CFO Perspective: Investing in Data-driven Analytics to Navigate Headwinds – Before they Arrive

Over the past two and a half years, the retail industry has evolved at a pace previously unseen. In many ways, the pandemic’s impact on our industry acted as a time machine – catapulting us years ahead earlier than expected.

At Macy’s, Inc., we recognized we needed to transform our business back in 2019 and began to map out our Polaris strategy. Unveiled in February 2020, the Polaris strategy was designed to reset our cost base, stabilize our profitability, return our company to growth and, most importantly, provide a seamless, omnichannel shopping experience for our customers. As the industry has rapidly evolved, our strategy has steadily and consistently guided our transformation while also providing the tools necessary to navigate through headwinds – all while keeping the customer at the center of our decision making.

As part of our strategy, we knew that in order to transform at the pace needed, we had to embed technology, data and analytics into our operations. We made strategic investments in technology-based initiatives, data science and the simplification of our technology architecture. As a result, we’re deriving far more insights about customer purchase behavior and shopping experiences which enables our decision-making to be more informed and operations more efficient than even just a year ago. This shows up for our customers through a consistently seamless and convenient shopping experience across our channels.

You cannot underestimate the power behind technology and data science. We know that even just one bad experience can drive a customer away. Technology and data science are enablers for our colleagues to be able to provide the best experience for our customers, which is crucial when navigating headwinds such as:

1.????Ongoing Supply Chain Disruptions

During the first quarter, the loosening of the supply chain resulted in a higher percentage of receipts arriving on-time or earlier than expected. Despite this, thanks in part to our investments, we managed inventory effectively and continued to deliver productivity gains. Our efforts resulted in an 18% improvement in turnover versus 2019 and even a 9% improvement compared to 2021, which had abnormally low inventory levels at the beginning of the year.

Within our supply chain, we’re utilizing machine learning and automation to improve inventory allocation, replenishment, forecasting and lead time management. For example, we use data and analytics to forecast lead time disruptions so that we can adjust modes of transportation accordingly. That way, product flows into the right markets at the right time to meet customer demand.

Effective inventory management remains a strategic priority for us. We are working actively to better align inventory metrics to actual sales trends through faster sell-through of our ?merchandise and adjustments to our buys to reflect the changing environment. The data science we continue to build into the business is key to the success of this work and helping to ensure we maintain strong margins.

2.????Changing Customer Behaviors

During this past quarter, we also saw customer buying behavior shift away from casual/active apparel and to occasion-based apparel, as well as from online shopping to in-store shopping. According to a PWC study, 73% of all people point to customer experience as an important factor in their purchasing decisions. We knew that we needed to pivot quickly to meet demand. Our digitally led, omnichannel ecosystem enabled us to deliver both what they wanted to shop for and where they wanted to find it.

At quarter end, our work resulted in inventories rising 17% from 2021 levels on a 13.6% increase in net sales. Compared to 2019, our inventory levels were down 10% - proof of our improved, disciplined purchasing and inventory management, despite continued supply chain shocks and changing consumer trends. To improve our demand forecasting, we're continuing to leverage predictive analytics and testing data science which enable us to be more personalized and targeted.

We’re shifting our promotions to be more personalized and targeted to the individual customer. We're focused on personalization as an important growth engine. And we continue to ramp up our capabilities to increase engagement, particularly with our highly engaged omnichannel shoppers, who are our best customers.

3.????Mounting Inflation

Inflation is certainly the largest headwind we continue to face and is increasing our cost of doing business - including our costs to produce our private brands as well as operating costs such as fuel and utilities. It is also impacting the consumers’ capacity to spend on discretionary goods and services.

In this highly dynamic and uncertain operating environment, we continuously look for ways to avoid raising prices for our customers while also protecting our margins. One of these ways is pricing science, which we utilize to change the timing, cadence and size of markdowns based on inventory availability, sell-throughs and demand patterns.

Our investments in data and analytics enable us to improve our pricing science and inventory allocation to make sure that our inventory mix and levels meet customer demand, minimizes markdowns and supports forecasted sales.?

As we move forward, we are continuing to invest in our technology and data science capabilities. These investments allow us to anticipate and evolve with shifts in customer demand, provide a first-class customer experience, build our competitive advantage and enhance long-term shareholder value.