So good morning and welcome. So I want to thank each of you for your interest in Macy's Inc. But before we begin, many of our colleagues are listening in right now. And I want to acknowledge that this is a very tough time in our organization and a tough time for our week with the announcements that we made yesterday. We announced many organizational changes, campus closures and additional store closures.
We're saying goodbye to many good colleagues and close friends. We are taking the organization through significant restructural change to get costs down, bring our teams closer together and to reduce duplicative work. We're making deep cuts that impact every area of our business. Now these changes are painful, but they are necessary. And I know that we will come out of this transition stronger, more agile and better fit to compete in today's retail environment.
So today, we're going to share our Polaris strategy to improve Macy's, Inc. Financial performance by stabilizing margins in 2020 and then growing our profit and cash flow over time. This strategy capitalizes on Macy's strengths, which I will address in a moment. It also addresses a number of legacy issues that were created to drag on our business, and it recognizes the ongoing secular shifts that are in retail today. So first, a quick review of the past 3 years since we had our last Investor Day.
So 2017 was a year of investment. After 11 quarters of negative comp sales, in Q4 of 2017, we comped positive, which kicked off 7 consecutive quarters of comparable sales growth. In 2018, our strategic initiatives brought us back to positive annual comparable sales growth of 2%, but we did not stabilize profits and we had a disappointing holiday season. 2019 was a tough year for Macy's Inc. And frankly did not play out as I intended.
While we executed holiday of 2019 well, our quarter to quarter performance was inconsistent. We have shown the ability to drive top line growth, which is important as it validates that we have a customer base that responds to our brand. But over this 3 year period, we also experienced margin compression, negative trends in EBITDA and reduced free cash flow. And we know this is a trajectory that we urgently need to reverse. So what are we solving for?
So we have some legacy challenges. Macy's, Inc. Was created over a series of acquisitions. While we've done a lot over the years to consolidate and align the various businesses under the Macy's brand, our people were still dispersed across too many campuses. Our store operations had duplicative support structures across both regional and district teams.
And our organizational structure, while improved by the changes that we made in 2019, was still too unwieldy. Our fixed cost base has grown faster than our sales. So we are resetting beginning with the organizational changes that we announced today. Our store fleet is too large to maintain at brand rights standards and is missing market opportunity. So we are optimizing our store fleet.
We're closing underperforming stores in lower tier malls. We're continuing the growth treatment in the best malls, and we're exploring off mall opportunities. Our business is overly reliant on our best customers. So we are expanding our successful loyalty program to increase the engagement with customers who shop with us only occasionally and to bring new customers into the brand. Our merchandising strategy has had fashion misfires, resulting in gross margin degradation.
So we are committed to curating the latest trends, exclusive products and best brands at great value, while balancing sales and margin. And we are taking a more focused approach to our higher margin private brands with plans to build $41,000,000,000 brands. Our digital experience has lagged in responding to the high bar customers have set today. So we are continuing the site and mobile upgrades that we began last year to create the best fashion digital experience. And we are relocating macys.com to New York City, the heart of the fashion industry.
These are all aspects of the business that are under our control and that we are taking action. Now looking externally, we all know that Macy or America is overmauled and over retailed. We see a bifurcation of malls, with the lower tier malls continuing to decline rapidly and the healthier malls beginning to stabilize with investment from their developers. America loves to shop, but our customers shop differently than they did 3 years ago. They have set the bar high on retail experience, both in store and online.
They expect to be able to move and transact seamlessly between stores, .com and mobile. Fast and free shipping is becoming the norm and clear value is required. The retail environment is moving business and significantly speed up the metabolism of the organization. We are clear eyed about the challenges in front of us and are working with urgency to change the trajectory of our business. And if we execute our plan well, I'm confident that we can stabilize profitability and cash flow in 2020 and then be back on a path to profitable growth.
Because despite all of our challenges, we do have a lot on our side. We have a loyal core customer base that is deeply engaged with our brands. We have strong relationships with some of the best fashion brand partners in America. Outside of their own stores and sites, I believe Macy's and Bloomingdale's are the best expressions of these brands, and we are partnering more closely than ever to serve our shared customer. We have a large and growing digital business that contributes to Macy's Inc.
Profitability. Our stores are healthier. The 150 stores that received the growth treatment continue to perform ahead of the rest of the fleet, and we've opened more than 200 backstage locations within Macy's stores. We've innovated and tested and iterated with in store experiences that bring freshness in key categories such as beauty and big ticket and with new concepts like story and the park. We've strengthened relationships with our mall developer partners and have a shared commitment to making the best malls in America an even better experience.
We've built strong foundational analytics capabilities. We are strengthening our technology infrastructure, and we are aggressively pursuing supply chain modernization. And in addition to the Macy's brand, which is the lion's share of Macy's Inc, we grew Bloomingdale's and Blue Mercury. The Polaris strategy we are introducing today is supported by a robust 3 year plan to change the trajectory of the financial performance of Macy's. It was developed over 6 months by business leaders across the organization, many of them here today.
It was comprehensive and addresses the challenges and ongoing headwinds we now will face. The plan is grounded in a deep understanding of how America shops today and what is unique about Macy's. Macy's is America's department store. Our customers come to us for fashion. They come to us for value and high quality products.
And we are proud of our heritage and the unique role we play in American culture and tradition. And we are stepping up to reclaim and redefine what a department store can and should be. And we will do this by focusing our resources on the healthy parts of our business and investing in the opportunity to grow where retail is growing today and in the future. This includes growing customer segments, nonprofitable or new profitable categories and off mall formats. We will accelerate what is working in the business, loyalty, backstage, destination businesses, our growth store treatment and mobile.
And we have developed new plans in areas where we have momentum, but can improve our execution, like digital. And we will focus our energy and resources on building new profitable revenue streams, including testing new store formats and working harder to maximize the value of each of our assets. Importantly, we are also addressing what is not working in the business and taking actions to stabilize profitability in the face of continued headwinds. We are reshaping and rightsizing our organization, streamlining our fleet and addressing the inefficiencies in our fixed cost base. And we are aggressively working to improve the profitability of the growing parts of our business.
The Polaris strategy has 5 points, which we will take you through today. Number 1, strengthen customer relationships. We will build customer lifetime value, expand our loyalty program and accelerate personalization and monetization. Curate quality fashion. We have we will drive disciplined merchandise category roles, be the best destination in the best brands and balance sales and margin.
Accelerate digital growth. We will improve the digital enterprise across both dotcom and our app, grow our omnichannel customer base and improve profitability. Optimize our store portfolio. We will continue the growth treatment for stores in the best malls. We will find ways to profitably expand off mall, and we will test and prove a market ecosystem.
And 5, we will reset our cost base. We will rightsize the organization and expense base. We will balance top line and bottom line growth. And we will improve the productivity and working capital, including faster inventory turns. So now some detail.
As many of you recall, in September, we introduced a productivity program that targeted $400,000,000 to $550,000,000 of improvements. At that time, we called it Funding Our Future. We also outlined at that point $100,000,000 to $200,000,000 of ongoing disciplined expense management. So there was a total of $500,000,000 to $750,000,000 of savings that we expected over the next 2 to 4 years. That was September.
But we knew we needed to do more to offset the secular headwinds that we faced. And since then, we broadened the scope of this program. We pushed our leadership across all functions, from our stores to our call centers to corporate, to rethink and challenge the ways of working, to better prioritize our investments and to streamline our organization and processes. And as a result, we are making significant structural changes to our organization through the Polaris strategy and where this leads. Over the next 3 years, our financial targets include rightsizing costs and expanding gross margin with accelerated savings totaling $1,500,000,000 by the end of 2022, dollars 600,000,000 of which is in gross margin improvement and dollars 900,000,000 of which is in SG and A savings.
In 2020, we're resetting the fixed cost base and are committing to a more stable SG and A rate moving forward. Over the next 3 years, the Polaris savings will stabilize our profitability and improve cash flow generation. This will fuel our capital allocation strategy for long term financial stability and value creation for our shareholders. Over the 3 years, some of these savings will drop to the bottom line and some will be invested in capabilities and systems to drive continued productivity gains. You'll hear more about this today in the areas of marketing and merchandising and supply chain.
Our strategy is underpinned by a robust technology plan, and we expect to find additional operational efficiencies as we fully tap into automation and data analytics. For 2020, we are anticipating negative comparable sales for several reasons: 1, the trajectory of our business over the last year 2, challenging continued challenged performance in mall based retail and some disruption from the structural changes we are making through Polaris. Additionally, while the consumer environment remains healthy, we do expect slower economic growth overall versus prior years. 2020 is a year of transition for Macy's as we make significant structural changes to the business, including the relocation of a portion of our workforce. We are committed to capturing the full impact from this plan and have built a rigorous governance and reporting process to ensure that we deliver every step of the way.
We will act choicefully, deliberately and with urgency. And today, the team will walk you through each of the five points of the Polaris strategy for the Macy's brand. However, I do want to emphasize that Blue Mercury and Bloomingdale's are important parts of the Macy's Inc. Strategy. This is especially true of Bloomingdale's, which is a $3,000,000,000 business.
And I will spend more time on Bloomingdale's and Blue Mercury in future investor conversations. So to start off this morning, Rich Lennox, who's our Chief Customer Officer, will take you through our strategy to improve the health of our customer franchise. Patti Ongman, who is our Chief Merchant, will walk through our strategy to consistently bring great fashion products and brands to our customers with improving gross margins. Joe Ramsey, who is the Head of Digital, will take you through our plans to accelerate the profitable growth of our digital business. This is a $6,000,000,000 business across all three brands that already contributes to the profitability and that we see as a key engine of growth.
We're then going to take a break. And when we come back from break, I will take you through how we intend to optimize our store portfolio. And just to give you a sense, there's 2 parts to this. First, we have a profitable and sustainable mall fleet that we'll talk about. We know that we need to rationalize our current fleet to invest the resources in the places where we can win profitably for the long term.
And then secondly, we're going to act on opportunities to grow profitably off model, including the pilots that we're going to be running with Backstage Freestanding and our new smaller lifestyle store format that we'll be announcing today called Market by Macy's. Dennis Moulay, who is the Head of our supply chain, will then take you through the work underway to create a smarter, faster, more efficient supply chain that supports both the stores and our digital business. Doug Sessler, who is the Head of Real Estate, will provide an update on our real estate monetization plans. And Paula Price, our Chief Financial Officer, will take you through how we are going to reset our cost base. And then she will review the financials supporting Polaris, including our 3 year outlook.
Then we're going to have the entire leadership team available for questions and answers. And then throughout the day, though, we will be providing KPIs and metrics that will be helpful for you to better understand the drivers of our business. So with that, let's get started. Let me turn it over to Rich, who will start his conversation or this conversation grounded in our customer. So Rich?
Good morning. My name is Rich Lennox. I've been with Macy's for 3 years. In this role, I spend a great deal of time working on brand engineering, marketing productivity and media mix modeling. But today, I want to talk to you about the evolution in our customer enterprise strategy.
It is the framework that we are using with my colleagues to deliver the best in class experiences across our omnichannel ecosystem, a strategy that is built on the foundational principle that while all customers are important, not all customers are created equal, a strategy that has 3 core strategic priorities: build a healthier customer franchise of highly engaged and highly profitable customers identify, engage and then migrate the next generation of high potential customers into our top tiers and leverage our data to develop a forensic insight at an individual and micro segment level, which will then we will then use to build ecosystem momentum across an ecosystem through loyalty monetization and personalization. In short, to improve the health and profitability of our customer franchise by increasing engagement and acquisition. I believe that the most valuable asset that any organization has is the strength of the relationship that it has with its customers. As stewards of the brand, it is our responsibility to build strong relationships. Those relationships allow us to foster very strong and powerful behavior, beliefs and emotions.
Consideration, preference, loyalty, advocacy, self identification and trust. It's a very simple truth. If they like the experience and love the brand, they become less price sensitive, more loyal and you win a higher share of their lifetime spend. They become more profitable customers. Building brands in today's world requires a degree of agility and speed that is unprecedented.
It requires new skills and new organizational structures. It requires mastering of the alchemy of customer insight, creativity, data science, marketing and technology and brand engineering. All are critical to succeed with today's highly sophisticated customer. Macy's is a Beacon brand. 1 in 3 American households shop with us annually.
There are close to 6,000,000 daily visits to our virtual flagship macys.com. And once a year, we get to put on a parade. The day before the biggest shopping event in America, 50,000,000 American households spend 3 uninterrupted hours with our brand. It generates over 26,000,000,000 media impressions. Macy's is an iconic brand, but we have to work hard to dial it back to full bright.
Macy's
has
a very strong customer franchise. 40,000,000 identifiable individuals have shopped with Macy's in the last 12 months. That translates into 1 in 3 American households. The cornerstone of our franchise is the new Star Lord Star Rewards loyalty program. In the 2.5 years since it has been launched more than 28,000,000 members have enrolled in this program.
Designed to be launched in phases with Phase 1 tasked to hug our best customers, we are now about 2 thirds of the way through the build of the program. In a few slides, I will show you the strong results that we have achieved. It has been a very significant rising tide under the business and we believe we are well on the way to have a best in class loyalty program in our category and importantly the most valuable loyalty program with our key vendors. The foundational tenant for any customer's strategy is to build an ecosystem that is capable of best serving the individual needs and desires of our customers where, when and how they choose to shop. We are operating across an omnichannel landscape from offline to online, from flagship to off price, and from on mall to off mall.
All components within this ecosystem must deliver inspiration to our core customers engage them and then provide them with the type of experience that is paramount to any strong customer relationship. It requires us to unify our initiatives and to create seamless omnichannel customer journey. You will hear more from this shortly from John and Patty. As I said, our strategy is to build on the foundational principle that while all customers are important not all have equal value. We are leveraging our customer data to develop a forensic insight into the behavior at an individual level and then apply that insight to build a healthier customer franchise of highly engaged, highly profitable customers and then retain them in those top customer tiers to identify and engage and then migrate the next generation of top tier customers into the high value segments and to acquire more millennial customers.
Over the last 2 years, we have been fundamentally reengineering our approach to building a strong customer franchise. We have undertaken a full evolution of our model. We have evolved from a model that was overly weighted to our high frequency promotional calendar essentially a transactional approach to a relationship centric model that is centered on growing engagement of our top customer segments in our franchise. In addition, we must identify and engage that next generation of customers that we can migrate into top tiers. This has been a very, very significant evolution.
And it has been an evolution that is essentially grounded on 3 layers of activity. The foundational layer is tasked to activate our customers, call them into action. It is centered on reengineering our promotional calendar to make our events structure clearer and more compelling. We determined which activations we could streamline or sunset to expand our highly successful Star Rewards program. This reengineering has allowed us to eliminate $204,000,000 or just over just under 7% of our marketing initiative markdowns this year.
The second layer is task to inspire. It is centered on reasserting our fashion and gifting authority through tentpole and always on campaigns, Campaigns that are tasked to build a narrative of curated fashion, highly desired brands all at great value and to strengthen the belief of our core attitudinal segment, the fashionable optimist that Macy's has the fashion credentials 3rd layer is task And the 3rd layer is task to engage those customers. It's centered on winning the emotional high ground. It's designed to fully leverage our unique properties of Believe, The Parade and the 4th July fireworks. This model is tasked to be a core component of our enterprise wide customer strategy, a strategy that is the foundational lodestone of the customer ecosystem that we are building.
The impact of increasing the levels of brand engagement and its contribution to sales is very clear. An e com only customer spends about $109 with this year and on average they visit us about 2.4 times. In contrast, a store only customer will spend $3.32 with us a year and visit us 3.5 times. If that store customer also begins to purchase in Backstage their annual spend increases to $5.92 a year and they visit us 6 point 4 times. Most importantly, when we have a fully engaged omni channel shopper their annual spend accelerates to $7.41 with us a year and they visit us 9.5 times.
Designing an ecosystem that allows us to path customers seemingly between channels becomes a very powerful engine for growth. And when you take that omnichannel shopper and engage them with a program such as loyalty, their annual spend increases dramatically and I will show you that in a moment. The impact on COV is first is further amplified by getting our customers to engage with other brand relationship drivers. For instance, if a customer migrates from being a single FOB shopper to become a cross shopper their CLV increases by $101 a year. If they start buying on their mobile phone it increases by a further $128 a year.
If they use the new Macy's Star Money currency their CLV increases by $2.47 a year. This is a great illustration of how an omnichannel shopper experience designed to drive CLB can be increased to strengthen the relationships with individuals through individual and overlapping programs. Let me walk you through a high level view of how our customer segment model works. It is the distillation of a more complex model that groups our known customers into 11 behavioral segments, a model that examines context the context of what they buy, how they buy, where they buy and when they shop. And very importantly ranks each segment on how profitable it is.
It is then fused with attitudinal insight and behavioral economics information to inform our CLV model. It will give you insight into how our customer franchise is structured. The most important segment we have we call the advocates. Advocates represent 1% of our customer base and 14% of our sales. They visit us 36 times a year.
They shop in 45 departments and 78% of them are omnichannel shoppers. On average they spend $4,700 with us here. The next segment we call the convinced. They account for 5% of our customers and 20% of our shales. They visit us approximately 21 times a year shopping 27 departments and they spend on average $1700 worth a year.
Our retention rate in these top two groups is 98% in a year. The next generation we call them the Occasionalists. They account for 54% of our customers. They account for 53% of our sales and they visit us about 5 times a year primarily around the main gifting occasions. They shop in 7 departments.
Importantly 57% of them are committed enough to be using a proprietary card with us. But most importantly €5,000,000 of that group are displaying behavioral and attitudinal characteristics that are very, very similar to high value segments. This represents a hugely significant opportunity for us to migrate them into the top tier. And I'll talk more about how we're going to do that in a few slides' time. Finally, there is a group of customers that we need to acquire and more on that shortly.
One of the most important principles of any customer segmentation model is that the similarities often outweigh the differences. In our case, Macy's customers are a very special group of people. They are life's natural optimists and they fuse that optimism with a huge passion and love of fashion. This is a psychographic segment that is very unique to Macy's. They are the center of what we do every, every day.
Let me introduce you to the fashion optimist. Here is a video that brings that customer to life. The numbers that you will see on the screen are sourced from MRI. This is the media standard for consumer insight. It allows us to weigh specific attitudinal characteristics as it relates to our brand and our competitor brands.
If you think about our customers, they cover a broad range of lifestyle and interests. On the surface, they can look very different, but they share a mindset that makes them the heart and soul of our company. We call her our fashionable optimist. We know that the fashionable optimist is a great audience for us. She's younger, she's more diverse and she's passionate about fashion.
It's how she shows who she is to the world. Beyond just shopping, she's very distinctive versus our competitive set. She is much more likely to say that she's optimistic. She's much more spontaneous. She's much more likely to say I'm not comfortable with conformity.
She's much more likely to be social and make friends really easily and to describe herself as adventurous and daring and fashionable. She's an incredibly confident, expressive and outgoing woman. She's a friend that everyone wants to be around, the one who you call when you need a night out to celebrate or blow off some steam. She's just this wonderful woman and she inspires us by how she lives her life. She's our core customer and she's who we design for every day.
Let's hear from her.
I love fashion. If someone has an eye for fashion, I think they have an eye for like how things look in the home.
Fashion
is really how
I think make myself happy.
My style is classic and elegant, very confident actually. It makes me feel very confident. It's something I'm comfortable in, something that I feel really expresses kind of who I am.
My style is a sophisticated, more casual look.
The clothing is good quality. I can wash it again and again and wear it. It's a good brand. It's a brand that I trust. It's a brand that
I know is going to again, like the blazer example, it's
going to fit me well. So that's where I find value is that they're carrying brands that I know.
I don't know how people would feel when they won the lottery, but I feel like close to it. I It's a high. I think that, like I said, close kind of identify me. And so I think that you want to look good. You want to feel good.
Looking into Macy's, I'm feeling excited,
because, you know,
I know I'm definitely gonna come out with something. Everything's pretty and smells nice and it kind of takes you away from your everyday worries. You have to go and see what's new.
My style is eclectic. I have a little bit of everything in my wardrobe. Classic, professional bohemian. So I don't think I have one thing that's just me.
I like the the brands, the fashion, but it's it's like the deal that's gonna be like a magnet right away. Oh, I love Macy's. I just I enjoy it. I enjoy shopping
here. Macy's has changed. It's not as basic as it used to be. Wow. They have unique stuff nowadays.
I guess Macy's helps me find what I'm looking for and gives me other ideas when I'm looking back.
The best things about Macy's are their selection, their value, and the store. Because it's a beautiful store even if you're not purchasing, you're just shopping around.
The customer segmentation model that I walked you through is at the center of transitioning from a transactional model to a relationship model. We are putting all our strategic priorities through the lens of customer lifetime value to ensure that we deliver a customer led insight driven approach throughout the organization. Since the launch of the loyalty program, we have seen a 4.4% increase in purchase behavior with over the 28,000,000 people that have joined that program. Most importantly, we have seen very strong engagement from our platinum tier. These are our best customers.
They spend at least $1200 with us annually. There are 2,800,000 members whose sales have risen by 14.9% since the launch of the program driven by the components of Everyday Air. There has been a decrease in the downward migration out of this tier as well as an increase in upward migration into that tier. Put simply, this program has activated our best customers, increased their spend and kept them highly engaged with our brand. When we expanded the program to allow tender neutral participation we enrolled a further 6,600,000 members.
With Star Money we have created a highly sticky currency that is very stable on response curves. Earn redemption and add on sales are highly predictable. But we did not see as much success with our gold and silver customers. Potentially high value customers that need to migrate up the CLV curve. Loyalty 3.0 allows us to give occasionalists chance to participate in everyday earn.
Platinum will continue to earn at 5% back in rewards. With this month, we will be giving gold 3% back in rewards, silver 2% back in rewards and bronze 1% back in bronze. Tiering this benefit is meant to provide incentive to migrate up. It is important to note that this phase will be cost neutral. We are funding this expansion through the sunsetting of the Thanks for Sharing program that many of you know.
Based on test results, we have determined that we could deliver a stronger ROI by reinventing the Thanks for Sharing markdowns into the Star Rewards program. Within the Occasionalist segment, we have 5,000,000 customers who share some of the most significant behavioral characteristics of our best customers. This is a group of enormous potential to us. Loyalty 3.0 will engage many of them, but we are also testing into other approaches to activate and engage with this customer. Targeted personalized content will start the conversations focused offers and value will activate them.
Every year 8,100,000 millennials or under 40 shop at Macy's accounting for just under 20% of our sales, but we need to do far better at engaging them and then migrating this segment. Significant research into the barriers and motivations of this group have given us real insight into what they think about Macy's, the good, the bad and sometimes the bleeding obvious. What we need to change at a product and experience levels, how and where we need to talk and message them to get them to meaningfully engage with the brand. The result is a pilot program that we have been seeing good results from. Patti will go into that next.
The customer relationship ecosystem begins with a forensic understanding of our customer. We have 40,000,000 known customers in our database. This data includes many of the dimensions and insights on who these customers are and what, when and how and where they like to shop. The loyalty program is the lodestone of building that highly profitable relationship with our known customers. It is the main source of an extremely valuable behavioral data insight, data that gives us a deep and rich understanding into their behaviors, insight that fuels a model that we can use to deliver personalization at scale.
The quality of our customer data enables us to personalize and then to monetize on-site and off-site through micro targeting segmentation As an example of the worth of this ecosystem, Kathy spent $1200 per year pre launch of the Star Rewards program. She joined the Star Rewards program and her spend increased to $13.55 a year. Based on her increased shopping behavior and the data we are capturing, we were able to send predictable personalized messaging to her which increased her spend to $13.98 a year an increase of 16%. When factored across the close to 14,000,000 highly engaged customers that we have and the 5,000,000 occasion list that we believe there is a strong opportunity presented by loyalty and personalization to increase their CLV. We believe this is a significant drive for growth.
And whilst we have some catching up to do on monetization, it is a gap we will be closing quickly. We are close to 6,000,000 visits to our macys.com every day and the potential to partner with strategic vendors gives us the unique opportunity to create a best in class fashion and beauty publishing model. In short, the combination of loyalty, personalization and monetization creates a flywheel of momentum within our customer ecosystem. I started this presentation by talking about the importance of building brand relationships in part delivered by 3 strategic priorities build a healthier customer franchise of highly engaged and highly profitable customers 2, identify and engage and migrate the next generation of high potential customers into our top tiers 3, leverage our data to develop a forensic insight into individual customers at both an individual and micro segment level, which will build the momentum across our customer ecosystem through loyalty monetization and personalization. Ultimately, I believe that the customer brand relationship is the most important asset that Macy's has.
Our teams are tasked to nurture those relationships to unify customer initiatives across functions, to inject a customer first approach across the organization and to optimize our customer journeys between our stores and e commerce. We are absolutely committed to bringing this iconic brand back to full brightness. Thank you. I'd like to introduce you to Patti.
Thank
you. Good morning, everyone. I'm Patty Jonman, and I'm the Chief Merchandising Officer for Macy's. Macy's is the fashion destination for fashion, value and celebration. We have a history of excellence and innovation in merchandising.
This is an important part of what differentiates Macy's from most of our competitors. With this space from which to work, we spent the year setting Macy's up for profitable growth. As you've heard from Jeff, we're reshaping merchandising as part of our Polaris strategy. Here's where we are now. We will drive disciplined merchandise category roles, be the best destination for the best brands and balance sales and margin.
There are 3 pillars upon which we've built our merchandising strategy. Our priority is to win with customers profitably. First, we must know and target our customers. Our goal is to drive traffic to our stores and websites with product that they will love. We use customer and industry data and analytics to define a category strategy that would gain the most profitability on the products that we sell.
We will maximize our high margin categories and those businesses where we dominate in market share, such as our destination businesses. And we will invent ready to wear. Our second pillar is a product strategy that recognizes our fashion authority and is built on strong relationships with our best vendors and outstanding private brands. Our 3rd pillar is value, ensuring we provide our customers with the value they expect while driving our own financial performance. In 2019, we did a great deal of work to learn what matters to our customer and what drives value for her.
To guide our thinking, we took a fresh look at the important role that each and every category plays with a goal of driving sales, traffic and profit. Each category of business fell into one of these roles hero, profit driver, traffic driver or opportunistic. We have thoughtfully reviewed the results of our category roles work to determine how to compete in the current landscape. We've built a roadmap to achieving profitable growth through increasing our penetration of our hero and our profit driver categories. Based on these roles, we have a plan to double down on businesses that drive contribution margin and grow these to over 65% of our business by 2022.
We'll do this by continuing to invest in our destination businesses, reorienting our focus toward contribution margin and disrupting our competition. This chart illustrates how we went about making our decisions. We use data, surveys and analytics to define our growth aspiration for each category of business relative to its current market share, its potential for growth and Macy's ability to win. You can see on the x axis, the value of each business to Macy's. As you move from left to right, the contribution margin increases.
And on the y axis from bottom to top, the importance of our targeted customer, which was more heavily weighted toward under 40 customers in digital. The bubble size is an indicator of our volume. Moving to the quadrants, the upper right quadrant is our largest category. These are our hero businesses. Businesses such as fragrances, women's shoes, dresses, handbags, men's and women sportswear fall into this quadrant.
Hero businesses represent 40% of our sales, but do 50% of our contribution margin. In the bottom right quadrant, we have profit drivers, our highest margin product. Profit drivers represent about 20% of our sales and about 30% of our contribution margin. Businesses such as furniture and mattresses, men's suits and tailored clothing, men's and women's accessories, fine jewelry and intimate apparel are in this quadrant. Top left is about traffic drivers.
These are really used to drive footsteps into our store and they have lower contribution margin, especially in the home store. Yet our customer expects us to offer a full range of assortments. So we'll use these businesses to strategically drive traffic. Bottom left is small and made up of specialty businesses like petites, men's swim and fashion watches. We will have very curated assortments in this quadrant.
As you can see on this slide, these are our 6 destination businesses: dresses, women's shoes, big ticket, men's tailored, fine jewelry and beauty, which fall into the hero, profit driver and traffic driver quadrants. You might notice there are 8 red circles. Beauty is broken into fragrances, skincare and makeup. The 6 destination businesses account for nearly 40% of our total sales and half of our contribution margin in Macy's. All 6 are high AUR and high margin businesses.
All 6 continue to outperform the balance of the businesses on market share, return on investment and profitability. We have disproportionately invested in these 6 categories to drive growth through great products, top performing colleagues, improved environments and enhanced marketing. For our customers, Macy's is her destination, a place she goes to celebrate every occasion in her life. Dresses, fine jewelry, beauty, men's tailored, all of these are an important part of making these moments special. And we continue to see significant opportunity to drive cross shopping, a competitive advantage of being a department store.
While we're pleased with our market share in these businesses, our goal is even greater market share growth in fine jewelry, dresses and beauty. We're making sure she has a heightened experience in each of these categories. As you can see, we're the category authority in beauty, men's tailored and dresses and a category leader in fine jewelry and women's shoes. Let's take a deep dive into one of our most important destination businesses, beauty. Beauty is made up of fragrances, a hero business and makeup and skincare, both traffic drivers.
We're a leader in beauty and have a higher market share with our younger customers than we do in the balance of Macy's, but we still have opportunities to grow. She's a very valuable customer to us. She spends 2.5 times more than the non beauty customer. 57 percent of our beauty customers are diverse and we have a high retention with her once we get her to our brand. In 2019, we invested in our people and our environment, spending 1.5 times the capital versus the prior year.
We've learned from Blue Mercury, the value of a customer centric versus brand centric environment. So we added more than 50 new vendors to open sell easy to shop environments, reshaped to be hybrid areas of discovery, designed to make cross shopping across brands easier and more accessible. We added 800 new points of distribution across our growth doors. And this strategy worked. Our capital investments have really paid off in beauty.
We captured online market share through expanded assortments, competitive price points and new categories. Our renovated doors have experienced 5 percentage points of growth in 2019. With these results, we will continue to invest in this beauty business. In 2020, with our vendor partners, we will be spending more than double what we spent in 2019. Macy's has the support of our vendor partners to continue to invest with us to drive new distribution, as well as digital campaigns, which are incredibly important to this under 40 customer.
I want to give you an example of an opportunistic business where we've chosen not to grow. We'll plan kitchen electrics down greater than 20% in order to grow margin by 2 percentage points over the next 5 years. While this business drives some traffic, it is less profitable. The customer expects Macy's to be a full line department store, but we will change the way we do it. We plan to deliver a more curated core assortment with key vendors, exclusives, strong value propositions and a streamlined vendor matrix.
We will reinvest to be more disruptive during the promotional events throughout the year. Kitchen electrics penetrate 1.5% of the total company sales during most of the year. However, this penetration doubles for Q4. We'll continue to protect this business when it matters most to our customer. As we learned in our category roles work, the reinvention of ready to wear is one of our greatest opportunities.
Macy's ready to wear has the number 2 market share behind Walmart at about 5%. However, for under 40 customers, we have about a 3% share. In total ready to wear, we over penetrate in our classification businesses, such as dresses, coats, suits, as well as in petites and plus at about 7%. We underpenetrate in the more casual sportswear businesses such as active, swim and denim. These are businesses where we are reinventing our ready to wear strategy to be more important to our younger customer.
We engage this customer through surveys, analytics and shop alongs to better understand her. We determined that our biggest opportunity is to make her shopping experience easier in our stores. We know she's already in our stores because we over penetrate with her in fragrances, kids, men's tailors to name a few. We have many of the brands she loves, but she's told us she can't easily find them. She wants to shop in their stores the way she shops online.
We've merchandised our ready to wear floors by lifestyle for the past few years, but she's telling us she wants a space of her own. As a result, we piloted a lifestyle zone across core brands and added new brands to supplement our assortment. She can shop for her activewear, denim, trend product, wear to work and basics in a space that's meant just for her. We're very happy with the results and with the customer reaction. We're already experiencing positive improvements in sell through and comp store growth.
We are confident enough to roll out the visual enhancements to many more growth doors and the classification assortment to all of our magnet doors. With this strategy and the product strategies associated with it, we will stabilize ready to wear sales in 2020 and return it to growth in 2021. The 2nd pillar in our merchandising strategy is product. Our product mix is key to the differentiation of Macy's from our competition. Our core assortment, the 10% of styles that make up 50% of our business will be in all doors.
This will enable us to grow BOPs, the most profitable fulfillment channel. We've talked about our categories that set us apart like our destination businesses, but the actual product within each category is equally important. We will share how we are maximizing our private brands, how we're the best expression of America's favorite brands and how we're delivering a consistent stream of trend products. Our ability to gain growth starts with our fashion credibility. Here's our Head of Macy's Fashion Office, Duran Guillaume to share how we curate fashion for America.
The fashion office is made up of a group of about 20 of the most super talented creative individuals who work within Macy's and their main focus is to bring the latest fashion trends to the Macy's Festival. We're a small team, but pretty powerful. That's great. Perfect. Stephanie is the most strategic member of the team.
I feel like the way how
you guys are pushing it needs to be dip dyed. It is more unstructured, feels more modern to me.
Rob is responsible for our home division. He has a fantastic eye.
When
you see the fashion experts being mentioned or messaged at Macy's, it really does start with the team in the fashion office.
We really are the eyes and ears on trends, fashion, culture for all the organization and we try and tie those trends all together to tell a company wide message to the customer.
We are looking for what people will be proud to wear every day and that includes what will most resonate with them from the latest collections. We are very passionate about our ability to make people feel great about getting dressed And you can count on us to bring you the best fashion wherever you are.
Thank you, Duran and team. Our fashion experts are curating the latest trends and exclusive products to boost confidence and inspire self expression. I'm often reminded by our vendors that Macy's has the best merchants and designers in our business. They're thinking critically and disrupting processes to improve and innovate the omnichannel customer experience. Macy's Fashion Academy is our best in class learning and development program, created in collaboration with Parsons School of Art and Design.
It offers outstanding development opportunities at all levels and across all disciplines of our merchant organization. This investment in our colleagues ensures that they will continue to elevate and change with our customer and bring the very best brands to our customers every day. Private brands and our top 10 national brands will make up about 55% of our business. Plus, we have numerous vendors that aren't in our top 10 that are incredibly important to our customer offerings. We will continue to offer great experiences with newness and innovation in stores and online.
For example, we will have 100 new vendors in our assortment for spring 2020. Our new Harrell Square experience in men's called the park is a great example of this. We completely reinvented the main floor of the men's area, turning it into a fashionable, curated, fast turning experience. We will be rolling this out to other flagships in 2020 with a goal of some version of this in all magnet stores in 3 years. We're creating a version of this for ready to wear as well, bringing small capsules of fashion products into our assortment beginning this spring.
Let's start our product focus with our private brands. Our customer loves Macy's heritage brands. Our research shows that Macy's shoppers associate them with quality and exclusivity, and they continue to be a foundation for high customer loyalty and engagement. However, our under 40 shoppers have told us our brands are more mature for more mature customers. And we know our private brand shoppers do skew older.
We've edited 6 brands and added 2 new private brands that will appeal to this, our targeted under 40 customer, as well as we've added a 3rd exclusive market brand to be announced this spring. We have a path to raise our penetration of private brands to 25% by 2025. Private brands are already among our highest margins, but we continue to find ways to improve. We're building and supply chain capabilities that you'll hear more about from Dennis. A significant part of our private brand growth will be through continuing to build our 4 best private brands to $1,000,000,000 each.
These four brands, INC, Alphani, Style and Co and Charter Club will each achieve $1,000,000,000 by 2025. And we're already well on our way. IMC is one of our broadest brands represented in ready to wear, men's, shoes, handbags, jewelry and sleepwear. Alphani also spans across several categories. In men's, 40% of our men's shoppers have bought Alfani in the past year.
And Alfani, INC and Club Room are in the top 10 brands in men's. Our men's shoppers associate these brands with looking professional, nights out and high quality. In ready to wear, Macy's shoppers have high familiarity with our private brands, with more than 80% having purchased an INC, Style and Co, Alfani or Charter Club item. These brands are 4 out of the top 5 brands in ready to wear. Charter Club is number 1 in fashion jewelry and sleepwear and number 4 in home.
INC is the number 1 designer hand non designer handbag brand in handbags. And Style and Co. Is the number 3 in all of CenterCore. As you can see, many things within our private brands work very well. We've had consistent growth in men's, home and CenterCore.
Within CenterCore, one of our first wins was in fashion jewelry. Private brands now make up 45% of our fashion jewelry sales and they have a +15 percent sales trend for the year. The growth is coming from these 4 big brands, Style and Co, Alphani, Charter Club and I and C that the customers told us that she loves and wants to see more of. Our margins are up 500 basis points to our 5 year average in private brand fashion jewelry. And we expect to continue to fuel the sales and margin growth.
Another example of moving with speed to respond to our customer and private brands is with our hotel classics. Building upon the success of our highest AUR private brand hotel collection, This gives our more classic customer the opportunity to get hotel quality and the classic prints and colors that she loves. This was a huge success and will expand from the original 109 doors to 220 this year, with a goal of getting it to all magnet doors by 2022. The hotel margin is among the highest in private brand. Hotel collection margins are at 50% with initial reads on Hotel Classic even higher.
We launched Hotel Classic Top of Table last month and the sell throughs have been very encouraging. Hotel is the largest and most profitable brand in our home store. Among the biggest changes to our private brand strategy and the one I'm most excited about are the reinvent of our ready to wear mega brands INC and Style and Co. All of this is in response to our customer and we know her well. Here are some early images of a new product for spring.
We completely reworked our assortment architecture, putting controls around assortment voids and basics, fashion basics, trend and each classification such as knits, pants, shorts and denim. We've given each ready to wear brand a distinctive DNA to control the duplication and the claim that it all looks alike. We did a deep dive on pricing to make sure our initial tickets make sense compared to the domestic market. To accomplish this, we had to make changes in how we work, simplifying the process and having one set of eyes across the design of the entire private brand portfolio. We invested in our team with a design lead and a product lead for all of our ready to wear private brands.
I and C will return as a focused fashion brand for the customer who wants the newest looks that will inspire confidence. And Style and Co will become our casual go to classic brand with key items anchored back to denim. Early reads on Q4 product test for reinvented brands are very strong, with customers reacting to more value at the same retail price. We have stabilized sales in 2020 and will begin to grow in 2021. So let's talk about our key national brands.
We bring America's favorite brands to our customers who know they can count on Macy's to have the best, most current and fashionable assortment. 25% of our business comes from these top 10 national brands. And Macy's is more than 20% of the wholesale business for many of them. Our margin is 2 percentage points higher with total with these core vendors. And it's our mutual goal to grow these vendors to 30% of our total sales.
To do that, we've integrated an important relationships that have to work for both Macy's and our vendor partners to be successful. Macy's is able to buy their best and exclusive product due to our scale. We share analytics and insights about our mutual customers. We're connected across all parts of our company, such as marketing, digital, supply chain and financial planning. We have jointly agreed upon contribution margin plans and clear and measurable results.
We mutually share staffing in stores and produce in store and online events to elevate the experience our customer has with these brands and with Macy's. Our teams work together every day. The Macy's buying team is New York City based, which enables our biggest vendors to have team members embedded in our buying offices. We are truly business partners, not just a buyer and a seller. And most agree that Macy's is the best representation of their brands outside their own websites and stores.
Lease offerings are also an important opportunity for profitable growth within Macy's. They currently represent 5% of our business. We've been leveraging our lease partners successfully to win in categories where they have deep expertise. As we look forward, we're expanding to brands where we can also elevate or enhance our existing categories. Our lease partners are driving comp growth, particularly in CenterCore, men's and kids.
We see most of our growth coming from our flagship and magnet stores. We will explore new partnerships that will support our category roles work, especially in ready to wear in kids. This year we launched Mango and Justice. We're also looking to expand our luxury lease partnerships, which continue to perform well. The 3rd pillar of our merchandising strategy is value.
In addition to being the best place for fashion and having the brand she wants, our customers count on us to give her the best value for her money. We will do this while driving our own financial performance and creating value for our shareholders. That includes maintaining rigor and inventory management, creating pricing and promotions that resonate with our customers and rolling out markdown optimizations. We have an aggressive roadmap to reduce our average stock by $200,000,000 at cost by 2022 and control our flow of receipts. This is part of our total inventory reduction that you'll hear more about from Dennis.
We'll do this by implementing new process controls and guidelines to manage our open to buy and inventory receipts, improving our buying tools to deliver better insights. And within merchandising, we're streamlining our buying and planning organization to create more agility and accountability. This will give our customers more frequent fresh product and declutter our stores. We are a department store that customers love. She gets excited by the deals and the gaming element of collecting loyalty points.
However, within pricing and promotions, we have an opportunity to find more balance between sales and margin, while reducing complexity for our customers. And we're doing this in 4 ways. Using rapid test and learn campaigns to shift our investments to promotions that are incremental, utilizing analytics to optimize our POS and coupon planning process to give insights that supplement merchant decisions, Having a dedicated merchandise pricing team to partner with our buyers to maintain constant focus on profitability and rolling out a robust location level markdown optimization in 2020. Following a successful pilot that allowed us to reduce prices in certain stores, while keeping the same product at full price in other stores. With the rollout, we can better support and drive each store's business in a more targeted way and give our customers the value they expect.
We also think it will simplify her shopping experience while making it easier to understand pricing. As a result of the initiatives I just took you through, we expect a minimum of $20,000,000 in gross margin impact in 2020 and about $100,000,000 by 2022 to go along with our other gross margin initiatives. So I'll wrap this up. Our merchandising goal is to deliver profitable growth with a focus on our customer and the customer's lifetime value that they bring. We'll do this by having the best, most agile team based here in New York with the fashion industry is based.
We will continue to use data and analytics to define our category roles and destination businesses to learn about her as she changes. And we will have the product she wants through reinvented private brands, the best of the national brands and a constant flow of newness in categories and assortment. We will balance sales and margin with a strategy to raise our margins through vendor partnerships, a more efficient supply chain and a better, smarter pricing strategy. Thank you very much. And I will turn it over to Jill Ramsey, our Chief Digital Officer.
Good morning. I'm Jill Ramsey, Macy's Chief Digital Officer. Macy's digital business is one of our key growth engines. As Jeff said, we do $6,000,000,000 in revenue digitally across our 3 brands. We do $5,000,000,000 in revenue on macys.com or 25 percent of Macy's brand, and this is what I'll be speaking to you about in more depth.
Over the last decade, macys.com has grown at a 24% CAGR, more than double the online market growth in our categories. 2 thirds of our traffic and over half of our sales now come through mobile. And ranked in the top 10, we continue to be one of the largest e com retailers in the U. S. Importantly, macys.com has been contributing to operating profit for more than 3 years.
However, as we mentioned on the last earnings call, our growth has slowed in 'nineteen, especially in the Q3 when the rest of Macy's business also slowed. This was due to shifts in our seasonal categories, changes in promotional activities and technical upgrades we made. We resolved the technical issues and saw accelerated growth from Q3 into Q4, even setting new records on important days like Cyber Monday, where we grew nearly 20% in a key time of year. Macys.comannualgrowthfor2019willbeinthehighsingledigitrange. This was a big year for our digital experience.
Let me show you some of the highlights of the improvements we made. One of the most visible changes that we made was a front end redesign, taking our site from a more traditional print ad look and feel to a much more elevated modern design, leveraging lifestyle imagery, streamlined fonts and a cleaned up background. We dramatically expanded assortment, taking, for example, 2 sisal rugs to 1200. When you add that much assortment for the customer, you really have to help her narrow and filter her selection. So we improved and overhauled our attribution and filters in the left hand navigation.
And we also added product recommendation engines like More Like This that leverages visual search recognition to find similar looking products in the catalog. We relaunched our same day delivery program, expanding item eligibility and market coverage, giving our customers another convenient fulfillment option. But 2019 was the year of the mobile app. We invested in a lot of changes, also updating the design look and feel with the bottom navigation, overhauling the front end design. And we added new style features like style inspo, where the customer can build out a style profile, swiping left or right on things she likes or doesn't like, that builds out her style preferences.
And then we can actually pull together outfits for her and send them and share them with her that she can like and post and share and hopefully buy. We updated augmented reality in our beauty category. She can virtually try on lipstick. And in home, she can virtually try home furnishings in her home setting or our office. We really bet big on store mode in the app because our customer needs support from us in the store.
When she goes into the store, her app switches into store mode, giving her a whole new set of navigational features. If she's a Platinum loyalty customer, we give her a free Starbucks.
The product
recommendations update and pull from her local store. We've updated store maps and some of the most frequently asked questions in our stores to help our customers. And finally, we made it much easier for her to pick up her omni pickup orders with a simple swipe of a barcode or pay with her Macy's credit card with a barcode. So these are just some of the enhancements we made in 2019 and a taste of things to come with the Macy's experience. And these changes drove measurable growth for us in 2019.
We saw a 56% increase in sales on app with nearly triple digit downloads and significant increases in our monthly active users. Our app is well rated by nearly 1,000,000 reviewers at a 4.8 star and now contributes to over 20% of our digital sales. Expansion of our vendor direct or drop ship business also fueled growth. We added over 1,000,000 SKUs and 1,000 vendors, driving a 59% increase in vendor direct sales, which now contributes over 13% of our digital sales. Vendor Direct is a win for our customers, our merchants and our bottom line.
We provide our customers significantly more selection, our merchants with trend and demand insights and our bottom line with less working capital. Our store pickup businesses, both BOPS, buy online pickup in store and BOSS, buy online ship to store, are also fueling online growth. Online Pickup is up 62% over last year and represents 9% of our digital sales. And online pickup orders, as we've talked about, drive traffic to our stores where customers buy an average of 25% more in sales. Complementing our store pickup program, our same day delivery sales grew 162% this year due to the expansion of product eligibility and market availability.
Same day orders fulfill in our stores and are now offered in 33 of our key and heavily urban markets. And finally, improvements to recommendation algorithms and expanded placements have led to over 30% of our 21% of our sales coming through product recommendations. While we're proud of the progress in 2019, e commerce competition is fierce and customer expectations only continue to rise. So let me share more about our 3 year plans to fuel profitable digital growth. As you heard from Jeff, we're focused on 3 things.
First, we will elevate the digital experience through improvements to our site and app as well as our omnichannel capabilities. 2nd, we'll grow our customer franchise with a strong focus on personalization and continued innovation to deliver the best fashion to our customers. And third, we will strengthen the profitability of our dotcombusiness through the synergies and strategies you will hear about from my colleagues this morning as well as additional dotcom specific initiatives. We'll start with our digital experience. Macy's.com is both our digital flagship store and the front window to our brand.
With more than 2,000,000,000 annual traffic sessions to macys.com and with over 40% of all new customers to Macy's making their first purchase with us online at macys.com, macys.com has to be our best experience. But we have a long runway of opportunity to address gaps to competition and fuel growth through improvements. The first rule of e commerce is a fast and easy experience. You will lose customers if pages don't load instantly or if core shopping paths are not intuitive. We are retooling our site and our app to make them faster and easier, incorporating best practices for technical page architecture and user design standards.
Next, you have to help customers find what they're looking for. And as a fashion retailer, we must inspire customers while they shop. Just as our stores inspire with mannequins and displays throughout the physical shopping paths, online, we will incorporate more inspirational assets throughout the digital shopping paths, whether customers are using search or choosing to browse on our site through category links. And we continue to refine our navigation, our attribution and filters using data science and learning from and reacting to how our customers show us they like to shop. Today, customers are increasingly starting their shopping with us using search, and we see this only growing as our assortment grows.
So we are migrating to a more dynamic machine learning search platform that is constantly optimizing for relevancy and incorporating newness as we have a steady stream of fresh fashion to our site. And finally, we have to get customers through checkout quickly. Today, known friction in bag and checkout means low hanging opportunity. We can drive a 2% to 3% lift in checkout conversion by improving sign in logic, simplifying and reducing errors, being more precise in communicating our delivery dates and adding new payment options like installment payments. But as you heard from Rich, omnichannel customers who shop across our channels are 2.3 times as valuable as a single channel only customer.
Our customer only sees 1 Macy's. And whether shopping online, in stores or on the app, they expect it to be seamless. So we will continue to optimize our omni experience like pickup or returns processes. Near term, this includes, as Patti mentioned, expanding the assortment eligible for pickup, making it easier to shop for pickup items online and increasing marketing of these programs. We will also continue testing and learning with curbside pickup, dedicated parking, and we're working towards scheduled pickups and easy self-service returns drop off.
I'm sure we've all heard and we all know through our own behaviors that over half of all offline retail today is influenced by online research ahead of time. So imagine the power of being able to shop your local Macy's store ahead of time and start a fitting room from the comfort of your living room or researching an item on app while you're on your way to the store, arriving at the store and wayfinding to its precise location. We are working to digitize more of our content to showcase store inventory more accurately online and RFID more of our items to aid finding in stores. All of this sets the stage for seamlessly shopping Macy's online to offline or offline to online. We also have significant opportunities to improve the delivery experience.
Today, we under promise and over deliver on shipping lead times. Many customers actually receive orders 2 to 3 days earlier than the website promises. By making website delivery dates more precise, first, we will give customers more confidence when their orders will arrive. And second, more customers will actually see faster delivery estimates than they do today. This will improve checkout conversion while not incurring incremental costs.
In summary, we will address known opportunities near term, yet remain focused on this on the long term. The bar for basics in e commerce like site speed, search relevancy, delivery speed will only continue to rise. Next, we will grow our omni customer base by reimagining our loyalty experience, increasing focus on personalization and bringing more fashion to our customers. You heard from Rich that our loyalty program is strong and growing. We will reimagine the digital experience for this.
And here's where we can have some fun. Loyalty exclusive offers on the app, earning points for things like style quizzes or writing reviews or uploading images or earning points for posting and sharing content. We're also looking at earning points for using things like our self-service features, like self checkout or self-service returns. And as you heard from Rich, our customers are fashionable optimists. They come for fashion and inspiration.
And Patti told you about strategies to curate our best fashion. But what inspires me is very different than what might inspire you. So personalization will be critical. When we get this right, we will combine the power of personalized algorithms and the art of fashion curation to ensure that Macy's inspires you with fashion tailored just for you. Taking a learning from outside of retail, from our friends in social media, we all know that fresh personalized content in a feed inspires us to open some apps more than others.
Personally, I keep my Macy's app right next to my Instagram app just to observe my own behavior. Learning from social media, we will add fresh personalized content in a feed to our app. I'll show you a demo of this in just a minute. But it's also really important to observe that today, customers are consuming fashion in new ways. They're renting, subscribing to, customizing, buying more used, more off price and more fast fashion online.
As the business model of fashion evolves and consumer preferences shift to value things like sustainability, so too must we. Our digital platform gives us an easy way to test and learn with these growing business models by using 3rd party partner tests where we can gauge demand and optimize the economics with little capital investment. I'll show you 1 in a minute. We won't get all these innovations right, but we will learn, fail fast and iterate. And we will use both Macy's and Bloomingdale's as test platforms for innovation, sharing and optimizing learnings across our brands.
For example, Bloomingdale's is testing a fashion rental concept that we're learning from on the Macy's brand. So in addition to rental, another area of growth and innovation we're excited about to test in is custom clothing. The custom and configurable clothing market is growing rapidly, thanks to digital technology, which makes it possible and scalable in a way it never was with old fashioned tailors. With our high market share of special occasion dresses and men's suiting, this is a natural spot to innovate. So in addition to the fashion app feed concept, I'm going to show you a demo of a custom clothing configurator concept here.
All right. So first, the fashion app feed. Customer will open her app. She might have a favorite brand like Michael Kors. So we tailor an offer for her.
Her stylist, Molly, has pulled together a new look for her to consider. Her local Macy's might be having a Sip and Shop event, a perk of her platinum loyalty status. Our fashion office, The Edit, providing our curated new trend looks. If she hasn't taken the style quiz, we'll embed that into her feed so she can have some fun and interact and build a style preference.
More offers.
She can follow some of her favorite either customers or colleagues supposed to share those looks, more local store events. We'll add our best of fun interactive tools to get her engaged and having some fun in and
we'll
show her what fall trends look like in her area. And we'll show her what fall trends look like in her area. Of course, we'll build in placements for sponsored placements. A vendor partner might want to do a unique and special promotion targeting a certain segment of customer. If she's made a purchase from us recently, we'll ask her to rate and review that right in her feed.
She doesn't have to go find an email for that. We'll have a lot of fun with this. We'll test and learn. We'll see what gets her to engage, what gets her to spend time in her app and most importantly, what gets her to buy. Our custom clothing configurator will allow a customer to change the neckline of a dress, her sleeve lengths, her dress length, allowing her to completely tailor her look just to her.
We're using a third party partner to test and learn. While we make all of these changes and continue to grow, we will also strengthen the profitability of our digital business. We look
at this in 2 ways.
The first is through the broad transformation and benefits you'll hear from my colleagues this morning. These enterprise activities will improve digital profitability as well. You heard from Patti about pricing and better product margins, which will benefit macys.com. And you'll hear from Dennis about the work to lower fulfillment and delivery costs, which will also benefit macys.com. In addition, we have digital specific initiatives we are prioritizing to grow and accelerate profitability.
BOPS, for example, is our most profitable digital fulfillment channel due to the lower costs and the added benefit of the associated sales. And we know we have an opportunity to keep growing our penetration of Bob's Pickup. This year, we added centralized pickup counters with at your service and added mobile features like I showed you to make the pickup process faster with a barcode. And we will build on these improvements to the experience and increase marketing for bots and item eligibility. We are also evaluating the economics of a customer discount for picking up orders in a store.
We'll also continue to grow ad revenue, creating a new income stream, which you heard Rich talk about. We are significantly under our fair share of online ad revenue for a top 10 e commerce retailer. This is a big opportunity and a big priority for us in 2020 and beyond. And we will that's an exciting one. We will also continue to reduce the profit impact from returns by giving our customers greater confidence earlier in the shopping experience through size and fit enhancements and product reviews.
With focus on these priorities to improve profitability, we are confident we can accelerate our digital profit contribution while growing our top line digital business. As you heard from Jeff, we're moving our digital teams to New York and Atlanta, shifting resources out of San Francisco. 20 years ago, San Francisco was the primary market for digital talent, and it was a great place to launch, incubate and grow our early e commerce business. Today, however, at $5,000,000,000 25 percent of Macy's, macys.com is a scaled, integral part of our business, and we must integrate digital further into our total company, which, of course, is headquartered in New York. We've been on a journey integrating digital for some time.
6 years ago, we integrated macys.com buying teams into corporate merchandising. And now our digital team will sit side by side with corporate marketing and merchandising teams. We know that physical synergies will lead to operating synergies that lead to improved customer experience and fuel growth. New York is also a thriving digital talent market, the epicenter of U. S.
Fashion and has convenient access to our vendors. Our digital engineering team will locate to Atlanta, our center of engineering excellence and another thriving digital market. These moves were strategic and thoughtful decisions. We have taken great care great caution with the operational and day to day components of our business to mitigate risk of disruption. We're ensuring subject matter expertise and knowledge transfer as we shift work to our teams in New York and Atlanta.
And we've been actively recruiting and onboarding key talent and specialized positions for the past several months. I feel really good about the talent we're seeing and the teams we are establishing. And I am confident that this transition will enable us to drive our strategy forward. And finally, it is with deep gratitude and appreciation that I recognize the team in San Francisco, who have scaled our digital business over the last 2 decades and built an incredibly valuable digital asset on which
to build.
To wrap up, we are clear eyed on the ever changing competitive landscape and the high bar our customers have set for us. I'm confident in our growth strategy. We will elevate the macys.com experience, grow our customer base and improve the profitability of our digital business. I want to emphasize that we have significant opportunity to capitalize on our digital platforms. Where we lag competitors, we will quickly catch up.
And where we outpace the industry, we will push boundaries to further innovate and fuel growth. Thank you. And I believe with that, we're taking a break.
15 minutes.
15 minutes. All right.
Ladies and gentlemen, we will resume our presentation at 9:45. Thank you. Ladies and gentlemen, please welcome back to the stage, Jeff Gannett.
Everybody getting settled? Okay. So welcome back, everybody. So next, we're going to spend some time on the 4th point of the Polaris strategy, which is to help you see how we're optimizing our store fleet in an omni world. So as Jill said, we have 40% of our customers that first encounter the Macy's brand through our digital channels, but the most tangible brand experience for our customer is in our stores.
And we are investing in our most profitable or our most productive stores in the nation's best malls. And we're beginning to explore off mall opportunities with a commitment that every store going forward is going to be brand right. We will ensure that we have a tight interplay between our stores and our digital to deliver the best possible omnichannel experience and to capture profitable growth. So before I walk you through our plans, let me share my perspective on mall based retail today. So as you know, some malls are in rapid decline.
And all malls are faced with significant competition from just the laundry list, big box, off price, luxury, digital native retailers as well as rental and subscription and re commerce and more. Everyone is competing for the same dollar. However, we see many malls that are thriving, and we believe that the best malls have a real and ongoing place in U. S. Retail.
In these best malls, we have very committed developers who are investing in experience. They're remixing the contents of their mall. They're being highly creative with their space. We believe these malls are here for the long run. And this is fortunate for Macy's and Bloomingdale's.
Our fleet is mostly located in these best malls. With the planned closures that we announced yesterday, we will further concentrate our fleet to winning locations with more than 65% of our sales and approximately 50% of our stores in those A malls or off mall and urban settings like many of our flagships. We are committing to these doors, and we will continue to be an important part of our fleet in the long run. Now you all know that over the past 2 years, we have focused on capital investments in these prime locations, which we call our flagship and magnet stores. The initial investments that we which we call the growth treatment started in 2018 with 50 stores.
And based on the strong returns, we expanded to another 100 stores in 2019. And we will continue with another 100 stores in 2020. So let's take a look.
Hello, my name is John Marracker. I'm standing in our Cross County store in Yonkers, New York. Cross County is one of our original growth stores and is a great example of the strategy I'm going to walk through today. Our stores are a critical part of our omnichannel portfolio and are a strategic advantage as we work to stabilize our business. Prior to 2017, our stores lacked a scalable capital investment model and as a result were deteriorating.
In 2018, we introduced a growth strategy that was aimed at improving the trend in 50 of our magnet and flagship stores. We closely monitored the investments in each location to ensure we were using most efficiently. Almost immediately, we saw that these stores were improving and it gave us the confidence to push forward with 100 more stores using an iteration of the investments to work best. 1st, we put an emphasis on talent with our best store managers leading these stores. We put a strong focus on key merchandising initiatives across critical product categories.
We improved and refreshed the physical space for our stores and we also developed localized marketing strategies. Before we continue on to our results, let's take a moment to see how this strategy transforms some of our stores. The 150 stores account for 51% of our total store sales volume. In the 1st 2 years, we've generally seen a 1.9% increase in the 150 stores that received this treatment. The original 50 continue to outperform the rest of our portfolio by almost 4 points.
And our dotcom sales in the gross store market area grew by 2 to 3 points following these investments, showing both an increase in store volume and dotcom volume. This strategy is working, our stores are improving. We will apply this treatment to an additional 100 doors and several flagship locations in 2020, which when combined with the original 150 will account for 78% of our total store sales volume. Let's walk through some learnings. There are certain product initiatives that were more effective helping to boost the store's performance.
Some of our top performing upgrades are our backstage store within store model, food and beverage, big ticket, beauty and fine jewelry. Our customers love the investments we are making in their Macy's and our stores that have received the growth treatment have consistently seen higher NPS scores. The product results showed us that when we got it right, we really got it right. But we still have the opportunity to improve in other categories like ready to wear and men's and this is a focus for us in 2020. Customer satisfaction is further driven by the strategies that are geared towards our customers' ever changing shopping behaviors.
To support our growing omni channel business, we equipped all of our stores with At Your Service Centers. Our At Your Service Centers have grown significantly since we rolled them out. Not only are transactions increasing with online pickup orders, but we are seeing an increase in associated sales, in foot traffic and in the profitability of our dotcom orders. Today, close to 80% of our digital returns go back to our stores. Customers still find it very important to visit 1 of our brick and mortar locations.
We continue to seek ways to make the customer experience even better. In 6 of our locations, we've been piloting customer self checkout, which is especially popular with customers during peak shopping times like holiday. Like our growth store treatment, following the results of our pilot locations, we are iterating on this strategy and we'll roll this program out to another 70 locations in 2020. Let me talk for a moment about flagships. These locations are retail powerhouses in their market.
They represent the best of retailing in America. Each has their own unique character and many of them are located in buildings that are steeped in tradition. Our flagship stores are the best of Macy's. When a customer walks into one of our flagships, they expect a specific level of service. The investments in these locations go beyond the growth treatment and are geared towards elevating environments, experiences and assortments.
One example is our new men's floor in Herald Square called The Park. We've elevated what the men's floor looks like, which has proven successful in Herald Square and we will be rolling this strategy out to some of our flagships over the next few years. In all of our stores, we will continue to ensure the right product is found in each location and our flagships we will continue to ensure our most important brands are represented. And in our neighborhood doors, we will continue to offer our best sellers and core assortment. Over the next 3 years, we will continue to invest in our stores through the strategies that we know work.
We will continue to satisfy the needs of our omni channel customer by giving them the products they want, how they want it and when they want it. We will continue to bring to life our fashion strategy. This is especially true in our flagship locations. We will continue to evolve to provide the best right investments. And most importantly, our customers are noticing these changes.
Macy's is a brand beloved by our customers and we will continue to iterate on our strategies to bring our stores and company back to growth. Thank you.
So we're confident that the growth strategy and treatment is the right strategy for our magnet and our flagship stores. And we're focusing our resources in the right stores, in the right malls, with the right partners to succeed. So 1 year from now, just to dovetail on something that John said, we know that our most productive 250 stores, this will represent 78% of our sales, and they will all be brand right and driving improved profit. And in 2021 2022, we will address the remaining magnet stores in our portfolio. So as part of the growth treatment, we are working on a number of labor models to find the optimal mix of people, process and technology that will drive productivity within a store.
And we know that there are some departments like fine jewelry and big ticket that require high touch sales support. In these areas, we've moved more colleagues to a commission structure. This ensures that sales growth and labor costs are aligned, and we have been very pleased with the results. In these commission departments, we see higher productivity, we see better colleague retention and importantly, we see better sales and higher quality service for our customer. There are also tasks, as you saw in the video, where the store where labor hours can be significantly lowered with technology.
We saw this in self checkout. We also saw this in the Q4 when we rolled out the new handheld devices in our stores. As you saw in the video at our Etcher service desks, which we have in every single store, this has had a big impact in making fulfillment easier and more efficient for us and obviously for our customer. Know that we will continue to test and analyze labor models across the store. So now I wanted to talk about the remaining of our portfolio, which we didn't get into in the video, which is the neighborhood stores.
So these neighborhood stores, they represent about 25% of our store count and less than 10% of our sales volume. They are mainly in C and D malls or in markets where Macy's has multiple stores in close proximity. These stores have been comping on average about 3 points below the rest of the fleet over the past 2 years. And while these stores are still cash flow positive, we expect them to decline more rapidly over time. And many of these stores are not brand right.
So over the course of 2019, we tested new labor models for these neighborhood stores, new layouts and new strategies in these stores. And we were not able to find a brand right solution that also met our profitability goals. So consequently, as you read yesterday, we identified approximately 125 stores for closure over the next 3 years, 29 of which are in the closure price process right now. So to select these stores for closure, we conducted a rigorous review of our entire fleet, and we utilized a market based approach. This was informed by store specific considerations, and it's got to start there.
But it also included the trajectory of long term profitability and strategic significance to our brand and customers and the omnichannel business in that individual market. Now based on the degradation of some of the malls these stores are in, we anticipate that the declines are likely to accelerate. So we're being strategic about how we manage this neighborhood stores portfolio. Something we announced yesterday to our team that's been in the works, we are now having our own region with a dedicated management team that covers all of these neighborhood stores, which will have a focus on productivity improvements. These stores will have focused merchandising strategies, edited assortments of core vendors and key basics.
They will continue to serve an important role in fulfillment and convenience to our customers in those ZIP codes until they are closed. As we all know, retail is dynamic and we know that markets and malls change. We will use the same rigorous process assessment for each of the stores in our portfolio on an annual basis to ensure that we have the optimal footprint of stores and that we have a current view of each store's value as retail versus real estate. This assessment process will also help us prioritize the order in which our remaining magnet stores will get the growth treatment. Something that was important to us, as we close these stores, we will work to retain as many of the customers as possible.
Now we gained good experience with localized media and personalization strategies and when we use to support our growth stores in both 2018 2019. We're now applying those learnings to the closing neighborhood stores. These neighborhood stores are just one component of our real estate strategy. And so what I'd love to have next is Doug Sessler, who leads our real estate operation, to come up and tell you how he's looking at our core going forward stores. So Doug Sessler?
Thanks, Jeff. Good morning. I'm Doug Sessler, Head of Real Estate for Macy's. And I'm here, I guess, not surprisingly, to talk to you about our strategy for real estate. I need the clicker.
So let's start with an overview of our real estate. We own and control great real estate, which we think is going to give us and does give us a real competitive advantage. As Jeff has described, we have a portfolio of about 525 full line stores, approximately 125 of which are the neighborhood stores that we've described and about 400 are the magnet and flagship, which we call our core portfolio. So what gives us this competitive advantage that I'm describing? Few points.
1st, broad footprint. We're in most of the major markets around the country, 49 of the 50 top markets precisely. We have an incredibly low cost of occupancy across the portfolio, less than $5 per square foot. And I'm not just talking about rent. I'm talking about total occupancy costs, rent, taxes, common area maintenance charges, the whole enchilada, so speak.
High quality locations. So as Jeff has mentioned, half of our portfolio, the core portfolio, A quality malls or valuable freestanding locations, 2 thirds of our sales come from these locations. The freestanding locations are generally very well located in urban and high traffic locations. And then lastly, monetizable assets. So 78% of this portfolio is either owned or ground leased.
Why is this important? Number 1, our right of use is very long. And if any point, we decide that it makes more sense to monetize for cash value than to operate as a store, we can monetize that value. This is, in our opinion, a truly significant competitive advantage. So let's talk a little bit about what we're doing with regard to our real estate strategy.
As Jeff has detailed, our work starts with the analysis of our markets and our fleet coverage. He's already walked you through the process by which we evaluate the store fleet. But in addition, we continue to analyze the specific assets within the fleet so that once we've gone through that analysis, we then come up with the assets which are the monetizable assets. And sometimes, we directly sell those assets. Other times, we take an indirect path, where we take a real estate development step.
I'm going to walk you through in the next couple of slides both our asset monetization and our real estate development strategy. So first, let's just talk about monetization. We believe that we're doing the right thing to garner value from real estate. And let's take a look at the candidates that we consider for monetization. 1st, there is the underperforming stores.
Of course, most of the neighborhood stores would fit into this characterization. Secondly, there's the opportunistic monetizations. These are situations where clearly real estate value outstrips the operating value and the location is not essential to our market footprint. And then lastly, there's land that's adjacent to a store, which is either excess or nonessential. So let me talk for a minute about the guiding principles that we use when we go through the monetization process.
Most of these locations are going to be purchased by a buyer who's a developer. They're going to either think about developing or redeveloping the asset. And so we need to think like that buyer and figure out what's the highest and best use for this asset if it's no longer going to be a Macy's store. Should it be residential? Should it be a hotel?
Should it be office, mixed use? Whatever. And whatever we decide, as we think through that, it needs to be complementary to the rest of the area and the adjacent mall, if it's a mall based. It needs to be able to be something that can be approved by the municipality. And of course, most importantly, it needs to make economic sense.
So we do quite a bit of analysis. We do development pro formas to really truly understand the value. And once we have figured that out, we then have the ability to go to the market and be a truly informed seller and hopefully capable negotiators. So what are the results that this has created, this process that we've been doing over the last 4 years? Well, over the last 4 years, we've transacted 135 assets.
By the way, most of those are one off transactions, and it's a total of $1,600,000,000 of proceeds for the company, which we reinvested in programs like John's Growth Store Initiative. This year, we expect in the neighborhood of $130,000,000 of proceeds, and I think it's reasonable to assume $100,000,000 plus of proceeds for the coming years on an annual basis. So now that we've sort of talked about broadly our monetization strategy, I want to talk more specifically about that important step that we're taking on a number of assets, which is our development process. You can see here, we really have 3 types of development that we engage in. The first, outparcels, and these are essentially small lots that we carve out of the parking lot.
We put a Chick Fil A or a Starbucks or maybe a bank on those locations. The second, large scale developments. These are really multiacre parcels adjacent to a high value store that are being developed into some sort of an asset, often mixed use. And then the third is special projects, projects like Herald Square, which I'll talk about in a minute. Everybody loves to ask me about Herald Square.
So let's talk about outparcels, and I want to go through each of these 3. We love this business. We've teamed up with 3 regional fee developers to develop, lease and ultimately sell these outparcels. These are pads that are typically less than an acre, and you can see in the site plan here 4 parcels that are lined up here. Often, we'll see more than one outparcel that we can do in a particular location.
And they're great because we're effectively converting underutilized parking into real value. The risk is low because we spend very little money until we have a tenant, and then we improve the pad, and then the tenant will typically build its own building. So it's taking the risk associated with that. These pads are also, once developed, very liquid because investors love the reliable income associated with a long term ground lease that the tenant signed. And for our perspective, the result is that we can take a nearly valueless piece of property and turn it into a $1,000,000 to $3,000,000 gain after all of our costs.
At this point, we have about 16 projects in our pipeline. We've got 40 more or more on the drawing board, and we're excited. Now let's turn to large scale development. The large scale program, as I said before, is where we're carving out a big chunk of land. Again, it's typically adjacent to high value stores.
And in these situations, we partner with local developers or regional developers who have the expertise to obtain the development rights and to build and lease these assets. Today, we have about 16 of these projects under negotiation or predevelopment. We have another 30 of them that are under consideration. Once the property is entitled and approved and the project is ready for construction, we typically structure these transactions in a way that we have the option to either take cash, a pre agreed upon value of cash for our land, which then the developer goes on and develops, or we can roll that value into the venture and have the ability to ride with the upside profits development profits alongside of the developer. Typically, these projects have a total cost of $100,000,000 to $300,000,000 and our land is in the neighborhood of 10% to 15% of that overall budget.
So as you can see, if we were to roll the interest in, we would have a substantial portion of the equity and have the opportunity to reap substantial upside. So let me turn to a specific example. Here's a picture of our store at the Burlington Mall. For those of you who live in the Boston area from there, know this to be a high value location on the north side of Boston. You can see from the picture, we've got a substantial parking area here.
And in this case, we're carving out 8 of 19 acres to create a mixed use development, which I'll show you here, that will have retail, office, hotel and a substantial residential component. You can see up in the center is Macy's, our store. The store will continue to have significant replacement parking, both in terms of a parking deck as well as surface parking to provide continued easy access for the customers and as well be able to service all of the mixed use components around it. Not only does this kind of project create value, great value for Macy's, but it also enhances the mall environment and enhances the nearby density of population. Here's a rendering that just shows you what the plan view will actually look like when it's completed, and this is a great example of these kind of large scale projects that we have in the pipeline.
So let me turn to our 3rd type of development, our special projects, and specifically, to talk a little bit about our project, Herald Square, which, of course, it's our most important asset and it's our most valuable development project. After substantial analysis and review, we decided to embark upon 1,500,000 square foot office building that will sit atop of the store. The rendering here shows a view of a sky lobby. So you'll express elevator up to a sky lobby. And as you literally open the elevator doors, this will be a 2 story high lobby, you'll have this this is actually the view you will have of the Empire Building Empire State Building, which I love.
I think it will create the sense of arrival that we're looking for in a 1st class office building. We're presently working with government officials and other stakeholders to obtain the zoning on the property that's necessary. We expect that this process will take us through the end of next year, at which point we could begin the development in earnest. We're excited about this project in large part because of the location. The success of Hudson Yards and the development around Penn Station has only improved this location in the sense that the center of gravity in Midtown Manhattan has clearly shifted to the Southwest and has really kind of created an improved location here at Herald Square because of this transit oriented location, and the city is very focused on wanting to create more density around transit.
So this fits extremely well with them. So that's the lobby, and you can now see here's the tower. We're excited about this. It's pretty obvious to see why we're excited about this project. We believe that this will be a development that will retain the character of our building and minimize the long term disruption to the store.
We also expect this project will make substantial improvements in and around the Herald Square area, both transit oriented as well as surface level. And lastly, I would just say, we believe that we will create a project that will allow us to continue to reinvest in the Herald Square store as well as the rest of the fleet. So with that, let me conclude with a couple of thoughts. First of all, we believe that Macy's Real Estate will provide us with an enduring competitive advantage. Through a rigorous and ongoing process of market and fleet analysis, we will continue to streamline the Macy's portfolio as well as evaluate our real estate monetization opportunities.
And lastly, we will continue to execute our development and asset monetization in a way that maximizes value for Macy's. So with that, I'll turn it back over to Jeff. Appreciate your time.
So thanks, Doug. So as you heard, a lot of thought goes into how we manage our real estate portfolio. But just to summarize, we're going to optimize the value of our existing store fleet by investing in the best stores in the best malls. We are going to be proactive addressing stores in unhealthy malls. But we also want to let you know that our strategy will not be limited to mall based retail.
And we won't be constrained by our current store footprint and format. So we will be taking our brand to areas of retail that are growing. We will start to pilot these new retail concepts, which can then be profitably scaled under the Macy's brand. So let me give you some context for where we are with the potential for off mall growth potential. So as you all know, mall based stores were once the primary channel for where our consumers purchase their apparel and home goods.
But today, mall based retail only hold about 4% to 45%, depending on our 38 categories in which we play, housewares being the lowest and handbags being at the high end. So the reality is that we have a large number of customers who no longer are shopping regularly in malls, but they know and have shopped Macy's in the past. And they have special shopping habits similar to our current best customers or the advocates that Rich described earlier. They would welcome the opportunity through our research to explore our fashion and take advantage of our great value and quality products. And we know this because a number of them are coming to us occasionally and they're shopping with us for special occasions.
However, Macy's current fleet doesn't include a physical store in the places where they're shopping regularly. Our research and initial tests suggest that we can win with these customers by leveraging our brand combined with omni non mall based retail experience. We're already innovating to serve this customer in 2 ways that we're going to share today. The first one is a Backstage freestanding store, which where we can build our Backstage brand. And the second one, which we're announcing today, is a small scale lifestyle store concept.
We have further innovations in the pipeline, and we will share those with you when we are ready to test. So as we look to store expansion, we are using the rigor of our test, iterate and scale model that has served us well. We are actively testing concepts with consumers to ensure that we have a value proposition that combines the best of our brand with consumer demands. And we are going to build these concepts, I want to emphasize this, smartly and as good stewards of capital. We have an established clear stage gate process to ensure that we have proven the viability for profitability before we invest significant capital.
And we will share our progress in the quarters ahead. So we're going to see a couple of videos. To explain these concepts further, let's hear it from our first one, and that's going to be led by Michelle Israel, who is the Head of Off Price for both Macy's and Bloomingdale's. She's going to tell you more about our thriving off price business.
Good morning, everyone. My name is Michelle Israel and I'm the Senior Vice President of Off Price for Macy's Inc, overseeing both Macy's Backstage and Bloomingdale's outlets. I'm here at our Backstage location inside Macy's at Paramus, New Jersey. Over the last few years, we've seen strong growth in both off price divisions, leading us to believe both have much runway for expansion. Backstage is the only national on mall off price store format and it's had a strong growth trajectory.
We posted consistently high positive comps and high customer satisfaction scores by relentlessly focusing on fashion and value. Bloomingdale's outlets is almost 10 years old and we have 19 freestanding the fashion and the value the off price customer desires. And we've been consistent in the Bloomingdale's outlets and we've achieved strong comp growth 3 years in a row. While Backstage of Bloomingdale's outlets serve different demographics, customer appetite for both offerings remains very strong. There's no doubt the customer wants to shop off price and they like being able to shop off price under our brand names.
Our success in both Bloomingdale's Outlet and Macy's Backstage gives us the confidence to grow our store portfolio, both on and off mall. We have a vision of an off price business that gives our current customers an off price experience. It also attracts new customers to our brands and supports the Macy's market strategy. Let me walk you through the strong progress we've made since launching Backstage before elaborating on our go forward strategy. Our tagline is our job description.
We're off price, on trend, arriving daily. Backstage consistently and quickly delivers trends, brands and value, driving sales, traffic and a bigger share of wallet with our customers. We have an off price dedicated merchandising team focused on finding the best product for our customer. And we've done this through our strong relationships with national brands and by finding and nurturing new manufacturers who can supply us with that all important right fashion at the right price. Let me give you a brief history of Backstage.
In 2015, we launched with 6 freestanding locations. These locations were working, but we knew we also had unproductive space in our full line stores that we needed to improve upon. So in 2016 2017, we tested our store within store model. We realized quickly that we had proof of concept and got aggressive. By the end of 2018, we added 165 store within store locations, bringing Backstage to all regions and climates in the country.
At the end of 2019, our store fleet comprises 6 freestanding locations and 211 store within stores. To support this aggressive growth in 2019, we opened a dedicated distribution center in Columbus, Ohio. As we continue to grow backstage, this will help us do 2 things, leverage pack and hold to take advantage of margin rich end of season excess inventory opportunities and also take advantage of enterprise inventory. As we grow backstage store within store continues to exceed our expectations. Locations have been open for at least 1 year grew on a comp basis by more than 5% in 2019.
We also anticipate improved year over year gross margin. This holiday season, Backstage improved its weekly sell through by more than 2 points versus 2018. So when we look at adding a Backstage store within store to a Macy's full line store, it's a win for the building. In most cases, the space in the store that was converted to a store within store is delivering higher sales dollars and margin dollars per square foot than the business it displaced. And we have continued improving the overall economics of Backstage.
Let me tell you a little bit about customer. Approximately 20% of the store within store customers are under the age of 40 and the customer base is more diverse overall. The customer lives in a household with children. We talk a lot about the cross shopping customer and she's one of our biggest success indicators. This means a customer who shops in both Backstage, store within Store and Macy's Full Price.
Those are really valuable customers. The store within store cross shoppers visits 6 times a year and spend about $78 per visit. They're very valuable and very engaged with the Macy's brand. And our Backstage customers are also among the happiest. In fact, the Backstage NPS score averages 72%.
So we've grown quickly and with that speed, we've learned a lot. As Macy's gets better at off price every single day, we believe Backstage still has significant runway to improve and maximize on those learnings. Given our success to date, we are continuing to aggressively grow Backstage over the next 3 years. In 2020, we will expand Backstage to another 50 store within stores, bringing the total count to 261. And we're also now bringing our focus back to freestanding locations.
The ones we have today are some of our best stores. For example, 4 of our current freestanding locations rank in the top 100 of Macy's full line stores in terms of productivity and their strong customer stores have higher sales productivity, higher gross margin and a faster churn than our store within store locations. Knowing all that, in 20 20, we will build 7 new freestanding off mall backstage stores. We will initially focus on 3 important markets for Macy's. These markets already show strong strength for us in off price.
Our 13 store within store locations in these markets delivered 2019 comp growth of more than 6%. These stores will help us recapture some of the customers impacted by full line closures. They will also allow Macy's to expand our reach to currently underserved customers and those within the growing off price sector. Excitingly, these locations will serve Macy's customers in 2 new ways. They will take returns from Macy's full line stores and create new pickup locations for BOSS orders, strengthening the link between Backstage and Full Line Macy's stores.
Customers will now be able to pick up their online orders and do their returns within a Macy's Backstage. We know our freestanding Backstage customers already an omni shopper. 43% of them shop on macys.com and 76% of them shop in Macy's store. They're engaged with us on an omni level and we're going to augment that experience. We believe this omni strategy will drive sales and customer satisfaction.
These factors get us excited to grow this armor, the Macy's brand. So over the next 3 years, we will continue to aggressively expand Backstage in strategic locations across the country. We will also continue to test and scale an off mall model that will expand our agile footprint and bring new customers into the brand. Overall, the performance of Backstage continues to exceed our high expectations. We believe further expansion of the model will lead to even better returns.
Our plan is to test, iterate and read the results to drive comp and profitability growth. Going forward, both Bloomingdale's outlet and Macy's Back Thank you,
Thank you, Michelle.
So that is what a department store can look like through the lens of off price. Now I want to talk about the next concept, a lifestyle store concept that we're testing in 2020. We're calling it Market by Macy's. These stores will be significantly smaller than an average Macy's, located off mall and lifestyle centers and feature a mix of the best of Macy's merchandise, local goods and community oriented events. The 1st Market by Macy's will open in Southlake near Dallas tomorrow.
This initiative is being led by Rachel Shekman, Founder of STORY and our Brand Experience Officer. Let's take a look.
When the opportunity came up to launch a new lifestyle driven Macy's concept, I couldn't help but raise my hand on behalf of the brand experience team. The task, in 1 year create a new retail experience where we can test, learn and innovate. The outcome, the market by Macy's, a social shopping space that celebrates community discovery I'm Rachel Shekman. Let's take a look at our first location and what we're testing in South Lake, Texas.
Peter, what are we doing today?
Seeing our new store.
So what are we testing? Running a smaller format store that's not inside a mall. Organizing assortment by lifestyle instead of by department with an assortment that reflects our community, injecting new brands and categories, featuring the best of our national brand partners and celebrating our Macy's private label brands. We prioritize focusing on events and food and beverage as additional meaningful revenue drivers. Meet Harold, our cafe for the community, by the community.
Breakfast, lunch, snacks, cocktails anyone? And yes, you can have a drink while you shop. From crafting classes to cooking demos, book signings to wine tastings, There are myriad of weekly events. So we thought to ourselves, it's common for retailers have private label brands. So why can't we also have private label retail shops?
So we re imagined a modern beauty apothecary and called it Getchell's, which pays homage to Margaret Getchell, the first female executive who worked at Macy's in 18/60. It's about celebrating beauty's tried and true mixed with what's new. Our test, learn and innovate approach shows up in how we're using technology. We teamed up with Avery Dennison to test RFID with beauty products, something typically hard due to liquid and metal elements. We partnered with Soluem to redesign digital tags.
We believe in the importance of being part of the community. For the past year, we spent time hosting gatherings to meet potential partners and colleagues. We went to people's homes to meet with community members. We cheered in the bleachers of the high school football games. Go Dragons.
We met with the mayor of South and her team. Thank you, Laura. We hired local food guru, Leslie Brenner to create our menu. We hung out with kid rock stars, meet 11 year old author, Abigail Perez, and we work with local artists to make our store feel like a home. So welcome.
It's our modern main street that sits at the intersection of culture and commerce. Come by for a quick bite, Get your beauty essentials. Pick up a macys.com online order. Grab a pair of kicks from APL. We open tomorrow at 10 am.
I'll see you there.
So thank you, Rachel. So that's what a department store can look like through a lifestyle lens. So we're excited about these concepts on a standalone basis. But more importantly, we're testing the power of these concepts as part of a larger market ecosystem. We have an opportunity to build a broader yet integrated Macy's experience within the metropolitan area.
So from listening to and studying our customers, we know that the majority of Macy's customers already shop in a truly omni way across multiple locations, online and through our app. Importantly, all Backstage and Market by Macy's stores will have fulfillment and return options for all Macy's customers. We know that the more touch points we have and the greater convenience we provide, the greater loyalty and engagement we engender with our customers. We know our customers will travel to flagship or magnet locations in the city for special occasions of those bigger shopping events. And we know that when they have the convenience of a local Macy's, they shop with us more frequently.
And based on the success of Backstage, we know our customer wants off price. So given this customer behavior, we're developing and testing how a fleet of Macy's stores of varying formats can work in combination across the city, giving customers access to the fullness of the Macy's brand. We're testing this retail ecosystem in Dallas, Atlanta and Washington, D. C. Markets in 2020.
We chose these three markets because they're growing metropolitan areas where we have a store base, but also have significant gaps in our current store coverage. They have a reasonable cost of operations, so we can build a model that improves our profit while being scalable. And we already have a significant digital business and can track the interplay between digital and physical access points in each of these three markets. So to better illustrate how we're looking at this ecosystem approach, let's take a look at Dallas Fort Worth. So this is our current market presence.
And what you have here is we have 15 Macy's full line stores, 6 of them with Backstage in store and a Bloomingdale's outlet. So our next is we want to identify the 3 neighborhood stores, which are on unhealthy malls, which we will close at some point in 2021 or 2022. The next slide shows how we will then backfill and how we will backfill with 3 Backstage Freestanding stores as well as 2 Market by Macy's and Lifestyle Centers. So our stores footprint in the Dallas Fort Worth area is going to have more units, less square footage, but it will be a mix of formats in the right locations for our customers to shop with us more frequently. But what is interesting is what this does for the dotcom business.
And when you look at the trade areas and the zipcode.com information we have. Based on how our digital business is distorted by zip code, along with our brick and mortar presence, we know that this new store footprint will provide a lift to our dotcom business, creating more of those high value omnichannel customers that the team has been talking about today. So in 2020, we plan to add in total a dozen freestanding Backstage and Market by Macy's stores in these three markets, Dallas, Atlanta and Washington, D. C, so we can test and iterate. We are excited about what we believe this will do for customers and our brand.
As we test these ecosystems in 2020, we're going to be looking for 3 things. We're going to be looking for evidence that we're building customer lifetime value using the acquire, migrate and retain metrics that Rich described earlier. We're looking for profitable growth for the total market, including all stores and dotcom and importantly, customer satisfaction, both in individual stores and in their experience across the ecosystem. We're committed to building these innovative concepts smartly. And when we land the proper and profitable economics, we will
scale. So I'm
going to next turn it over to our next speaker, who will cover a critical part of our retail platform, which is supply chain. This is an area where, frankly, we have lagged, but we see as a major value creator going forward. We're aggressively going after the work that needs to be done to create a more efficient, flexible supply chain. This work is a source of much of our productivity improvements and it is critical to gaining maximum value from the retail ecosystem that I just described. So I'm going to hand it over to Dennis Moulay, who is our Head of Supply Chain.
Thank you, Jeff. Good morning. I'm Dennis Moulay, and I've had the pleasure of working at Macy's for the last 9 months as a Chief Supply Chain Officer. I joined Macy's with over 30 years' experience in supply chain operations and strategy in both consulting and retail organizations. I'm excited today to walk you through how we're changing Macy's supply chain to be customer driven and efficient.
Let's start with the definition of supply chain at Macy's. So in March of 2019, we created a new supply chain organization consisting of 6 core functions. It starts with sourcing. We work with our overseas partners to produce our private label products, transport them over international waters bring them into the United States. Inventory Management and Analytics uses data science and analytics to improve throughput of our network, to locate product where it should be and to help us best meet customer demand.
Transportation is the physical movement of goods, both internationally and domestically, to both our stores and our customers. And distribution and operations is the physical picking, packing and staging of our product to fulfill an order. Procurement works across the enterprise to assist in contract and cost negotiations for all of our merchandise supplies and services. And sustainability works across functionally on driving changes in processes and procedures as it relates to environmental and human rights policies and practices. Now we've always executed these functions, but they operated under different leadership, spread across the organization.
And while we were effective at executing them in each individual silo, our integration points were not aligned. We missed the opportunity to capitalize on benefits across the organization, and we lagged in our service to the customers. We incurred higher costs to serve. As you heard from Jeff and the rest of the team, consumer shopping trends are changing. Consumers have more choice, more options.
And more demanding of speed, product quality and price in an omnichannel environment. While this has changed how our consumers shopped, our supply chain has not evolved to best service those needs. With the supply chain function spread across the organization, it was not optimized end to end. For example, we operated special individualized networks based on channel or category or product type, each with their own transportation services, each with their own solutions, driving incremental cost, inconsistency in customer service and higher cost to serve. Like many retailers, Macy's had previously viewed the supply chain as transactional, moving goods from point A to point B and optimizing costs along each individual point.
While this was effective in the old retail model, it limits flexibility. It drives up end to end costs, and it impacts the speed and service we need in today's omnichannel model. In addition, we experienced higher costs when you look at our aggregated spend. For example, our sourcing model was focused on brands, not product classifications. It was deleveraging our scale with our relationship with our vendors, driving higher costs and limiting efficiencies.
Putting supply chain capabilities under a single organization with a single leader allows us to better manage end to end movement of product throughout the network, better optimize our total cost and better align to our consumer needs. We recognize supply chain is table stakes for any retailer. We know there are significant opportunities within our supply chain. I'd like to walk you through what we're doing across the supply chain to modernize our work, to save costs, improve margins and deliver a better customer experience. We're reshaping our supply chain to move away from the historical transactional view that we used to have to a highly efficient customer focused supply chain, one that will allow us to improve our ability to meet customer demand no matter where they're at, no matter how they shop at a lower cost.
We're going to accomplish this by 4 things: 1, creating a best in class sourcing capability that will drive profitability throughout our private brands redesigning how inventory flows through our network using advanced analytics and inventory management improving our operations to increase our throughput leveraging transportation to drive inventory productivity, and we're enhancing our procurement capabilities to include a more focused and strategic planning effort, deeper category analytics, better insights. And we're emphasizing the importance and the role that we play in driving and supporting environmental and human rights policies and practices across the industry. In doing this, confident that we will build a world class supply chain that supports growth, lowers costs, improves productivity and is better aligned to our customer expectations. I'd like to spend a few minutes and walk you through the details of what we're doing, starting with our sourcing. Our sourcing strategy is focused on 3 key levers: 1, reducing our private brand costs to support cost of goods to support margin growth 2, reducing our lead time to increase our agility and our speed and 3, continuing to innovate in order to provide our merchant partners the ability to source the best and freshest fashions.
To enhance our costs, we're leveraging data and analytics to develop costing models, taking into account category based scale, component level costing and country of origin. We're optimizing our supplier strategy, right vendors, right locations, right capabilities in the right country to leverage spend and optimize cost. And we're leveraging raw materials consolidation and management to eliminate unproductive fabrics and consolidate categories as appropriate. To make our sourcing faster and more agile, we're leveraging improved demand signals, trend intelligence to get the right product, the right amount upfront. We're introducing selective fabric platforming to increase speed and product creation and the ability to chase and respond to trend and unplanned demand.
And we're streamlining our organizational structure to allow clear decision rights focused on faster decision making and ownership. And finally, we'll support our merchants by sourcing the freshest and newest fashion materials available, leveraging our supplier capabilities in design and production to inform new product innovations and expanding on fabrics and product sustainability initiatives like BCI Cotton and fabrics made from recycled materials. Over the last several months, we've been piloting several of these solutions. I'd like to share with you some examples of the results we've been able to achieve. We've seen savings across all of our pilot categories, where we leverage our new tools and new capabilities.
For example, we leverage should cost models to identify where fabric or cut, make and trim costs were higher than we expected. This helped us negotiate savings and reduce the total landed cost. We enforced subcomponent level cost transparency, allowing us to negotiate all components and understand the cost buildup of product. We incorporated regional costing to understand where and when to move volume to duty free regions, enabling double digit duty savings. And we eliminated cost averaging across SKUs by asking for full subcomponent cost transparency from our vendors.
This allowed us to eliminate outlier quotes quickly and challenge finished goods costing. And we use material consolidation where appropriate, leveraging common materials across programs to increase our depth of buy and lower our costs. In total, for the pilot, for the targeted spend categories, we're able to reduce cost of goods by $19,000,000 a 6% improvement, utilizing just a subset of the actions and limited data sets that we plan to employ. We're on track to optimize and scale this opportunity over the next 3 years and drive a 6% to 8% reduction in cost of goods, which will generate $120,000,000 in margin improvement. Additionally, with the streamlined organization, enhanced capabilities in our overseas offices, improving our planning, scheduling and factory capacity, positioning and staging of raw materials, better alignment with our manufacturing partners, we'll reduce lead times by as much as 30 days from design to store.
This will improve our reorder cycle time, allow us to reduce inventory and make decisions closer to trend. By leveraging our capabilities, we'll be able to bring new innovations, new fabric, new production techniques to our merchant partners, helping to contribute and continue to enhance our assortment and support our fashion direction. We're excited about where we're at and the opportunity going forward within our sourcing organization. Let's move on and talk about how we're redefining fulfillment capabilities. Our strategy for fulfillment is to move to a centralized fulfillment model.
This model will require us to change and build new capabilities across several of our supply chain competencies. For example, inventory management and how we flow goods and where we place it. Our distribution network and operations and how we process freight and domestic transportation to move goods quickly through the network at the right costs. You may have heard us refer to this concept as hold and flow in the past. We've evolved this concept to focus on a broader set of the assortment, fully leveraging our existing network and assets and incorporating an omnichannel customer perspective.
In order to explain where we're headed, I'd like to take a minute and walk you through how our current network operations work today. Our network today consists of essentially 2 separate networks: 1 that is focused on store delivery, which delivers product to our bricks and mortar store and the second, which is our direct to consumer network that focuses primarily and solely on our growing e commerce business. Let's walk through how these networks work. Today, our vendors, including our private brand vendors, will ship to 2 different channels separately. Our store delivery centers and or our direct to consumer network.
Product that is shipped into the store delivery network is cross stocked and moved directly to the store it was ordered for. We do not retain any inventory within this network. All inventories flow to the store it was ordered for. For a direct to consumer network, we retain product in our facility until a customer places an order. At that time, we pick it, pack it and ship it to the customer.
Naturally, sales will vary across all stores. And while we do the best we can to allocate to the appropriate store, the variability that we have in sales and product by style, color and size creates an imbalance of inventory assets across the network. Some stores will be out of stock, while others will have excess inventory on their floor or in their sock room. With no inventory left in the network to rebalance it, it results in lost sales and higher markdowns. Moving to centralized fulfillment will help us reduce these issues.
Gives us flexibility with our inventory, allowing us to better use our inventory purchases to support sales across any channel. It gives us speed, allowing us to recover faster from sales, fulfilling consumer orders more efficiently by having inventory available in the centralized locations, and it provides better cost management, reducing end to end cost by lowering markdowns, reducing expense necessary to fill omnichannel orders and really leveraging assets more effectively. Let's walk through how this is going to work. In our new model, inventory will be shipped to a centralized fulfillment center. A portion of that inventory will then be shipped to the stores to meet initial customer demand, while the balance of the inventory, referred to here as flexible inventory, will be held at this fulfillment center.
We'll hold this inventory to support e commerce orders and to fill in sales as they occur. And while we will still have variability in sales across the stores, we now have flexible inventory that will allow us to fill back in and make and fill the network in. That will allow us to fill the stores in that are selling faster and get the inventory where we can actually sell it, while maintaining our ability to fill online orders from the centralized fulfillment center. This results in improved sell through, lower markdowns as well as allows us to respond faster to our consumers and lower our costs of online fulfillment. Now to move to the centralized fulfillment network, we have to make some investments in our current network.
Our plan is to start by converting our direct to consumer buildings to centralized fulfillment centers. That will not only allow us to process consumer freight, but as appropriate, allow us to process freight for the stores, both replenishment as well as basics and fashion goods. This allows us to capitalize on the benefits associated with centralized fulfillment, while leveraging our current assets initially to do so. Now similar to sourcing, we've been testing and piloting this concept over the last several months. While the pilot has been limited number of products based on our network configuration, we've still been able to generate substantial results.
In both of these cases, we were able to divert small quantities of product out of our current store network and into the consumer network. We then watch sales. And if stores sold through, we replenished via small parcel. The measurements above represent full life cycle of product all the way through liquidation. The effective markdown rate is driven by increased selling at regular price before clearance, lowering the amount of inventory that we had going into clearance and liquidation.
Across all of our product categories in 2019, we were able to improve sell through by 5% and lower our effective markdown rate by 2.5% for the products that were put in the program. In addition, we experienced other benefits, including improved in stock and improved channel allocation of e commerce orders. We kept more orders within the centralized fulfillment network, enabling us to lower our costs, improve our lead time and reduce our packaging our cost per package. We reduced our e commerce fulfillment by $3.74 per unit with a 6% faster click to receive and a 3% reduction in split shipments. In addition, by leveraging analytics on inventory management and inventory placement at peak, we're able to improve our supply chain asset utilization and productivity by over 17%.
Over the next 3 years, we will be scaling and optimizing this concept, bringing more of our assortment into centralized fulfillment, driving lower effective markdown rates, which will generate $180,000,000 in margin improvement, improve our in stocks, generating incremental sales and margin and reduce our average inventory by $200,000,000 at cost. This network will allow us to more easily support the new store ecosystem that Jeff mentioned. It allows us to fully leverage our current assets, creates a network that supports expanding buy online, ship to store capabilities to any one of our formats. In addition, it lowers our cost of fulfillment, keeping more orders in the centralized fulfillment network, which is able to ship to our customers faster and at lower cost. It also reduces the need for our stores to have labor focused on fulfilling orders.
It allows our store colleagues to spend time necessary in the store with the customers that are shopping. More common inventory that Patty discussed in our centralized fulfillment centers will allow us to reduce our delivery expense by allowing us to ship more orders and complete one package versus generating multiple packages per order. That reduces the number of packages, thereby lowering our costs to deliver the same volume. We're excited about this and excited about our abilities to roll this out and make it happen. Next, I want to talk about procurement.
In procurement, we're really enhancing our current model and capabilities. We launched the procurement function approximately 3 years ago, and it was focused on core capabilities necessary to do procurement, really focused on lowering our spend, tactically oriented and executed based on contract expiration or contract renewal. We're taking the next step to evolve our capabilities, to be more focused on category planning, more focused on category analytics and procurement capabilities. We'll drive more strategy into our negotiations and our management of our spend. We're leveraging 3rd party experts to provide category insights, to leverage develop spend and reduction targets and assist in helping us manage critical events and better leverage aggregate spend.
Over the next 3 years, we've identified areas of savings across the organization that will equate to $200,000,000 in savings between capital and expense. And finally, no supply chain conversation is complete without a discussion on sustainability. So previously, sustainability at Macy's has been grassroots initiatives driven throughout many organizations and areas within the company. We have taken steps to make sustainability a priority at Macy's. In 2019, we launched our new sustainability report with goals that align to SASB standards.
Going forward, we're formalizing a sustainability team that will focus on coordination of our plans and efforts across the organization, aligning key activities and key focus areas, driving accountability for achieving results under a common governance structure and supporting both internal and external communications of efforts, plans and results. Our sustainability initiatives include responsible sourcing, social compliance, human rights and environmental initiatives to reduce waste and carbon footprint. I mentioned in the beginning of the presentation the efforts we're making to redefine and rebuild our supply chain across all of our functions. While we've been behind in the past, we believe and have proven that our strategies will not only allow us to catch up but drive substantial results to the organization. Thank you.
And at this point, I'd like to turn it over to our Chief Financial Officer, Paula Price.
All right. Thank you, Dennis, and good morning, everyone. As Dennis said, I'm Paula Price, CFO, as most of you know. And again, we appreciate your being with us today as we share our plans and our targets for repositioning ourselves for growth. So let's take a quick look at my agenda.
First, I'll provide some detail on the 5th point of our Polaris strategy, reset the cost base by walking you through the major restructuring that we have underway. 2nd, I'll begin my financial discussion by sharing a few details on our expected performance for 2019. And third, I'll walk through our financial plans for stabilizing profitability and setting ourselves up for growth, while also discussing our long term financial targets, which align with our goal of creating value for our shareholders. And then I'll wrap up with our outlook and guidance specifically for 2020, highlighting the drivers of our expected near term performance. So let's take a look at the 5th point of the Polaris strategy, reset the cost base.
As each of our presenters have emphasized, through Polaris, we're addressing what is not working in the business. And we're taking specific actions to stabilize profitability in the face of continued headwinds. We're reshaping our organization, streamlining our store fleet and addressing the inefficiencies in our fixed cost base. And we're working aggressively to improve the productivity of the growing and more strategic parts of our business. By resetting our cost base, we will right size the organization and expense base, allowing us to better balance top line and bottom line growth and improve the productivity of our working capital.
So I'll address our focus on sales, profit and working capital when I come on to our financial discussion. But I want to spend some time addressing how we are rightsizing the business. So as Jeff mentioned earlier, we are undertaking a substantive reset of our fixed cost base in 2020, streamlining our organization, which will result in a significant reduction in expense. Importantly, as part of the restructuring, we are consolidating several campuses. We will close our San Francisco, Lorraine and Downtown Cincinnati offices, relocate our Macy's digital headquarters to New York City, expand our technology hub in Atlanta and in New York, move the corporate team to Long Island City, while consolidating our Midtown offices into a renovated Herald Square for our merchants.
And as a result, we will have our teams working closer together in fewer locations. These moves also allow us to monetize or sublease facilities in San Francisco, Downtown and some of our Midtown New York office spaces. As you heard from Jill, the relocation of our digital headquarters from San Francisco to New York will allow our digital product and tech teams to work in closer proximity to the rest of the business, while also allowing for better coordination across all aspects of digital, merchandising, marketing, infrastructure and mobile. This move will allow us to take advantage of the fact that New York City is now a major technology center and home to a deep digital talent base. We consider the digital business to be a major engine of growth and this unified structure is key to delivering a seamless omnichannel experience for our customers.
When complete, through our restructuring, we will have rightsized the organization and our fixed cost base. In 2020, we expect to realize approximately $250,000,000 of SG and A expense savings related to our corporate headquarters or offices. While we do this recognizing that we're saying goodbye to many great colleagues, as Jeff said, we will come out of this transition stronger, more agile and better able to compete in today's retail environment. So let's move on to the financials. And I'll start by briefly touching on our 2019 expectations.
So as most of you know, our Q4 ended only 4 days ago and we're currently closing the books on the year. Therefore, the 2019 numbers that I'll be speaking to are preliminary. And so except for high level sales, we will be sharing our final 2019 results in all related detail on our Q4 earnings call on February 25.
And
so with that said, during the Q4, we delivered $8,300,000,000 of net sales at an owned plus license comparable rate of down 0.5%, bringing our full year sales to $24,500,000,000 at down 0.7 percent exceeding our guidance. And as we stated in our sales release, the entire organization committed to delivering holiday 2019 and it showed up in our execution and our results. Our 2019 strategic initiatives all turned in a good performance against our expectations and our flagships and our magnets as a whole saw an acceleration in comparable trend performance from the Q3 as did our digital business. Destination businesses were solid and we benefited from the planned improvements in our promotional calendar throughout the season, including adjusting our earn and redeem event this year. So all in all, we were pleased with our holiday 2019 performance.
And as a result, today we are tightening our 2019 EPS guidance to be at the top end of our previous range. So we're now guiding adjusted diluted EPS of $2.72 to $2.77 and when excluding asset sale gains, $2.35 to $2.40 a 6.8% increase on the bottom end. Importantly, our results throughout the year have allowed us to continue to execute our capital allocation strategy aimed at enhancing our long term financial stability and value creation. We invested approximately $1,000,000,000 back into the business in the form of capital expenditures. We voluntarily paid down approximately $565,000,000 of debt to move closer to our target leverage range.
And we maintained our cash dividend to our shareholders. So those are a few highlights that I wanted to share on our 2019 performance, just illustrating it at a very high level. We will, of course, provide more detail on our Q4 earnings call in just a few weeks. So let's jump into the future, the purpose of our being here today and spend some time tying together all of the threads you've heard from the team as well as reviewing our financial targets. Over the next 3 years, we've set goals that we believe are achievable in an environment of macro uncertainty as well as secular pressure in the department store sector.
In developing our Polaris transformation strategy and our targets, we have been very clear sighted about the challenges we face. And as we have shared, we have repositioned our organization to collectively do the work to stabilize profitability and prepare for growth. And so as a result of the major changes we're making, we do anticipate near term disruption, which I'll address when I walk through our 2020 guidance. However, once we get through 2020, we are targeting a return to positive sales growth within this 3 year period. Through our work over the next 3 years, for 2022, we are targeting net sales of $23,200,000,000 to $23,900,000,000 This incorporates a baseline in 2020 with negative OwnPlus license comps along with modest comparable sales growth at the high end of our targets thereafter.
Including the transition year of 2020, our cumulative 3 year comp sales rate or our 3 year CAGR on a comparable basis will be in a range of approximately down 1% to flat, which includes modest positive growth following the baseline year of 2020. We're targeting EPS in a range of $2.50 to $3 including asset sale gains, growth of up to 3% at the high end when compared to the new midpoint for 2019 guidance. Within this, we are targeting up to $300,000,000 in asset sale gains over the 3 year period. Excluding asset sale gains, we are targeting an EPS growth rate of 5% on the same basis. And then free cash flow of approximately $1,000,000,000 that we will allocate according to our capital allocation priorities.
You have heard from the team that we are urgently repositioning our business for a healthier future as our sector continues to rapidly evolve. This means investing in those parts of our business that will keep us competitive in this changing retail landscape. So we will not only invest in how our customers shop today, but also invest in retail concepts that align with how our customers will shop in the future. And our experts have told you about the strategies we will be focused on over the next 3 years to stabilize and then begin to grow our top line, particularly our growth strategy initiatives for our streamlined fleet of stores, enhancements to our digital business and our off price expansion. And at the same time, we will be testing and iterating new off mall formats, measuring and refining the results before scaling.
And we don't expect our journey to be perfectly linear. While we expect comparable sales to be further down in 2020, we also will begin to see the impact on top line net sales from the store closures we are planning. The approximately 125 store closings we announced this week collectively account for nearly 6% of our current sales. And based on the timing of store closures, over the next 3 years, we estimate that the closures impacting 2022 will have a negative net sales impact of about $960,000,000 which is net of the estimated retention in surrounding stores as well as the negative impact on digital sales. In 2020, the 30 or so doors that we announced last month will have a negative net sales impact of approximately $240,000,000 which when combined with our expectations for comp decline will reset our sales baseline.
And so from this reset in 2020, we expect to begin growing again as a result of our ongoing investments in our existing growth strategies and the modest early benefits we expect to see from the new retail concepts we are testing and iterating. By 2022, our goal is to return to positive comps. But if it takes a bit longer to innovate into the right formula, we believe we have accounted for that at the low end of our range, down 0.5% to up 0.5%. When we get the formula right, we'll be in good position to scale our strategies to contribute further growth in the long term. And while our 3 year financial plans include modest assumptions around the benefits generated by our top line strategies, most importantly, it focuses on how we're going to fund these strategies and mitigate the secular headwinds we foresee.
And as an outcome, stabilize and then begin to grow our profits and cash flow inside the next 3 years. In September, we emphasized our acute focus on the need to pivot our organization to effectively compete and profitably grow in an ever changing retail environment. And at that time, I use this slide to walk through our comprehensive productivity program that would allow us to work smarter, more efficiently and more profitably. Then our goal through 2023 was to reduce our annual costs by $400,000,000 to $550,000,000 while also improving working capital by approximately $100,000,000 That was in addition to the $100,000,000 to $200,000,000 expected annually from ongoing disciplined expense management. Since then, we have significantly broadened the scope for this program as part of our Polaris transformation strategy.
And as Jeff said, we challenged our leadership across all functions to significantly rethink our ways of working, to prioritize our investments and to streamline our organization and processes. And as a result, we're making significant structural changes to the organization. Our productivity initiatives are now bolder, more aggressive and transformational. And they will prepare us for future top line growth. We are redeploying capital from the lowest performing stores to assets such as digital, backstage that can generate a higher longer term return.
And we are rightsizing our cost base, creating a streamlined more brand right Macy's that will be better positioned to effectively compete in today's and tomorrow's marketplace. Ultimately, our goal through all of this work is to generate productivity savings of approximately $1,500,000,000 and to reduce working capital by $200,000,000 Recall that these initiatives drive efficiencies across gross margin, SG and A and working capital. And in September, we expected between $275,000,000 dollars to $375,000,000 of savings that would benefit gross margin. With our more aggressive actions, we have significantly increased the benefits we expect to realize in gross margin, increasing our 3 year target of up to $375,000,000 to approximately $600,000,000 $100,000,000 of which we expect to realize in 2020, as you heard from both Patty and Dennis. We have been able to accelerate the timeline for our initial productivity targets, extracting additional savings by bolstering our sourcing, inventory management and procurement capabilities that they both discussed.
Similarly, recall that in September between $125,000,000 $1,000,000 $175,000,000 of savings was expected within SG and A. And as you can see, we've also substantially increased our SG and A expense savings to approximately $900,000,000 by 2022. Admittedly, this is a big step up from our goals in September, but our goals now include our unprecedented restructuring as part of Polaris. Over the next 3 years, we'll continue to look for ways to reduce our fixed cost base. And as a result, we expect to at minimum stabilize our SG and A operating leverage by the end of the next 3 years.
In the 1st year, we anticipate that these actions, the reduction in corporate headcount, the closing of stores and a call center, the consolidation of our corporate and digital campuses as well as improvements in many business processes will drive at least $500,000,000 in cost savings. Within SG and A, we continue to evaluate the business more thoughtfully. So over the next 3 years, while the restructuring is a meaningful portion of the savings within the corporate bucket, you've heard Dennis size the approximately $120,000,000 of opportunity within the supply chain. And there are additional productivity savings we're targeting in marketing and stores from which we expect to be able to drive nearly $300,000,000 of savings. As Jeff mentioned, we will take some of these savings to the bottom line, allowing us to stabilize and then grow our profitability.
And we will also invest some back into the business. We plan to concurrently invest in those capabilities, systems and importantly, strategic initiatives that we expect to drive our operating performance. As a result of our accelerated work on our productivity initiatives, we see the ability to stabilize and then moderately grow EBITDA dollars and rate within the next 3 years. We expect that the growth of our digital and off price businesses will benefit from some of the secular headwinds that we foresee, which is expected to pressure our margin rate. However, our refreshed merchandising strategy that prioritizes those categories and vendors that drive traffic and profitability will help protect our merchandise margin, initially allowing us to keep pace with pressure with the gross margin pressure and then ultimately allowing us to more than offset the foreseeable headwinds.
Additionally, we'll benefit from our plan to enhance capability in inventory management, while investing to develop an infrastructure that can sustainably contain fulfillment costs, as Patty and Dennis both highlighted. And we expect to benefit from not only the growth of our digital business, but also from further improving its economics through initiatives like site monetization and through our customers' increasing use of buy online, pickup in stores. You should note that we expect stabilize EBITDA margin in line with our 2019 expectations and then improve them through 2022. And even in a more restrained sales scenario that the low end of our target draws upon, there may not be margin expansion yet, but we believe we're establishing the bottom from which we can grow at a baseline that is higher than some might expect. And as we look at the next 3 years, we expect to be able to stabilize cash flow.
We estimate we will be able to produce between $4,800,000,000 $5,200,000,000 in cumulative operating cash flows by year end 2022. We expect to accomplish this through stabilizing profitability and beginning to revitalize our sales. In addition, we're also anticipating that working capital will improve through managing receipts better, faster inventory turns and further optimization of our will not only go hand in hand with our productivity initiatives, but also enable us to improve working capital by approximately $200,000,000 by 2022, double what we expected in September. As we invest back into the business to support our overall strategy, we are prioritizing our capital spend over the next 3 years across 4 broad areas of focus. First, we're investing in those assets that have the potential to lead to future growth.
Testing and iterating on strategies like Backstage Freestanding, our new store format and the continuing evolution of digital. 2nd, we're reinvigorating our retail platform through upgrades to the highest potential stores in our fleet. Investments such as the growth treatment, which has demonstrated promising results. We are leveraging the key learnings from the successful comp lift in our earliest rounds of the investment in order to prioritize and reallocate capital, employing the highest returning of those treatments. 3rd, we're modernizing our foundation around the merchandising supply chain that better responds to the changing needs of our customers.
And 4th, we're making aesthetically right improvements to the base of our operations that importantly complement the growth investments we're making to ensure that all of our assets appropriately reflect the Macy's brand. Annually, we expect to allocate approximately $1,000,000,000 on average to capital expenditures over the next 3 years, consistent with recent levels of spend. We'll increase our investments in reinvigorating our store platform, modernizing our foundation and testing and iterating new store formats, applying a rigorous capital prioritization and investing strategy, requiring our project plans to exceed a hurdle rate that is appropriately in excess of our cost of capital. Our commitment over the next 3 years is to stabilize and then grow EBITDA dollars and rate as well as free cash flow. We are expecting to do this while executing the tough but necessary work of closing about 125 locations.
Despite the almost $1,000,000,000 of sales impact the store closures will have through 2022, at the high end of our targets, we expect to be able to improve adjusted EBITDA margin rate and free cash flow through the Polaris work we have referenced throughout the day. So taking the commitments to improve adjusted EBITDA another step further, let me take the opportunity to link and reiterate our capital allocation strategy and how we see it in action over the next 3 years. We continue to stay very consistent with our capital allocation strategy and to take a holistic approach that ensures alignment of capital with the business' operational and strategic priorities, one that maximizes financial flexibility to execute in a range of economic cycles and one that optimizes the use of any remaining excess cash. So based on our 3 year financial projections, this translates into the following: prioritization of capital allocation choices that we believe best enhances value for our shareholders, beginning with sound investments in the business to stabilize the core and to begin to drive growth again. Maintaining a flexible, durable balance sheet through appropriate delevering and targeting a leverage ratio of 2.5 to 2.8 times.
Returning capital to our shareholders in the form of our existing cash dividend, which we believe is sustainable based on sufficiency of cash and current strategic priorities and potentially resuming share repurchases once we have achieved our target leverage ratio. We believe we will have the flexibility to pursue all of these priorities inside 3 years. So with that as a framework, we expect to allocate our capital largely to reinvesting in those projects designed to stabilize and then grow the business, to continue to pay an appropriate dividend and to pay down our debt. As you look at this 3 year cash targets on the slide, we take you through our expectations for free cash flow. Proceeds from all asset sales, debt reduction and dividends.
We expect a leverage ratio excluding asset sale gains that is within our target range within 3 years. This would lead us to excess capital in the range of $200,000,000 on the low end to $800,000,000 on the high end by 2022 that we would then have the flexibility to either invest in new strategic initiatives or with board approval, resume our share buyback program. We've outlined our 3 year strategy. So now let's take a closer look at 2020, the transition year and our expectations for the next 12 months. With the 3 year plan as a backdrop, share to a range of $2.45 to 2 point approximately $100,000,000 of asset sale gains as compared to guidance of $150,000,000 in 2019.
Excluding asset sale gains, we are guiding EPS to be $2.20 to $2.40 setting the high end at the top of our current guidance for 2019. Our 2020 comp sales expectations reflect a decline that is primarily driven by the combination of 4 factors that we built into our forecast. First, the trajectory of our business over the last year. 2nd, the continued challenged performance in mall based retail. 3rd, our expectation for a fair amount of disruption based on the significant structural changes we are making to reset our cost base and 4th, the expectation for slower economic growth even in an environment that is still healthy and strong.
Additionally, the approximately $240,000,000 of net impact from the store closures that we announced will depress our net sales. Accordingly, we are guiding total net sales to be down year over year and expect between $23,600,000,000 $23,900,000,000 with owns less license comparable sales growth in the range of down 2.5 to down 1.5%. We expect our comparable sales performance to be relatively consistent throughout the year with the fall slightly better than the spring. While sales are projected to decline, we nonetheless intend to stabilize gross margin rate, EBITDA and cash flow in 2020. We are very mindful of the potential for disruption of our digital business from the campus moves we are making, but again share that we have been standing up the new teams for the past few months and have plans in place to partially mitigate potential disruption.
We expect our gross margin rate to be approximately flat for the full year with the greatest pressure in the Q1 as the $100,000,000 of benefits from our Polaris transformation skewed towards the back half of the year. Headwinds that we foresee to margins are mainly the result of the growth we're pursuing in our strategic lower margin businesses, Backstage and Digital, which includes the ongoing pressure from delivery expenses as well as from tariffs. We will anniversary the rollout of the Tranche 3 tariffs introduced during 2019. We're working hard to mitigate the 2020 impact and we'll have an update when we report our earnings. Despite lower sales, we expect SG and A rate to be approximately flat for the full year and expense savings from Polaris to increase as we move through the year.
We expect our work through Polaris to improve SG and A by at least $500,000,000 approximately $275,000,000 of which are expected to come from payroll savings. These savings will offset the impact of lower sales on our fixed cost operating leverage and you can find our full 2020 guidance in the appendix to my presentation on our Investor Relations website. If any revisions are required as a result of our 2019 results, we'll do so when we report earnings later this month. So as you reflect on the materials we have shared with you today, there are a few messages that I'd like you to take away from a financial perspective. 1st, 2020 will be a transition year for us as we take the critical steps necessary to stabilize profitability and cash flow, while also repositioning the company for future growth.
2nd, through Polaris, we will rightsize our SG and A base to our sales levels and stabilize and then expand our gross margins. And 3rd, we expect this is actually not quite 3rd, one more. We expect Polaris to generate $1,500,000,000 of productivity savings, $900,000,000 in SG and A $600,000,000 in gross margin. And now 3rd, we will consistently employ a capital allocation strategy that enhances our long term financial stability and value creation for our shareholders. Thank you.
And now I'll turn it back over to Jeff.
So thank you, Paula. So now you have sight of our updated strategy, the plans to support it and our 2023 year financial targets. And you have our commitment to giving regular updates on our progress. So we're committed to delivering all five points of our Polaris strategy. We will strengthen customer relationships.
We will curate quality fashion. We will accelerate our digital growth. We will optimize our store portfolio, and we will reset our cost base. 2020 is a crucial year for us as we implement the structural changes that this plan requires. I have confidence that we will work through these changes and know deeply that we have a culture that when given clear direction and a vision that inspires that we execute very well.
So before we open up the meeting to Q and A, I do want to say that we have a clear perspective on where Macy's Inc. Is going and where it fits into retail today and a clear vision for the Macy's brand. So Macy's is proudly America's department store. For 160 years, we have served all generations at every stage of their lives. Our customers' unique optimism have shaped our vision.
Fashion. Customers come to Macy's for a compelling curation of the latest trends, exclusive products and best brands, and that boosts confidence and inspire self expression. They come to us for value. Customers are loyal to Macy's. We deliver great quality, better products at great prices, and we have trusted service.
And they come to us for celebration. Macy's customers come to Macy's for the special moments of their life, for special occasions, for gifts and to create shared memories. Our customers are already omni shoppers, and we have this tight interplay between our stores, the site and the app. That is important. Convenience and tailored experience is expected.
Constant innovation is required. And our vision is an ecosystem that gives our customers easier and more convenient access to the fullness of the Macy's brand from online to offline, on mall to off mall and flagship to off price. And when we get this right, Macy's will grow again with the next generation of American shoppers. And executing the Polaris strategy that we shared with you today is key to getting it right.
So I
just want to thank you for your 3.5 hours of attention and for your interest in joining us on this journey. And now I'm going to open it up for Q and A. Mike, do we have a mic for any of our illustrious Good morning, everyone.
We're just going to wait to set up. Paul, do you want to join him upstairs? I'll ask 2 things when we do the Q and A. We have mic runners around the room. If you can wait for the mic to come to you, then everyone on the webcast can hear the question as well.
And when you speak, if you can actually say your name and your firm, everyone will get their name into the transcript. So thank you.
You want
to start with Matt?
We need water in case we need to get out.
I guess so.
Thanks. Matt Boss, JPMorgan. Thanks for all the color today. Maybe Jeff, just to start out on the top line, could you elaborate a little on the 2020 same store sales forecast? Maybe any additional color on the front half versus back half expectations and some of the disruption that you mentioned?
And then just larger picture, the best way maybe you'd rank the drivers in terms of the change between 2020 and then return to growth, it sounds like, by 2022 on the top line?
So just, Matt, to reiterate the four reasons that went into our guidance for sales for 2020. The first one was just being mindful of the trajectory of our business and what is going on with that. And so when you think about the full year and where we were and what we're taking into 2020 with us. The second reason was really what's going on with mall based retail and what we're seeing is some of the deceleration in some of our malls and being mindful of that. The third reason was we are going to have some disruption.
And I do think that our team has done a really good job of managing to that. Our HR teams have done a great job of standing up new teams that will be in both Atlanta with Naveen as well as in San Francisco. That team is now going to be in New York that Jill is leading. So we feel good about the talent that we are finding. And so I think we've got as good as a mitigating that disruption as we possibly can.
And we're also mindful that while the economy is still healthy, that we do believe that it's not going to be as strong as it was in the 2 previous years. So that all was kind of baked into our kind of guidance for what it would be. And as Paula mentioned, we do think that the business is going to be pretty consistent through the for the full four quarters, maybe slightly better in the back half of the year. So that's how we're kind of looking at it. And to your the second part of your question about what we see as kind of the biggest contributors to growth, number 1 is definitely digital.
So when you look at our digital business, we're disclosing that across Bloomingdale's and Blue Mercury and Macy's, it's a $6,000,000,000 business. We've grown it very aggressively. We have a lot of ambition to continue to grow it by improving the functionality, the site experience and the interplay with both what we're doing in stores as well as the opportunity to even take mobile to a different level. So that would be number 1. Number 2 that Rich talked about was really we have knowing what happened when we did Loyalty 1.02.0, when we do 3.0, which is again giving value to those silver, gold customers and to those bronze members, we know that spends a lot of value.
And it gives us the benefit of getting a much better intelligence about a broader set of customers that will then set the foundation of everything that we have with ambition for personalization and monetization. So I put loyalty 2nd on the list. And the 3rd on the list I put would be Backstage. And I think that what we've learned from Backstage is we have a customer that has a sequential appetite for great brands at great prices. And we've clearly seen that in every one of our store within stores.
And with Michelle's leadership, what we've done with the outlet at Bloomingdale's and our ambition to take what has started in 2015 with kind of the sleepy freestanding concept in back states, it has been growing ever since to now start to take that into other markets. So those would be my 3 contributors.
Thank you.
Mattie, in the back. A lot of hands.
Hi, Dana Telsey, Tag. As you think about the change in sales volumes from the closed stores that you're getting, how do you account for the online sales drop that typically occurs when you close a store? How do you think of bringing that together? And lastly, on the capital allocation part, it seems like supply chain is a huge part of the uptick. How do you think of the cadence of bringing that in and what that means to margins?
Thank you.
Yes. Thanks, Dana. So I'll start and then I'm going to have Dennis talk about supply chain. And then I'd love John Harper to talk about what we're doing to kind of mitigate some of the potential sales loss that we would get in some of our closing stores. But let me take the first part of your question, Dana, which is really, we've done obviously, we have closed some stores in the past.
So we're getting good at identifying where there's opportunities and where there's potential risk. And as mentioned, when So we have been very careful. And we learned this from what Rich and his team did with what we were doing with personalization strategies with respect to our growth stores. And applying some of those tactics to our closing stores is helping us reach those customers in more efficient ways with content that they care about that will help keep them in the Macy's ecosystem. But I would like to turn it over to John to just mention what you're doing right now with the closing stores, what you've learned from the past and how we're retaining as many of them as possible.
Yes. Good morning, everyone. We have learned a lot about how to retain our customers. Number 1, we use our loyalty program and our client system in our stores to really track our best customers, see what they're buying so that we can retain them in nearby stores. And number 2, something we didn't do well at the start of closing stores is really also retain our best colleagues to nearby stores.
And those best colleagues are very, very useful in bringing their best customers with them to the nearby store. Dennis?
Dennis, supply chain.
Yes. On the supply chain side, as I mentioned when we were talking earlier, centralized fulfillment really allows us to capitalize on the assets that we have today. And so we're not building new assets, we're really just enhancing the current assets. So we're going to be able to move very quickly in starting this up. Our plan is, well, we need some technology support, and we'll need to do some stuff inside of the buildings to get throughput.
We have full confidence that we're going to get that set up this year and start running, and then we'll scale it as we build the capabilities to go do it. But again, leveraging our current asset pool really gives us an advantage. We already piece pick orders today for all of our e commerce customers that place orders. So doing that for our stores really just becomes a similar process with just a different flow of transportation. So we're really aligned to go do that and move as quickly as we can.
And Dana, we expect that productivity to flow through, as we move through the year. So less upfront and more in the back half.
Oliver?
Thank you. Hi, Oliver Chen, Cowen and Company. Captivating the under 40 customers seems like a big opportunity. What would you say are the key drivers of that strategy? And your customer lifetime value analysis was helpful reducing the churn is a key driver of that analysis.
So what are your thoughts on where you're losing customers in churn? And finally, as we think about the interplay between online and physical and the opportunities with traffic and the online growth happening, what does the margin interplay look like?
So why don't we start with so I appreciate that you took your 5 part question down to a 3 part. So this is good, Oliver. So I want to talk about the under 40 first and how we're looking at that. I love Patty to kind of again talk about what you're doing with the under 40. And then Rich, maybe you can talk about what you're doing with respect to the under 40 as well.
And then, Rich, I'd like you then to take the question on what we're doing to kind of make sure that we do not have that downshift in migration of customers and how we're building customers through the funnel? Why don't we start with you, Patty, on under 40?
Sure. Thank you, Jeff. We did talk earlier, and my team and Rich's team worked together to build this lifestyle pilot that we talked about earlier in the day. And it was really about just understanding what we were doing well and where our opportunities did lie. And we walked away understanding that the customer is in our store.
She's in our store for fragrance. She's in our store for men's and she's in our store for kids. And it was really just became my responsibility to give her what she was looking for and ready to wear. And so the big focus of our attracting that customer is around ready to wear. It's the number one thing she comes to us for.
And we're just challenged to get that right. With a big opportunity to grow denim within our store, and you will start to you probably already are starting to see those changes happening in the store. I would also say backstage plays a huge role. We already know that that customer is considerably younger than the Macy's customer every day. And as we add a Swiss store, a store within store from backstage into our buildings, that drives that customer in the store as well.
So we put a lot of work into this and we continue this pilot is continuing. We're going to take what we've learned and roll it out to about 150 stores now and take the assortment out to every one of our magnet stores going forward within 2020.
Hi, Rich Lennox. So in talking to the millennials, what we had to do, as Patti said, is we had to really go in and understand what were those barriers and motivations to shopping in Macy's. I think the first thing we really decided is we had to reassert our product authority with them. As Paddy has spoken about, we have an amazing set of brands and we really hadn't been telling them that story in a way that was breaking through. So it was engaging them in the right channels and it was also giving them a clearer value proposition.
That value proposition, as I spoke about it, really is the basis of the loyalty program, something they can really understand and see the added value that they're getting. In terms of managing customer lifetime value, every brand you see customers migrating in and out of the brand. But what we very deliberately set in to do 2 years ago with the launch of the loyalty program is to get in and hug those best very, very high value customers to them because they are really the key driver of the profitability of the organization. Loyalty Phase 1 and 2 has done that very well. But what we are capable of doing now is finding people who through their behavioral signals that we can read, targeting the people that we can migrate and pull up.
So it becomes really a game of retaining and then migration into those high value tiers.
And Oliver, your last question in terms of just the behavior of an omnichannel customer, frankly, the more touch points we have, the more profitable and the more connected that customer is. So with the personalization techniques that Rich and his team are developing is when you see the opportunity that if you can get them and start to seed backstage values because there's look alikes in our database that would suggest, hey, this customer looks like this customer, they're enjoying that. This is what's happened to their spend, starting to see those opportunities with them. So you're seeing lots of cross play going on between our channels based on the data that we have now of our customer.
Thank you. Paul Trussell, Deutsche Bank. I wanted to follow-up on the Backstage. Actually, I think you have about 275 locations or so at the end of next year. What percent of sales will Backstage represent?
Maybe talk also about how the merchandising of that concept has evolved over time? And kind of finally, discuss a little bit more details on the off mall growth strategy and how you're thinking about freestanding backstage stores as well as this Market by Macy's concept? What would you be looking for before you decide whether or not to roll out store number 2?
Okay. So Paul, I'm going to address your first question and then I'm going to turn it over to Michelle Israel, who is our off price expert for the second parts. And mine's easy, because we don't disclose the size of our Backstage business and what it means to but it's getting substantially bigger is what I could say. It might be unsatisfying, but we're very confident in the growth of it. What I would say is that any store that we have opened backstage continues to give us mid single positive comps in the 2nd and the 3rd year.
And this can be in the bowels of a store that has all that is going to that is the escalator or an elevator. It's underproductive space. One of the things that Michelle said in her video was that in virtually all cases, the Backstage production, when we have it in the Macy's store, is producing at a higher profit and a higher dollars per square feet than the business that it's displaced. So we're very confident that that will continue to be our journey is that our customers are loving off price. We're also seeing a lot more activity going on between a Macy's customer who's now shopping off price in addition to their Macy's purchases.
So I'd like to turn it over to Michelle to talk about any other comments about Backstage plus now the freestanding concept?
Sure. And I'll address your question about just the Backstage merchandising and how we're thinking about that. In the 5 years that we've been doing Backstage, we've been doing a lot of testing and learning and trying different ways of merchandising the floor. And what we've really found, which isn't terribly surprising is what she wants is really great newness and fashion at a great price. And the more we can tell that story and we've instituted a philosophy of new and now really across our front line.
So when you walk into a backstage, you really see a merchandising philosophy with a sign that says new and now that speaks to that fashion that comes in and changes continually. We're taking that philosophy and expanding it to the other families of business. We've also found that through our testing that we need to have our backs to just have all families of business. So we've done ones that didn't have necessarily home or didn't have them all together. When it is a fully contained store, it tells the story and it tells the story best when we do take a stand and say this is what the look of the moment is right now.
So we are changing this new and now front lines consistently with corporate direction or letting each store do it in a localized way that really tells what their customer needs. So it isn't one particular vision because it is off price and it should feel that treasure hunt. So it is brand agnostic. It is really about the fashion. And then when we look at the freestanding that philosophy really does stay the same.
It's a bigger footprint than the Swiss's, the store within stores are. So we're continuing to tell that story. But when we look at locations, we really look at where is that Macy's customer look alike. So where there may be a void as we've closed other stores or we see an online customer who penetrates or we see that sort of classic off price customer where there's a density of population. There's that profile that we're looking for that is younger, that is more diverse, that has kids living at home.
So that's how we'd look at it.
And the other thing I would add, Paul, to your question of what sort of proof points are we looking for, certainly, I would add
project plan. I think also, Paul, when we're closing a neighborhood store, you're looking at you're closing at about, let's call it, 120,000 to 150,000 square feet. And you got it backstage, it's going in. It's going to do similar volume with similar gross margin rates. It's going to serve those communities in a similar way.
That's a real thesis that we want to prove out through the pilot that we're doing in the 3 markets. The other thing I have a lot of confidence in is really what Michelle's journey has been with the Bloomingdale's outlet and everything that she's learned on her journey through that. And just the tricks that we've learned, obviously looking being great students of our competition with respect to this. We believe that Backstage Freestanding will reinforce the Backstage franchise that we've got built within the Macy's stores. And we know the cross play that goes on between customers that are shopping in both brands and how big that means in terms of their profitability and lifetime value.
So we do believe it's additive. And when it gets to the we'll keep everybody updated on how we're progressing with that.
And I would just add to that as we continue with the ecosystem adding the omni ability into the freestanding back stages will really close that circle of how we get that customer engaging with us on all levels.
Kimberly?
Great. Thanks so much. Kimberly Greenberger, Morgan Stanley. I wanted to ask on the $1,500,000,000 in gross cost savings, what piece of that do you expect to drop to the bottom line in terms of net savings? Are you releasing or talking about the cost of the growth treatment on a per store basis?
And do the Backstage stores, the freestanding Backstage stores, do they as a group make money now?
So let's see. In terms of what is which of our $1,500,000,000 how much of that is dropping through to the bottom line? What we did in this case, Kimberly, was give you sort of our longer term targets. And so what you'll see is that we do expect to grow our EBITDA dollars and rates in our over the 3 year period. So we are dropping some of that through to the bottom line just to make sure that we can stabilize profitability in 2020 and then to begin growing thereafter.
The rest of it, we are investing back into the business in the growth initiatives that we've talked about today, as well as we roll out or I should say as we pilot and test our new retail concept, we're investing there as well. And then mitigating some of the normal headwinds that we expect to see. And then you've had 3 parts of the question. Just repeat the second one, if you would.
It's about
back there, the growth treatment, it's like we've been at that now. So we're now into our last tranche of we're the 3rd tranche of it, so the next 100 stores. And so John and his team have been a really good steward of capital on this. They're now between $2,500,000 to $2,700,000 in cost on those. Depending on it, you might have a flagship store that's going to be slightly more, but you're going to have some stores that are going to be slightly less.
But that's been about what we've been spending. About half of that spend goes into customer facing amenities. So that would be like lighting, carpet, bathrooms. The remaining balance goes into sales getting initiatives. And as John described in his video so John, why don't you just go through again what are those sales getting initiatives that have given us the most traction?
Yes. So as Jeff said, about half of that cost is into business getting. Those would include things like adding food and beverage, particularly Starbucks has been very popular. When we do beauty remodels, we get a very good payback. On top of that, if we add big ticket to a store, that where big ticket does not exist today, and update the fine jewelry areas, Those have been the areas that have been the most beneficial and most productive for us.
And so with the growth treatment, what we've seen is that they lift sales by 1.9%, so almost 2%. And we've been able to sort of isolate which of those treatments gives us the highest return. And so that's how we're focusing our investments going forward around that. We have not to your third point, we have not profitability on our Backstage stores as a grouping. And so but what I would say about that is that we have been consistently improving the profitability and the economics on that and we now have made some changes in our supply chain that should further help us in that regard.
So we're pleased with the improvement that we've been seeing in terms of the overall economic and seeing that it is consistent with what we'd expect to see in terms of when we first launched the investment in that. The idea behind that is that, again, it would achieve net present value consistent
the whenever we do the growth treatment in a particular store, we also see the digital business in those zip codes lift by 2 full points. So that's the other piece that we always accord into the equation is that this ecosystem that spins with investment that we put into brick and mortar. It's not just a new store that's added, it's also the growth investment in an existing store. And the other comment is that we're very encouraged by the profitability improvement of what the outlet has experienced at Bloomingdale's. So we have a clear glide path based on what we see at Bloomingdale's.
Robert Smith, the Center For Performance Investing. Is there an opportunity to encourage domestic sourcing and perhaps along those lines product tagging like, for example, Macy's America?
I'm going to turn it over to Dennis about what you're seeing right now in the American supply chain that addresses that question. Is it ever going to be at a substantive level? And then what categories you might see it that would answer this gentleman's question?
Yes. So we when we do source, we do work with a lot of different vendor partners. And so we do look out in the U. S. And we do some domestic sourcing today, primarily in things like shoes and other places.
I will tell you, it's not nearly as prevalent as what's coming in still available from overseas. And so our main markets are the Asia and other places overseas. There's not a lot of availability and not a lot of domestic suppliers here that can actually produce our volume at the levels that we need to with the speed that we'd like it to be. So we balance that. We try to find as many as we can.
Again, most of the folks that we even source domestically with are importing products. So getting true domestic suppliers that can handle the size of what we would need to have is a challenge.
The other thing is we certainly have tried in the past made in American products in shops, in Poppins, capsules. It works for the moment in which you're telling it in marketing, but I don't see it as a big scalable opportunity for any category yet. There are certain categories like in the China business, you have a lot of American production in furniture categories, in which you have a high concentration, but in apparel, it's more challenging.
Matt, you go in the back.
Paul Lejuez, Citigroup. Just three quick ones. How much of the SG and A reduction is simply coming from store closings? Is that number included in what you're citing as that $900,000,000 reduction? Second, what's the impact on the credit profit sharing as a result of closing these stores?
What are your assumptions over the next several years on that credit piece? And then I unless I missed it, I don't think we heard anything about vendor direct today. So if you could comment on that, I think it's been a decent driver of comps for you plans there. Thanks.
Thank you, Paul. So we're going to let Paul answer the first two questions and then Jill, we're going kick it over to you for the 3rd part on vendor direct.
So I'll start with your first question, which is how much of the SG and A is from the store closures? And the answer to that is none of it. So the productivity savings were sized and determined independent of the store closure exercise. And then what is the impact of store closures on our credit sales? So we modeled our credit sales really as a percentage of what's going on with our total sales line.
And then we factored in, in terms of our guidance, some additional just bringing the bad debt levels up to sort of normal levels. So, that's all factored into our range. But we expect very little impact from the store closures or I should say it differently, the impact would be encompassed in our guidance.
I think just to remind you, Paul, is that the store closure volume for what we are closing right now is about $200,000,000 in total sales. So it's a very modest piece of the overall sales stack and the accorded credit income effect. And Jill, why don't you talk about vendor direct?
Yes. Vendor direct or dropship fulfillment has been a great source of expanded assortment for us online, giving our customers a lot more selection. And for me. It's also driven it's fueled a lot of growth for us over the last couple of years. We've gone from 6% to 13% now of our digital business being vendor direct fulfilled.
And this past year, we added 1,000,000 SKUs and 1,000 vendors and saw 59% growth in our year over year drop ship business. So it's been a great source of growth and that's all that's not all cannibalized growth. So when we go back and analyze how much of that is just sort of cannibalizing existing, we are seeing some portion of that is driving incremental growth for us. I would say the other strategic benefits, these really give us great trend and geo demand insights that our merchants can use and fuel back into the flywheel of buying better owned. And also, it's great for the bottom line.
It really reduces our working capital. So it's a great source of growth for us.
Hi, there. Thanks so much for all the
comments this morning. So my first question is on Herald Square. I was wondering if there was anything more that you could share with us on timeline, expected economics to Macy's and then how you're thinking about disruption to the store operations as you go through that process? And then the second question is on private brands. It sounds like there's a big opportunity that's been outlined today.
I believe that's been part of the strategy in the past. Could you help us to isolate what's really different this time that makes you confident of achieving those goals?
So let's talk about Herald Square. And what I would just say first is that we still have a lot of work to do on Herald Square in getting our partners totally aligned with us. So as Doug said, this is not an imminent where we're putting it out to developers to scale this. We still have got to work through a lot with our city officials. They've been great The opportunity for us to The opportunity for us to work on Greerly and Herald Square to help update what's going on with the MTA.
We've been very mindful that because it's our most important asset that retail is and very healthy retail has to go hand in hand with monetization of this real estate strategy. So we are minimizing the amount of disruption that would be very less very little square footage is going to be occupied in this. It's really creating the supports to create this platform atop the middle of the store where the tower would be built from. But I'd like Doug to give you a little more detail about what that process looks like and what would potentially timing outlines look like.
Sure. As Jeff said, it's a process. I mean, anybody who knows anything about building skyscrapers in New York City, it doesn't happen overnight. I can't remember, I think Hudson Yards probably started about 10 years ago. Having said that, we really think that we can get through an approval process by the end of next year.
That's our hope and expectation. It's a political process. You have to work with the city and all the constituents to make that happen. And then once we get through that, then we can actually, if you will, start the development in earnest. Then it will have a multiyear development time line just like any major project of this scale.
On the disruption question, I'll say 2 things. One is, we spent an inordinate amount of time looking at many different ideas about how to create value, real estate value out of this site, some of which were invasive to the store. And ultimately, we came to the conclusion that we didn't want to be overly invasive to the store. And I think the real issue is once it's done, Jeff's point is absolutely accurate, the amount of disruption of space is limited. Obviously, you have to build structure through the store.
We're going to continue to operate the store throughout. We're very focused on minimizing structure up, you have effectively a tabletop on top of the building, then you'll build a building above that. And that will all pretty much be external to the store. So you will have some short term disruption, but the store will continue to operate. We're very mindful of our means and methods on how to do that to minimize that disruption.
And I'd just say that we have some history with doing a major remodel in Herald Square. And the amount of tracks that we took out for the last remodel is far more than what we're going to be doing with this. So I do not expect disruption to disrupt the operations of the building. Customers like an activity that goes on like that. So that's been our experience there.
To the second part of your question on private brands, and I would love to turn it over to Patty to take you through her confidence with that. But I'd say the single biggest change since the last time we talked about private brands was what Dennis and Brian, who runs sourcing for us, are doing with supply chain. And just our full confidence about the opportunity to get COGS down, to get better opportunities with fabric and speed involved with all of our brands. And I'd love Patty to take you through one more time about what she's doing in terms of getting to the DNA of each of the individual private brands and how that relates to an exact customer.
Okay. I think I'm on. We've talked about this a little bit. It's really not across the board that is, I will say, needs a lot of work in private brands. Our home, our center core, our men's and kids businesses are actually very strong, very reliable and have had consistent growth within them.
It's really about the work that we're doing in ready to wear that I think is going to make the biggest difference of all. And I think that's also where our teams working together, we're going to make the biggest impact with supply chain on ready to wear and apparel in general as well. Our customers really love our private brands. And I'm often asked, how do you feel about that? And what should you be doing about it?
But like I said, we're well on our way to having 4 brands that are over $1,000,000,000 They're very loyal to these brands. And all of our everything that we get in surveys and everything else has really, really positive results around these private brands. And I would just say the biggest change that we're making is really what Jeff referred to, which is just the DNA. I think we've gotten a little bit stagnant and ready to wear. And since then, we have really taken every single brand and very surgically said, what is the purpose of this brand?
What is it going to stand for? And how are we going to make it be incredibly meaningful to our customer? We changed the team, putting a design person in charge of it. We added a product person to oversee all private brands. So I just think we've done the work and we've laid out the plans.
And I'm very confident we're going to get to what we're to those $4,000,000,000 plans in over the next 2 to 3 to 5 years. Dennis?
Yes. The only thing I would add is, as we're going through our sourcing process, we work really hand in hand with the merchants to really understand what they're trying to go do. Our objective is to find that product that they're looking for with the right quality at the right price. And getting lower COGS really gives them an opportunity really drive sales because we can provide the product that much cheaper. And with the speed that we're building in, we can get a lot faster to the consumer.
So we're reducing that amount of time from trend identification to actually getting product on the floor and building out our replenishment model so that we don't have to buy as much upfront, but we can flow in fast afterwards, which all will go to supporting kind of driving sales and reducing our investment.
And Dennis, can you talk about the changes you're making with your sourcing team?
Yes. We so historically, we've run sourcing pretty much within each individual brand separately, and so we went after kind of each brand as its own. We've launched a strategic sourcing organization. We're building that out now. We've hired some world class people to come in and really help us define what that is.
But the concept is we're really now looking at classifications. And so instead of sourcing a knit sweater from 2 different people because they're different brands. We now if it's the same quality and it's the right thing and the vendor can do it, we'll source it from the same place. It gives us volume, it gives us density, and it allows us to reduce costs. At the same time, we've gone through our material catalog, and we've significantly reduced down the number of materials so that we don't have a lot of duplication.
So now as we invest in raw materials, we're spending a lot less money to make the product because we're combining what those materials look like. That and then working with our vendor partners on things like fabric platforming, having them hold fabric for us so that we can place an order, they can produce quickly, we can move that product through the network, get it out to the stores, really helps in terms of our ability to drive speed. And then just tying it back into centralized fulfillment, not pushing all that inventory out to the stores and being able to hold it, really gives us the ability to as things are selling, we know where they're selling, and we can get back in fast. So it really kind of ties the whole model together from a how do we source, how do we go to market, how do we think about it, how are we reducing our costs inside of that, increase in our speed. And at the same time, those people who are outsourcing are finding new vendors, new factories that have different capabilities, different production opportunities for us or different fabrics that we can use that we then take back to Patty's team, and she's got a great design team who takes that stuff, looks at it and either builds it in or incorporates it.
But it's it creates a whole ecosystem and a lot of kind of interaction between the product, the merchant team, the design team and the sourcing team.
Thank you, Dennis.
Hi, Bob Drbul from Guggenheim Securities. A couple of questions. The first one, on the 125 stores that are slated to be closed, the vendor support that was in line with those stores seem to be higher than the rest of the other 400 stores or so. So when you think about the outlook for gross margin going forward, can you just talk about the level of support that you expect from your top national brands, national vendors and how that should flow over the next few years? That's my first question.
My second question, I think Joe mentioned ad revenue as an opportunity, top ten ecom retailer. Is a lot of that just going to come from existing brands that you sell that I mean, can you just talk about how that should unfold as you think about the support there? And then the last one, I think Patty mentioned 100 new brands this spring. I don't know if we can get a flavor for any of those that you would highlight in terms of new brands that you're bringing in spring season. Thanks.
Okay. So let's 2 of those questions are going to be to Patti and then one, Jill, you're going to take. So I just would start with this idea about we are deep in partnership with all these brands. And your point, Bob, is well taken. When you look at the gross markdown rates of these stores that we're closing, higher than the balance of the organization.
And so when you look at what we're doing in terms of our margin objectives with these particular brands, in essence, the natural margin of our business together rises when you're talking about taking out those stores that have higher gross markdown rates. So Patti does a brilliant job of really working with these vendors on all the pieces of how we go and do business together from our marketing, our capital, our in store support, what we do with our shared inventory. So I'd love her to give you some more detail on that. And then, so why don't we start with that?
Okay. Happy to talk to you about that. First of all, we've started some preliminary work already with our vendors, just with the changes that we're making in our supply chain, the changes we're making in our pricing effectiveness, the changes that we're making with these 125 stores to your point, which are probably more supportive than some of our faster turning stores. We've started those preliminary conversations already. I put together a team, very small team to work with me to help maximize what we're going to do with our vendors around this.
I would say they're as excited about the possibilities of our mutual improvement in margin as we are with all these things that we're putting into place. Obviously, we couldn't go too far down the path until we went public with the information. So that will be high on our list to finalize those things over the next few weeks. But it's a pretty exciting time to be one of those vendors that is closest works as closely with Macy's as most of our vendors do. So it's going to be a very good for both of us, I think.
Thank you, Barry. And then, Rich, why don't you start with monetization? And then, Jill, if you want to add anything.
Yes. So I think monetization, 1st and foremost, is dependent on our ability to build that ecosystem that exists between loyalty personalization and monetization. Essentially, what we're doing is we're taking a very deep us is we can on-site, we can monetize the front of us is we can on-site, we can monetize the on-site traffic at €6,000,000 which really gives us a very good base to work with our vendors to do. When you start getting into the really substantial ad revenues is when we go off-site. And we use our 1st partner in targeting data to allow us to say to our vendor partners, we understand the purchase journey that these customers are taking.
We also understand the value of that individual customer that's in front of us, now bid for that customer. That builds an ecosystem where you are constantly building a flywheel. The more the customer engages, the more we know about them, the more we can segment them, the more we can allow our vendor partners to target into them. We when we set out on designing this ecosystem, we believed, and I think it was absolutely the right decision, that the fundamental basis of that had to be the loyalty program. It was the source of deep, rich data.
If we've gone through the other two doors, we would never have had that data set to allow us to do that. So I think as we drive marketing productivity and we've learned a lot of lessons about marketing productivity in the last 2 years, we are now able to share those lessons with our vendor partners to drive their ROAS, which will feed them into our monetization system, essentially taking monies not just out of co op dollars, but out of their main national budgets?
Thank you. And Rich, how would you characterize the opportunity?
I think it's very significant. I think it's a when I look at I use the expression, when I looked at loyalty, I think it is the rising tide under the business. As retailers, we are very, very good at basically saying what's sold, when and at what margin. What loyalty allowed us to do is come in and say to whom, why and what have they done before. And is our customer franchise essentially getting much more healthy?
What I think is that monetization and personalization will have as big as impact on the business as the phases 1 of loyal as phase sorry, as phase 12 of loyalty. So I think what we've seen in Phase 12 in loyalty, the combination of Phase 3 in loyalty, personalization and monetization is that next lift in the rising tide.
Thank you.
Hey.
A new one's coming.
Michael Binetti with Credit Suisse. Thanks for all the detail and help today. I wanted to follow-up on 2 questions that you touched on earlier. One was on how you built up, I think some of the recapture as you think through the store closure plan. I think you have about $1,400,000,000 in sales and recapture about $960,000,000 So maybe how you thought through some of the buildup on that's about 30% recapture, is that consistent with what you've seen in some of the recent closures?
And how does that break down between the actual physical stores? What the assumptions you made for some of the e commerce in those markets? And then I do I would love to get a little more detail on the credit component to it since it's I think it's about half of the EBIT of the business. Do you see that moving higher as a percent of EBIT through the plan? And what have you historically seen?
Any dynamics you could share with us on what you've historically seen in a local market as you close stores on the credit side? And then Paula, maybe an easy one, if you wouldn't mind help. Anything you'd be willing to share on the interest expense assumptions for 2021 2022?
Saum, do you want
to Sure.
Credit first.
Yes. So Credit first. Okay. So I'll do credit first. In terms of the credit component, with respect to the closed stores, again, we just assume that we do an assumption percentage of sales in terms of the credit revenue assumption.
And we expect our EBIT to actually improve. And we've guided our credit to be more or less at least we haven't guided the out years, but certainly in 2020, we've guided it to be more or less consistent with last year. So that would mean that the rate goes slightly down relative to its percentage of EBIT. And in terms of how we're thinking about interest expense in the out years, what you would have seen on the cash flow slide is that we have between $700,000,000 and I believe $1,000,000,000 of debt reduction planned for the 3 year horizon, which would of course bring down interest expense. And so that's how I would describe that.
And We're talking about what happens when we close the door. And it really depends on what market it's in. And if it's a single store market, you're going to have a bigger degradation of those sales as well as what would online. And it also depends on what business it's in. So just give you some quick examples.
So when we saw when you see a competitor closing, how much of that do we capture? And when we close a store, how much does the competitor capture? And it really depends on where it is and what's going on with the team and how they've been able to mitigate some of that. So on businesses like cosmetics, we hold ourselves to a very high standard to say how do we maintain as much of that as possible. And John has done a great job with that, which he can give you some color on.
When you get into a business that is not differentiated, so if it's a business that it's not exclusive, it's not a private brand, we don't have content that's differentiated, we're going to retain less of that. If you're in a multi store market, we have a higher retention rate. And so that average that you're quoting is about right, but it can wildly vary. We have some stores that have a much higher retention rate. We're really planful for it.
When we think about the next, let's say, it's almost a little less than 100 stores that are in their neighborhood stores. We've got a 2 to 3 year window to work through exactly how we're going to migrate those customers. So we're deploying a lot of tactics to improve our retention rate. Our guidance assumes that it is pretty standard to what we've done in the past. So we would hope to beat those expectations in the out years.
And John, anything Just one thing to clarify, because you mentioned two numbers that were in our slide. 1 was the 1.4 and I believe the 1 was the 960 that we're taking out in 2022. So that is actually not a just to clarify, it's not a function of the recapture. It's the $1,400,000,000 of sales related to the 125 stores is really what those stores are generating today. And these are neighborhood stores, so we would expect them to decline as we move into the out years.
So part of that decrease is really reflective of that decline that we would expect to see for these stores. And the other piece of it is that we are closing 125 stores over the course of the 3 years. And so when you get to 2022, we don't close them all by then. There is a portion of the stores that's close closer to the end of the year. And so we still get the benefit of those savings or I'm sorry, of those sales throughout the year.
So when we pull out the $960,000,000 it's actually much smaller than the $1,400,000 So I think that that's not just recapture, just to clarify.
John, anything you want to add on that?
Yes. I would just add. As Jeff said, retention really varies depending on the location of the nearest store, also the penetration of the businesses within a closed store and how important things like beauty are to that store. But what's really exciting coming in the future is as we can fill in gaps with things like the freestanding backstage and provide that entire ecosystem of the dotcom sales into that brick and mortar, much less square footage and more productive, really think we can fill in the gaps and retain especially those online customers where in the past maybe we lost them.
Thanks for taking my question. It's Omar Saad from Evercore. Thanks for the comprehensive presentation. A couple areas of follow-up pushback from me, if that's okay. Three things, inventory, concessions and mall traffic.
So on inventory, dollars 200,000,000 opportunity, 3.5%. I think about a company the size of Macy's, the complexity of all the brands, the seasons, the categories, the sizes, colors, etcetera, it's really complex inventory system. Isn't technology isn't the opportunity to use technology to better manage your inventory one of the bigger opportunities? And when I see that $200,000,000 number, it leaves me feeling a little bit flat. And then that brings me to concessions.
You talked about top 10 brands, I think represented 25 percent of your business. Wouldn't this kind of restructuring plan been a great kind of jumping off point to maybe start to test concessions
in marketplace formats with some of those big brands.
Given the consistency of their business, place formats with some of those big brands. Given the consistency of their business and it will give you a huge opportunity to kind of convert inventory and working capital to cash and let them own the inventory? And then lastly on mall traffic, there's a really comprehensive plan, a lot of different levers to it. But how much of it and I appreciate that you included incorporated in your guidance kind of continued mall traffic pressures, but how do we think about malls more holistically as a channel in their health, even in the healthy locations? Does that format work?
Are your mall operating partners doing more to kind of revitalize that business? Or are we just at the whims of what happens in those malls? Thanks.
Yes. So why don't I start with malls, and I would love you to add to that, Doug. So why don't we start with that? So, Omar, what I'd say is that we are our relationships with our mall developers is more active than ever right now. And what I'm finding is they are, particularly in all the properties, when you think about those A Street malls, Green Street malls, there is a plan for most of those mall developers to completely change the leasing mix over time, which is going to create a hive of activity for new customers to come into them.
And you're going to see much less of concentration of apparel and accessories. You're going to see more on food and beverage, more on entertainment, more on hospitality. And that is going to just make it more of a mecca for customers, for all generations of customers. That obviously, us knowing that and knowing what the mix in our buildings look like, I do believe that there is 400 or more malls, let's just call it that 400 range that are vital and will stand the test of time versus the 1100 that are there out there right now. So I get the idea about and the pessimism about malls in general, but there is a whole crop of great malls out there that there's great visions for how they improve over time.
And Doug, what would you add to that? Yes.
I would amplify that. I mean,
I just
I'm somebody who lives inside the Ring Road, right? I tour a ton of malls every year. And when I read The Wall Street Journal, you'd think every mole in America is going to die. And whenever I'm at a cocktail party and somebody asks me that question, I say, look, you cannot treat them all alike. As Jeff pointed out, there's 1100 of these things.
There's 300 that are dead men walking, right? But there's a whole lot of other ones that are clearly viable. I mean, I will say I absolutely believe that the mall is here to stay. It's going to morph. It's going to shrink in terms of number, but it is a viable place.
I mean, you walk in during the holidays, there are plenty of malls that have a lot of shoppers, very vibrant, and we're a key part of it. So that's a cornerstone of this element of our business. And frankly, I wouldn't have taken the job 4 years ago if thought malls were dead. They're alive, and they're not all of them are alive. But we're and when we go through our process, the elaborate process that Jeff described earlier in thinking about this, we think not only about how is our store doing, but how is that mall doing?
Who is the owner? What kind of capital are they reinvesting? What are their plans? And that's a critical part of the strategy from our perspective.
Let me take the second part of your question, Omar, which is about lease. And so and you're talking about our top vendors. We're very open on any of those relationships. And we actually have a couple that were on that list that are actually operating lease operations within our stores. One critical element, they have to be really good at retail themselves.
So they have to have an infrastructure that can support what is required to run a retail business. And some of them don't have that infrastructure. So or they're already tapped out based on where their properties are. So and we do have we've worked it out where we can have owned and leased in the same vendor in a store. We did it with Coach.
We've done it with Levi. So we are open for business on that. We do think that in some cases like Levi's, Levi's a great brand. And what we worked out with Chip on that was we said, okay, both in the women's and the men's business, you operate both these locations in a particular store. And in some cases, we found out the business went sky high.
In other cases, we were operating it better as an owned business. So we're open. We do believe that based on the European and the Far East model of lease operations and with our real estate, we have a high appetite for doing things that are customer centric. So if you've got ideas and there are certainly vendors out there, they know we're open to business on that topic. And the last thing your question was in terms of the use of inventory.
And I would ask Navin Krishna, who is our Technology Officer, just to talk about some of the upgrades that you're doing in technology that is helping us with inventory.
Yes. Navin, Krishna. So we are planning to use technology to solve the inventory problem. What Dennis described was a simplified version of it. So when you look behind and you look at the several companies that came together to form Macy's, you can imagine number of inventory systems that we have.
The complexity of pulling all that together, that inventory showing one source of truth is the complexity. And we are solving that through building what we're calling common services that is across the Macy's portfolio, you will have one service to find inventory of any product SKU color combination. And Patti referred to a store location level pricing. The way you get to store level location and pricing is also how you get to a store specific inventory for a particular SKU and color. So that is something that we actually are actively solving.
It will be solved this year.
Thank you, Naved. We have one more? One more? Okay.
Lorraine, do you have a mic?
Thank you. Lorraine Hutchinson from BofA Securities. Just wanted to ask one more follow-up on Backstage. Historically, you've given us the lift to the store when you've opened a new Backstage. Can you provide that for the latest tranche of stores?
And did you see any change as you moved Backstage into some of the more productive Macy's stores? I'm
going to turn it over. Did you hear the question?
Yes.
Okay. So, Michelle. Hi.
So, we do continue to track the lift to store. Some of the noise around that has gotten messier over time as we the stores have continued going on. But as we've opened the newer stores and some of the higher volume stores, our lift to the store has stayed pretty consistent. And what's been exciting about that has been the 2nd year lift. It improves over time.
So as we continue to settle into the space and we continue to have customers find us, the lift continues. So every single store we've opened has continued to bring that probably single digit lift and a higher one in the 2nd year.
The other thing, Lorraine, on that is what we've learned because of Michelle has the purview of all vendors from when you think about Bloomingdale's to Macy's and you think about to your question about some of these better stores and the opportunity to tailor assortment into some of these best stores that have higher productivity requirements, they have higher dollars per square feet and you've got customers that are looking for best brands in them. So it gives us the opportunity to tailor assortments depending on whatever store it is in the Macy's portfolio. Thank you everybody for all of your interest in the Macy's brand.