of our focus of our organization has placed on the Polaris strategy, efforts that I have spoken to you about frequently over the past 2 years. This transformation strategy has evolved as the external environment changed and new opportunities arose. In the actions we took, have led to a stronger, digitally led retail business.

Here are just a few highlights of what we’ve accomplished. Number 1. We have modernized our digital platform and now offer an engaging and convenient experience with the power to meet customers whenever and however they choose to shop. In 2019, our digital team worked as a siloed organization. Today, it is fully integrated. We have a scaled platform operating the number 2 website in our categories in the nation with 39% digital penetration, an increase of 9 percentage points versus fourth quarter of 2019.

Number 2. In 2019, our store strategy was largely focused on the highest quality A and B malls, while accelerating the closure of stores in C and D malls. Today, the consumer’s increasingly more omnichannel and we are focused on establishing a more appropriate footprint in markets to drive sustainable and profitable omnichannel growth. Given this, as we said on our last call, we have delayed most of the remaining closures we earmarked in 2019 in order to maintain a physical presence in many markets, while we scale up our off-mall format stores. In addition to being in place for discovering and shopping, our stores are also fulfillment hubs supporting our digital operations through buy online pickup in store, curbside pickup and same-day delivery. Keeping these cash positive stores open also helps us to fund the investments we’re making to reposition our fleet over the next several years.

Number 3. In 2019, we were over-indexed on occasion-based apparel, had less disciplined buying behavior and our approach to promotions was overly complicated for customers, all of which was driving high-levels of markdowns and low inventory productivity. Today, our pricing is simpler and clearer, allowing our customers to better understand the value they are receiving. Today, we offer a more balanced, curated merchandise assortment that reflects our disciplined purchasing behavior with new categories, products and brands that inspire our customers style across the value spectrum from off-price to luxury. And today, we remain best positioned based on the health of inventory and multi-category and multichannel capabilities to pivot with greater agility in response to changing customer trends.

Number 4. In 2019, the spread between customer acquisition levels and customer attrition levels was narrow. In 2021, we flipped that dynamic, while also benefiting from recovery-driven demand. Our initiatives have led to an accelerated rate of customer acquisition that far outweighs the rate of attrition.

Number 5. In 2019, we had just created a new integrated team to re-imagine our supply chain that previously segregated store and digital inventories and relied on a distribution network that lacked efficiency. Today, as a result of our investments, we have a more modern supply chain network that is agile, data-driven and increasingly automated. We’ve seen the results of this work pay-off throughout 2021 from increased speed of delivery to operational efficiency and to better inventory utilization.

And finally, we have invested in advanced technology and data science throughout our operations enabling us to increase productivity and profitability of the entire business. To best realize our strategic goal of building profitable lifetime customer relationships, we successfully built a new enterprise data and analytics organization that is helping us to embed data and analytics into everything we do. We have already seen improvements in our efforts around personalization and pricing. In short, we are a different Macy’s, Inc. today than we were in 2019, more agile, more profitable and more relevant to our customers. That said, as we enter 2022, we see both headwinds and tailwinds ahead that together encourages us to offer a more measured outlook for the year.

Now I’d like to take you one level deeper into the work we’ve done to achieve our performance this past year across customers, merchandising, digital initiatives and stores. First, customers. Our customer focus is paying off; 44 million customers shopped with our Macy’s brand in 2021, up 1% from 2 years ago. They bought more and combined with higher AURs spend more on each visit. We are adding new customers with 7.2 million new customers in the fourth quarter, an 11% increase compared to Q4 2019, with 58% coming in through digital. Nearly 30% of these new customers were dormant over the past 12 months who are now re-engaged. For the full-year, new customers increased 26% over 2019 to 19.4 million. This trend reversal in customer acquisition is an important marker for us, and a strong indication of the increasing relevance of the brand. We will continue pursuing our strategies to build on this momentum.

Let’s turn to merchandising. Through our data-driven merchandising approach and our team’s agility and creativity, we successfully navigated supply chain challenges ensuring we had a strong assortment for the holiday season. We placed bets on categories like fragrances, fine jewelry, home decor, men’s outerwear, toys, sleepwear and watches, which all performed well in the quarter. Bloomingdale’s, which helps us reach affluent consumers continue to see strength in luxury throughout the quarter with strong performance from handbags, fine jewelry, men’s shoes and contemporary, fragrances and home.

In addition to enhancing the shopping experience of our core customers, we also focused on new offerings to further attract the under 40 shopper. In the fall season, we added a curated selection of brands, products and categories to 160 Macy’s stores that appealed specifically to this younger more diverse customer. These brands include, Cotton On, Steve Madden, Michael Kors and Levi’s as well as our new private brands, And Now This and Oake.

We are pleased that our customer response and the results we’ve seen to-date. This in-store strategy align well with the digital strategy to attract the under 40 customers that we rolled out in the spring through our contemporary sitelet. At Bloomingdale’s, brands geared towards the under 40 customer had a record year. Our private brand Aqua and various luxury brands outperformed in both sales and margin in 2021.

This brings me to our digital initiatives. Today, our profitable digital platform is more modern and engaging, thanks to our redesigned app experience, personalized homepages, curated sitelets and improved search function. Aided by the shift in consumer preferences, the growth of our digital business continued in 2021. Sales remained strong and we saw healthy levels of conversion for macys.com at 4.2%, a 13% increase compared to 2019.

During the fourth quarter, Macy’s app had the largest quarterly gain in downloads across our peer set with an 81% increase in downloads over the third quarter of 2021. Today, our Macy’s and Bloomingdale’s digital teams operate more efficiently within a single back-end structure, while each nameplate retain separate dedicated site merchandising and customer facing benefits. Compared to 2019, Bloomingdale’s digital sales grew 51% during 2021 with traffic increasing 28%.

Lastly stores, a critical part of our integrated omnichannel ecosystem. The role of stores is evolved with customer shopping habits. The interplay between our digital and physical assets is critical, and we remain focused on sustainable omnichannel sales growth. During the quarter, 58% of our omnichannel markets representing 80% of our sales had growth above 2019 levels, and half of these grew by at least 10%. For the year, we grew sales in 52% of our omnichannel markets versus 2019.

Now to the macroeconomic environment that we see in 2022. First, tailwinds. We believe the consumer demand will remain healthy as the job market improves and wages continue to rise. We expect demand to increase, particularly as people return to the office into social events. International tourism remains a tailwind, particularly beyond 2022. This past year, international tourism was down 50% from 2019 levels with the fourth quarter strengthening before Omicron weighed on consumer sentiment.

With headwinds, we expect inflationary cost pressures both for us and consumers, uncertainty of industry promotional behavior, supply chain disruptions, competition for talent, lapping of stimulus packages and potential COVID variants. But we are confident that our financial health and operational agility put us in a stronger position to navigate the dynamic environment and challenges we expect in 2022.

Let me now pass it to Adrian for additional color on our Q4 results.

Adrian V. Mitchell — Chief Financial Officer

Thank you, Jeff, and good morning, everyone. We’re excited about the momentum gained through Polaris in 2021, and are focused on maintaining that momentum over the course of the coming year. Our top priority remains driving shareholder value through a combination of strong performance and the strategic allocation of capital. Our ambition for Macy’s, Inc. is even bolder now given a much healthier business and our increased confidence and conviction in our Polaris strategy.

With this context, I will walk through a summary of our fourth quarter performance against our 5 value creation metrics; sales, gross margin, inventory productivity, expense management and capital allocation. First, sales. We generated $8.7 billion in net sales during the quarter, up $328 million, or 3.9% from the fourth quarter of 2019. Comparable sales on an owned-plus licensed basis increased by 6.1% despite the approximately 125-basis-point headwind from the Friends and Family shift we mentioned on our last call. Holiday sales were stronger than expected. Yet, with the emergence of the Omicron variant, tempered consumer sentiment contributed to weaker January sales than we had anticipated. To a lesser degree, the absence of the 2021 government stimulus payouts was also a factor. The overall softness in the month of January appear to be industry-wide and temporary in nature.

Now on to gross margin. Gross margin for the quarter was 36.5%, down 30 basis points from the fourth quarter of 2019. Notably, holiday delivery surcharges, which were essentially non-existent in 2019, reduced margin by approximately 85 basis points. Merchandise margin increased 160 basis points from the fourth quarter of 2019. Leaner, more productive inventories and lower markdowns were the primary drivers. Our pricing initiatives also helped drive higher full price sell-throughs and AURs; versus 2019 full price sell-throughs improved 650 basis points and full-price AURs increased 10% for the Macy’s brand.

Including holiday surcharges, delivery expense accounted for 5.9% of net sales, 190 basis points higher than the fourth quarter of 2019, but down from the fourth quarter of 2020. Delivery expense reduction is a top priority for us. Here, our focus is on reducing split shipments and increasing the efficiency of in-store fulfillment. Improving order throughput per labor hour is one initiative that we’re working on, and we have been pleased with the improvements we achieved in the fulfillment test stores that we deployed in November. Based on these results, we plan to roll this initiative out to an additional 35 locations before holiday 2022.

Now, let’s shift to inventory productivity. Our gains in this area have been a vital source of our gross margin achievements, which are driven by the evolution and scaling of data science into our work routine and decision-making. During the critical holiday period, inventory levels remained healthy, and for the full-year, the gains we made were impressive no matter which period you compare performance against. Inventory was down 16% versus 2019, while full-year sales were almost flat, and versus 2020, inventory was up only 16% on sales growth of more than 40%. As a result, inventory turn improved by 22% compared to 2019.

We also saw another quarter of strong expense management discipline. SG&A expenses were $2.4 billion in the quarter, down $80 million, or 3.2% versus 2019. SG&A expenses improved as a percent of net sales to 28%, down 210 basis points from the fourth quarter of 2019. This was driven by the expense leverage we gained as sales grew, the continued benefit of permanent Polaris cost savings and the revenue generated by Macy’s Media Network, all of which were partially offset by increased labor costs. Macy’s Media Network exceeded our full-year expectations, generating more than $105 million of net revenues that offsets SG&A expenses.

During the quarter, we also made significant headway in filling open positions, provided premium weekend pay to our colleagues and accelerated the adoption of $15 per hour minimum wage in another 200 or so stores. Credit card revenues were $264 million, up $25 million from the fourth quarter of 2019. As a percent of net sales, credit card revenues were up 10 basis points versus 2019 to 3%. Better than expected bad debt levels continue to benefit credit card revenues during the quarter. Now the bottomline profitability. Adjusted EBITDA margin was 14.4% or 50 basis points higher than the margin achieved in the fourth quarter of 2019 despite asset sale gains that were $65 million less in 2021. After accounting for interest and taxes, these results generated adjusted diluted EPS of $2.45, up from $2.12 in 2019.

The final value creation metric is capital allocation. We ended the year in a strong cash position. Our full-year capital expenditures of $597 million were focused largely on technology-based initiatives including both that support our digital business, our data science initiatives and the simplification of our technology architecture. We generated $2.3 billion of free cash in 2021, which includes the receipt of the majority of the CARES Act tax refund in January of $582 million. Our strong free cash flow allowed us to pay off $1.6 billion of debt early. This, coupled with our solid performance, resulted in a year-end leverage ratio of 1.8 times well below our initial target of 2.5 times and materially better than pre-pandemic levels.

At the same time, we remain committed to returning capital to shareholders. As Jeff referenced, during the quarter, we exhausted the remaining $200 million of share repurchase authorization, repurchasing 7.5 million shares. In total, under the full $500 million authorization, we repurchased 20.5 million shares or more than 6.5% of shares outstanding.

Now, let me turn it back over to Jeff. And then I will return to discuss our long-term outlook and 2022 guidance.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Adrian. As we discussed on our call last quarter, our Board of Directors undertook a more extensive review of our e-commerce and brick-and-mortar operations to determine the best path forward for Macy’s, Inc. to enhance value for our investors. This was additional work to review business and strategy that our Board and management team perform on a regular basis. Throughout this extensive review, the Board and management were focused on 2 core objectives. One, ensuring we deliver for our shareholders in the near, medium and long-term. And two, provide the most convenient and seamless shopping experience for our customer across all omnichannel touch points. In every scenario we considered, we found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders and a separation of our digital and physical assets. This was true at both Macy’s, Inc. and brand levels.

Furthermore, after a comprehensive review, we found that the integrated omnichannel Macy’s, Inc. with multiple nameplates from off-price to luxury continues to be the most appealing to our diverse and multi-generational customer base. We conducted the review with the assistance of AlixPartners and our financial and legal advisors. There were no constraints imposed on AlixPartners or our advisors with regard to the options analyzed. This review included evaluation of the separation of the digital business overall, as well as the potential merits of a separation of the Macy’s or Bloomingdale’s digital businesses individually. We analyzed revenue growth drivers, unit economics and the financial profiles of our digital and store businesses. We also evaluated the possible benefits of a third-party investment considering any need for capital as well as a potential exit path for a financial partner, and we considered whether there would be value in issuing a special equity offering that would track the financial performance of our digital business.

Key to the Board’s decision making were the significant separation and ongoing costs from operating separated businesses, including potential debt separation costs. And for Bloomingdale’s business, a significant loss of benefits available to Bloomingdale’s through leveraging the scale of Macy’s, Inc. Also, another important consideration was our view with the damage to gross margin for both the digital and store businesses due to the potential transfer cost and markdown liability. We also found that in every alternative scenario we considered, the execution risk for the business and our customers was too high. The net, we determined that Macy’s, Inc. has a stronger future as a fully integrated business with Macy’s and Bloomingdale’s together and assessing a broad range of brands, price points and customers across digital and stores.

In undertaking this review, we also asked our advisors to pressure test our Polaris strategy. Their findings reaffirmed our confidence in the strategy and boosted clarity on several initiatives that could be accelerated over the next several years to unlock greater value for our investors. These initiatives begin with digital. We have a number of new capabilities in the works. First, the marketplace we announced last quarter is expected to deliver incremental value above our $10 billion digital sales target. In addition to our owned and vendor direct platforms, this third-party marketplace will allow our teams and partners to expand and enhance our strong digital experience. Through the marketplace, we can dramatically expand our categories, brands and online SKU assortment to respond more quickly to the changing and diverse needs of our customers. In addition, we continue enhancing our digital platform and launching new offerings. These investments are paying off, and we are pleased with the active user and conversion increases we’re seeing across our apps, bloomingdales.com and macys.com.

Beyond digital, we’ve identified several other focus areas. First, our merchandise categories. We have identified key categories where we will continue to build upon our already strong foundation. Example of these categories include, furniture, men’s tailored clothing, women shoes, beauty, dresses and jewelry and watches. Today, I’m pleased to announce our partnership with Pandora to broaden our already strong assortment in fine jewelry. In November, we launched Pandora in 5 stores. The fine jewelry business in those stores saw an incremental 23-percentage-point increase in sales growth over 2019 from the new assortment. Pandora attracts younger customers and we will now expand to 28 additional locations in 2022.

There is new categories like toys, and our partnership with Toys”R”Us has been instrumental in attracting new customers to the Macy’s brand. Of the customers that shop Toys”R”Us, 25% were new customers to the Macy’s brand and 93% of these toy customers cross-shopped to other categories. We doubled our toy business in 2021, and we are excited for more aggressive growth when we open Toys”R”Us stores with in-store in all of our locations during the second half of this year, creating a completely new and immersive experience for our customers.

Both Bloomingdale’s and Bluemercury are also working with best-in-class categories and brands. During the quarter, Bloomingdale’s saw success in its Holiday Carousel collection with Giada De Laurentiis. The partnership was a key to Bloomingdale’s gifting performance in the fourth quarter. We are excited to announce that next month Bloomingdale’s will unveil its latest Carousel collection with Netflix Bridgerton.

Another focus area is marketing and loyalty. Our Star Rewards loyalty membership is growing every day. Through enhanced personalization capabilities, we can increase engagement that drives positive brand perception, additional visits and purchases. We are testing advanced in AI-driven targeting to help determine the best communication channel, frequency, message and offer for customers. We view personalization is a growth engine for our company in the early innings of development. Consistent with our digital focus, we have significantly shifted our media mix towards digital marketing. Today, 66% of our total spend is on digital versus 35% 5 years ago. Over this time, Macy’s has experienced a 25% improvement in our return on advertising spend.

Next, off-mall stores. We see big upside in repositioning our physical store footprint by scaling up our small format Market by Macy’s and Bloomie’s stores. We opened 3 Market by Macy’s stores in 2021, and are seeing encouraging customer response. Sales exceeded our expectations, and we found that these stores are more productive to run and staff and stock with inventory. This new format is also bringing in new customers who are engaging with our curated under 40 brands and products. In 2022, we will open Market by Macy’s and Bloomie’s in additional markets as part of our omni-market strategy.

Finally, the shopping experience. One common threat across our Polaris initiatives is the need to build new capabilities to ensure the shopping experience is as convenient and compelling as possible. This will drive growth in our active customer base and increase shopping frequency and spend per visit. Customer shop both online and in stores, so maximizing the combined experience remains key to our success. We look at our stores as destinations for both discovery and experience, as well as fulfillment hubs. So we will continue to invest appropriately in our stores to create a more connected, tech-enabled omni-ecosystem.

Now, I’d like to speak to one of our most valuable assets, the Macy’s brand. Starting next month, we’re repositioning it with a promise to help our customers express and own their style, expert in-person advice and personalized data-driven recommendations that help people express their personal style will differentiate us in a cluttered marketplace. This brand transformation is a key step within our Polaris strategy to win with fashion and style. We will also announce details of our new social purpose platform and commitments in a few weeks. Macy’s, Inc. has been a strong partner to the local communities in which we operate. But today, as stakeholders expectations of corporations and of us change, we’re prepared to better align how we do our work with the common good. As we transform our business, we see the opportunity to create a social purpose platform that leverages our scale, unique strengths and culture to create more meaningful change in the world.

Now, I’ll pass it on to Adrian for our outlook for 2022 and beyond.

Adrian V. Mitchell — Chief Financial Officer

Thanks, Jeff. We believe that shareholder value will be enhanced through strong performance driven by the successful execution of our Polaris strategy combined with the efficient allocation of capital. We will make disciplined, risk-adjusted decisions when deploying the cash we generate. Given the ebbs and flows of consumer sentiment and the need to weather unforeseen risks, our first capital allocation priority is maintaining balance sheet strength. By doing so, we preserve the ability to fund investments that foster profitable sales growth and deliver healthy long-term returns. We will fund these types of investments and return excess cash to our shareholders, and we’ll deliver direct returns to shareholders through a modest yet predictable dividend and meaningful share repurchases.

With that in mind, let me walk you through our updated 3-year outlook. In light of the headwinds and tailwinds that Jeff spoke to earlier, we do believe that the macro environment will continue to offer some challenges. Nevertheless, we remain committed to achieving low double-digit adjusted EBITDA margins annually, and in 2024, expect to be within a range of 11.5% to 12.0%.

For sales, we’re targeting a low single-digit compound annual growth rate for net sales. We expect our long-term sales growth to be driven in 3 ways. First, the scaling of our digital marketplace, including expanding the depth and breadth of our merchandise categories, as well as the re-platforming of our core digital platform. Second, improving mall-based trends supported by our investments in omnichannel capabilities and technologies. And third, the expansion of our off-mall stores. As we referenced earlier, the recovery of international tourism to pre-pandemic levels is not anticipated for some time. So there is potential upside should that occur within the next several years.

The gross margin, we are targeting a rate in the high 30s even as digital penetration increases to the low to mid 40s as a percent of net sales. To do this, we’re looking to maintain solid merchandise margins aided by lean inventories as well as additional profitability from our pricing initiatives and the growth of digital marketplace. At the same time, we will be closely monitoring the promotional environment within the industry which we recognize has been at historic lows this past year.

In regard to future delivery costs, we’ve developed several initiatives to mitigate delivery expense while improving our customers delivery experience. These include, optimizing fulfillment algorithms, reducing split shipments through the use of data science and enhancing inventory placements and assortment allocation. In addition, we began rolling out initiatives aimed at increasing aisle-level profitability for online SKUs this past quarter.

Now let’s move on to SG&A. We are targeting to improve SG&A leverage with increased digital sales and a more efficient staffing model in stores. The $900 million in permanent cost savings we realized over the last 2 years, will remain a significant benefit to our SG&A leverage. At the same time, 2021’s SG&A benefited from a number of open positions that we expect to fill. In 2022, a portion of the savings achieved through our Polaris initiatives will be reinvested to support our colleague financial, educational and well-being initiatives. Based on this, and wage inflation expectations, SG&A as a percent of sales is targeted to be elevated over the next 3 years from 2021 levels peaking in 2022. Within SG&A, we also expect to continue benefiting from other profit tools such as Macy’s Media Network and additional opportunities that could arise when scaling our digital marketplace.

Next, credit card revenues. In the near-term, we are targeting credit card revenues as a percent of net sales to be slightly below our historic average of 3%. This reflects our expectation that bad debt within the credit portfolio will migrate to pre-pandemic levels over the next few years, and thus pressure returns. However, in the medium-term, we expect proprietary credit card sales penetration to rise, which will offset the increased pressure from bad debt and help facilitate the rebound of credit card revenues to about 3% of net sales by 2024.

Now let’s turn to our long-term capital allocation plans. We’re targeting capital expenditures of approximately $3 billion over the next 3 years. Our spend will be primarily allocated towards our technology architecture, data science applications across our retail operations, digital platform enhancements, fulfillment capabilities in stores and further upstream and our personalization efforts. In 2022, we are targeting approximately $1 billion of capital expenditures.

At the same time, we also expect to continue to meaningfully monetize our real estate. We have a robust monetization program that has produced more than $2 billion in asset sale proceeds over the last 6 years. Our plan is to continue the strategic development of our assets to maximize our real estate values while repositioning our physical footprint to provide our customers a seamless and convenient omnichannel experience.

After accounting for capital expenditures and asset sale proceeds, we are targeting to generate between $3.2 billion and $3.6 billion of free cash flow over the next 3 years with up to an additional $900 million of incremental debt capacity with strong financial flexibility given our leverage and EBITDA targets. This level of cash generation and cash capacity will continue to support our capital allocation priorities which are grounded on our commitment to enhance shareholder value.

Those priorities include first, maintaining a healthy capital structure that is focused on best positioning Macy’s, Inc. for access the bank and capital market funding under all economic scenarios. And second, maintaining investment-grade credit metrics with well-laddered debt maturities, which includes targeting an adjusted debt-to-adjusted EBITDAR leverage ratio of 2.0 times or below. Next, we are committed to investing in initiatives that further strengthen our digitally-led capabilities across the enterprise, including investments through our capital planning program as well as other value creating strategic investments.

And lastly we will return capital to shareholders in the form of a healthy yet modest dividend that increases annually and meaningful share repurchases absent more attractive investment alternatives. As Jeff mentioned, we announced the first dividend increase today and the authorization of a new open-ended $2 billion share repurchase program. As part of our 3-year outlook, I want to provide more detail on our guidance for fiscal 2022 as well as the first quarter.

We believe 2022 will be a transitional year as we move beyond the recovery and the market begins to normalize. At the same time, we expect high levels of inflation to erode consumers’ discretionary income. Our 2022 expectations reflect our strategic positioning and the associated risks in what may be a more challenging market. Despite these challenges, we are committed to continuing the discipline we demonstrated in 2021 to drive strong margin performance through our pricing initiatives for merchandise margin, our continued focus on delivery expense mitigation and our SG&A cost discipline.

Now let me provide the details of our full-year 2022. For Macy’s, Inc. we expect net sales to be flat to up 1% with continued strong AUR performance at more modest levels than we saw during most of 2021. For our owned-plus licensed comp sales, we expect a 3-year compound annual growth rate of between 1.1% and 1.4%. That’s growth from 2019 results. Digital sales are expected to be approximately 37% of net sales. We expect the gross margin rate between 38.1% and 38.3%, slightly down from last year largely due to increased digital penetration and expected inflationary cost pressures.

Credit card revenue of approximately 2.9% of sales is expected. From a rate perspective, SG&A is expected to be in the range of 33.7% to 33.9%. Asset sale gains are expected to be between $60 million and $90 million. Adjusted EBITDA margin is expected to be between 11.0% and 11.5%. Net interest expense is expected to be approximately $190 million for the year. Adjusted diluted earnings per share is estimated between $4.13 and $4.52, and does not include the impact of any share buyback that might occur throughout the year.

Now a few comments on sales trends within the year. We are targeting strong year-over-year growth in the first quarter, but we expect our quarterly net sales penetration as a percent of annual net sales to more closely align to our pre-pandemic quarterly cadence. Recall that we were still early in the recovery at this point last year, and that our results in the first quarter of 2021 were significantly affected by the pandemic. Impacts from the acceleration of the recovery and stimulus payouts more significantly benefited our results in the second and third quarters of 2021. This makes the year-over-year net sales growth in the first quarter of this year more favorable than that in the subsequent quarters.

We also expect between 55% and 60% of our annual adjusted EBITDA, excluding asset sale gains to be generated in the fall season. Of this, nearly 7% is expected in the fourth quarter. Additionally, outside of the first quarter, the remainder of asset sale gains are modeled in the fourth quarter. With those factors in mind, we expect net sales in the first quarter to be between $5.3 billion and $5.4 billion. For adjusted earnings per share, we expect the first quarter will be between $0.77 and $0.85 compared to $0.39 in 2021. This includes an anticipated benefit of approximately $25 million from asset sale gains, and again, does not include any impact from share buybacks. More details on our outlook are included in the presentation posted on our website.

In summary, we are pleased with the results that we generated in 2021, and look forward to building upon our success, not only in 2022, but over the next several years. We have proven that we have a highly resilient business, one with further capacity to grow profitably and enhance shareholder value.

With that, I’ll turn it back over to Jeff for some closing remarks.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks, Adrian. Today, Macy’s, Inc. is a transformed organization. We are well-positioned to compete successfully and profitably in today’s market. We operate one of retail’s largest e-commerce businesses integrated with a nationwide footprint of stores and fulfillment centers. We are confident in our path forward as one integrated company continuing to execute our Polaris strategy and the accelerated initiatives we shared today, allowing us to unlock additional value, acquire new customers and grow market share.

I want to express my gratitude to the entire Macy’s, Inc. team for their passion and dedication in serving our customers and delivering strong results. We have a lot of work ahead, but I am excited to put these plans into action and deliver an even bolder and brighter future for our company, our shareholders and our customers.

And with that, let’s begin the Q&A.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We’ll take our first question which comes from Matthew Boss of JP Morgan. Please go ahead. Your line is open.

Matthew Boss — JP Morgan — Analyst

Thanks, and congrats on another nice quarter. So Jeff, revenue growth exits this year at a positive low single-digit CAGR, matches your long-term Polaris plan. So near term could you speak to momentum that you’re seeing in the business driving your first quarter outlook? And then, as we think beyond, how are you thinking about the timeline and opportunity if we think about international travel, smaller format stores in this digital marketplace model?

Jeff Gennette — Chairman & Chief Executive Officer

Hi, Matt. Thanks for the question. So as Adrian just said in his comments, we expect the first quarter on a one-year stack. So we’re now going to be comparing to 2021, it’s going to be our best quarter relative to last year. And I think what — all of our, what would you should look at is really the penetration of each quarterly business and look at a year like 2019-2018 to see how we’re kind of cadencing the business. So that’s how I would just look at. And to Adrian’s comment, we do expect that the other quarters are going to be less in overall growth to ’21 than the first quarter is.

To the second part of your question, let’s talk about the 3 individual pieces you mentioned. First, on international travel. So this is an interesting one, because you’ve heard us say that it means about 3% to 4% of the total business at Bloomingdale’s and Macy’s and that it’s certainly been our experience pre-pandemic. We got about 50% of it back, when you look at 2021, a big chunk of that was basically with an increased digital business to those international zip codes. We did see some return in the month of December, Bloomingdale’s had more of the affluent international customer coming back more there. It was our best quarter when you look at the 4, but then you basically circle back into, back to lower levels with on Omicron. So, we don’t expect when you think about that 50%, that’s yet to come, certainly going to be a tailwind. We know it will come, but we’re not anticipating seeing that in 2022, and we’re looking at future years for that.

As your question about small format stores, this is one that we’ve opened in both Bloomie’s, for the Bloomingdale’s brand. We did that in Washington DC in the Mosaic Mall and then we’ve got 5 of them that have opened in Dallas-Fort Worth and Atlanta, and encouraging results. And what I’d say there is that everything we’ve talked about in terms of the retail ecosystem of getting that formula right where you’re looking at the full business being done by customers between digital and where they choose to shop in brick-and-mortar, that’s starting to pan out for us in those markets. And what we’ve seen is what really comes down to is, we think we have a formula right between offering, and value, content, very flexible spaces if you’ve been in one, but what’s really important is location, location, location, and getting not only the right off-mall location, but then the right placement of that storefront within that mall with great sight lines, great exterior signing, etc. So we’re very careful in what we are picking there.

We look at that kind of expansion between those nameplates and off-mall in really 3 buckets. We have the densification which feeds into the omni ecosystem. We’ve got new markets, and what you’re going to see there and we’re looking at that for both Bloomie’s as well as Macy’s. And then we’ve got the replacement strategy where you might see us and you’ll see this in 2022, where we’ve got a site plan where we’re going to open a store and it’s next to a neighborhood store that has been in a very challenged mall. We want to make sure we develop that and have that ready to go to pass off customers versus when we have closed stores in the past where you see those customers retreat. So that’s what I’d say about small door strategies.

And the last question is on marketplace, and that is, you know we’re gearing up our team right now. So hiring up, very excited about the talent we’re able to get. We’ve got our tech team working with our Mirakl, which is our tech partner right now, syncing up that, and we’re working with our merchant teams right now about the new categories that we’re going to start with. So as we mentioned on our last call, expect marketplace to add a lot of incremental value and that starts in August of this year.

Matthew Boss — JP Morgan — Analyst

Great. Best of luck.

Operator

We will now move on to our next question from Lorraine Hutchinson of Bank of America. Please go ahead. Your line is open.

Lorraine Hutchinson — Bank of America — Analyst

Thanks, good morning. I just wanted to focus on CapEx for a minute. How much is included in that $3 billion for this fleet transformation that you’re talking about? And then, how should we think about the key thing of the share buyback program?

Adrian V. Mitchell — Chief Financial Officer

Thanks very much for your question, Lorraine, and good morning to you. So with regards to CapEx, we do have right now a smaller portion of our capital around the new store rollout. This is one thing that we want to make sure that we’re continuing to prove ourselves into. As Jeff mentioned a bit earlier, we feel really good about the performance of these stores. We feel that we have the formula right. We are highly focused on location, location, location, but as we continue to think about the scaling up those stores we’ll continue to update our capital plans. Where we’re spending a lot of our dollars in terms of the $3 billion is really around the omnichannel capabilities, and those things are things like personalization in the data science across our entire operation, our fulfillment infrastructure upstream and downstream, our digital marketplace. Those are the kinds of things that we’re actually focused on in terms of our capital spend.

And then your second question is really around share buybacks. We have $2 billion authorized, and we view that as very much open-ended. And as we think about the deployment of that excess cash, we’re really focused on what’s in the best interest of our shareholders. And so, as we’ve talked about before, our first priority is really maintaining a healthy balance sheet. The next priority is investing in high return initiatives including strategic opportunities that will allow us to accelerate our Polaris strategies, and absent more attractive investments, we will certainly return capital to shareholders in the form of dividends in a meaningful share buyback program, but the timing is very much open-ended for us, but we’ll be very opportunistic about the $2 billion authorization.

Lorraine Hutchinson — Bank of America — Analyst

Thank you.

Adrian V. Mitchell — Chief Financial Officer

Thank you, Lorraine.

Operator

Well move on to our next question from Omar Saad of Evercore. Please go ahead. Your line is open. Caller, please go ahead. Your line is open. You might be on mute.

Omar Saad — Evercore ISI — Analyst

Hey, good morning. Sorry about that. Thanks for the very useful presentation guys. Jeff, just quickly, a quick follow-up on the study you guys did on e-com business. Looking at the possibility of separating it. It doesn’t sound like it was a close call at all, was it? And then a quick follow-up on sales, it seems like it’s all macro issues are kind of dampening the outlook for 2022. Any company-specific or sector-specific trends, have you seen fashion and apparel sales peak or is it really all the macro inflation issues that are kind of tempering the guidance? Thanks.

Jeff Gennette — Chairman & Chief Executive Officer

Hey, Omar. So let me take your first question on kind of the e-commerce study that we did with really kind of the business review and shareholder value. So just to kind of reiterate, we had 2 big main objectives on this, and one was, how we can deliver shareholder value in the near, medium and long-term. And the second one, as we said, we really want to respect the customer, the omnichannel behavior of the customer at all touch points. Was it a close call is your question. I would just tell you that it was very unconstrained and it was a really comprehensive review. We have very strong advisors. We’ve been working with the Board on this for many, many months. We brought in AlixPartners as you know in that October timeframe, and we just went through every single scenario, and basically came around to that one integrated Macy’s at both Inc. and the brand levels, deliver greater value than a separation of digital and physical assets.

And I would just kind of hook on 4 things that were really key to our decision. The first one is as Adrian described, with just our free cash flow, we are not capital constrained to be able to invest in the business and in the digital elements of our business, that’s one. The second one is just the high separation costs that come with separating digital and stores. As well as, number three would be the ongoing cost from operations of having separated business. And then just for the last one would be the executional risk to the customer, to our brands and what would happen with that. Because of this, the extensiveness of this review, it did give us an opportunity to say, okay what, in the Polaris strategy is working, what should be shared, what should be picked up and really just being clear-eyed about what our opportunities are on that. So we are, and as we mentioned, accelerating a number of initiatives within that, personal and obviously one that was already in the works which is digital and what we’re doing with marketplace. So $10 billion in digital, more to come in marketplace.

New and expanded categories. So we can go into a lot of conversation about that, but let me just suffice it there that the opportunity to go into new categories or expand the ones that we’re existing in. Big opportunity with data-driven personalization, and now that we’ve got 70% of our business being tied to our loyalty programs, just gives us a lot of flexibility to move away from broad-based promotion and really personalizing our message all the way through the customer journey.

And then the fourth one that Matt asked about earlier is really off-mall small format so, and opportunities with that. I would not be able to kind of weigh in on this, because there were things that came up out of this that I have nothing to comment about, sorry, to just talk about.

Adrian V. Mitchell — Chief Financial Officer

Thank you, Jeff. One key thing that was really important from this work that Jeff described, it’s just the fact that our strategies are durable, and it’s important to acknowledge that today we’re in just a much different competitive position than we were even just 2 years ago, we’re financially a much stronger business. We have a healthier balance sheet and we’re more efficient in how we think about our capital structure. And this is really evidenced by the $3 billion that we’re planning to invest in capital spend over the next 3 years in addition to the target of $3 billion of free cash flow that we’re also expecting over that same time period. So the net of it is we got through the research with our advisors was we’re not capital constrained, as Jeff alluded to earlier, and the accelerated initiatives that Jeff highlighted, are initiatives that we can pursue now and into the future.

Jeff Gennette — Chairman & Chief Executive Officer

Yeah, now more to your second question really kind of macro trends, what I’d say is what’s interesting right now is just the dormant categories that we’re all the way through the pandemic, they’re very strong right now, and to be expected. And they haven’t fully rebounded to the levels that they were in 2019. So when you think about women’s shoes and dresses and then women’s tailored clothing, which were all strengths for the Macy’s and Bloomingdale’s brands, those are going to continue too. They’re giving us great strength right now and that will continue.

But what I am encouraged by was the brands and the categories that were strong all the way through the pandemic, just continue to be strong at a good pace. That would be brands like or that would be categories like fragrances and home store, both in big ticket, as well as in soft home big ticket, there was never a demand issue. There was a supply chain issue that’s starting to really improve. Fine jewelry was dormant, or excuse me was quite strong through the pandemic, continue to be strong, fine watches, sleepwear. So we’re continuing to watch the apparel areas, they are still down, but they’re getting better, and casual and at-leisure was always good, the dress categories are picking up. So we expect that’s going to be the momentum going forward.

Emerging categories are coming up obviously, everybody knows, we’re in a denim cycle right now that definitely has been strong for us, and the new categories for us, things like toys, which we really didn’t have a strong business, we doubled our business in 2021. We expect to double it again in ’22. So yeah, so I would tell you that that’s kind of the movement of what’s going on at the FOB level. I think the thing that we’re watching carefully is what continues on the supply chain, what continues on with inflation, and as we lap the stimulus package and really looking at that demand that we’re up against. So that’s all factored into our guidance.

Operator

We will now move on to our next question from Kimberly Greenberger of Morgan Stanley. Please go ahead. Your line is open.

Kimberly Greenberger — Morgan Stanley — Analyst

Great, thank you so much. Good morning. And I want to extend my great appreciation for all of the detailed guidance and the outlook, it’s very helpful. I had a question, my couple of questions are really about the outlook for 2022 and beyond. I’m wondering, Adrian, if you can just start with SG&A for example. It looks like at the mid-point of your revenue guidance and the mid-point of your SG&A guidance, we’re looking at about $8.3 billion of SG&A here in 2022. How should we think about varying your SG&A either up or down if you were to beat your sales guidance or come in short of your sales guidance, maybe you can just help us think about the variability there.

And then on the quarters for 2022, obviously, with Q1 exhibiting the greatest year-over-year growth Adrian, does the guidance imply that total revenue could be down year-over-year in the second and third quarter? And then, I’m not sure if you or Jeff would like to share just any overarching philosophy or strategy when you look at inventory management. It looks like you’ve got really super-lean levels here coming out of the fourth quarter. As I look back to the fourth quarter of 2019, inventory was about 20% higher. Do you feel comfortable running with inventory at this level compared to 2019 or at some point this year would you look to at least close a piece of that gap? Thank you so much.

Adrian V. Mitchell — Chief Financial Officer

Thank you. Kimberly, and good morning to you. So, let me just start a little bit talking about our outlook. And as we think about our long-term targets, what we would say is that we believe they are achievable and that they also reflect the momentum that we’ve already achieved and that we’re building at Macy’s. Now as it relates to the P&L, and I’ll highlight a bit more around the SG&A, which is a key part of your question. As we look at 2021 and move into 2022, we feel that we’ve built a track record and are building a lot more confidence and conviction around the strategies that we’re executing and also what’s in the queue.

So look, we exceeded top and bottomline expectations every quarter in 2021. We expanded merchandise margins every quarter, and a lot of this was driven by new capabilities around inventory productivity and our pricing disciplines, and we created SG&A leverage as sales grew this year and we learned a lot about that. And as we think about 2022, we do expect to see an elevation in SG&A. But peaking in 2022, we expect SG&A leverage as we move beyond 2022 into the out years. So a lot of that really results in a healthy level of adjusted EBITDA margin which we are committed to having at low-double digit levels, and at the same time being able to generate strong free cash flow in order to support a lot of our investments in the business as well as returning value back to our shareholders.

With regards to the quarters, to your point, if you think about where we were in the first quarter of last year, we are still very much dealing with the pandemic. And so, we do expect that our first quarter will be stronger relative to our outer quarters of Q2 through Q4. Now, we took a very measured approach in terms of how we approach those additional quarters. As Jeff mentioned a bit earlier, we certainly recognize the headwinds with regards to inflation which could impact discretionary spending for consumers, potential tightening consumption, if employment gains start to reverse, a number of factors on the headwind side that really has to be balanced with the potential tailwinds that Jeff mentioned earlier around greater demand in areas like apparel with back to work as well as going out for social events and potential upside in international tourism. So very much a measured view.

And so, the key thing to your point about Q2 through Q4 is, we also have to consider that the second and third quarter sales were strong last year, and that was heavily driven by the recovery and driven by the stimulus packages. So this makes our year-over-year comparisons in those quarters much more modest as we think about the entire year and the quarterly cadence throughout the year. But I would reiterate that we view our quarterly cadence to be more consistent with our pre-pandemic levels than what we’ve seen as we migrated through through the pandemic.

And then lastly, in terms of inventory, we’ve seen a very healthy level of inventory productivity in 2021, and we expect to have those gains as we look forward in 2022 and beyond. The data science is a very key part of that, really understanding where demand is by channel and by markets, being able to better align our inventory to where that demand is, using the data science to better forecast, not only our sales demand, but also the necessary receipts, all the way down to an item level. The data science is giving us a lot more confidence in our ability to maintain a healthy level of inventory in moving forward, including as we’re expanding into new categories, both with our owned categories as well as marketplace categories.

Operator

And we’ll take our next question from Paul Lejuez of Citigroup. Please go ahead. Your line is open.

Paul Lejuez — Citigroup — Analyst

Hey, thanks guys. I’m curious as you think about the sales CAGR over the next several years through ’24, how are you thinking about the breakdown between transactions versus ticket? And how will pricing factor into that? Curious just how you’re thinking about how to build on the AUR gains from this year? Thanks.

Adrian V. Mitchell — Chief Financial Officer

So, as we think about our sales CAGR for the next several years, we’re very much focused on low single-digit growth in terms of the topline. When we look at 2022 on a stack looking back to 2019, what you see is that, we’re up about 1.1% to 1.4%. Now, when we think about the combination of things that are driving that, number one, is the importance of having active customers that are shopping more frequently, and that are expanding their spend, not just in the core categories, if you’ve known Macy’s for a long time, but also new categories that we’re expanding to within our business as well. So we do expect as we move forward that AURs will certainly be a dimension of that, but much more modest levels than what we saw in 2021. But importantly, getting the frequency of customer purchases, getting them to expand into new categories, keeping the active customer file increasing, those are kind of the key drivers that’s going to support our low single-digit growth in the upcoming years.

Operator

We will now move on to next question from Oliver Chen of Cowen. Please go ahead. Your line is open.

Oliver Chen — Cowen — Analyst

Hi, Jeff and Adrian, congrats on a great quarter. With the digital business near and longer term, what’s the interplay going to be with margins as you think about the bottomline as well as gross margin? And you also mentioned re-platforming, that sounds like a major opportunity, would love your thoughts on some of the key priorities there, as well as how you’re driving differentiation in the marketplace, and as we look beyond to augmented reality and rethinking the mall virtually, how you’re approaching the Metaverse as well? Thank you.

Adrian V. Mitchell — Chief Financial Officer

You want to go with repositioning, or you want to go with marketplace?

Jeff Gennette — Chairman & Chief Executive Officer

Sure. Oliver, let me just say with marketplace, we’re currently in the stages, we’re not ready to announce how we’re approaching the categories, but I would tell you that the merchants are looking at kind of tangential categories to existing content digitally that we have either through owned inventory or through VDF, and obviously when you look at the breadth of offering that we have, we still have a lot of categories that we’re not in where customers accept Macy’s as a trusted resource for that. So that’s guiding kind of when you think about the roadmap of how we’re looking at this, we’re looking at what that with the introductions will look like over the next number of years, but kind of expect kind of tangential categories is how we will launch in August of 2022.

Adrian V. Mitchell — Chief Financial Officer

Oliver, good morning to you. As it relates to gross margin, we expect to have higher levels of digital penetration over time, and the offsetting two that are really two key things, one is around the increased improvement in our retail margins driven by our pricing initiatives as well as our managing our inventory productivity as well as the initiatives that we’re pursuing with regards to delivery expense. So we have a number of initiatives that’s getting a lot of traction coming out of last year, entering into this year around reducing the number of split shipments, reducing the distance that our inventory and orders are relative to delivering it to our customers. So we’re pretty excited about the traction we’re seeing there, and that’s one of the reasons that we provided an outlook of elevated gross margin in future years into that.

As we think about the differentiated experiences with regard to re-platforming, this is really an extension of the work that we’ve done with regards to our mobile apps. As we’ve talked about a bit earlier, the refreshing of our mobile apps has resulted in higher conversion, and just a better experience for our customers since we launched it in October, and our expectation around the broader re-platforming of our website is very similar. We want to be abe to manage a healthy level of conversion, AOB, help our customers navigate through our site seamlessly and in a very convenient matter, having get connected to our store experience as part of our omnichannel strategy. So it’s really continuing the things that you heard us talk a lot about in 2021 which is around differentiated experience, new features, easy way to navigate the website. And we believe that those kinds of investments and experiences will be accretive to the brand.

Oliver Chen — Cowen — Analyst

Okay. And a quick follow-up on pricing and the pricing environment. What do you think about the customers appetite for increases in elasticity, and how might you be sharing that with vendors as we think about inflation more broadly as well as cost inputs and demand? Thank you.

Jeff Gennette — Chairman & Chief Executive Officer

Yeah. Oliver. It’s a great question, and it’s a different story depending on what category you’re in and what brands you’re in, and what the actual item is whether not, it is a key item, the opening price, whether not in this fashion. So, all of them have different rules. What I’d say is that where we have done this, we saw it the most in big ticket, because big ticket based on the supply chain challenges and just production we were dealing with price increases really in the very beginning of ’21 all the way through. And what we found is that you get into like some of the sectional and some of the price points for the larger big ticket items we could pass on. We basically, those cost increases led to higher retail prices and higher tickets. Customers accepted those. As you get into kind of the opening price mattress or sofa business, something that might have been $499 one year by, with the cost increases to make the same margin, it might have needed to gone to $549 or $599, in those cases the customers push back. So, we’ve made those adjustments. We’re looking at all of the kind of the architecture within each of the businesses.

So we’ve got that in a bulk of our categories. We’ve had those learnings and we’re building that into our private brand stop sourcing to be able to mitigate the cost there for where we don’t believe a customer we will take an additional ticket or higher ticket in those areas when we think about your question about our brand partners working with each of them. So, if it’s the bulk of the business which in many of our brands are fashion, we’re really focused on how do we put more make, more embellishment, more fashion into those goods. Those sometimes, and often can carry higher tickets. But if it’s a basic commodity, basic tank T short, we are working, we could be working short, we could be having the same ticket, but then we’re mitigating based on what we do with our pricing science. So we might have lower POS.

We certainly are able to get more margin on the back-end when we mark those fashion goods down. We’re not doing it at a national level anymore. We’re doing it a localized level and we have the opportunity to look at dynamic pricing and what the unit ownership at a particular SKU is at a store level, what the out-date is, what that sell-through is, that’s going to generate a different hard markdown price than you might get an another store that is either fulfilling more robustly to demand or they’re selling through with customers who are coming into those stores. So, we just have much more science and data analytics that are helping us in all of our pricing decisions that are mitigating some of the effects of where we are having higher tickets.

To the question that Adrian answered earlier from Paul, we do expect more modest AUR increases in 2022, we were up a little over 11% in ’21, we expect it to be more in the 5% range across all of our categories in ’22.

Operator

We will now move on to our next question from Michael Binetti of Credit Suisse. Please go ahead. Your line is open.

Michael Binetti — Credit Suisse — Analyst

Hey guys, thanks for taking my questions here, and for all the detail today. Maybe, you gave us some thoughts on tourism for the year, would you help us understand what tourism was relative to 2019 levels, as you look at third quarter and fourth quarter, just so we can kind of understand the trend there? And then, I guess first quarter, it seems like to us leaves a little bit of room for performance on the sales side, you just did — your fourth quarter sales retail sales were almost 4% above the fourth quarter of ’19, but your first quarter guidance is a little over 3% below first quarter of 2019. I’m just trying to think about how you guys frame the upside-downside in the near-term here in the first quarter?

Jeff Gennette — Chairman & Chief Executive Officer

Hey, Michael, let me take the first question, and I’ll have Adrian to take the second one. So, with tourism, what I’d say is that the only quarter that was any different, so quarters 1 through 3 was over a 50% drop and quarter 4 was slightly better on particularly at the Bloomingdale’s brand. So, pretty consistent. And as I mentioned on the earlier question, what we did see was we saw a mix change within that international tourism business more of it went to digital, generally it’s about 12%, but the businesses is digital and it was 33% in ’21 that was digital, to be expected. So, what I’d say is that we’re looking very carefully at any signs, we know it by country, we know it by store, obviously we’re very connected with what’s going on with tourist bureaus and advanced travel plans, what that looks like, what bookings look like and hospitality. Clearly, this affects, there is like 30 doors in the Macy’s chain and a number in the Bloomingdale’s chain that are disproportionately affected by it. So, we’re watching it very, very carefully. And as mentioned, we do believe it’s going to come back, but we were 50% down in aggregate, we don’t have that built into our planning for 2002, if any of that were to come back. We’re expecting more of that to come back in ’23 and beyond.

Adrian V. Mitchell — Chief Financial Officer

So Michael, thank you for your question, and good morning. As it relates to the momentum coming out of Q4, we were able to perform in Q4 primarily because of our competitive position, our inventory position, which we spoke to a lot in 2021 in terms of just inventory availability. And as we came into looking at our forecast and our guidance for 2022, including the first quarter, we really just had to be very measured and thoughtful in how we thought about that cadence, that quarterly cadence throughout the year. As Jeff mentioned a bit earlier, we really have to think about the evolution of potential headwinds balanced with the potential tailwinds that we’ve seen even more recently with the geopolitical uncertainty, with shifts in demand, with continued wage inflation and increases. So this makes our year-over-year comparisons more modest than what we would have seen in 2021, but yet we actually expect to have growth as we look at our comparisons relative to 2019. So those are the kinds of things that we consider that really factored into how we thought about the first quarter and also the subsequent quarters for 2022.

Jeff Gennette — Chairman & Chief Executive Officer

And Michael, just to add to what Adrian said, when you look at the first quarter of ’21, it really was that March stimulus drop that happened in March. And the effects that that had on our business. So, when you think about it as a comparison between that and ’19, think about it that way.

Operator

We will now move on to our next question from Carla Casella of JP Morgan. Please go ahead. Your line is open.

Unidentified Participant — — Analyst

Good morning. This is Mike on for Carla, and congrats on the quarter. I just wanted to ask a question about leverage. Given that it’s come down quite well ahead of schedule, I was kind of curious whether any noteworthy updates in regards to your conversations with the rating agencies, and should we kind of expect the debt pay down at least in the topline of the gross debt to EBITDA metric is kind of put on pause for now is kind of focus on other capital allocation priorities? That’s all from us. Thank you.

Adrian V. Mitchell — Chief Financial Officer

Thank you for your question. To your point, we’re just very pleased with the efforts that we’ve taken to delever the balance sheet. As I mentioned a bit earlier, the number one priority for us is to maintain a healthy balance sheet. And as you know, we paid down the $1.3 billion of senior note in August of last year and on an accelerated basis, we paid off a $294 million note in October that was actually due in January. When you think about the performance that we’ve had in 2021, we ended the year with a 1.8 times leverage ratio which is well under our target of 2.5 times. So going forward, our focus is to making sure that leverage ratio remains below 2 times or at 2 times or below. So, we’ll just continue to pay debt as it matures and continue to have constructive dialog with the rating agencies with regards to the health of our balance sheet and our capital structure.

Operator

We will now move on to our next question from Chuck Grom of Gordon Haskett. Please go ahead. Your line is open.

Chuck Grom — Gordon Haskett — Analyst

Thanks, good morning. I apologize for the near-term question, but I’m just curious, you spoke to January being softer. And I guess I was just curious if you’re seeing any noticeable change in spending patterns by income cohorts in light of some of these inflationary pressures and the lap stimulus at the end of the child tax credits, etc.?

Adrian V. Mitchell — Chief Financial Officer

Chuck, no difference really when you look at — when I looked at the slow down between January and November-December, when you look at it by customer cohort. So, obviously we look at all of our segmentation, and there were some aberrations based on whether in parts of the country, but when you look at income level or you look at it by spend type, not a lot of differences.

Operator

We will now move on to our next question from Dana Telsey of Telsey Advisory Group. Please go ahead. Your line is open.

Dana Telsey — Telsey Advisory Group — Analyst

Good morning, everyone, and congratulations on the results. As you think about the new customer number, which was a great increase in 2021, how are you thinking about that new customer target for 2022? And then, just following on, just delivery expense mitigation, how are you thinking about that over the next 2 or 3 years? Thank you.

Jeff Gennette — Chairman & Chief Executive Officer

Let me take the customer, and I’ll have Adrian take the second part, Dana. So I think with the real focus that we have right now on customers is taking that 19.4 million customers that came into the brand in 2021, and getting a second and third and fourth purchase from them. And so, really working through all of our personalization technique and seeking content that could be of interest to these customers, to make sure that they’re not want and done. We do have, because you’ve got the bulk of them that are coming in via digital and a majority of them now younger and more diverse. So, making sure that we get a second purchase out of them and using our data and analytics technology and personalization to see that content. So, that’s a big focus of ours. Obviously, when you’ve got new initiatives coming in, we’re going to get new customers, one of the big opportunities for us with marketplace was the font of new customers that will come in through that. So, but when I think about one of our biggest opportunities overall, in terms of our loyalty program, is personalization. So, looking at those, all those new customers coming in and making sure we have great offers for them to stay with us.

Adrian V. Mitchell — Chief Financial Officer

Good morning, Dana. As it relates to delivery expense, we just strive to achieve greater efficiency as it relates to delivery expense, and this is really important because the growth of our digital business is just still paramount to the enterprise. Now as a bit of context in 2021, we did increased digital penetration to 39%, which was up about 9 percentage points over the fourth quarter of 2019. And so, given this pace of increased digital penetration, we have a number of initiatives that we’re pursuing to mitigate the delivery expense increases over time.

Let me just give you a couple of examples. One is just really managing the number of packages that a customer receives with their order, and this is really about reducing the number of split shipments and the kinds of initiatives that we put in place is really consolidating slow-moving items into one location, so that we can actually minimize any excess packages when actually selling these fast movers. The other piece is really around how we think about where the inventory should be located. So, as we think about inventory allocation and our replenishment strategies, we’re using data science to just better align where the demand is by channel and location across the country, with where we’re actually placing the appropriate level of inventory all the way down to an item level.

The third thing that we’re doing is really looking at true item level profitability, we call it debt net profit, and we look at this very actively within the organization to really understand how our buying decisions and how customers response on things like return rate impact the profitability of those individual items, and by managing that effectively we can also help mitigate some of the complexity in terms of delivery expense within the supply chain as well. So the sum of it is, we’re using a lot of analytics to really the average the business, look at what’s happening with our products, to really understand ways to continue to mitigate delivery expense as digital penetration increases within our business.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

And we’ll move on to our final question from Blake Anderson of Jefferies. Please go ahead. Your line is open.

Blake Anderson — Jefferies — Analyst

Hi, good morning, thanks for all the details so far. I just wanted to ask on the promotional environment, and apologies if we missed it, but for fiscal 2022, I know you mentioned you continue to expect AUR growth of 5% to 6%. Have you talked about how much you may be baked in for conservatism on the promotional environment if that picks up at all? Thank you.

Adrian V. Mitchell — Chief Financial Officer

So, I would just say that we’ve got — we do expect the promotional environment to heat up. But what I’d say is that I think everybody has learned the value of leaner inventories and we’re all buying a lot closer to lag than ever before. So to Kimberly’s earlier question, when you look at the amount of our book stock versus the expected demand, we do expect to see the stock to sales ratio to be very favorable to margin expansion. So we’re also looking to — we’ve certainly seen some of the issues with having cluttered stores and too much content, and really curating those and be more aggressive about the added in our stores is really helping overall sell-throughs, and for the offer for the customer for the clarity of that.

So, we do expect that we’re going to be able to bring the inventory level in consistent with the demand we expect, and we’re going to basically continue to leverage the lower base that we’ve gained over the past couple of years. So even when the promotional environment, even when it increases, we will be ready for it. And I think one of the other big tools of that is really everything we’ve learned through our data science and all of our pricing initiatives will help us with whatever the demand, how that changes, we’re going to be ready for maximizing the margin for the customer at the right time.

Operator

And it appears we have no further questions over the audio at this time. Sir, I’d like to turn the conference back for any additional or closing remarks.

Jeff Gennette — Chairman & Chief Executive Officer

Thanks everybody for your attention and your interest in Macy’s, Inc. Have a great day.

Operator

[Operator Closing Remarks]