Macy’s Inc (M) Q4 2022 Earnings Call Transcript

Macy’s Inc (NYSE: M) Q4 2022 earnings call dated Mar. 02, 2023

Corporate Participants:

Pamela Quintiliano — Vice President, Investor Relations

Jeff Gennette — Chairman and Chief Executive Officer

Adrian V. Mitchell — Chief Financial Officer

Analysts:

Brooke Roach — Goldman Sachs — Analyst

Oliver Chen — TD Cowen — Analyst

Chuck Grom — Gordon Haskett — Analyst

Matthew Boss — J.P. Morgan — Analyst

Alex Straton — Morgan Stanley — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Tracy Kogan — Citigroup — Analyst

Bob Drbul — Guggenheim Partners — Analyst

Ashley Helgans — Jefferies — Analyst

Presentation:

Operator

Greetings, and welcome to the Macy’s, Inc. Fourth Quarter 2022 Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn [Technical Issues] to Pamela Quintiliano, Vice President of Investor Relations. Pamela, you may now begin.

Pamela Quintiliano — Vice President, Investor Relations

Thank you, operator. Good morning, everyone, and thanks for joining us to discuss our fourth quarter 2022 results. With me on the call today are Jeff Gennette, our Chairman and CEO; and Adrian Mitchell, our CFO. Jeff and Adrian have prepared remarks that they’ll share, after which we’ll provide time for your questions. Given the time constraints, we ask that participants in the Q&A please limit their questions to one single-part question.

Along with our press release from earlier this morning, a slide presentation has been posted on the Investors section of our website, macysinc.com. In addition to information from our prepared remarks, the presentation includes supplementary data to assist you in your analysis of Macy’s. Also note that, unless otherwise noted, the comparisons that we’ll speak to this morning will be versus 2021. Comparisons to 2019 are provided where appropriate to best benchmark our performance given impacts from the pandemic.

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

In discussing the results of our operations, we will be providing certain non-GAAP financial measures. You can find additional information regarding these non-GAAP financial measures as well as others used in our earnings release and our presentation on the Investors section of our website.

Finally, 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.

With that, I will turn the call over to Jeff.

Jeff Gennette — Chairman and Chief Executive Officer

Thanks, Pam, and good morning. And thank you for joining us today. So, I’d like to start by recognizing our colleagues. In 2022, as consumer behavior rapidly changed, we adjusted our receipts and operations accordingly. At the same time, we fortified our balance sheet and continued to execute our long-term goals.

In the fourth quarter, we achieved net sales of $8.3 billion. Beauty, dresses, tailored clothing, luggage and gift giving outperformed while soft home, active and casual were challenged. We offered freshness in every category and brand, even down trending ones that are still important to customers.

Peak holiday selling periods mirrored pre-pandemic patterns, but lows were longer and deeper. Post-holiday demand for remaining winter and early spring product was stronger than expected and markdowns were shallower than contemplated when we provided our updated guidance in early January. End-of-year inventories declined 3% to 2021 and were down 18% to 2019.

Looking back on 2022, we began to see signs of consumer weakness and a shift in category demand late in the first quarter. We adjusted the timing, amount and composition of receipts by channel, category and brand. As macro pressures mounted and industry-wide inventory built on easing supply chain constraints, we bought closer to need, helped open-to-buy reserves and bought into areas of strength. We were measured with promotions and markdowns, and did not chase unprofitable sales. These actions benefited fourth quarter results.

We had our ninth consecutive quarter of AUR improvement and a better-than-expected gross margin rate of 34.1%. Our adjusted EBITDA margin rate was 11% and adjusted diluted EPS was $1.88, including a $0.17 discrete benefit related to the favorable resolution of a state income tax litigation. Our financial health and stability enabled us to navigate uncertainties while continuing to invest in growth drivers.

At the end of the year, we had $862 million of cash, $1.2 billion less debt than 2019, and no material debt maturities until 2027.

Turning to 2023. There is conflicting data regarding the U.S. consumer. As a modern department store operating from off-price to luxury, we have a full view of income tiers, aided by our high penetration of loyalty members and robust credit card portfolio. On the surface, the consumers are in better shape than 2019. Jobs and wages are strong, and savings levels are elevated relative to historic levels, but prices for services and goods were higher.

Inflation has surpassed wage growth and revolving credit is rising. Adrian will provide specifics on our 2023 outlook, but we believe discretionary spend will be under pressure across income tiers and expect the allocation of disposable income to continue shifting towards services and essential goods.

Even as consumers re-prioritize spend, there is opportunity. With the continued expansion of a hybrid work model, there are more in-person meetings and flexibility for personal travel. We believe the desire to be with loved ones, go on vacation and attend events has not diminished, and expect gift giving and occasion-based demand to continue.

Reflecting on the last three years, 2020 was a year of crisis management, 2021 was stabilization and in 2022 we laid the foundation for a sustainable low-double-digit adjusted EBITDA margin and longer-term sales growth.

So, let’s discuss our progress. At Macy’s, we reevaluated our approach to merchandising. Since the pandemic, we have materially reduced markdown allowances and made a strong pivot to an upfront cost negotiation model; changed how we incentivize merchants, so bonuses are based on Macy’s, Inc. sales versus functional responsibilities, allowing us to ship receipts and markdown dollars; increased open-to-buy reserves, enabling us to read and react to customer signals intra-quarter; and begin to work more closely with strategic brand partners to mutually grow brands in a healthier way.

Beyond merchandising in 2022, Macy’s also launched Own Your Style, an omnichannel brand platform encouraging customers to celebrate their personal style, introduced a Marketplace on macys.com, ending the year with 20 new categories and 500 new brands that our customers had been signaling demand for, and introduced Toys “R” Us store-within-stores in every Macy’s, more than doubling toy sales for the year and attracting over 0.5 million new customers.

In 2022, we continued to embed data and analytics across the enterprise. We added and refined pricing science capabilities, such as competitive pricing and enhanced channel and location level markdowns, and there is opportunity to further maximize profitability and drive even more productive sell-throughs.

We also introduced Mission Every One, our social-purpose platform designed to advance Macy’s long-term brand relevancy for all stakeholders. We look forward to reporting on our year one progress in the coming weeks. And we invested in our number one resource, our colleagues. We completed a $15 per hour minimum wage increase nationwide and introduced our Guild education partnership with approximately 3,000 colleagues taking advantage of free education benefits. These actions have produced overall turnover by roughly 3% since 2019, excluding reductions in force and seasonal employees.

We have entered 2023 in a position of financial and operational strength with a proven track record of executing our strategic priorities, even in periods of uncertainty. This year, we will be testing, investing and scaling for sales and margin expansion.

In addition to our existing initiatives, including pricing science and data and analytics, we will focus on our five primary growth vectors: number one, Macy’s private brands reimagination; two, Market by Macy’s and Bloomies off-mall stores; three, Marketplace; four, luxury; and, five, personalized offers and communication, which we have broadly described as personalization in the past.

These vectors were contemplated when we introduced our long-term, low-single-digit annual growth sales CAGR goal in the fourth quarter of 2021. Since then, we have steadily invested even as macro pressures have intensified. We are currently targeting low-single-digit annual net sales and comparable owned plus licensed sales growth beginning in 2024 off an assumption for a low-single-digit decline in both metrics this year.

Our target is based on the timing and anticipated impact of several rollouts and does not assume a dramatic improvement in consumer health. We are making strategic investments to fuel future profitable growth, and these investments are reflected in our 2023 SG&A and capex assumptions, which Adrian will discuss shortly.

This morning, we will provide an overview of the five vectors, including proof points that give us confidence in their viability. So, let’s start with Macy’s private brands. When our Chief Merchandising Officer was promoted to her role roughly two years ago, private brands became one of her top priorities. Since then, we have built the capabilities and infrastructure to reimagine, strengthen and grow the portfolio. We’ve created a dedicated private brand team with new design, sourcing and merchandising roles, and broad cross-functional support. The team is now executing our vision for a differentiated, defendable and durable portfolio.

Our approach is rooted in consumer insights. Our team has conducted over 80,000 online surveys, 35 days of digital community engagement, and hundreds of hours of in-store fit research and shop-alongs. This data has informed our go-forward strategy, which is focused on five key pillars; brand identity, original design, strategic sourcing, relevant size and fit, and compelling value.

The role of private brands is to drive customer loyalty, be a differentiator for our business, complement our matrix of national brands, and benefit our gross margin. We currently have 24 private-label brands in the Macy’s portfolio, which combined represented roughly 16% of Macy’s 2022 sales. Over the next three years, we will rigorously evaluate all of them and we’ll refresh, reimagine and replace brands.

As part of our commitment to inclusivity, our new portfolio will reflect customers across every life stage, style preference and price point. We started with an initial update of INC in mid-2022. Early results have been favorable with fourth quarter sales up 28% to last year.

So turning to our second growth vector, our off-mall smaller-format stores. These stores play an integral role in supporting our omnichannel ecosystem. We currently have eight Market by Macy’s and two Bloomies. These average about 30,000 square feet to 40,000 square feet or roughly one-fifth the size of our on-mall locations. Looking at the five Market by Macy’s and the one Bloomies that have been open for over a year, fourth quarter comparable owned plus licensed sales increased by 8% and 12%, respectively.

Off-mall conversion is significantly above mall locations, and customer experience scores on layout and neatness of the store, ease of the checkout process, and availability of colleagues are 25 points to 30 points higher. According to Placer AI data, off-mall centers have 2.5 times more visits than on-mall. Thus far, we are most successful in centers that include high-traffic concepts like off-price or grocery, where our unique products and brands provide a differentiated option. When opening in existing markets, cannibalization is lower than anticipated and new customer acquisition rates are higher than on-mall.

In 2023, we plan on opening four Market by Macy’s and one Bloomies. And if new locations continue to outperform, we will look to incrementally accelerate off-mall openings beginning in 2024. With our strong liquidity position, we are prepared to take advantage of opportunities as they present themselves.

We are currently evaluating the right number and mix of on and off-mall locations. Our ecosystem and customer are dramatically different today than when we announced our 125 Macy’s store closure plan in February of 2020. Since then, we have closed approximately 80 Macy’s locations and plan to close another five this fiscal year. We have shuttered our most significant underperformers, exited dine [Phonetic] centers and improved the existing store experience, while delaying closures of others that are cash flow positive. Today, roughly 99% of our mall base is profitable on a four-wall basis.

Our third growth vector is our online Marketplace. Over the last year, we have built a team focused on identifying, recruiting, onboarding and supporting sellers. Since its launch last September, we have founded over 90% of our total Marketplace customer base are Macy’s cross-shoppers.

Additionally, Marketplace, number one, captures incremental sales opportunity in categories and brands where we have historically limited offers, such as video games and electronics; two, drives a larger average order value and higher units per order; three, allows us to quickly move into new and adjacent categories without inventory risk; four, gives our customer more choice at scale; five, enables us to ship channels for certain customer-wanted brands that do not have a high velocity of sell-throughs; and six, attracts a new younger customer.

We have plans to add 2,000 brands on Macy’s Marketplace this year and to launch a Bloomingdale’s Marketplace in the back half.

Luxury is our fourth growth vector. In 2022, both Bloomingdale’s and Bluemercury achieved their highest annual sales volume in history. Congratulations to the teams. At Bloomingdale’s, which just celebrated its 150th anniversary, Loyallist members accounted for over 70% of owned plus licensed comparable sales and spent 7% more year-over-year. Our top of the list loyalty customer, defined as Loyallists, who spend at least $5,000 annually, spent 9% more year-over-year.

Over the past several years, we have used data and analytics to allocate assortments on a store level, including an elevated mix of brands and categories at our top locations. And across our base, we have been refreshing and remodeling our center core areas. Response from customers and partners has been positive and we plan on accelerating this program in 2023.

Bluemercury has been under new leadership since mid-2021. Over the past year, our active customer base grew by 12% and our loyalty customer, which represents over 80% of sales, spent roughly twice as much as non-loyalty. Outstanding service, exclusive events and cutting-edge national and proprietary brands continue to be top priorities.

At Macy’s, our focus on luxury beauty continues to strengthen our presence with great brands. Over the past five years, we have been actively updating our beauty departments and plan to renovate roughly eight to 10 per year over the next several years. These are full beauty floor remodels, where we will add new brands, right-size some existing brands, and focus on adjacencies and services. A key piece has been upgrading our luxury omnichannel beauty experience with brands like Armani, CHANEL, Creed, Dior, Jo Malone, La Mer, Tom Ford and YSL Beauty. We are also working with our luxury brand partners to create memorable events such as our Dior Made with Love experience at this year’s upcoming flower show.

The fifth growth vector is personalized offers and communication. By targeting at the customer level, we can build loyalty, grow customer lifetime value and further protect margins. This year, we have run tests with tens of millions of Macy’s customers, including our Star Rewards members who represent roughly 70% of our Macy’s owned plus licensed comparable sales. The test is focused on individualized promotions and consistent cross-channel experiences. We’re pleased with the early learnings and we will continue to refine offers and communication to make the experience more tailored and intimate.

It’s an exciting time to be here at Macy’s. We have exited 2022 more relevant, flexible and disciplined with a firm understanding of what it means to be a successful, modern department store. We are committed to freshness across categories. Our model allows us to pivot product, promotions and messaging. We will buy conservatively, preserve liquidity and open-to-buy, and not chase unprofitable sales.

We are confident in the amount, composition and mix of inventories, and we will continue to evaluate macro indicators and customer data to respond to signals, positioning us to compete and win regardless of the environment.

So, with that, I’m going to turn it over to Adrian for more detail on our fourth quarter and forward outlook.

Adrian V. Mitchell — Chief Financial Officer

Thanks, Jeff, and good morning, everyone. 2022 was a year of volatility and uncertainty, and provided further proof that the disciplines we have built into our business are driving us forward and strengthening our modern department store positioning. Our diversified model allows us to respond to shifting demands of our customers across categories, brands and the value spectrum.

As we look ahead, we are confident that the investments we’re making to date in our five vectors will drive long-term profitable growth. We will balance testing and iterating to ensure that we scale these critical initiatives with an educated perspective on their ability to contribute a high return to our business.

Now, I’ll take a few moments to walk through the fourth quarter results of our five value-creation levers before providing additional details on our expectations for 2023 and beyond.

First, omnichannel sales. We generated net sales of $8.3 billion for the fourth quarter, a decline of 4.6% versus the prior year and down 0.9% to 2019. Comparable sales on an owned plus licensed basis decreased 2.7%.

Moving to the second value creation lever, gross margin. Our gross margin rate was 34.1%, down 240 basis points from the prior year and down 270 basis points versus 2019. Of the year-over-year decline, 300 basis points was due to lower merchandise margin, primarily driven by higher markdowns and promotions relative to last year when inventory constraints in the industry led to low promotions and robust full-price sell-throughs. This year’s higher level of markdowns and promotions reflected our commitment to end ’22 at the right level and composition of inventory, and our response to the competitive retail environment, both of which were contemplated when we provided our fourth quarter outlook.

While markdowns and promotions were elevated versus last year, they were better than our expectations. However, inventory shortage was above plan and prior year, due to increased step consistent with trends seen throughout retail. Despite merchandise margin degradation, Macy’s, Inc. owned AUR rose 2% in the fourth quarter driven by ticket increases and category mix. For the year, owned AUR increased over 4%.

Delivery expense was 60 basis points below last year on a 2 point decline in digital penetration and lower peak delivery surcharges. Compared to 2019, gross margin degradation was primarily due to a 7-point increase in digital penetration.

The third value creation lever is inventory productivity. Inventory declined 3% year-over-year and 18% compared to 2019. Inventory turnover was down 4% from last year and improved 15% to 2019. We’ve made significant progress in leveraging data and analytics to better forecast sales demand, receipt timing and flow across the supply chain. In 2023, we will focus on more advanced inventory productivity initiatives, including improved automation and more flexible inventory allocation to drive higher sell-throughs and ultimately more sales.

Expense discipline is the fourth value creation lever. SG&A decreased $30 million or 1.2% to $2.4 billion. SG&A as a percent of net sales was 29%, 100 basis points higher than last year. Compared to 2019, SG&A improved by 110 basis points. The year-over-year rate increase was primarily driven by continued investments in colleagues across competitive pay, incentives and benefits. Retaining and hiring the best talent is imperative to operate at the caliber needed to deliver our low-single-digit sales CAGR target and a sustainable low-double-digit adjusted EBITDA margin.

We remain focused on increasing our productivity and managing controllable costs to align with our expense disciplines. However, as a result of the investments we have made and will continue to make in our people, we expect our 2023 SG&A rate to delever. I will discuss this further in a few minutes.

Within SG&A, Macy’s Media Network had net revenue of $57 million in the quarter and $144 million for the year, up 34% to 2021. Credit card revenues were $262 million, down $2 million from last year, but above our expectations. As a percent of net sales, credit card revenues were 3.2% or 20 basis points higher than the prior year, primarily benefiting from higher balances in the portfolio and better-than-expected bad debt levels.

As Jeff mentioned, we expect the consumer to continue to be under pressure in 2023. Within our portfolio, we see higher credit usage trends, slower repayment rates and increasing bad debt levels. While not at 2019 levels, we are watching these metrics closely to get perspective on the consumer and the potential impact on credit card revenues, particularly profit share which is the largest component of the credit revenue stream.

In addition, we are reviewing the Consumer Financial Protection Bureau’s proposed rule relating to late fees and are evaluating the implications that the proposed changes may have on the credit card program. Due to the uncertainty around the proposed rule, our outlook for 2023 does not reflect any estimate for a potential impact.

Fourth quarter diluted EPS was $1.88 versus $2.45 in 2021 and $2.12 in 2019. Adjusted EPS exceeded our expectations, even excluding benefits from the better-than-expected interest income, due to higher interest rates and a lower effective tax rate, largely due to a favorable state income tax settlement.

Lastly, the fifth value creation lever is capital allocation. We continue to take a balanced approach to capital allocation with an ongoing focus on maintaining a healthy balance sheet, investing in our business and returning capital to shareholders. In 2022, we generated $1.6 billion of operating cash flow compared to $2.7 billion last year. The year-over-year decline was primarily due to lower earnings and last year’s receipt of the $582 million CARES Act refund in the fourth quarter.

During the year, we invested $1.3 billion in capital expenditures, of which roughly two-thirds related to enhanced omnichannel capabilities, digital and technology, data and analytics, and supply chain modernization. Free cash flow, inclusive of proceeds from real estate, was an inflow of $457 million in 2022.

Our focus and discipline around balance sheet health has contributed to strong leverage with an adjusted debt-to-adjusted EBITDAR leverage ratio of 2.0 times, in line with our target. We have paid down over $1.8 billion of long-term debt since August 2021, inclusive of the $1.3 billion secured note we issued during COVID in June 2020, and have no material debt maturities until 2027. Additionally, we benefit from having fixed-rate debt in a rising interest rate environment.

Our balance sheet gives us the capacity to invest in initiatives that drive long-term profitable growth. We expect approximately $1 billion of capital spend in 2023. Over the next three years through 2025, we expect to spend up to $3 billion in total capital expenditures focused on digital and technology investments, data and analytics, supply chain modernization, and omnichannel capabilities, including our growth vectors.

We expect to continue returning excess cash to shareholders through dividends and share repurchases, and are pleased to have recently announced a 5% increase in our annual dividend resulting in a quarterly dividend of $0.165 per share. We will continue to apply a thoughtful approach to excess cash with our remaining $1.4 billion share repurchase authorization.

Next, I’ll spend some time discussing 2023 guidance and expectations. Our 2023 outlook reflects heightened uncertainty surrounding both the consumer and the macro environment. We believe allocation of spend between goods and services and essentials and non-essentials will continue to shift away from discretionary categories. The low and high end of our guidance reflects various scenarios regarding the severity and duration of headwinds, offset by how we can and will respond. To pause on that, we believe our tools and processes give us the ability to navigate dynamic environments. We have the flexibility to respond to changing demand and the freshness customers are looking for. This is supported by financial and operational health.

Before discussing our outlook, I have two housekeeping items. First, fiscal 2023 is a 53-week year. This is reflected in our guidance, unless otherwise noted. Second, beginning in the first quarter of 2023, we’re planning to combine credit card revenues net and Macy’s Media Network’s net monetization revenue as part of our other revenue line item in our income statement to provide increased transparency. Historically, monetization revenue has been reported as an offset within SG&A, while credit card revenue has been reported as its own net revenue line item.

In conjunction with this change, we will begin presenting SG&A and adjusted EBITDA as a percent of total revenues rather than net sales. Total revenues will include net sales and other revenue. Additional information on this presentation change, a reconciliation to prior years, and full details of our 2023 guidance are available at the back of our earnings presentation on our website.

For the full year, our expectations for Macy’s, Inc. are as follows. Net sales of $23.7 billion to $24.2 billion, representing a low-single-digit year-over-year decline, reflecting our view that the consumer will be more challenged in 2023 relative to 2022. Comparable sales on a 52-week owned plus licensed basis to be down approximately 2% to 4% year-over-year. Digital as a percent of net sales to be roughly 32% to 34%. Other revenue to be about 3.7% of net sales with credit card revenues accounting for approximately 84% of that. Our credit card revenue outlook assumes increased bad debt compared to 2022, reflecting recent credit card portfolio trends. A gross margin rate of 38.7% to 39.2%.

Our disciplined approach to inventory management and pricing science should result in lower markdowns and promotions year-over-year. We will continue to refine location-level pricing and expand machine-learning pricing capabilities to automate strategic promotions from vendor direct inventory to owned inventory. Partially offsetting these benefits is the lapping of ticket increases in 2022 that we do not anticipate repeating.

SG&A as a percent of total revenue is expected to be about 35%, reflecting ongoing investments in our colleagues and infrastructure, consistent with our focus on long-term profitable growth. On payroll, we see these investments in three ways.

First, customer experience. Store productivity has increased over 20% since 2019. Our innovative selling model has improved productivity, while providing a convenient and experiential in-store shopping journey. Second, we must pay competitively to recruit and retain the best talent. The strength of our colleagues is on full display with recent performance, where we achieved a 10.8% annual adjusted EBITDA margin rate, despite a volatile macro environment. And third, the new capabilities we have and are continuing to build require different skill sets than we have historically needed. We have thoughtfully added dedicated teams to support growth, resulting in over 100 new colleagues. The capabilities we’ve added have helped support our operational strength and control and are critical to the success of our growth initiatives.

For non-payroll expenses, which account for approximately 55% of our SG&A, we managed well against inflation in 2022, achieving low-single-digit growth despite roughly 6% increase in the consumer price index. We will continue to be disciplined with our expense management in 2023 and beyond.

We expect asset sale gains of $60 million to $75 million, reflecting anticipated headwinds from rising interest rates. Adjusted EBITDA as a percent of total revenue of roughly 10% to 10.4% or 10.3% to 10.8% as a percent of net sales, and interest expense of $165 million.

After interest and taxes, we are estimating annual adjusted earnings per share of $3.67 to $4.11. Our adjusted EPS guidance does not assume any impact for potential share repurchases.

As we think about the first half versus second half of 2023, we expect year-over-year sales performance to be softer in the first half. As a reminder, in the first half of 2022, the consumer was still benefiting from stimulus as well as a return to travel, occasions and events. This was particularly evident in the first quarter of 2022 when we posted a 13.6% year-over-year net sales increase, making it our strongest sales growth quarter of the year.

In the second quarter, starting around Father’s Day, we began to see a slowdown in pandemic-related categories, increasing inflationary pressures and savings rate declines, which impacted sales and gross margin. These pressures build through the year. In the second half, we are anniversarying an accelerated weakening of the consumer, a shift in spend to services and essential goods, and excess industry-wide inventories and composition misalignments, which subsequently led to heightened markdowns and promotions beginning in the fall of 2022.

For the first quarter of 2023, we expect net sales of $5 billion to $5.1 billion. Adjusted EPS is expected to be $0.42 to $0.48. In addition to the quarterly sales comparison I just discussed, our net sales outlook assumes that the strongest sales we experienced in the peak holiday season and into January do not continue as the consumer further depletes their savings and becomes even more selective in their spend across goods and services.

Gross margin rate is expected to be down no more than 20 basis points for the first quarter of 2022[Phonetic] and our outlook also includes a $7 million asset sale gain we expect to recognize. End-of-quarter inventories are expected to be down mid-single digits to last year on a percentage basis.

We have made great progress transforming our business. We have achieved financial and operational stability, while navigating the past three years of global uncertainty. Now, more than ever, we believe we are poised for long-term profitable growth, leading to additional shareholder value creation.

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

Jeff Gennette — Chairman and Chief Executive Officer

Thanks, Adrian. So, as we look to 2023 and beyond, we have the capabilities, infrastructure and discipline in place, supported by a highly-engaged team that is incentivized to win. We are taking a prudent approach to our capital allocation to protect our financial health, which provides us with significant flexibility to respond to changing trends, while also prioritizing our five growth vectors. This provides the fuel to achieve sales growth beginning in 2024. We look forward to sharing more on our progress in the coming quarters.

And operator, we are now ready for questions.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] The first question is coming from Brooke Roach of Goldman Sachs. Please go ahead.

Brooke Roach — Goldman Sachs — Analyst

Good morning, and thank you so much for taking our question. Jeff, can you elaborate a bit more on the inflection to positive sales and comp growth that you’re expecting beginning in 2024? What gives you the confidence in that inflection against a choppy macro? And what are the key drivers there? And then, perhaps, for Adrian, can you also provide some additional context on how you’re approaching sales guidance for 2023 and in particular 1Q? Have you seen a deceleration in the consumer recently that’s driving that conservatism? Thank you.

Jeff Gennette — Chairman and Chief Executive Officer

So, good morning, Brooke. And I’ll take the first part of your question about — so, our growth outlook is really supported by the five growth vectors that we spoke to on the call. And we’re not ready to size each growth vector individually, but we will definitely give everybody an update on that in the future. We’re in the early innings of these growth vectors, but we’ve been building them for a couple of years and we have a lot of confidence in them. So let me just kind of check through them.

I think the first one is the private brands reimagination. So this is — when you think about — we are — we started touching the private brands about two years ago with new talent that we brought in. We looked at existing brands, so we wanted to reburnish. INC is a good example of that. And you saw in the fourth quarter, INC is our biggest, most powerful missy brand, picked up 28% in the fourth quarter. The new brands start to launch in the back half of 2023 and we have a very aggressive schedule going through all — through the — through 2025. Right now, private brands is about 16% of our business and we know that can grow, but it’s lots of refreshed content, replacement of existing brands and adding new brands.

The second one is really off-price or off-mall expansion, and we’re just really focused on unlocking the full potential of our off-mall fleet knowing that what a storage base does to our overall omnichannel business. So, I think, the headline here is that the ones that we’ve opened, we have eight on the Macy’s side, two on the Bloomingdale’s side. When you look at those that have been opened more than a year and you look at the fourth quarter business that are on the Macy’s side have picked up 8% from the fourth quarter and on the Bloomingdale’s side have picked up 12%.

It’s attracting a new raft of customers. It’s helping the digital business in those zip codes. We are looking for — we’re going to be launching new ones in 2023. And by the end of the year, we are hoping for a scalable model.

If we look at the digital Marketplace, so this is one that we launched in September of 2022. We ended the year with 500 brands and also 20 new categories. So aggressive schedule there. We’re looking to add 2,000 more brands in 2023, and importantly, we’re launching a Bloomingdale’s Marketplace in the back half of this year.

And we talked about luxury brands. And so, as we mentioned, Bloomingdale’s and Bluemercury as well as Macy’s Beauty, where we have a lot of luxury offerings. But the Bloomingdale’s and Bluemercury had a record year in 2022 and Macy’s Beauty, with great strength in fragrance and skincare and color, we’ve added a number of brands with a lot more coming. So, we’re investing in both the online and the in-store remodels and experiences to really bolster that.

And then the last is really personalized offers and communications, which has so many benefits. When you talk about relevancy of communication that goes to customers, reducing — giving value — very specific targeted value to certain customers. And so we are running lots of tests for reaching tens of millions of customers. We’ve been — we’ve always got something going on each week and we are very encouraged by the early results, but we’re not expecting on this particular one to see meaningful benefit until the end of 2024.

So, all these initiatives are really intended to drive long-term profitable sales growth, which we’re targeting to achieve in 2024 and beyond. So, I’ll give you more updates as we get into all of our earnings calls, but I’ll turn it over to Adrian for the second part of your question.

Adrian V. Mitchell — Chief Financial Officer

Good morning, Brooke, and thank you for your question. Excuse me. The first thing I would say is that we do enter 2023 in a position of strength. When you think about our disciplined inventories down 3% to last year, down 18% to 2019, our data-driven decisions, our financial and operational health, which, from an execution standpoint, has been on display in 2022, we really step into 2023 with confidence. But we also recognize that the consumer remains under heightened pressure.

So, as we think about the sales glide path for 2023, let me just kind of walk through kind of how we thought about it, which will provide a bit more context on the improved trajectory that we see for 2023. So in the first quarter, if you reflect on 2022, the first quarter was our strongest quarterly year-over-year compare. We’re up 13.6% last year in the first quarter, and this was a point in time when we were effectively — government stimulus was still out there, there was a clear resurgence in terms of return to work, occasion, travel and there was inventory constraints that were really beginning to loosen, but still a little bit tight at that point in time.

As we got into the second quarter, the consumer was still relatively healthy and inflationary pressures began to intensify as consumers began to reallocate from goods to services. So, we saw that pivot begin to kind of pick up. And as the supply chains loosened and inventory really flowed into the retail context, the promotional landscape began to intensify.

Now, as we think about the third and fourth quarters, the macro pressures, the excess inventory surpluses, the continued inflation really created a lot of challenges that you’re very aware of as we think about the third and fourth quarters. So as we think about the compare to last year, you have that intensifying period over the course of last year. And what we’re saying is that we expect to have more of a recovery as we think about our trajectory from the first quarter to the second quarter, as well as targeting sales growth in 2024. And we assume that this growth that we expect in 2024 will remain in a situation where the consumer remains under pressure.

But given the growth vectors that we’ve discussed, we have confidence that we can achieve that growth by 2024 from an annual basis. So that gives you a little bit of a sense of the composition.

Now, as we think about the fourth quarter, the only thing I would add is, we learned a lot about gifting in 2022. That was a real strength for us, and we’re excited about what we’re actually positioning ourselves to do in the fourth quarter of 2023. So that certainly gives us confidence in addition to the 53rd week, which will benefit from in the fourth quarter.

Operator

Thank you. The next question is coming from Oliver Chen of TD Cowen. Please go ahead.

Oliver Chen — TD Cowen — Analyst

Hi. Thank you very much. You gave a lot of helpful comments on a cautious consumer. What’s in your control as you think about the product assortment and the switch of the consumer demand? And as we model forward, what are you embedding for traffic? Would you expect traffic to continue to be fairly volatile? And lastly, the younger customer. As you intersect the brand renovation and private brands, what’s top of mind for captivating and getting the younger customer into the store? Thanks a lot.

Jeff Gennette — Chairman and Chief Executive Officer

So, let’s talk about it. When you think about, Oliver, on your three questions on product assortments, we see similar trends to what we’re seeing right now. So you basically have occasion-based categories that are still strong. And so when you look at what’s going on in dress up, when you look out luggage, categories like that, those will continue. We do have those models, the pace to start to abate as you get into the back half of the year, but still strong.

When you look at the businesses right now that have been quite challenged for us, the pandemic categories, we do actually expect them to start to pick up as we get into the back half. I think the big thing when you look at our disciplines and what we’ve done with inventory control is that, we’re ready to be able to pivot where the customer goes on this. We’re watching this very carefully. We look at our trend curves. We look at what’s going on in Bloomingdale’s, which is, in many cases, early warning for us about things that are really doing well or will do well, and those that are starting to taper off.

The liquidity that we’ve built into our open-to-buy is really — gives us the flexibility or we call dry powder, to be able to respond to where the customer is going. So, we have done that well. We control our inventories, and we are very disciplined about how we’re allocating receipts.

With respect to traffic, traffic has been relatively good. We expect that to continue. The consumer is still healthy and we’re looking at conversions across both online and in-store to ensure that we are maximizing all that traffic that we’re getting, but the consumer is under pressure. And so — and we expect what we saw particularly with self-purchase that we quoted in the beginning of January that that’s going to continue all the way through 2023. So our guidance anticipates that.

And then to your question about the younger customer, clearly, there are categories right now that we’re winning very much with the younger customer. We expect those to continue, where we have market share strength there. And then there is categories when we look at apparel. So, the comment about private brand reimagination is really going to respond to all the life stages, which includes kind of the Gen Z and the alpha customer. And so looking forward to sharing those opportunities in the future as well as this younger customer and how we can take care of them with other offerings, particularly in Marketplace. So that is very much in our mind when you look at the new categories that we’re adding, the new brands that we’re adding, and look at this younger consumer and the opportunity to address them that way. And what we’re seeing from Marketplace is categories that are doing well. We have the opportunity to bring them into our own format in the future. We’re evaluating that right now based on early learnings we’re getting from successes on Marketplace. So the younger consumer is clearly in our sights.

Operator

Thank you. The next question is coming from Chuck Grom of Gordon Haskett. Please go ahead.

Chuck Grom — Gordon Haskett — Analyst

Hey, good morning. Great execution, guys. I’m curious what you’re seeing on spend across some of your different income cohorts, the low-end and at the high-end. And then, Adrian, I think the real surprise here this morning is the gross margin guide, which obviously demonstrates a lot of confidence. So just wondering if you can dive into that, particularly things that you can control in terms of pricing on the localization level and other factors that give you that confidence that you can hit 38.7% to 39.2% in this year?

Jeff Gennette — Chairman and Chief Executive Officer

Hey, Chuck, it’s Jeff. So I’ll start with your question about income tiers, and then I’ll throw it to Adrian to talk about gross margin. So, what I’d say is that all income tiers are going to be pressured in ’23. As we’ve seen since the second quarter, we’ve actually seen very similar trends across income tiers at Macy’s. So really for the last two quarters.

I guess the good news on this is that we have a broad range of categories and price points that we get to lean into, the inventory discipline, the open-to-buy. I think the big thing to remember is what we did in the — in really at the beginning of 2020 when we went to kind of an upfront net cost model with our — most of our suppliers and massively reduced the reliance on our markdown allowances.

The other thing that we did at the same time was that we based our incentives for our merchants on the enterprise sales versus their functional sales. That really made receipts and markdowns be an enterprise opportunity, and it gave us then the opportunity, particularly what you’re going to see in 2023, to layer in these open-to-buy reserves on top of a more conservative view and a more cautious view of where the consumer is going. So that is — we’ve been able to respond to that.

I think when you look at it from off-price to luxury, when you look at our nameplates and our brands, what we’re seeing is that the consumer is pressured. I would like to comment about luxury. So, luxury just continues to have strength. When you look at the Loyallist program at Bloomingdale’s, that spend was up 7% in the fourth quarter and the top of the list, which is the top of that, which is a big chunk of the overall business and very profitable business, that was up 9%. So we expect — we think about share of wallet, we have opportunity to capture more and particularly that top of the list. And that luxury consumer, they’re really spending where there is scarcity and when there is specialness.

So, what we’re doing at Bluemercury, what we’re doing at Bloomingdale’s and what we’re doing in the beauty area at Macy’s is really helping our customers see us as a place where they can buy these categories because they’re so discerning in their purchases. So, where we see softness and where we see strengths, we’ve got a model that is ready to respond to all income types.

Adrian V. Mitchell — Chief Financial Officer

Chuck, good morning to you. So, as it relates to our gross margin outlook for 2023, I think one of the things that’s been very consistent that you’ve heard from us is our commitment to margin expansion as well as our commitment to inventory productivity. And so, overall, as you look at 2023, we’re looking to have lower markdowns, more effective promotions to offset partially by lower ticket price increases. But let me just kind of give you a little bit of a complexion of the three things that we’re focused on.

The first is healthy inventories. So when you think about inventory being down 3% to 2021, which 2021 was a year of inventory scarcity, our inventory composition as well as our levels are actually quite healthy. So the strength of freshness and to be able to sell-through the items that we put in front of the customer, that’s something that we’re pretty excited about and we have the flexibility in our open-to-buy reserve to respond to sales demand signals to be able to get and maintain the right composition throughout the season.

The second thing is really more focused on compelling promotional events and reducing our broad-based promotions, while levering up our personalized offers and communications so that we can have more regular price sell-throughs. We’ve already tested with millions of customers our personalized offers and communications thus far this year. We are pleased with the results that we’re seeing. And in combination with that, we’re really committed to not chasing unprofitable sales. That served us well in the fourth quarter and that will also continue to be a principle as we get into the new year.

The third is really the mix of categories. We’ve been very disciplined operationally in terms of how we think about the pivot of the customer and where he or she is spending. And so we’re going to continue to do that, but we feel that freshness, fashion and newness is going to allow us to have more full-price sell-through, which is going to be able to help our gross margin.

So, when you think about opportunities like dresses and men’s tailored that’s not offered at scale in value retailers, we’re just very well-positioned for that kind of mix around the full-price sell-through to really enhance our gross margin throughout the year. So those are the things that we’re excited about.

We’re continuing to look at things like freight and raw material cost and opportunities there. We feel good about the progress that we’ve made there, but fundamentally we’re just being very disciplined on all the levers around gross margin and already have the momentum and traction to bring that into 2023.

Operator

Thank you. The next question is coming from Matthew Boss of J.P. Morgan. Please go ahead.

Matthew Boss — J.P. Morgan — Analyst

Great. Thanks. So may be two-part question. Jeff, when you think beyond this year about the sustainable top-line model moving forward, where do you see white space market share opportunity? And do you see expansion opportunity given the lateral store closures that appear to be picking back up? And then, Adrian, is it high-30s for gross margin in terms of the profile multiyear? And can you leverage the expense base at low-single-digit theme — at low-single-digit sales growth?

Jeff Gennette — Chairman and Chief Executive Officer

Hey, Matt. So I think the white space question is related to how many categories our customers signaling interest in Macy’s. I think we’re learning a lot from Marketplace and categories that when you think about video games, you think about electronics that were the most popular categories on Marketplace during the fourth quarter. We’re learning a lot about some of the apparel businesses and categories that we have added or brands that we have added. So there is big opportunity with that.

When you look at some of our lease opportunities and what we’ve been able to do, Pandora is a great example of that, that has immediately energized our entire jewelry floor at big productivity level, increases from what we had previously. We’re going to be expanding that. So we’re looking at all of the categories where we are — we play in and what’s our opportunity to narrow our assortment on the most important things and expand in areas that we’re not.

We’re looking at it by customer type. So, to Oliver’s earlier question about when you look at Gen Z and alpha, what are those categories that they want to traffic in and what’s the best way for us to bring that to market. From an own model, it may not be profitably — we may not get the ROI on that, but on Marketplace, it makes a great deal of sense. So expect us to look at the full portfolio. We have a big TAM. We do when you think about opening price, if you think about our off-price business is going out below $20, you look at Macy’s going out in the $40 range across the same categories and Bloomingdale’s is more than double that.

So depending on where those income tiers are and where those customers are, we’re looking at our full arsenal between VDF, hybrid, Marketplace and owned to be able to respond to that. And we now have the tools to be able to do that. When we look at it in the context of market share gains and new customers, we’re really looking at — and white space for us would also be customers that would consider our brands, but don’t go to [Indecipherable] because they don’t find our brick-and-mortar particularly convenient.

So there may be places — even though we’re in 49 of the top 50 markets, there’s many ZIP codes where we don’t penetrate because customers are going to off-mall and that’s how they’re satisfying their needs. That’s why we’re so excited about what we’re looking at in terms of Market by Macy’s and Bloomies. So expect us to continue to fortify that. When we do that, the digital flywheel and the omnichannel business start humming. So, that’s how we’re looking at where we’re going to go with white space and new customer opportunities.

Adrian V. Mitchell — Chief Financial Officer

Matt, good morning to you. So, to answer your question very simply on gross margin, we remain very focused on high-30s in terms of our gross margin rate. The thing to keep in mind is, as we continue to scale Macy’s Media Network, continue to scale Marketplace, those are additional profit pools that will certainly strengthen our margin profile. But you also raised an important question about SG&A, so let me spend a little bit of time on that because I think it is important to mention for us to understand.

The first thing is, in 2020, we were very committed through Polaris to reset our cost base and we actually did that. So if you look at 2019 versus today, we have about 30,000 colleagues less in the workforce, that’s about 27% less colleagues on sales in 2022, that’s relatively comparable to 2019 levels. But the important thing we have to keep in mind is that we cannot fuel growth without investing in our talent. And this was on display in 2022 when you think about the quality of execution and the success that we’ve had with the priorities that we’ve committed to over the course of the last couple of years. So that really was on display last year.

But let me just dimensionalize our payroll investments and speak to our successes on the non-payroll side. On the payroll side, as we make investments in talent, the first and foremost thing is around the customer experience. And what we’ve done in terms of in-store and supply chain is, as of May, we’ve actually have nationwide $15 minimum pay, but the important thing is that we’re continuing to see productivity, for example, in our stores above 20% relative to 2019.

The second piece is really around competitive pay. We have to retain and attract the top talent to execute at the level that we need to, to really think about growth in 2024 and beyond. And so you are very familiar with our growth vectors, but it’s about having the right team to deliver the kind of execution that we need to really win.

The last piece is really around the capabilities, and we’ve talked about this quite a bit over the years and really excited about the traction that we’ve been getting. You’re seeing data and analytics as a new capability, not a capability we had several years ago, and our pricing science has really served us well. Marketplace is now officially launched that didn’t exist six months ago. Private brands, we’ve made investments, and as we’ve talked about, we see growth opportunity there. Personalization is another dimension, Macy’s Media Network. So building new capabilities requires talented individuals from the industry and we’ve been able to attract and retain those individuals.

We do consider the way that we’ve managed non-payroll expense is a win for us. When we look at the data, the consumer price index is in the range of about 6%, some indices seem to be a little bit higher, but we were low-single digits during that period. So we’ve been very disciplined on that side. That being said, we remain committed to a double-digit — low-double-digit EBITDA profile on net sales and the total revenue, and that’s about discipline as we move forward.

Operator

Thank you. The next question is coming from Alex Straton of Morgan Stanley. Please go ahead.

Alex Straton — Morgan Stanley — Analyst

Great. Thanks for taking my question. Really two pieces. First is that you’re already hitting this low-double-digit adjusted EBITDA margin target, and I think that was your kind of longer-term hope. So, a nice outcome there. So maybe, is that still the right long-term target or what are some puts and takes there?

And then, secondly, just following up on the luxury piece and the questions earlier, I just wanted to zoom out. It sounds like you’re incrementally positive on Bloomies and Bluemercury as a part of the bigger luxury strategy, and I know some of the competitors in the space are struggling. So maybe you could help us understand how that opportunity has changed in the market broadly compared to, say, pre-COVID or if you’re thinking about it any differently than you did then? Thank you.

Jeff Gennette — Chairman and Chief Executive Officer

Hey, Alex. So let me start with luxury and then I’ll throw it to Adrian to talk about the double-digit EBITDA profile and how we’re kind of thinking about that in the future. So we are bullish on luxury. And this is a share gain for us in terms of going after the luxury opportunities. You have a customer that remains healthy. They have the resources. As I mentioned, they’re really spending with their scarcity and specialness. So the full omnichannel experience is quite important. What is the experience like online, what is it in stores, what it is — in many cases, there is a colleague-customer relationship that is quite developed. And they’re very discerning, our customers, on their purchases. So, how do we think about that?

So we are definitely committed to additional market share in — particularly when you think about Bloomingdale’s and you look at Bluemercury. So when you think about how that manifests when you look at Bloomingdale’s. So we have really want to be that customer’s consideration for a multi-brand upscale retail option. We just finished our 150th anniversary at Bloomingdale’s and spent a lot of time on content, on exclusive content, and really developing strong mutually productive relationships with established luxury brands. And this can be approachable to aspirational, a real curated expansion of luxury labels that our customers love. And those are adding new content not only on the website, but in individual stores is — and these can have huge effects on overall comps.

So we’re very focused on that. We’re using data and analytics. We’re leaning into the breadth of offering to ensure that we have the right content. I pointed to a couple of areas that we’re really focused on would be the luxury offerings as well as the advanced contemporary offerings. So that when you walk into a Bloomingdale’s, so you go on to the website, you know clearly what we stand for. And to — and that we believe is going to yield as it has in 2022, continued market share gains.

I think when you think about Bluemercury, and that had an outstanding year. And when you look at that new management team is doing a great job on there and — a lot of work on the horizon though. And so when you think about the strength that we have in proprietary brands there, it’s a big chunk of the business. When you look at what they’re doing, they got a 12% increase in active customers in 2022. So we are definitely focused on re- reinvigorating the client experience, refreshing the assortment and services because of the spa element of that to really cement us as a beauty authority in those price ranges.

We’re adding a rotation of brands in the cachet discovery platform, which is similar to what Bloomingdale’s is doing with their carousel program. And we’re explain — expanding our footprint in high-potential markets and neighborhoods.

And as I mentioned, when you think about Macy’s, when — we’re having a strong year as well as it’s been for a while in terms of the beauty area. So we’re actively renovating our beauty departments as well as refreshing our website. We’re renovating roughly eight to 10 stores a year and we’re really doing that by sizing down our existing offers and then expanding it with great brands that we’re adding. So I mentioned them in the call about what those are.

I think just — for those of you that are in New York, come to the Flower Show that we’re coming, and which is going to be in a couple of weeks. This Dior Made with Love is a massive collaboration we’ve done with a very important luxury brand that is really showing us as a fragrance destination, but married with the assets of what a true luxury brand can do with a retailer like Macy’s, Bloomingdale’s and Bluemercury. So just — that I think will give you the spirit of what we’re looking to continue to expand at scale.

Adrian V. Mitchell — Chief Financial Officer

Good morning, Alex. I’ll be very succinct on your question. So, first and foremost, look, we are certainly focused on long-term sustainable growth, and that’s really around low-single-digit growth on owned plus licensed sales as well as total revenue. And as Jeff shared, there are clear a number of vectors that we’re excited about at different levels of scale and maturity, but the most important thing is we’ve actually built that foundation in 2021 and 2022. We’ll continue to complete a lot of our testing in pilot in 2023, but we’re excited about the growth profile in 2024 and beyond.

From a low-double-digit EBITDA standpoint, we view that in terms of percent of revenue go forward. Starting in the first quarter, we will begin to report on a total revenue basis, but we are committed to that. We’re committed to the growth vectors and the margin expansion vectors that will get us there.

Operator

Thank you. The next question is coming from Dana Telsey of Telsey Advisory Group. Please go ahead.

Dana Telsey — Telsey Advisory Group — Analyst

Hi, good morning, everyone. As you think about the merchandise margin, which I believe was down around 300 basis points, how are you thinking about that going forward and especially the cadence as we move through the year? And on the data science journey, which seems to be very effective, how far along are you on that data science journey? Is there more to capture? And then just lastly, what are you seeing in shrink? How is that impact and how you’re planning? Thank you.

Adrian V. Mitchell — Chief Financial Officer

Terrific. So with regards to merchandise margin, we feel good coming into the year. So much of our merchandise margin is dependent on our inventory position, not just the level of inventory, but the composition. And where we tend to win is having fresh inventory where we can get full-price sell-through and our multi-category flexibility helps us quite a bit as well.

As you can imagine, over the last year, we pivoted into occasion-based and away-from-casual, and that has served us well. But when the customer comes back, we’ll be able to respond well. I think the disciplines around the open-to-buy to really respond to demand signals in local markets is going to serve us quite well. So we feel very good about that.

We’re in the, I would say, mid-to-late innings on data science. The reality is, given what we’re learning, it seems like the journey is not done. We continue to find more and more opportunities to expand margin profile through our data science. So it’s really fascinating to see the insights that are coming through the learnings we saw in 2022, but we’ll definitely take the opportunity to lean into the data at a much more granular level to make sure that we’re finding even more margin opportunity. So there is more upside for us, and we’ll be very clear about that as we continue to progress. As we think about our shrink levels, I’ll have Jeff speak to that briefly.

Jeff Gennette — Chairman and Chief Executive Officer

Hi, Dana. So shortage was worse than anticipated. And I think as you’re hearing from other posts, it’s an industry-wide trend. We definitely had an uptick since last year. Two factors. One is the shift — the channel shift that you have going from digital back to stores. So, obviously, you have more porous forgers in your stores than you do in your warehouses that are fulfilling most of your digital orders. So that was anticipated. And then you do have heightened theft in particular pockets of the country, and we are working aggressively with our teams and local officials on how we can better protect our assets in the future.

Operator

Thank you. The next question is coming from Paul Lejuez of Citigroup. Please go ahead.

Tracy Kogan — Citigroup — Analyst

Hey, thanks. It’s Tracy Kogan filling in for Paul. I just wanted to ask a quick follow-up on the last question on shrink. I was just wondering how much it pressured your margins this quarter. And then separately, you guys talked about changing the way you incentivize buyers and I’m wondering if you’ve had enough time, I’m not sure if you put that in place just in 4Q or a little bit earlier, but if you had enough time to see if it’s actually changing behaviors? Thanks.

Jeff Gennette — Chairman and Chief Executive Officer

Let’s talk about shrink first. So, as we’ve reported at — when we talked about it at ICR, there is — we built that into our reserve, and so recognizing the trends. We have RFID on virtually everything that we do. So we’re doing daily counts on our content. So we really know what’s going on in the course of our buildings. And so we build that into our shortage reserve and whereas that went higher, we built that into our expectations when we revised our posts or our guidance in the end of January. As it relates to your conversation about…

Adrian V. Mitchell — Chief Financial Officer

Buyer incentives.

Jeff Gennette — Chairman and Chief Executive Officer

In buyer incentives, that’s been in place really since the beginning of 2020. So when we went to the net cash cost model, we basically then looked at not only our bonuses, but also how we incent our colleagues based on what they get in their annual reviews. So that is not a temporary and was not a recent action. It’s been in place now for over two years.

Tracy Kogan — Citigroup — Analyst

And has it changed buying behavior? Has it — I assume if it’s continuing, it’s kind of having the effect that you want.

Jeff Gennette — Chairman and Chief Executive Officer

Yeah. When you think about it, a plan is we’re on the second — the new season starts, because of all — we’re making adjustments on our plans constantly based on customers. So to be able to react in real time to where customers are signaling interest, with what you do with receipts and what you do with markdowns and how you pull that back into — you might have somebody that is planning a business at a particular level, and it’s much stronger than that.

You want to make sure you’re giving them the receipts and according markdowns to be able to fuel that business. And somebody that is slowing down from an original plan, you want to be able to do that. If you’ve got those buyers that are owning those particular relationships and they’re incented on the original plan, that’s going to incent bad behavior. And what you really want to do is make sure that you’ve got behavior that is incenting where the customer is going. So I think it absolutely has changed the way that our teams are approaching being much more customer-centric and using the assets that we have to respond to that in real time.

Operator

Thank you. The next question is coming from Bob Drbul of Guggenheim Partners. Please go ahead.

Bob Drbul — Guggenheim Partners — Analyst

Hi, good morning. Excuse me. Just a couple of questions, just around pricing and AURs. When you look at what’s happening with the consumer, a number of your vendors have worked to take prices higher and AURs higher. I’m just wondering, do you see any reason to believe that some of the prices will need to come down? Or do you feel good about some of these initiatives that have taken place? I’m just wondering if you can maybe comment on that, that would be helpful. Thanks.

Jeff Gennette — Chairman and Chief Executive Officer

Hey, Bob. So let me talk a little bit about AUR and then have Adrian kind of reinforce what we’re doing with pricing to support that. I think what we’re expecting is when you looked at 2022, we had an increase of about 4% in overall AUR and that was largely ticket increases. I think what you’re going to see in 2023 is, there is going to be an increase in ticket prices, but not near the level that it was in 2022.

And so, when you look at the big change for us in terms of AUR is just having less and lower clearance markdowns that is moving through in the degradation of your overall AUR. We’re going to have targeted promotions versus as broad-based as they used to be. And with a rightsized inventory that is really tied to sales demand in real time to customers, it’s never perfect. But we’re getting better at allocation, we’re getting much better at really understanding where the customer is going in terms of potential trends and we’re getting better with pricing science, which I’ll turn it over to Adrian to give you some feedback on that.

Adrian V. Mitchell — Chief Financial Officer

Absolutely, and good morning, Bob. I would just reinforce the thesis that Jeff described, which is inventory health is the gift that keeps on giving. The reality is that it spills into allocation, it spills into full-price sell-through. And our discipline was initially the level, then we pivoted to the level of composition and now we’re into things like the appropriate allocation by market, by store, by channel. So it’s really a discipline that we continue to mine for additional benefits.

The pricing science is highly linked to that. We talked a couple of years ago about location-level pricing that is fairly scaled at this point where we’re able to really look at style, by location to be able to understand what is the optimal price to maximize margin. We’ve added the dimension of dynamic pricing which allows us to really understand, depending on a moment in time, what’s happening in the industry and how we need to respond.

But also I think the next lever that we’re thinking through quite a bit is this notion of personalized customer-centric offers and communication, which really allows us to begin to go after a reduced broad-based promotional platform. And that’s a tremendous opportunity. We’re very excited about what we’ve seen in our tests. So, overall, I would say there is more to come, but the pricing science capabilities continue to grow, to continue to expand and continue to get more sophisticated. And with that will come even more margin health.

Operator

Thank you. The next question is coming from Ashley Helgans of Jefferies. Please go ahead.

Ashley Helgans — Jefferies — Analyst

Hi, guys. Thanks for fitting us in. Most of our questions have been answered. Just wanted to ask one on digital versus stores. So stores obviously had a really strong year this year. A year ago, you talked about achieving low- to mid-40s digital penetration by 2024. Just was wondering if you could provide — or are you providing any update on that target? Looks like it will be around 32% to 34% this year. I know you have Marketplace scaling for both Macy’s and Bloomies. So just how focused are you on still scaling digital to that level? And then, Adrian, maybe how does that digital target impact your long-term margin goals? Thank you.

Jeff Gennette — Chairman and Chief Executive Officer

Let’s talk about — so digital obviously grew significantly over 2019. And when you look at our business in 2022, it was up 31% versus 2019 with traffic up 7% and conversion up 11%, but definitely a drop off from where we were in 2021. So kind of going through digital penetration through the years. It was at 25% in 2019. In the pandemic, it was — it hit the 40% level. In 2021, it abated and went to 35%. 2022, it went to 33%. And then to your comment, we do see it stabilizing right now at the 32% to 34% range. So that reset has really now occurred post-pandemic, and we have a new baseline for digital penetration in 2023. But we do believe that digital will grow in the future.

And you mentioned one of the big ones for us is not only getting better with functionality and experience, but also what we can do with Marketplace. So we have a lot of work for us — ahead for us on that, but we’re quite excited about the early learnings in that. We’ve done a lot on our website. We’ve done a lot with our mobile app. I mentioned Marketplace, but we’re leaving no stone unturned in terms of our opportunities in digital because part of the omnichannel flywheel is our presence there and how that basically addresses all the customer needs.

Adrian V. Mitchell — Chief Financial Officer

As we think about the destination for us, it’s really — excuse me, as Jeff described, a digitally connected omnichannel ecosystem. The stores matter, the digital matters, but how do you really integrate that in a very seamless way, that’s what the customer is looking for. When we think about our margin profile, we are focused on the low-double-digit EBITDA as a percent of total revenue going forward. And that’s something that we have a lot of conviction around.

When you think about the growth of the digital channel, it’s important to keep in mind that even though there may be an expense dimension, for example, parcel expense on the gross margin line, you do get a lot of SG&A leverage. So, as we think about the composition of our digital penetration versus store penetration, we’re obviously very focused on the impact of the different line items, but, ultimately, what is the bottom line margin profile that that delivers for us.

The other benefit as we think about digital is the expansion of capabilities that we’ve added. So when you think about margin health and you think about the flexibility of selling products on the own platform versus the vendor direct platform versus the marketplace platform, that’s an additional opportunity for us to optimize our profit profile. So we tend to look at a metric called dead net profit. So as you can imagine, as we think about our Marketplace profitability, there may be owned items that are more profitable on marketplace, and so that’s an opportunity for additional margin expansion.

So those are the kinds of operational things that we’re going after. But from a digital standpoint, we have many, many vectors to protect our margin expansion goals with various levels of digital penetration.

Operator

Thank you. At this time, I’d like to turn the floor back over to Mr. Gennette for closing comments.

Jeff Gennette — Chairman and Chief Executive Officer

So thank you, everybody, for your interest in Macy’s, Inc. brands, and we look forward to updating you on our five growth vectors on our first quarter earnings call. Everybody have a great day.

Operator

[Operator Closing Remarks]