梅西百貨 (M) 2003 Q4 法說會逐字稿

May I have your attention, please?

I'd like to thank everyone for holding and welcome you to the conference call today with your Chairperson, Karen Hoguet.

I want to remind the participants that you'll be in listen-only mode during the presentation today.

Today's call is also being recorded for replay purposes.

Ms. Hoguet, thank you for using Sprint Conferencing.

We'll turn the call over to you.

Thank you.

Good morning, and welcome to Federated conference call scheduled to discuss fourth quarter 2003 earnings.

I am Karen Hoguet, CFO of the Company.

Any transcription or other reproduction of the statements made on this call without our consent is prohibited.

A replay of the call will be available on our website beginning approximately two hours after the call concludes.

Please refer to the Investor Relations section of our website, www.fds.com, for discussion and reconciliations of any non-GAAP financial measures discussed this morning.

We were very pleased with fourth quarter performance.

It was great to see the improvement in the sales trend in the back half of the quarter and equally great to be able to produce such a strong bottom-line performance.

In addition, the cash-flow generation continued strong in the quarter as it had been all year.

I will walk through the key components of our fourth quarter performance and then provide a quick overview of the year.

I will then conclude with a few comments on 2004.

First, sales.

Sales in the fourth quarter were $5,053m, up .7 percent versus last year.

Sales in comp stores increased 1.4 percent in the quarter.

As we discussed when we released January sales a few weeks ago, our sales were strong across the Company in the quarter, but Bloomingdale's had a particularly strong sales performance.

By family of business, sales in the quarter were strongest in career apparel, both men's and women's, handbags, and shoes.

Weak sales trends were experienced in Housewares and in Tabletop.

The gross margin rate was very strong in the quarter at 41.0 percent, up 1.1 points over last year's 39.9 percent.

This was due to lower markdowns resulting from our strong sales and good receipt management, as well as continued good shortage or shrinkage results.

At the end of January, inventory was down 4.3 percent versus a year ago.

This results from the Company's efforts to better edit our assortments, although we did end the year with lower-than-expected inventory due to strong sales in the last half of the quarter.

SG&A in the fourth quarter was $1,314m versus $1,369m last year.

In both years, we had store closing and consolidation costs, $12m this year in the fourth quarter and $68m a year ago.

Without these store closing and consolidation costs, SG&A dollars were essentially flat year over year.

As a percent of sales SG&A dropped this year in the fourth quarter by 1.3 points.

However, 1.2 points of this resulted from the reduction of the store closing and consolidation costs, so excluding that, SG&A dropped about a tenth.

Depreciation in the quarter was $181m versus $180m a year ago.

Operating income in the fourth quarter was $758m, up 20 percent over last year's $634m.

Interest expense was $61m versus $70m last year, and tax expense was $237m versus $223m last year.

As previously discussed, this year's tax expense benefited from the one-time $38m adjustment to the net deferred tax liabilities.

Net income in the quarter was $460m versus $341m last year.

Diluted earnings per share was $2.50 in the fourth quarter, or $2.29 cents without the one-time tax adjustment.

This represents a 29-percent increase over last year's $1.78.

We are very pleased, as I said earlier, with our fourth quarter performance, both on the top and bottom line.

For the full year 2003, let me just list off some of the highlights of our performance.

Comp store sales decline of .9 percent, which was within our expected range of down 1.5 percent to flat.

And as you know, our sales trend improved as we moved through the year.

Private brand sales continued strong in 2003, with penetration growing from roughly 16.5 percent last year to 17.2 percent in 2003.

The gross margin rate improved 40 basis points in 2003, due primarily to lower markdowns resulting from good inventory management and strong fourth quarter sales.

Inventory shortage or shrink remained at last year's low level, which was better than we had expected.

SG&A was down $13m in dollars versus a year ago, and as a percent of sales, SG&A increased 30 basis points due to the drop in sales.

In 2003, we experienced increases in depreciation expense, pension, and medical costs that we were able to offset with reductions in selling, credit, and pre-opening expenses.

Operating income in the year was about flat in dollars versus last year, and up as a percent of sales about 10 basis points.

Diluted EPS from continuing operations was $3.71 for the full year, or $3.51, excluding the fourth quarter one-time tax adjustment.

This represents a 9-percent increase over last year's $3.21.

Net cash provided by continuing operating activities was $1,590m in 2004, $422m above last year's level.

We benefited in 2003 from lower cash taxes due largely to the realization of the benefits of the Fingerhut tax losses, from higher profitability from continuing operations, and the lower inventory levels, offset, in part, by higher receivables balances.

Net cash used by continuing investing activities was $75m below last year, due primarily to $59m in lower capital expenditures.

Cash flow from continuing operations after investing activities but before financing was very strong, $1,028m versus $531m last year.

We utilized $645m of this excess cash to buy back approximately 16 million shares of stock during the year.

We also instituted a 50-cent-a-share annual dividend last May, and we paid down $457m in debt this past year.

Offsetting some of this cash outflow, by the way, was $193m that came in from option exercises.

At year-end, we had $925m of cash on our balance sheet, of which roughly $700m is what we call invested cash, or cash not needed for day-to-day operations.

And at the end of the year, our debt-to-cap ratio, net of cash, was 34.5 percent, down from 38.7 percent a year ago.

The fourth quarter represented a great end to the year.

We are very pleased with our performance in the quarter and the full year, but like you, we are focused more now on delivering good performance in 2004 and beyond.

So let's talk about 2004 for a few minutes.

Keep in mind that all forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from the assumptions mentioned today due to a variety of factors that affect the Company, including the risks specified in the Company's most recently filed Form 10-K and Form 10-Q.

Two thousand and four is starting off much stronger than expected.

In part, this is due to very favorable weather conditions, but the underlying trend does feel better.

The excitement being created on our apparel floors from the new lines, as well as from our private brands, is terrific.

As you saw in our press release this morning, we increased guidance for February sales from 2 to 3 percent to 7 to 8 percent.

While we do not think that the entire gap to expectations will continue as we move forward, nor do we think we should change our expectations for the year based on three weeks of February, it does bode well at least for the quarter.

We are now trying to reevaluate our March and April plans so that we can better gauge our guidance for the quarter.

Our guidance for the full year is unchanged from what we released a few weeks ago -- comp store sales of 1.5 to 2 percent for the year and diluted EPS of $3.70 to $3.80.

As I just mentioned, we need to see more than three weeks in February before we would change our outlook for the year.

The Home Store centralization is progressing well.

We are very busy putting together the new organization, as well as detailed transition plans.

We are communicating extensively to the organization and working to give the impacted individuals some certainty as quickly as we can.

We are so proud of the organization and how they're reacting to the change.

Even those most at risk of losing their jobs or having their lives disrupted have been very supportive of the strategy and are acting very professionally in the interim.

We don't have any updates on the expected financial implications and probably will not for 60 to 90 days.

We are very excited about the opportunities in front of us, and as I said when we made the Home Store announcement a few weeks ago, we believe that this new organization will help make our Home departments, as well as our stores in total, really exciting places to shop.

And with those remarks, I will now stop and take your questions.

[Caller instructions]

Deborah Weinswig with Smith Barney, your line is open.

Go ahead.

Good morning, Karen.

Congratulations on a great quarter.

Can you talk about the Best Value program and how we're going to see that interpreted in the Home business and where we are currently are in terms of the whole store in terms of percentage of sales and where we could see that going?

Yeah, I mean our Best Value program, or every day low price --we do believe will grow dramatically over the next couple of years.

Our longer-term goal is to reach 10 percent from roughly 1 percent in 2002.

It grew a couple of points in 2003, but we -- I can't really talk yet about what's going to happen with the Home Store until the new team is in place and puts their plans together, but we do expect it will grow significantly in our Home category.

Okay, and I know that there's been kind of four key priorities, and one of those was communicating better with customers for more effective marketing.

Can you discuss where we are right now with the kind of national advertising test and when we might see a full-scale rollout?

Yeah, no, as I think all of you know, in the fourth quarter this year, we tested a new common advertising approach in three markets -- Atlanta, New England, and San Diego.

And the marketing test was, in fact, deemed a success.

From a sales standpoint, we achieved similar results as our control groups in these markets even though we shifted significant marketing dollars into what we would call brand-building vehicles, as opposed to just focusing on price promotion.

We also learned some things that didn't work as well, and, in fact, as we speak, we're trying to fix those parts of the campaign.

But we do expect to roll it out by the fall of 2004, most likely by the fourth quarter, and we do feel like we're on track to make that happen.

Great.

Thanks so much.

Adrianne Shapira with Goldman Sachs, your line is open.

Thanks.

Karen, clearly a strong start to '04.

Could you give a sense of the sales out performance at some of the reinvented stores, what kind of gap you're seeing?

You know, Adrianne, as we looked at '03, I mean three weeks of February, as I told you when we spoke earlier, is just too hard to generalize from.

But in '03, the reinvented stores do tend to do a little bit better, not all of them and not a huge gap that I can sit here and tell you that based on the reinvent, you should add blank points to the comp store sales trends.

That's all baked into our plans already.

Okay, and how many of the stores are basically touched with some sort of reinvent initiative?

I believe it's about 100 now.

Okay, and going forward, even though not all the results are encouraging, still very much [inaudible]?

We're still expanding it.

And the results are not "not encouraging" --

Sure, no, but not uniformly across the base.

I’m just wondering how many stores you expect to reinvent this year.

Two thousand and five, we would expect 70 to 75 percent of our volume to be done in reinvented stores, so we are continuing to roll out.

And the key parts of the reinvent that we're rolling out are what we're calling the four amenities -- the improved fitting room environments, the way-finding signage, the shopping buggies to help, particularly in the Home departments, and the price look-up machines.

And have you called out a market that you'll be focusing on this year?

Not yet.

We're still working on that.

Okay, thanks, Karen.

Stacy Turnoff with Merrill Lynch, your line is open.

Go ahead, please.

Good morning.

Given the stronger February sales, and I know that you've not changed the guidance for the year, but are you implying that the comp items for the quarter is above the original plan of 2 to 2.5 percent?

You know, just based on February, if March and April continue on plan, yes, the quarter will go up.

What we're trying to evaluate is if we think March perhaps may be slightly lower than it might've otherwise been or how much of this trend we should assume continues into March and April.

Okay, great.

Thank you.

It's a good problem to be having.

Shari Eberts of JP Morgan, your line is open.

Good morning, Karen.

Just to follow-up on that.

You mentioned in the release that you thought you might have borrowed some sales from March.

Can you just give a little more color on that?

And then just any regional differences you’re seeing?

Obviously, only three weeks but, you know, what you’re seeing out there.

I’m not going to comment on regional differences at this point.

I mean I really am uncomfortable talking about sales mid-month.

But given the strength, you know, we all thought it was important to do so.

As we’ve gone back and reevaluated our first quarter plans it is possible that part of the strength in February is because we under planned it vis-à-vis March.

And in other words, our March plan may have been planned too high.

So we’ll obviously be evaluating this closely before we release sales next, a week from Thursday.

Okay.

And then I noticed the receivables trended up a bit this year.

Can you talk about what you’re seeing in your credit trends?

I mean particularly, for the year as a whole our penetration was relatively flat.

But in the fourth quarter we did see an increase in penetration or usage of our credit card, which is obviously a very good thing.

And in terms of bad debt trends?

No issues.

Okay, great.

And then just a last question.

Obviously, the cash flow is very strong.

I assume you’re sort of at the low end of debt to total capital targets.

Just wondering what your thoughts would be in terms of looking at the dividend or increasing the rate of share repurchases going forward?

You know, we’re – obviously, the share repurchase program is going to be an important use of our cash as we go forward.

And particularly as we’re sitting with $700m of cash on the balance sheet.

You know, I think continuing the program at a comparable rate to what we’ve been doing, you know, makes sense.

And on the dividend side?

Really nothing new there.

Obviously, we’ll be looking at should it grow, should it not, et cetera, you know, some point later this year.

Thanks, Karen.

Jeff Stein with McDonald Investments, your line is open.

Go ahead.

Good morning, Karen.

Wondering given the fact that you ended the year with inventories somewhat below plan and sales are already starting off above plan the second quarter, any concern at all that there may be some spot shortage problems later in the quarter?

There are always going to be spot shortage problems when sales are good.

But I have not heard the merchants complaining that inventory is holding back sales.

Okay, and I missed – I was a little confused before when you were talking about the number of reinvent stores that you’re going to be adding in the current fiscal year.

Can you please repeat that?

We didn’t give it.

We’re still working on what that number will be and in which markets.

Okay.

And a final question.

Share buyback.

How many shares are currently authorized for repurchase?

We have roughly $70m remaining in our authorization.

But as you know, we go back to the Board frequently to increase it.

Okay, thank you.

Bob Drbul with Lehman Brothers.

Your line is open, go ahead please.

Good morning, Karen.

Hi, Bob.

I guess my question would be around, if you look at the business and the way it’s trending sort of coming out of the fourth quarter and into February.

When you look at the amount of business that you’re selling at full price versus any sort of promotionals, can you give us an idea what level of full priced selling is occurring right now?

I’m not sure I can answer the question specifically, but it may help you to know that in February that is not a clearance month.

So there’s a lot of what’s selling is the new Spring merchandise which would be at full price.

Okay, and when you look at the full year just based on that type of an assumption, for your gross margin assumptions has that at all changed going into the rest of the year?

It has not changed.

As we had said a couple of weeks ago we expect a very slight improvement versus ’03 in gross margin rates for 2004.

And one final question, can you comment at all on the industry consolidation or any likelihood that you see in this year?

I can’t comment on that.

All right, thank you.

Linda Kristiansen with UBS, your line is open.

Thank you.

Karen, just two questions.

Can you elaborate a little more on the terms of the new brands and fashion?

You know, the significance of the improvement?

Is it having a halo affect for the rest of the women’s area in general?

And secondly, I guess when I go through the stores the one thing in the reinvent program that probably still seems to need more work is terms of clarity and pricing?

Is there anything new on that front?

That’s it, thanks.

In terms of your first question, obviously the private brands and the new lines, and just the general interest in career apparel, all are factors contributing to the good sales.

I’m not quite sure, you know, what to attribute to what there.

But obviously it feels very good right now.

In terms of the price clarification or simplification we’ve actually made a lot of progress at reducing the couponing activity, again in 2003.

And it’s a slow process but we do see that improving.

I also think as we grow the every day value program that will help, as well.

Will we see more reduction then in couponing in ‘04?

Yes, Linda, you will.

Okay, thanks.

Christine Augustine with Bear Stearns, your line is open.

Thank you.

Karen, would you be able to share with us the vendors’ response to your consolidation plans in the Home Division?

And then my second question is on inventory levels how are you planning them going through this year, 2004?

We are planning inventory turn to be improved slightly this year, in 2004.

The only reason I hesitated a minute as I had said earlier we ended the year with inventories below what we had expected.

So when I look at a point in time, you know, to next year I’m not exactly sure what the inventory plan will look like.

But in terms of if, you know, you looked at it quarterly we would expect an improvement in turnover this year, although less than what we’ve achieved in the last couple of years.

In terms of vendor reactions to the home centralization this is all secondhand, but my sense is that they’re very excited.

Obviously, if we can accelerate sales growth and do, and make their products look better in our stores that’s obviously going to be good for them, as well.

And Karen, do you have – what is your view at this stage on an off-the-mall concept for Federated?

As you know, we are very focused on improving our comp store sales, which would mean within-the-mall.

Okay, thank you.

Karen Young with AllState, your line is open.

Go ahead.

Yeah, hi.

Good morning.

Good morning.

The benefit to cash flow from increasing current income taxes for the year, is that simply a matter of timing, one year to the next?

It’s that, and it’s also a function of the Fingerhut losses, so it’s sort of both of those.

Could you break-out Fingerhut?

I can’t.

Would it be significant?

You know, the truth is, you know, my guess is, I don’t – it depends on what you’re calling significant.

But clearly, as you’re going to forecast cash flow for next year, you know, I think the billion dollars after investing activities before financing activities is somewhat overstated in terms of an ongoing cash flow.

And my guess is probably by a couple hundred, $200m to $300m, if that helps you in terms of projecting beyond.

Okay, thank you.

Also, the – your home business, can you just confirm, I think is it 20 percent of your business, is that right?

19, but yes.

19.

And then, can you just give us some information about the characterization of it in terms of mix, housewares versus furniture, or however you …

You know, we have not broken that out.

A good chunk of it would be big ticket, which would be furniture, bedding, and rugs.

Okay.

The remainder is what we call small ticket which would be tabletop, textiles, housewares, which includes cookware, small electric, and then luggage.

Okay.

And in what categories do you expect the biggest improvement?

I think the biggest improvement will come from housewares, but it’s potential – I mean textiles is one of our stronger businesses, but I think perhaps with the change we can even accelerate that further.

And so those would be the two areas.

Okay, and then, finally.

You had given some information about higher post retirement costs.

Correct.

For next year.

Some very labor intensive companies have actually decreased their expectation of the costs due to the Republican Medicare Plan because they feel that in the future that the Medicare drug benefit will provide some of the offset to the costs?

Did you factor any of that into your assessment of the impact in ’04 in long term?

Not in ’04.

Yes?

No, not in ’04.

Okay, okay, thank you.

Dana Cohen with Banc of America Securities, your line is open.

Hey, good morning, Karen.

Just two questions, and if you’ve dealt with this I apologize.

I had something this morning.

Just in terms of why, I know you talked about this a little bit, but is it just, you know, a sense of conservatism just to think you maybe borrowed from March?

I mean is there any – it doesn’t sound like there was any shift of promotions or anything?

Well, I do think that we over planned March, under planned February.

But that is not the whole gap.

And so if you think you’re going from two to three, to seven to eight, so let’s say a five to six point gap, a good portion of that is honest to goodness just good business.

Right.

I wouldn’t mislead you into thinking it’s all going to come back in March.

Right.

Some piece of March that may have been planned too high.

And is that just the compare?

I’m just trying to get a sense of what you think now makes, you know, the March plan too high because you do have the shift of Easter helping March, as well?

I went back and looked at 2001 which was the year with the same calendar.

Again, we’re getting extremely analytic but we don’t want to project forward too much of the February strength if it’s not real.

Not because of guidance and you all, but more because of receipt levels.

Right.

And to get this right means a lot to how we run the business.

You know, but again, I don’t want to take anything away from February.

It is good business.

Right.

And then with respect to, you know, and obviously the month is not over, but just when you’re looking at these types of numbers, I mean obviously you saw turn in AUR in sort of December.

I would presume AUR is positive, but you know, any sense of that composition?

How much is, you know, units versus priced?

Let’s wait until the month is over.

Okay.

Our plans are better monthly, and I just feel more comfortable waiting till we release sales.

Right, but it would be fair to think that, you know, AUR is obviously some component of this?

Yes.

Okay, great.

Thanks.

Michael Exstein with CSFB, your line is open.

Go ahead.

Hi, Karen.

Two quick questions.

First is how much is the lack of snow helping the numbers for February?

I think it’s helping them.

I think in part, Michael, is people planned February, and particularly after last year’s President’s Day disaster with weather.

Right.

It has to be a piece of it.

Should, I mean now that that, you’ve finished that, how much was that?

In terms of the comp that, you know, you’re sort of guiding us to now?

Can’t judge, but I do think that’s part of why I believe we may have under planned February.

Okay.

Apparently people expected worse weather at some point.

And so that’s why, you know, again, I don’t, I think that some of this gap is good business that should help March, April, and hopefully beyond.

It’s just not, I wouldn’t add, you know, five to six points to the quarter at this point.

Okay.

And secondly, just in terms of good business, where are you in terms of number of units in the store year-over-year?

And currency in terms of the units?

I mean are you much more current this year than last year, and therefore, the stores have a better look?

Well, currency is about the same as a year ago which is extremely good.

Okay.

I mean as we brought the inventory levels down over the last three years, our currency as we’ve started February has gotten very clean.

And how about units?

You know, I don’t look at units in that way, Michael, and so I don’t know the answer.

Okay, great.

Thank you very much.

Wayne Hood with Prudential, your line is open.

Go ahead.

Yeah, Karen.

Just back on the sales side.

What do you – what are your sales expectations for better apparel versus moderate that’s embedded in the first quarter numbers?

And if you did have to revise your plan would it be in the better area versus moderate?

Or are they both rising at a similar rate?

We don’t break out our expectations between better and moderate.

And so, and at this point I don’t know what our revised guidance would be, but again, we just don’t break it out that way.

Is the better area performing, continuing to perform better than the moderate area?

Or is moderate now starting to show some improvements because of the better halo?

Let’s wait until after the month is over, and I’ll have a better read on that.

All right, thanks, Karen.

Paula Kalandiak with Wells Fargo, your line is open, please.

Good morning.

Two questions.

The first is in the press release it says that two stores have been announced as closing in 2004.

And I was wondering what happened to those five stores that were announced to close before May of 2004?

They closed right before yearend, and they’re listed in the 2003 closing.

I see, okay.

And then, my other question is based on areas of strength in weakness in 2003 are there going to be any major shifts in allocation of floor space in 2004?

There are no overall allocations of space changing in the store.

Thank you.

There are no further questions.

Okay, thank you all, very much.