Good morning, and welcome to Macy's, Inc., first quarter 2019 earnings conference call. Today's hour-long conference is being recorded. I would now like to turn the call over to Mr. Mike McGuire, Head of Investor Relations. Please go ahead, sir.
Thank you, operator. Good morning, everyone, and thanks for joining us on this conference call to discuss our first quarter 2019 results and our full year 2019 outlook. With me on the call today are Jeff Gennette, our Chairman and CEO, and Paula Price, our CFO. Jeff and Paula have several prepared remarks to share, after which we'll open it up for a question and answer session. Given the time constraints and the number of people who want to participate, we ask that you please limit your questions to one with a quick follow-up. In addition to this call and our press release, we have posted a slide presentation on the investors section of our website, macysinc.com, that summarizes the information in our prepared remarks, as well as some additional facts and figures regarding our operating performance and guidance.
Our Form 10-Q will be filed in a few weeks. That too will be available on our website at that time. Keep in mind that all forward-looking statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today. A detailed discussion of these factors and uncertainties is contained in the company's filings with the Securities and Exchange Commission. In discussing the results of our operations, we'll be providing adjusted net income and diluted earnings per share amount that exclude the impact of impairments and other costs. You can find additional information regarding these non-GAAP financial measures, as well as others used in our earnings release and during this call, on the investors section of our website.
As a reminder, today's call is being webcast on our website. A replay will be available approximately two hours after the conclusion of this call. It will be archived there following the call for one year. Now I would like to turn this over to Jeff.
Thank you, Mike, and good morning, everyone, and welcome to the Macy's, Inc. first quarter 2019 earnings call. Paula and I will take you through our first quarter results. Then we will open up the line for Q&A. As you saw in our press release this morning, we delivered another quarter of comparable sales growth. We achieved a 0.7% increase in comparable sales on an owned plus licensed basis and earnings per share of $0.44. Our performance for the quarter was in line with our expectations. The first quarter was a solid start to the year, and we are on track to deliver our annual top and bottom line guidance. Before I get into the quarter's highlights, I do want to comment on the recent movement on tariffs. This is a dynamic situation. Let me give you a high-level view.
The three tranches of tariffs that were enacted in 2018 have no meaningful impact on our business and were factored into our 2019 guidance. The increase of the third tranche from 10% to 25% on May 10th does have some impact, particularly on our furniture business. The team anticipates that this can be mitigated. If the potential fourth tranche of tariffs is placed on all Chinese imports, that will have an impact on both our private and our national brands. We would work with our manufacturing and brand partners to size and minimize the impact to our customers. This potential fourth tranche of tariffs was not contemplated when we provided annual guidance. We are hopeful that trade talks between U.S. and China will continue productively and that trade actions between the two countries will deescalate. Now let me share a few of the highlights from the quarter.
All of our brands, Macy's, Bloomingdale's, and Bluemercury, performed to our expectation. Bloomingdale's had a very good quarter overall. At our flagship store on 59th Street, that led the way. Women's shoes, ready to wear, beauty were all strong, each benefiting from the renovations in those departments, which were completed last year. Bloomingdale's The Outlet also saw strong performance in the quarter. Bluemercury had a strong quarter across the board in its specialty stores, shops within Macy's, and on bluemercury.com. Its proprietary brands, M-61 and Lune+Aster, continue to be important growth drivers and increased penetration to total sales in the quarter. In the Macy's brand, it is encouraging to see that our investment strategy is paying off. As an omni-channel retailer, our competitive moat is a healthy brick-and-mortar business, a robust e-commerce business, and a great mobile experience that ties it all together.
We are applying a balanced investment strategy to support all three. We are focused on providing our customers with a great experience, no matter where or how they shop. In the first quarter, we saw continued improvement in our brick-and-mortar business, led by the Growth 50 stores. The Growth 50 stores continue to outperform the rest of the fleet, which gives us confidence to expand this treatment to 100 more stores this year. In the first quarter, we saw a significant sales contribution from Backstage, which we expanded to 120 stores in 2018 for a total of 170 Backstage locations in Macy's stores. Our e-commerce business delivered another quarter of double-digit growth with our expanded Vendor Direct program making a meaningful contribution, and mobile remains our fastest-growing sales channel. We launched STORY at Macy's on April 10th, opening 36 locations in 15 states on the same day.
I'm proud of the agility the team showed in taking this big bang approach to the STORY launch and we're pleased with the early response from the customers. As a refresher, we acquired STORY a year ago. This is a retail concept that takes the point of view of a magazine, changes like a gallery, and has a unique merchandising approach. Each STORY at Macy's has a robust events calendar and community outreach plan that will be refreshed with a new theme and merchandise every 10 to 15 weeks. STORY at Macy's gives new customers a reason to visit our stores and gives our current customers a reason to come back and see what's new. The STORY launch is part of our ongoing strategy to improve customer engagement and drive store traffic through exceptional experiences.
Overall, the first quarter was a solid performance for Macy's, Inc., and we are on track for the year. While we're pleased with our consistent comparable sales growth, we won't be satisfied until we're taking market share, and we will get there business by business and store by store. Our five strategic initiatives for 2019 will be the drivers of our comparable sales growth. As a reminder, they are: Growth 50 becomes Growth 150 stores, and we expect a similar lift in sales. We are expanding Backstage, the only on-mall off-price option in America, to another 50 doors and will maintain the strong performance of the Backstage locations opened in 2016 through 2018. We are getting better at off-price every day. We are continuing the aggressive expansion of Vendor Direct. Our customers love the expanded brands and assortment. We are focused on our mobile-first strategy.
We know our customers use our apps to shop. We crossed $1 billion in app sales in 2018. It's also their highly valued assistant for interacting with the Macy's and Bloomingdale's brands, whether it's in store, from home, or anywhere in between. We are making our app experience even better as we build out Macy's Wallet, My Store, and My Stylist@Macy's. Our fifth strategic initiative for 2019 is our destination businesses, which are six categories where we already have a top three market share. In four of the six, we're taking market share, and these categories punch above the rest of the business on return on investment and profitability. Work is well underway on each of these five initiatives, and we expect that they will contribute to our sales growth as we move through the year.
Looking ahead at the rest of 2019, we are squarely focused on continuing comparable sales growth, taking market share in our key merchandising categories, and growing our customer base by retaining existing customers and bringing new customers into the Macy's and Bloomingdale's brands. I am confident that we will continue to make progress. Before I turn it over to Paula, I do want to leave you with three thoughts on how we're viewing our business. First, Macy's is growing again, and we will continue to grow by taking full advantage of our well-established omni-channel capabilities. Second, we are a strong company with a healthy balance sheet and the flexibility to weather a potential downturn and be opportunistic about growth. Third, we have a clear line of sight into profitability growth.
We know we need to grow both the top line and the bottom line. We are aggressively pursuing productivity improvements to make that happen. Paula will take you through the financials and provide more detail on the productivity improvements that we're expecting.
Thank you, Jeff, and good morning, everyone. As Jeff mentioned, we're off to a solid start to the year as we continue to post growing comparable sales and to make significant progress on our strategic initiatives. Additionally, we've continued to improve our financial flexibility, not only to help fund these investments, but also to return cash to our shareholders. We've maintained our operational and financial discipline by thoughtfully managing our business with an eye towards profit growth. Turning now to our first quarter results. Our performance was in line with the expectations we established in February. We delivered $5.5 billion of sales, an increase of 0.7% on an owned plus licensed comparable basis. This puts us on pace to deliver the annual sales guidance we gave you in February. We saw strength within our destination businesses, especially dresses, fine jewelry, men's tailored, women's shoes, fragrances, and skincare.
Active and kids were also strong performers, while handbags continued to be a challenge. We delivered our strongest performance in the Midwest and Northeast regions of the country. Digital continued to deliver strong growth. Our sales with international tourists were down 3.1% in the quarter. While international tourism remained a headwind to sales, it showed improvement versus the fall season. Total transactions were up 5.7% in the quarter, reflecting a positive customer demand trend, particularly from our best customers. Average units per transaction were down 2.2% as our platinum customers continued to spend more with us in total and to buy fewer units over multiple transactions.
Our average unit retail was down 2.7%, driven by the mixed impact from the strong performance of Macy's Backstage and our efforts during the first quarter to clear through the expected elevated spring receipts, as well as a challenging comparison to a very strong AUR performance in the first quarter of 2018. We generated credit revenues in the quarter of $172 million, up 9.6% from last year, and saw credit card penetration up 80 basis points in the quarter to 46.3%. Credit card revenue continued to be driven by higher finance charges related to higher balances and the momentum of our Star Rewards loyalty program. Our gross margin rate for the quarter was 38.2% of sales, down approximately 80 basis points to last year, as we expected. The decline was primarily driven by higher delivery expense, not offset by merchandise margin expansion.
As we discussed on the last earnings call, while we entered the year in a clean inventory position, our spring transition receipts are, as expected, slightly elevated, and we worked prudently to clear this inventory during the quarter. We remain committed to expanding our merchandise margin in the future. We recorded $2.1 billion of SG&A expense in the quarter, an increase of $29 million or 80 basis points on a rate basis over last year. The increase in SG&A dollars is driven primarily by investment in our Macy's Backstage rollout and other strategic initiatives that are driving our comparable sales growth. Depreciation and amortization totaled $236 million in the quarter, while interest expense benefited from lower debt levels. Our effective tax rate benefited from the resolution of certain tax matters.
While the resolution was beneficial to this quarter's tax rate, it is important to note that it was contemplated in our tax rate guidance for the year. We delivered $137 million of adjusted net income in the quarter versus $149 million last year. Included in these net income figures are asset sale gains of $31 million and $18 million, respectively. Adjusted EPS was $0.44 in the quarter, compared to $0.48 last year, of which asset sale gains represented about $0.10 and $0.06, respectively. Cash flow used in operating activities was $38 million, compared to cash flow generated from operating activities of $322 million last year. The difference between years reflects the timing of inventory purchases. Capital expenditures were $264 million compared to $190 million last year.
The increase in the first quarter is due in large part to the timing of spending on our strategic investment, as our 2019 plan remains approximately $1 billion. Asset sale proceeds were $34 million compared to $23 million last year. We paid cash dividends to our shareholders of $116 million during the quarter. We ended the quarter with $737 million of cash, which was in line with our expectations. Our debt repayments in the quarter were minor, and we continue to plan to use excess cash in 2019 to further reduce our debt to be within our target leverage ratio when excluding asset sale gains. This will further strengthen our healthy balance sheet.
Before addressing our expectations for the balance of the year, let me give you a quick update on Funding Our Future, our productivity initiative that when combined with our sales growth initiatives, will help return Macy's to profit growth in time, while also mitigating cost headwinds and supporting strategic investments. This work is now well underway. We have a defined roadmap and are continuing to lay the foundation for broader rollout. Our cross-functional teams are confirming our multi-year savings, which, as we have said, will be significant and will be communicated in the back half of the year. Under the leadership of Dennis Mullahy, our new Chief Supply Chain Officer, our scaling of the hold and flow approach that we discussed last quarter continues to progress nicely.
We expect it to be fully up and running by the end of the second quarter, and we are pressing forward on other opportunities within our supply chain, merchandising, private label sourcing, marketing, stores, and procurement workstream. For example, we are beginning to test location-based markdown optimization, which will allow us to better support and drive each store's business in a more targeted way. We currently have six pricing zones for stores and one pricing zone for e-commerce. These zones are very broad. Demand by store varies. When we take markdowns, the price gets reduced across the entire zone, regardless of store-specific demand. We needed a better way to respond to store-specific customer demand as opposed to a broad response across all stores in the zone. We piloted location-based markdown optimization and saw positive results and are now excited to roll this out on a broader scale.
That is a very quick update on Funding Our Future. Turning now to our 2019 guidance. We are reaffirming our guidance for the full year. We continue to expect 2019 earnings per share to range from $3.05-$3.25. Excluding asset sale gains, we expect earnings per share to range from $2.80-$3. You can find all our guidance and related commentary in the slide presentation we posted on our website. However, I do want to remind you of a few items as you update your model. First, based on our solid first quarter performance, combined with our conviction in the initiatives Jeff laid out, we are confident in our ability to deliver our guided sales comp for the year.
We continue to expect our comparable sales performance to be relatively consistent throughout the year, with the fall performance slightly better than the spring. Second, we continue to expect our gross margin rate to be down moderately in the first half of the year and down slightly in the second half, which we saw begin to play out in our results for the quarter. We expect to see slight sequential improvement in the second quarter. Third, inventory is higher than we would like it to be, as we stated on our last earnings call, due to slower sell-through on spring product during the quarter. Importantly though, we continue to expect levels to be consistent with our original guidance of up at the end of the spring season and below last year by the end of the fall season, which is also consistent with our gross margin guidance.
In closing, we have delivered results consistent with our expectations and are on track for the year. Our 2018 initiatives continue to resonate with our customers. Our 2019 initiatives are beginning to contribute. We continue to enhance our financial flexibility and durability. I'm excited by the enthusiasm and energy of our colleagues as we work together to make this business even stronger and ultimately to enhance both customer and shareholder value. Now we'll open it up for Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. As a reminder, ladies and gentlemen, please press *1 to ask a question. We will pause for just a brief moment to allow everyone an opportunity to signal for questions. As a reminder, if you could just limit your questions to one question and one follow-up, and then re-queue for a second question. We will now take our first question from Matthew Boss. Please go ahead, sir. Your line is open.
Great. Jeff, maybe to start higher level, how best to size up the state of the U.S. consumer today, maybe versus a year ago? Any category lead indicators that you're watching here? Just in your view, how resilient is the consumer to the potential for rising prices on apparel and furniture, if that's the path that we need to take?
Yeah. Good morning, Matt. Just where I look at the consumer right now, still healthy. Unemployment is low, wages are rising, the consumer confidence is still strong. I think the tax rebate issue that we had in the January, February timeframe has certainly passed us, and now we're caught up in terms of those checks going out to our consumers. Relatively very healthy. When you look at the tailwinds that we had last year, perhaps not as strong as that. Obviously we had tax relief last year that we're now lapping. That change, I think, buoyed a lot of consumer interest in the economy and in our categories last spring. Still overall healthy. I think to the conversation about the recent news, let me just address, just add a little more color to what we talked about, my opening comments on tariffs.
The first three tranches of tariffs that went into effect in 2018, the third tranche of tariffs that had an increase from 10%-25% last week. We're working through all those. Even in the furniture category, which was really touched by the 10%-25% increase last week, we have strategies to mitigate that. We think that those strategies will limit the customer concern and reaction to them. The big one is really if there is a fourth tranche that's put into effect. If that goes into effect, it remains, it's over $300 billion, it's going to affect a lot of the apparel and accessory categories that are coming in.
What I'd say on that is that, looking at all those categories and those brands that are included, it is hard to do the math to find a path that gets you to a place where you don't have a customer impact. As you would expect, we work at that with two buckets. We do have about 20% of our business that's being done in private brands, our own sourcing. We've been working hard at that for a number of months and really for a couple of years about moving production out of China. It's still an important piece of our overall mix within China, consolidating the amount of manufacturing partners that we have to improve our scalability and our power to negotiate there. We're well at work on our own private brands.
The bigger piece is really our negotiations with our national brand partners, and we're working very closely with them on the potential impact to our shared customers. At Macy's, fortunately, we operate at a scale. We feel like we're going to be able to come up with solutions that work best for us and our brand partners. It's too early to comment on what we think that's going to mean in terms of potential price increases and what categories are going to be more affected than others. I think we're going to be doing that all the way through the next couple of weeks. Obviously, we're very hopeful that talks between the U.S. and China will continue, they'll be productive, and that these trade actions will deescalate. I think this is a stay tuned.
Great. Just to follow up, on inventory management and in light of some of your larger picture thoughts, I guess, how are you planning your forward receipts just in light of this uncertainty? More near term, where do you see the concentration of the excess inventory, maybe just by category? Is it a reasonable goal to be realigned to sales into back to school, or should we more think about into holiday?
What I'd say is that when you look at our current inventory position, we're heavy right now in some spring content, and we worked to mitigate that in the first quarter, which we'll talk about. When you look at our total versus our own inventory right now, our comp inventory is up 2.4%, our total inventory is up 3.9%. We do have more in-transit inventory than we had last year that anticipates trying to get earlier receipts in for key periods underneath some of the tariff conversations.
The only thing I would add to that, Jeff and Matt, just to tie this to gross margin, is that consistent with our guidance for gross margin to be down moderately in the spring. We will see some gross margin pressure in the second quarter as we continue to clear the excess spring receipts. However, we do expect gross margin to see a slight sequential improvement in terms of pressure from the first quarter. The teams are already working hard on this, and we continue to expect our inventory position to be up in the spring and down by the end of the year.
That's helpful. Thank you.
We will now move on to our next question from Omar Saad of Evercore. Please go ahead, sir. Your line is open.
Thank you for taking my question. Nice quarter, especially against the more difficult comparisons. You mentioned omni-channel and mobile, and it's obviously areas you've been investing in significantly. Maybe you could help us understand what you're seeing in those efforts, whether it's buy online, pickup in store, ship to store. Are you starting to see broader customer acceptance and usage of these technologies, especially through the apps and on mobile? I'd appreciate an update there. Thank you.
Hi, Omar. When you look at how we're spending our monies, a lot of our technology spend is going towards really making mobile best in class. Our customers really voted on this, and mobile is definitely the method of choice that they're using. It's kind of their constant shopping companion. Improving the in-store experience, improving the navigatability of that anywhere and any how they want to engage through the mobile app, we are spending towards. We really break up our mobile expenditures and technology spends on three buckets of mobile. We look at as Macy's Wallet, My Store and My Stylist@Macy's. Macy's Wallet is, it gets at the first part of your question, which is, wow, BOPS and BOSS is becoming a much more potent piece of an omni-channel of our strategy.
Customers really like the convenience and the security of picking up in store. They can do it in the same day if it's a BOPS purchase, or they can do it for something that we're shipping in from one of our warehouses or from Vendor Direct that takes a couple of days. With Macy's Wallet, they have the opportunity to get in and get out of the store much faster. Macy's Wallet is also helping us with the My Rewards function that gives app-exclusive point incentives and in-store rewards. The second piece of our mobile spend is really on improving the in-store experience. Providing store maps, product location is being piloted in the fall, in-store product recommendations. The opportunity for scan and pay if they want to get in and get out without engaging with the sales colleague.
We'll give them all information about personalized sales events. The last piece where technology is helping us with improving the app is really what we call My Stylist@Macy's, which is really providing virtual stylist opportunities. We're doing that. We're piloting that right now in the second quarter, and we're adding the ability for the customers to find and follow a stylist that they can collaborate virtually with via chat or with Style Board. It also gives them the ability to follow trends from influencers. Our overall technology spend is really how to improve the customer experience, the navigatability, but mobile is a big chunk of our emphasis.
Jeff, are you seeing the digital piece of the business shift a little bit from traditional e-commerce where people have it shipped to their homes to some of these new options available to consumers?
Yes. What you have right now is that when you look at buy online, pickup in store and buy online, ship to store, it's now over 10% of all digital demand. That when we were talking about this a year ago, it was about 3.5% of the digital demand. It's now over 10 in the combination, and we expect that to continue to grow. We built out these extra service centers in every single one of our doors. Our customers are loving that. We put it at the number 1 entrances. They're getting in and out much more quickly. With everything that we're doing with our fulfillment logic and our inventory placement, it's just a more viable and potent way for a customer to interact with us. I think us and our competitors, in-store fulfillment is very powerful.
Very helpful information. Thank you very much, Jeff.
You bet.
We will now take our next question from Paul Trussell of Deutsche Bank. Please go ahead, sir. Your line is open.
Good morning. Wanted to ask about the Growth 150. For the first 50, certainly driving nice outperformance, congratulations on that. Curious if those doors are turning a positive comp. Also, as we think about the next 100 doors, is there as much opportunity as the first 50 in terms of top-line growth? Lastly, from the learnings with Growth 50, what is the potential for upgrades or staffing and service changes that can be made to the rest of the fleet? Thank you.
Hi, Paul. I think I'll just start with what you started with, which is the Growth 50 stores have been quite strong for us. They are giving us a positive comp. They far are outpacing the balance of the fleet. Where we talked to you about this at the end of the fourth quarter was that they were up three points. They're now up four and a half points when you look at the first quarter of 2019. Very strong. Obviously, based on how they were trending, we started to get all of these in place with the investments that we put forth. They came on really line at the end of the third quarter of 2018. That momentum has continued into 2019. What we saw in 2018 gave us the confidence to add another 100 stores.
These 100 stores, we do expect to behave the same as the Growth 50 stores do. By the end of 2019, these 150 stores are going to represent about 50% of the brick-and-mortar business that the Macy's brand does. It's going to make a meaningful difference, we believe, to our overall brick-and-mortar trend. Within the Growth 50 and now the Growth 150, we address the second part of your question, which is, this isn't just about capital. This is about increased colleague support, the quality of management, really looking at building up categories, making bigger distortions, getting better goods into these particular stores. We do expect that they will continue to outpace the balance of the company when we get the 150 up and running. The next tranche of growth stores we're evaluating and what we would do in 2020.
That does take up two of the three segments that we have outlined in our store strategy, both of the magnet stores and all flagship. Those will all be part of the growth message. The neighborhood stores, which is the remaining tranche of stores, we are working on what that formula looks like. We tested four stores in 2018. We're testing eight more right now. We expect to walk out of 2019 with a scalable strategy for the stores that we call the neighborhood stores.
Thank you for that color. Just a quick follow-up. You gave a few comments on the Funding Our Future initiatives. Maybe you can just elaborate a little bit more on the benefits that you are expecting to see by year-end across supply chain and sourcing and the pricing initiative. Thanks.
Thanks, Paul. I'll take that. One of the things that we're doing with Funding Our Future is developing more and more tools to manage our inventory, especially with respect to fulfillment logic, advanced fulfillment logic, which we're already using, but we're developing that even further. Really drilling into the supply chain. We're already using the fulfillment logic, as I said before, to get our customers their products in the quickest amount of time at the lowest cost for us. We use a combination of our mega centers and our stores and vendor partners to offer customers the best experience. We're just taking that a step further. We're looking at our inventory position and markdown risk and applying that to these decisions, all really amplified by data analytics.
We're getting ahead of the peak holiday season by allocating more of the high volume inventory in DCs, or distribution centers, to operate at full capacity. We have a number of other initiatives in supply chain that are focused on replenishment and getting us the product sooner. We're looking across how do we use all of our locations, our stores, our DCs, how do we use those even more smartly. We're consolidating BOSS shipments to stores to reduce the shipping cost. We talked about hold and flow on the last call. When we talk about the different work streams, there are a lot of sub-initiatives under each work stream. We're really excited about the potential of this program.
As I've said before, our teams are busily at work, and we'll come back to you with more specifics on the Funding Our Future program as well as the target for the three to five years. We do expect this target to be significant. You should really think about Funding Our Future as the fuel to grow our business, to take market share, and to expand the customer franchise, and importantly, to improve profitability.
Thank you. Best of luck.
Thank you.
We will now move to our next question from Kimberly Greenberger of Morgan Stanley. Please go ahead. Your line is open.
Great. Thank you. Good morning. Jeff, you mentioned in your commentary that you've got line of sight into profit growth, and I'm wondering if you can sort of help us understand the path to get from where we are today, where I think we didn't see profit growth last year or here in Q1. What's the event path that gets you to profit growth? What are the key ingredients?
Kimberly, what we've talked about is that the first stage of that is comp store growth. Getting consistent comp store growth, top line moving. The second piece that we're focused on is really what we're doing with market share and narrowing the market share gap that we had. We were down about four and a half points to the overall market at the end of 2017. We narrowed that to two points in 2018. We expect to narrow it further in Q1. The third is really having a healthy customer franchise. With the initiative that we put in with the new loyalty program a year and a half ago, we're really taking care of our core customer.
They're spending more with us. When we, a year ago, added the bronze tier of that, of having a tender neutral portion of the loyalty program, we've been adding about a million customers a quarter through the bronze tier. We have acquisition strategies that are at play right now. Right now, we basically have a very healthy franchise with males, both under 40 and over 40. They love us. We've got good share there that is growing. Females under 40 is really our opportunity. We're really delving into that right now. We have her in certain categories like dresses and fragrances and handbags. We need to drive her into more categories in the store. We leverage our strength as a department store to do that. We're really focused on the early career segment, this 24-29-year-old. You'll hear more about us on that.
Getting the customer franchise and getting that growth right is a real focus of ours. The last point is really on profit growth. That's our fourth stage on that. That's really what Funding Our Future has been all about, to not only fuel the top line but also the bottom line. One of the elements that we see of that is the ability to grow gross margin and really expand merchandise margin to cover some of the headwinds that we have with increased delivery expenses, free shipping that we offer our customers as a result of all the loyalty programs. Funding Our Future is really going to ultimately be the fuel that we use on all of these aspects.
That's what you should expect to see as to Paula's earlier point at the end of the year, for us to outline for you exactly what the three-to-five-year window looks like when we get back to profitability growth and how we're going to exactly do that.
That's really super helpful. Thank you. Paula, I just wanted to follow up on the revenue guidance for the year. It looks like the spread here in the first quarter between your comp growth and your total revenue growth. If I look at the owned comp, it looks like the spread is about 130 basis points. The total sales guidance for the year at approximately flat with a comp of flat to plus one. I'm just trying to understand if there was maybe a timing difference in Q1 that caused the spread to be bigger than implied in the total guidance and perhaps there's a catch-up coming in the future quarter.
Kimberly, the biggest driver of the larger than normal spread between total sales and comp sales is the store closings, both in 2018 and at the start of 2019. That of course, impacts our total sales but not our comparable sales. We do expect that gap to narrow as we go through the year. We continue, as you highlighted, to expect our owned plus licensed comp sales to be flat to up positive one, and our total sales to be about flat. Just as a reminder, we closed 12 stores in 2018 and four stores at the beginning of 2019. Also, we'll be opening new Bloomingdale's stores in the fall.
Very helpful. Thank you.
We will now take our next question from Chuck Grom of Gordon Haskett. Please go ahead. Your line is open.
Good morning. This is actually John Park on for Chuck. Can you guys talk about the performance of Backstage in the quarter, a little bit about the evolution of its sourcing given the growing scale? I guess just at a high level, how do the merch margins look for Backstage versus the rest of the business?
Backstage is performing well, and we're on track with everything that we saw in previous years and how it's performing in 2019. It was a meaningful piece of our comp performance. We have 170 that we opened through 2018. As we mentioned on our last call, anytime you add Backstage into one of our buildings, it lifts the comp of that store by about five full points. What's really exciting about Backstage is that when you look at it in the second and the third year, that the momentum continues. It's not just a one-year episodic issue or opportunity. We look at the other headline we brought up in the fourth quarter was the cross-sell that goes on for a customer. About 15% of the customers that are in the stores that have Backstage are cross-buying in both areas of the store.
Their purchases are up about 40% when they do that. That gave us the confidence to add more Backstage. We've added nine so far of the 50 from 2019. We're very excited about seeing what's happening with the comps and how the comps of Backstage are driving the comp of the entire store. There's just a noticeable benefit when Backstage is being added. We see that across stores that are magnets, stores that are neighborhoods, and stores that are flagships. It really is pretty indiscriminate about the effect that it's having on all types of our store profile. We're going to keep it going. The other part of your question, we have Backstage, we have the warehouse that is going to be up and running in the third quarter. This is our first dedicated Backstage warehouse. It's going to be in Ohio.
That's just going to help us with the logistics of this. We're still in the early innings of Backstage, but we get better at it every day. We're learning every day, and it continues to become a more meaningful piece of our success every day.
Great. Just switching gears a little bit, can you talk a little bit about the performance of your overall business during key selling events like Easter, Friends and Family, and most recently, Mother's Day, I guess, versus the balance of the quarter?
Yeah. What I'd say is that I'm very comfortable with the way that our cadence has been met. We did a lot to clean up our promotional calendar in 2018. We've got a comparable calendar that we're working on in 2019. I expect the promo days to be in line with what we did last year. We're always looking at how do we look at those promo days and how will we make them more relevant for the season that we're in. We're in good shape on all that. Friends and Family, Mother's Day really performed at expectation in the first quarter.
Great. Thanks. Best of luck.
Sorry. We will now go to the next question from Oliver Chen of Cowen and Company. Please go ahead. Your line is open.
Hi. Thank you. A lot of what we're doing now is really looking at this metric of customer lifetime value and the acquisition cost relative to lifetime value. What are your thoughts about how that may intersect with your loyalty program and key learnings you've been having, and using loyalty to drive personalization as well as data collection, thinking about the right kind of customer retention and repeat as well as new and existing customer analysis?
I'll start with this one, Oliver. Our Star Rewards loyalty program continues to perform very well. Our platinum customers are shopping with us more frequently. They're spending more with us. They really love the simplicity and value of the new program. We've had great responses to the exclusive platinum customer experiences that we can offer them. Platinum customers make up about 30% of our sales, and their spending behavior is up 10%. For 2019, we have a goal of getting to about 7 million tender neutral bronze customers, and that's about double the number that we would've had in 2018. We're just about under 1 million bronze customers at the end of the first quarter. We're very pleased with our Star Rewards loyalty program and how it's helping us to drive customer value.
The other thing, Oliver, I'd point out is the transaction count in the first quarter. That was up almost 6%. What we're seeing in that is that you've got a lot of these customers that are shopping more frequently than ever based on the values and the experiences that we're offering her. We expect that to continue. We think that the transaction count is a good proxy for how she's feeling about us. We see that in our surveys on that. We look at it in her spend. We just look at how often she's coming into our brand through the app, through the store, or from our site.
Okay, thanks. The follow-up is just thinking about millennials as well as Generation Z, and a more difficult category as a whole has been women's and young women's apparel.
Yeah.
What do you think needs to happen there, and how would you reorientate a lot of your discussion around ensuring that you have the younger customer for the long term? It's been difficult because the shopping habits and the patterns and the assortments really need to be different in our view.
Yeah. I agree with you. There are some areas where the under 40 female customer loves the Macy's and the Bloomingdale's brand. When you look at fragrances, when you look at dresses, when you look at handbags, those are all places where we get high share. Two of those three we're growing our share with that same customer type. Our opportunity is in sportswear. We basically recognize what we need to do with our brands. We're working very closely with our brand partners as well as our own private brands. We're also looking at our environment and what does the environment need to be for this customer. Does she want to shop in a traditional department store? Are there ways to segment an area that is uniquely hers based on what she's telling us?
We're working very closely with those customers and creating spaces in our stores that we're going to be testing through 2019. It's content, it's values, it's environment, it's what we do in terms of marketing, what we do with personalization, what we do with experiences that we've created, like STORY, that are very attractive to this customer. We're trying to hit it from all angles because we recognize we have a big opportunity with share here, and we're not going to be satisfied until we're doing better with it.
Thank you. Best regards.
Thanks, Oliver.
We will now move to our next question from Robert Drbul of Guggenheim Securities. Please go ahead. Your line is open.
Hi. Good morning. I was just wondering if you could give us some insight into how your private brand portfolio is performing versus the national brands. I was wondering also if you could just maybe give us a little bit of thoughts around the monthly flows that you had and how you felt like weather impacted your business as well. Thanks.
Yeah. Let me start with the second part of your question. That is that in sales, we don't think that weather had an impact on our sales. It's really the bifurcation between warm weather goods and cold weather goods. Yeah, warm weather goods did not sell as well as they did last year because the weather was colder. We made up for that with the sell-throughs of our cold weather inventories. I think that the sales, I would say, very limited impact on our overall business. The composite of our inventory did change. As we talked about in the fourth quarter, we had elevated spring receipts that were part of our inventories exiting the fourth quarter. With the unseasonable weather, that wasn't helpful in clearing that.
When you look at our 2.4% positive inventory in comp locations, we've got some spring weather that we are working through. As Paula said, our gross margin guidance anticipates that, and so we think we're going to exactly where we thought we would be at end of second quarter inventory, as well as in margin. We're heavy right now in spring goods based on weather and where we came in, but we're working through that prudently, and we're going to be where we think we need to be going into fall season.
National brands versus private brand?
Our private brand portfolio continues to be strong and continues to grow and complements the overall offering that we have. Margins continue to be strong. Yes, they're both working together in tandem.
Great. Thank you very much.
We will now move to our next question from Lorraine Hutchinson of Bank of America. Please go ahead. Your line is open.
Thanks. Good morning. Paula, could you just comment on the merchandise margin performance in the first quarter? It sounds like delivery expense was a big reason for the drop in margin. I was also hoping to hear your outlook for delivery expense as the year progresses.
Yeah. First of all, let me just comment that we are on track to achieve our gross margin guidance for the year. For the quarter, again, we were 80 basis points down. That's in line with our expectations. As I said on the call, that was due primarily to higher delivery expenses not being offset by merchandise margin expansion. Let me give you some context on how we look at this. One of the most effective drivers of how we offset the headwind of delivery is through merchandise margin expansion, which in 2018 fully offset the delivery expense, we do have a line of sight to get back there.
I've discussed Funding Our Future a few times, a few of the initiatives like localized markdown optimization, which I talked about earlier, hold and flow, updates to our fulfillment logic, all of these will improve our merchandise margin. As I've said, we will come back to you with our specific plans from Funding Our Future, we'll have targets that we expect to be significant for the next three to five years. That's going to be key to how we mitigate this important headwind, how we invest in our strategic initiatives, ultimately, how we grow our profit in time.
Was merchandise margin in the first quarter down in addition to higher delivery expenses?
No, merchandise margin was flat in the first quarter, Lorraine. The degradation in gross margin was the increased delivery expense, based on the robust digital business that we have and the great loyalty program where the customer gets free shipping.
Merchandise margin, it includes the markdowns that we said we would incur to clear the excess spring transition receipts. It would have been higher had we not have had those markdowns, similar to the trend that we saw in 2018 when the merchandise margin expansion fully offset the delivery expense increase.
Thank you.
We will now move on to our next question from Dana Telsey of Telsey Advisory Group. Please go ahead. Your line is open.
Hi. Nice to see the improvement in the top-line trends. As you think about the Vendor Direct business and the additional SKUs being added, how are you seeing productivity there, and how is margin progressing on the e-com business? Is that a margin help or margin hindrance? How are you thinking about it? Thank you.
Hi, Dana.
Hi.
The headline on this is I think Vendor Direct has only upside. It adds sales, it adds profit, it increases customer consideration of Macy's, it increases traffic to our site, it addresses failed searches. The profit rate on Vendor Direct is basically accretive to our overall when you look at it because you really don't have any of the SG&A expenses that we have. The margin pretty much hugs whatever the category is in the main box. If it's in home, those margins are very similar. Because of the minimal incremental capital, the no inventory investment, it makes for a very high ROIC case. In Q1, it was about 10% of our online sales came from Vendor Direct. We see that penetration increasing as we add more and more content to it.
As you know, Dana, I'm sorry, go ahead.
No, you go on.
Yeah. As you know, we manage our business in an omni-channel way. One of the things we can offer as an omni-channel retailer, as an example, is our customers can order online, they can pick it up in our store, and then when they're in our store, they buy more goods. We think about that as an omni-channel experience. Overall, our e-commerce business enhances our overall business. When we think about some of the headwinds with respect to the e-commerce business, such as delivery expenses, as I just mentioned earlier, we do have a line of sight as to how we're going to mitigate those, and that is encompassed within our Funding Our Future initiatives.
Any early reads on STORY and what makes you expand it to additional stores? Thank you.
Yeah, I think STORY is performing really well for what we expected. We really had four goals with STORY. The first one was, how we're going to bring new customers into the brand. When you look at the amount of hits that we've got and the amount of media exposures on this thing, it has been very strongly received, and we've really gotten the message out about what STORY means. We've got a lot of new customers that are coming into the building. We also wanted the second piece was how we would see repeat visits from existing customers. I think, you've got the all-store effort of making sure that customers know where STORY is in the building, making sure they go and experience it. It's all new products and experiences, and it changes as we've discussed, every 10-15 weeks.
The third benefit is that the narrative about Macy's being a traditional department store is. This is opening our door to new partnerships and kind of breaking that paradigm where people think of us as open to new ideas, new partnerships. We're getting more calls from people that we wouldn't have had interest from in the past. That's giving us an opportunity to keep our brand moving. I mean, we're a fashion retailer, and to have new and exciting new partners coming in the door is really important to us. STORY has been a nice portal for these conversations to start. Just the last thing I'd say about STORY is that it's the prime rib of our stores in terms of space and location. It's fun and it's changing.
Yeah, we're in the early days of this, but we're really pleased with the customer response so far. To where your question was going, Dana, we will evaluate. We have it in 15 states right now, 36 stores, very important doors for us. We haven't made the decision yet about when and where we're going to expand it beyond the 36 stores it's currently in.
Thank you.
We will now move to our next question from Michael Binetti of Credit Suisse. Please go ahead. Your line is open.
Hey, guys. Thanks for all the information this morning. Can I ask just about the composition of same-store sales? You've touched on this in a few different ways, but with the transactions much higher and the AUR lower, it makes sense. Initially, you were highlighting Macy's Backstage as a big growth driver, so that would be intuitive. I guess it wasn't as intuitive to me why units per transaction will be moving lower with the lower price points in the Macy's Backstage section moving up in mix. I think you reminded us that, and I think this started in the fourth quarter, that some of the changes to Star Rewards lower that barrier of free shipping. The incentive for the customer to bundle units together till they get to a $50 or $75 bundle, I think, goes away, and that they just order one item at a time.
Do you expect that to persist? Does that change the leverage point on the comp at all as you look forward, if this is going to be the business going forward, higher transactions and lower UPT?
There's a lot there, but let me just say that I look at transactions, average unit retail, and units per transaction together to assess the dynamics of the business. In the first quarter, all three of these worked together to drive positive sales comp. As I mentioned earlier in the call, our first quarter transactions were really quite strong, up 5.7%, and that reflects the continuing positive trend that we're seeing in customer demand, particularly from our best customers. In terms of average unit retail, that was down 2.7% in the quarter, and half of that decrease reflects the strong performance of our Macy's Backstage within Macy's stores. We have 170 of them, but 120 of them are new versus last year. These are significantly helping our in-store comp, but at a lower AUR.
AUR was also impacted by our work to clear excess spring receipts, as well as the tough compare against a very strong AUR performance last year. To your question about average units per transaction, again, those were down 2.2%, but that's mostly because our platinum customers continue to spend more, buying fewer units over multiple transactions. We are continuing to test and iterate in terms of what the free shipping thresholds will be. That's sort of the dynamics that we're seeing.
Thanks for that. If you see the current dynamics hold where the transaction growth is obviously very positive. If more of the growth does continue to come from transactions at lower AURs, does that change how you thought about the leverage point on comp historically, if that's how the comps are going to be built every quarter?
Well, I would say one of the biggest things that you should consider in terms of looking at our sales comp leverage is the fact that this is an investment year for us. 2019, like 2018, will be a year of investment as we continue to invest in the sales growth initiatives that are growing our positive comp. You have to take that into consideration as you're looking at our leverage.
Got it. If I could just add one on. You didn't mention a change to the credit revenue outlook for the year, I'm assuming there's no change to what you'd tell me, it was quite a bit above the run rate in the first quarter that we thought we'd see for the year. Is it just slower growth through the rest of the year, maybe because the comparisons get tougher? Any way to help us think about how you see credit through the year? Thank you.
Sure. Our credit revenue is broadly in line with our expectations, its performance in the quarter has been driven by strong credit sales bolstered by our Star Rewards loyalty program, as well as an increase in new accounts and continuing strong balances. We're maintaining our guidance for the year as it is quite early in the year, we want to continue to be prudent in our overall guidance.
Okay. Thanks a lot for the help.
We will now move on to our next question from Paul Lejuez of Citi. Please go ahead. Your line is open.
Hey, thanks guys. I'm curious how much overlap there is between the Growth 150 and the stores that have a Macy's Backstage. I guess the second part of that is if we fast-forward to the end of the year and we consider all the stores that don't have either a Macy's Backstage or are not part of the Growth 150, what does that number look like? From that point, which of those stores might get included in one of those two programs? Thanks.
Hey, Paul. It's actually really interesting and well-balanced when you look at if you look at the 173 Macy's Backstage stores that we have, really well-balanced when you look at how it's split across flagships, magnets, and neighborhoods. When we did the initial rollout, I think it was in 2016, we really focused on those stores that had the most productivity opportunity. We really weighted it more to the neighborhood stores. Then as we said, look, there may be an opportunity to get Macy's Backstage into every one of our Macy's locations. We started to play with getting into the magnet stores. So we're really looking at that. When we add in the 50 stores that are being added in for 2019, all of the three different store segmentations will be touched by that.
What I can tell you as a great headline is that every one of the segments in every one of these scenarios is improving its trend versus the control. The neighborhood stores that got Macy's Backstage, doing far better than the stores that don't have it. The same thing with magnets, and the same thing with the flagship stores. Also those trends are improving the longer that Macy's Backstage are in those stores and customers understand it, get used to it, and we market to them.
Gotcha. On the Vendor Direct program, I think last year you doubled the SKUs, beginning in the second half of last year. What's the plan for the second half of this year on Vendor Direct?
I think what we said in the end of the fourth quarter was that we plan in 2019 to add another million SKUs into Vendor Direct. That we were going to go to 1,000 vendors versus the 700 that we had as part of the program in 2018. We're on track. When you look at the first quarter, we added 125 vendors. We added 265,000 SKUs to the sites. We added new brands in. We're on track with what we said we were going to do at the end of fourth quarter.
Got you. What does that million SKUs represent in percentage terms?
That would be on top of, I believe it's $1.5 million is what we had at the end of 2018. It's a sizable increase.
Gotcha. Thanks. Goodbye.
You bet. Thanks.
We will now take our final question from Alexandra Walvis of Goldman Sachs. Please go ahead. Your line is open.
Great. Thanks so much for taking the question here. I have a question about your destination businesses. You talked about them performing well, and I believe, Jeff, in the prepared remarks, you said that four of them were taking share. I wonder if you could let us know which of the destination businesses those are, and what's working there versus perhaps working a little bit less well in the two classifications where you aren't taking share.
What I'd say is that the commonality between, first off, these six businesses, they're really leveraging the strength of being a department store. The opportunity that if we have a customer that's coming to us for dresses and she's not buying shoes, okay, what are we going to do to make sure that she hears from us? There's real opportunities in terms of personalization, of direct targeting on opportunities like what we see with that. Taking advantage of these businesses being very, very strong within the Macy's portfolio. All these businesses have a top three market share. When you look at them, and also these six businesses represent almost 40% of our total, they're planned to double the rate of increase that we have in the balance of the store. We have strength in them, and we're putting strength behind them.
That's increased content, moving AURs with better goods, getting great values that are planned with all of our vendor partners or what we're creating with our own, what we're doing with an environment, what we're doing with sales colleagues, and what we're doing with management. You can see from the numbers which ones. When we look at beauty is not gaining overall market share. That would be one of the two. We're gaining market share in fragrances, but we're not in overall beauty. We're really holding our own in skincare, but we're not maintaining our share, and we're ceding market share in color. We're very focused on that right now. The others are doing quite well. We're onto something with this.
It's a place that customers consider Macy's and how do we leverage them more fully and once into these categories, how do we get them to shop in other parts of the store or site?
Great. Thank you. One more perhaps on tariffs. Thanks for all the color up front there on the impact of tariffs to the business. Just a question on the list 3 tariffs. How much of your business does that affect predominantly, as you said, the furniture piece of the business? How much of a headwind is that creating for gross margins, and can you confirm that that's contemplated within the guide?
We don't quote what percent of our business is affected by which tranche of tariffs. What I would say is that the third tranche going from 10% to 25%, the team is mitigating whatever exposure that is. It is a relatively small piece of our business. That's how we were able to mitigate it across the entire company. What is the effect going to be in furniture specifically? We're working through that, but the overall guidance comprehends are working through that. It's really the big point is that fourth tranche is not comprehended in the guidance, and we're working through what the implications would be if it fully goes to 25% at the end of the summer.
Great, thanks so much.
Thank you.
We will now take our final question from Jay Sole of UBS. Please go ahead. Your line is open.
Great. Thank you so much. Jeff, I just wanted to ask you a little bit more about your comments on tariffs. Can you just maybe talk to us at a high level about how you, or just maybe just retailers in general, would think about sharing the burden of tariffs with the branded partners?
Yeah. I think that we work very closely with our brand partners on that. In some cases, we've done this. Think about what happened when we had the cotton staple change, and we had the apparel prices going up when that happened. There is a model on that about where, are there certain brands that can command a higher ticket? Are there some commodities that absolutely not, you're going to retard demand, and you've got to stay at the price. Either through the combination of you as a retailer or as your wholesale partner, you're absorbing those increased costs. We're working through all that right now. We've been through this before. This is obviously big because of the amount of imports that do still come out of China across many different categories.
We have work to do to work through this with all of, obviously our own sourcing through our own private brands, but also our national partners. We've been having lots of conversations with our partners. They have with their other retail partners. We haven't worked through it yet, but we're at work right now with if this does go through, what we're gonna do. What categories are gonna hold prices because we don't believe that we can sustain an increase? What areas do we believe we can? Then when we don't think we can sustain an increase, where's that burden gonna be? What side of the conversation does it play into?
Got it. The other question, if I could, is that obviously goods imported from China will have a new tariff, but there's a lot of goods that probably in the store that won't. Because in the cotton situation, everything that's impacted by cotton has to have a price increase. How would you anticipate the interplay between a lot of goods on the floor that will be from China versus a lot of goods on the floor that won't be from China?
Yeah. Stay tuned on that. Obviously, that's the compression issue we're dealing with right now. It's also those goods that are similar in the same brand that came at a different time that still may be in the system when the new goods come in. We're looking at that compression in the same brand and across brands and how the consumer is going to see it. That's all part of the calculation that our teams are working through right now with our brand partners.
Yeah. Okay. Thank you so much.
You bet.
All right. Thank you, everyone.
Thanks, everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.