梅西百貨 (M) 2004 Q1 法說會逐字稿

May I have your attention, please?

I would like to thank everyone for holding and welcome you to the quarterly earnings conference call with your chairperson, Karen Hoguet.

Just a brief reminder to the participants online -- you will be in listen-only during the presentation today.

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

Ms. Hoguet, thank you for using Sprint.

We'll turn the call over to you.

Thank you.

Good morning, and welcome to the Federated call scheduled to discuss our first-quarter earnings.

I am Karen Hoguet, CFO of the Company.

Any transcription or other reproduction of the statements made in 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 reconciliation of any GAAP financial measures discussed this morning.

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.

This morning, I will discuss three subjects -- first-quarter performance, an update on our home store centralization, and our outlook for the remainder of the year.

First, the quarter's results.

We are extremely pleased with our first-quarter results, and we expect the momentum to continue at least through the remainder of 2004.

Our sales performance in the first quarter far exceeded our original expectations as well as that of our key competitors.

Comp store sales in the quarter were up 6.9 percent versus our original expectations of 2 to 2.5 percent.

And we were able to convert those above-plan sales at a very high profit rate.

Our earnings per share in the quarter of 52 cents compares to our original expectation of flattish earnings to last year's 24 cents per share.

This demonstrates the leverage in this business when sales are stronger.

Let me now talk about the components of that performance.

Sales in the quarter were $3,517,000,000, up 6.9 percent over last year.

The sales strength was experienced across the entire company, although Bloomingdale's and Burdines produced the largest increases.

Bloomingdale's performance was driven by strength in the high-end sector of retail, while Burdines is benefiting from their integration with Macy's.

And both of these divisions are seeing improvements in the tourist business.

By family of business, the strongest sales trends in the quarter were experienced in better sportswear, handbags, jewelry, women's shoes, men's tailored clothing, men's sportswear, and luggage.

Weakness continued to be experienced in housewares and, to a lesser degree, in tabletop.

While the stronger economy and the current strength in fashion and career merchandise are both clearly helping our performance, our focus on the four priorities is also helping our results.

Just as a reminder, those four priorities are -- one, assortments -- well-edited and differentiated merchandise offerings; two, pricing -- simpler and more credible; three, the in-store shopping experience -- easier and more comfortable; and four, marketing -- more creative, more brand-focused, and more cost-efficient.

Gross margin in the quarter was 40.1 percent, up 90 basis points over last year.

The gross margin rate benefited from the strong regular-price selling as well as low inventory levels.

At the end of the quarter, inventory as you see on the balance sheet was down slightly from last year.

Included in gross margin were $4 million of anticipated consolidation markdowns in Florida, without which the gross margin would have been higher by 0.2 points -- or the gross margin on a comparable basis was up 1.1 points over a year ago.

SG&A dollars in the quarter were up 4.6 percent over last year and essentially on plan.

This year's SG&A increase was due in large part to higher pension expense, higher expenses related to the higher sales, and higher store closings and consolidation costs.

The store closing and consolidations costs included in SG&A in the quarter were $15 million compared to $8 million last year.

This total store closing and consolidation cost includes $7 million of costs associated with the home store centralization which I will discuss in a few minutes.

Fortunately, the strong sales allowed us to leverage the expense dollars, and the expense rate improved 80 basis points versus last year, even with the higher store closing and consolidation costs.

This rate improvement was obviously unexpected, and again, demonstrates the power of strong sales.

Depreciation and amortization in the quarter was $177 million versus $180 million last year.

Operating income in the quarter was $216 million or 6.1 percent of sales versus last year's $146 million or 4.4 percent of sales.

This is an increase of 48 percent in dollars and 1.7 points as a rate.

Interest expense in the first quarter was $60 million, down from $70 million a year ago.

This decrease is due to the strong cash flow over the past year, resulting in lower levels of borrowings.

Tax expense was $60 million, and net profit was $96 million, up from last year's $46 million.

Share count in the quarter on a diluted basis was 184.2 million shares, down from 189.5 million shares a year ago.

In the first quarter, we utilized approximately $90 million of excess cash to buy back 1.7 million shares.

EPS on a diluted basis was 52 cents, more than double last year's 24 cents a share.

And like sales and earnings, the cash flow we produced was better than we had expected.

While cash from operating activities was $170 million below last year, this was due to lower income tax payments in 2003 resulting from the use of Fingerhut net operating losses.

Net cash used by investing activities was $71 million in the quarter compared to $52 million last year due primarily to timing.

And net cash provided by financing activities was $25 million, up $149 million versus last year due primarily to high stock option exercises.

All I can say in conclusion on the quarter is -- what a great way to start the year.

And as I said, we do expect the momentum to continue.

I will now move onto the second subject in my agenda for this morning -- the home store.

Since we had our last conference call, Eric Salus, who is president of our new home division, has been busy building his team.

He has brought in people from all of our divisions as well as from the industry.

As we said when we announced the reorganization, we would be looking for the best and brightest talent.

This team is shaping up as anticipated, with over 80 percent of the positions already filled.

By the middle of the third quarter, Eric's team will be running the home business for all of the Macy's divisions.

In terms of the costs inherent in making this happen, we are expecting to spend approximately $40 million in startup expense for items such as severance, systems, relocation, establishment of new offices, etc.

As you saw, we booked $7 million of these costs in the first quarter.

We are currently anticipating approximately $17 million will be booked in the second quarter, with the remainder in the fall season.

In addition, we will take markdowns associated with the parts of the assortments in home with which we are not going forward as we commonize and improve our product offering.

This number is still being refined, and could change.

But at this point, we are expecting to spend approximately $30 million in incremental markdowns, which will negatively impact our gross margin in the second and third quarters.

We currently expect to book about $12 million of these markdowns in the second quarter, with the remaining 18 million to be booked in the third quarter.

But as I said, these numbers are still being refined, so could change.

In terms of the benefits we expect to get from this reorganization, the biggest impacts should occur in sales and gross margin.

However, those benefits will not be felt until 2005, and really, not until the fall of 2005.

Given the lead times in this business, it will take that long to have a major impact on the assortments.

We will save on some expense, but our expectation is that we will invest much of this back into the stores to improve the shopping experience.

On a net basis, we expect to save approximately 5 to $10 million on an annual basis starting in 2005.

As we said when we announced this strategy, it is primarily geared at increasing our sales and not reducing expense.

Although the home division is just getting started, we are really excited about the energy and the culture being formed in this organization and the possibilities for what they can deliver.

The group is already hard at work focusing on applying the four priorities to the home business.

They are looking to expand the limited distribution product, a strategy that has been so successful in the rest of the store.

They will work on trading up the assortments to be more consistent with the rest of the store, and intend to re-establish our fashion leadership in home categories.

They will create lifestyle-based assortments, and are looking to add new categories to make the stores even more exciting.

I could go on and on, but the key message for you today is that we are confident that we will be able to return Macy's to its historic position of strength in the home store category.

So now, I'm going to move on to the third topic for this morning, our outlook for the remainder of the year.

In the second quarter, we are expecting comp store sales in the range of 2 to 4 percent.

This is higher than our original guidance of 1 to 1.5 percent, and higher than what we had guided last Thursday.

As we look at the trends more closely over the past few days, we see more upside potential in the sales for the second quarter.

On a two-year basis, our second quarter comp store sales would be plus 0.4 percent to plus 1.4 percent given this guidance, which compares on a two-year basis to plus 0.8 percent in the first quarter.

So in other words, even though the absolute number is expected to drop from the 6.9 percent delivered in the first quarter to 2 to 4 percent in the second quarter, on a two-year basis, that's not the case.

Gross margin is expected to be flattish to last year's very strong gross margin performance in the second quarter, excluding the $13 million of markdowns expected to be taken in association with the home store, and also the Florida integration.

Including those markdowns, the margin could be down slightly in the quarter.

The percentage increase in SG&A dollars in the second quarter versus last year is expected to be slightly higher than what we produced in the first quarter due to higher store closing and consolidation costs as well as the increase in pension cost.

Included in the quarter will be roughly $27 million of store closing and consolidation costs -- approximately $17 million for the home store, and $10 million for Florida and other store closings.

This compares to $10 million a year ago.

With those as our key assumptions, we are expecting earnings per share in the second quarter to be in the range of 57 cents to 62 cents.

In the fall, we are now expecting comp store sales to be up 1.5 to 3 percent versus 1.5 to 2 percent previously.

Gross margin rate in the fall is expected to be flattish due to the $18 million of estimated home-store-related markdowns.

Expense in the fall season will include an estimated $31 million of store closing and consolidation costs this year versus $41 million last year.

Our planning assumptions for the full year 2004 include comp store sales of 3 to 4 percent for fiscal 2004 and earnings per share in the 3.80 to 3.90 range.

This estimate includes the 24 cent per share impact of the home store which was not included in our prior guidance.

On an apples-to-apples basis with prior guidance which, as I mentioned, excluded the impact of the home store, this revised guidance for the year would be $4.04 to $4.14.

This is much higher than what we expected when we started the year, due primarily to the strong sales.

On a full year basis, our current guidance of 3.80 to 3.90 includes onetime costs associated with store closings and the home store consolidation estimated at $108 million -- $70 million for the home store, $31 million for the already-announced Florida integration and store closings, and $7 million for an additional planned store closure that has not yet been announced.

We are very excited about our performance so far this year, and the strength of our sales trends.

Our focus on the four priorities is clearly paying off.

And with that, I will take your questions.

(Operator Instructions).

Deborah Weinswig, Smith Barney.

Good morning, Karen, and congratulations on a fantastic quarter.

In terms of the home store centralization, you discussed that the savings would be reinvested.

Can you talk about -- would that be store labor, or would that be something else in terms of the actual fixturing, etc.?

There's a couple of things going on.

In terms of the expense reinvestment, it will be in store selling -- sales specialists and also additional help to keep the stores stocked and looking good, which is also labor.

Separate and apart from that expense strategy, we will be dedicating a good portion of our reinvent capital after this year to reinventing the home store.

Plans for that are still being developed, but that will be capital as opposed to expense.

You mentioned returning Macy's to its position of strength in home.

How should we think about the off-mall home stores in the future there?

You mean in terms of the competitors?

No, in terms of where the future would lie for Macy's.

At this point, we are completely focused on building the home departments within our department stores.

George Strachan, Goldman Sachs.

Karen, it looks as though your expenses were down roughly 90 basis points if you exclude the store closings.

That's obviously where you beat our number for the quarter.

And yet, we have pretty flat expenses over the balance of the year even though you have taken comps up.

Is there some upside in terms of leverage if the sales actually come in as expected?

Yes.

As I said, expenses were pretty close to what we expected in dollars, which is good performance given how strong the sales were.

But it's the leverage from getting a 6.9 percent comp store sales increase instead of 2 to 2.5 percent.

So to the degree sales exceed what we're guiding you, SG&A rates could come down further.

But I do not see huge opportunities in terms of expense dollars.

Any benefits at all from the experimentation with markdown optimization initiatives across the company?

At this point, I think as all of you know, we are experimenting in two ways.

In our Macy's division, we are rolling out slowly a homegrown system that we call 20/20 which is helping us not only more effectively take markdowns, but it is also helping us guiding our open-to-buy or on-order to things that are selling, which is really where the payoff is coming -- keeping a flow of goods flowing receipts.

That helps margin, but it's also helping sales.

We are also testing ProfitLogic at Bloomingdale's in a couple of merchandise categories, and results there look promising as well.

But at this point, George, there's nothing globally that is affecting the number.

Bob Drbul, Lehman Brothers.

Could you talk -- I guess you talked a little bit about Burdines and Bloomingdale's.

Can you talk a little bit about the performance differences between Macy's West and Macy's East?

The only division -- I mean, every division had a very good performance in the quarter.

The only two stands-out were the two I mentioned.

Okay.

And then in terms of the private-label business, can you talk about any of the initiatives to deal with some of the concerns around quotas and sort of what you and your organization see as the concerns around quotas for next year and even in the back half of this year -- any shortfalls?

The concerns -- and I would not call it a concern.

The issue that we're all trying to manage is what is going to happen in terms of pricing next year.

But again, our hope is that we will be able to deliver the customer a great value, both in terms of higher quality and potentially lower pricing depending on the item.

Shari Eberts, J.P. Morgan.

You mentioned Burdines as one of the best divisions, and part of that here was the benefit from the Macy's nameplate.

And I was just curious to hear more details on that, because I almost would have thought it would've been the opposite impact.

We were concerned, Shari, that when we had more Burdines-Macy's stores geographically than Burdines stores that that hurt their business.

But in fact, it's really done well.

So we're very pleased with that.

That's great.

And then in terms of just the inventory sort of flattish on the quarter -- how should we expect that to play out through the year as the sales momentum continues strong?

We had expected inventory to increase somewhat this year, particularly as the business has grown.

But there's still improved turnover this year.

So I would say that's still the case.

Last question -- you did not mention any update on the credit trends.

I'm assuming there is no change there, but --

No change there, and it is all looking good.

Jeff Stein, Key McDonald.

Wondering if you could just talk a little bit about the differentiation between your home goods strategy and your apparel strategy.

Clearly, you're trying to replicate what you've done on the apparel side in offering different assortments.

But can you talk a little bit about some of the different challenges you face in that segment of the business from a competitive standpoint and a merchandising standpoint relative to apparel?

I think it is still early, Jeff.

We have centralized the business as a way of being able to execute the same strategy we have done in apparel, which is a far more regional business.

So I think that is the biggest difference.

And now that we will be able to be faster-moving and more decisive, I think it's going to help us, given that so many of our competitors are in fact national and not regionally based.

Those same factors are obviously very different in apparel.

But the strategy that we're going to implement in home is really going to be quite similar, as I discussed earlier -- trying to differentiate the assortments, give more newness, and really be the fashion leader.

Linda Khristiansen, UBS Warburg.

Karen, can you talk about -- again, a question on home, and how much you would see home ultimately representing.

As a percent of sales, I guess it's just under 20 percent.

Do you see that growing much if you're successful with the turn?

And what kind of businesses in home could be growing the most?

And I was curious about the anticipated gross margin impact.

I do not see much change in the penetration of home.

Our hope is that it will grow at least as fast as apparel, if not faster, over the next couple of years.

But I don't see a major shift, and I don't see at this point any changes in terms of space.

We'll reallocate within home, but I do not see any major space changes happening to give more space into the home businesses.

If it did grow faster than the overall business, how would that impact gross margin, potentially?

The home business in total is really very similar.

And the hope would be we would be enhancing margin with these strategies.

I do not see it having a big impact.

Also, I guess you have got -- maybe as a test store, I'm not sure -- in downtown Chicago with three stories of home.

And you've put a lot of home in Bloomingdale's in Chicago.

Any implications there for Macy's in terms of -- is that a test store, or what is the idea there?

Completely separate.

Bloomingdale's has four stores that are entirely home -- one in Newport Beach that has been there for awhile;

Las Vegas; and two now in Chicago -- Medina, which is the one in downtown Chicago, and Oak Brook, where Bloomingdale's is putting in and testing home stores.

And again, that's separate from Macy's.

And I do not see that becoming a major expansion vehicle.

But any learnings out of that store, I assume, could also be applied to Macy's as well?

Really, it is a different customer.

Stacy Turnof, Merrill Lynch.

I know you've mentioned in the past that you were planning to meet with vendors regarding the apparel quota issue.

Could you share with us any new viewpoints on that?

Really, no update.

What Stacy is alluding to is, as you would expect, we -- and I'm sure, all retailers -- are not only focused on the quota issue from a private-brand perspective, but also from what our vendors are going to be doing.

But there's really no update there.

Okay.

My second question is in terms of the markdowns in the home area, what kind of markdowns are you planning to take by (ph), if there's anything specific by product or by division?

At this point, we do not know that.

Filippe Goossens, CSFB.

Congratulations, by the way, with the solid performance there.

With regard to the shares you bought back during the quarter, $90 million -- were they all repurchased before you indeed confirmed an interest in looking at Marshall Field's?

We don't comment on the timing of our buybacks.

Okay.

But you have, at this moment, not suspended that repurchase program, correct?

Correct.

Then with in regard to your interest in Marshall Field's, can we continue to assume that you will be a disciplined interested party just like what you have done in the past -- in other words, that you will not overpay for this property?

You can assume that.

Wayne Hood, Prudential Financial.

Karen, I just want to come back to home business for a second.

When you think about '05 and beyond, the changes that you are making there -- will that have any impact on turn -- cash flow or how we look at inventory growth in '05 and beyond?

And is there any change in the supply chain into the stores that need to take place or infrastructure build-out to support that?

At this point, I think you could assume that we will improve the turn, although I can't give you any specifics as to how we will do that.

But as we have done in apparel, editing the assortments will be a piece of the strategy.

So I would be disappointed if we did not improve the turn as part of this effort -- how much, I can't tell you.

And in terms of any supply chain changes, it's just way early to know anything on that front.

Okay.

And my last question related to that is that there were material changes going into the business, and yet, you are really not looking for a material change in sales, and the assortments are getting better.

I'm just wondering why wouldn't you expect more improvement in sales -- and it's just mirroring what you expected in the apparel business?

That would be about 2004?

No, for the home business in '05 and beyond, I thought you said that you expected to kind of mirror the growth in the overall business.

And I would have thought that you would expect to be higher than the overall business.

I said to mirror the growth in the non-home parts of the business, which is growing faster than home.

Christine Augustine, Bear Stearns.

Thank you.

Karen, could you discuss ticket and traffic trends during the first quarter and if -- where you think the outperformance really came from on the comp -- was it (multiple speakers) more driven by average unit retail or mix or --?

I think it was -- the average unit retail was up more than we had expected.

So I think a lot of the outperformance did come from that arena.

And as far as reinvents go, where are you as a percentage of your store base year to date?

And did you see a difference or have you been seeing a different in that performance on a comp store sales basis?

(multiple speakers) 100 of our stores have now been reinvented.

Many more have some components of the reinvent.

But in terms of the full package, there's 100.

And we expect to have at least 50 more done this year.

And by the end of '05, stores doing 70 percent of our volume will have been reinvented.

And yes, we are seeing a slight increase in sales trend in the stores that have been reinvented versus those that were not.

And the reason it's slight is that the capital is slight.

So we're getting a very good return on that investment right now.

Okay.

My final question is with regard to acquisitions generally speaking.

Could you just review your criteria?

What do you mean by criteria?

In other words, whether or not you would be willing to consider dilution, would you expect an acquisition to be neutral --?

(multiple speakers) No, we don't have any rules like that.

Each one is a unique situation.

As Filippe said, obviously, we will be very disciplined in terms of the price that we pay, and would clearly not pay more than what we think something is worth.

But I don't think there are clear rules beyond that.

Dana Cohen, Bank of America Securities.

Julie Lerner, Metropolitan Capital.

Good morning, Karen, and congratulations.

I wanted to know if you could talk a little bit about the successes that you are seeing or plan to see with respect to the new product launches such as Hilfiger, CK, etc.?

We will not comment on individual lines, but in general, they are all doing very well, and we're extremely pleased with what it is doing for our floors.

Private brand is also doing well.

But it has all been newness and excitement on our floors that we really think is helping the overall business.

Lee Backus, Buckingham Research.

First, let me add my congratulations to a great quarter and a good outlook.

We have seen significant consolidation and restructuring expenses over the last few years.

Looking forward, is there any carryover into '05 in the home restructuring or the consolidation of nameplates?

At this point, Lee, we do not think so.

So is there anything else you see in '05 as far as restructuring or consolidation?

At this point, no, or we would have announced it.

Teresa Donahue, Neuburger.

Quick question on the home business -- any thoughts you can share with respect to pricing and promotional approaches that compares to what you're doing in the rest of the store?

What I can say is that it's a very high priority for the home team.

Theyactually have a full-time senior person focused only on pricing (multiple speakers) trying to deal with this issue.

People shop for home differently than they shop for apparel.

So strategies that work in apparel do not necessarily work in home.

And so we are obviously spending a lot of time looking at that.

But the good news is the work that we're doing is all database.

And we will test and experiment and try to crack this nut.

Interesting.

Thank you.

Ward Davis, Trivium Capital Management.

Karen, two questions -- one is given the strong sales we have been seeing in apparel in general so far this spring, what has been your experience in past periods when you have seen healthy sellthrough in a spring period in terms of its continuity into the fall season?

That's the first question.

And the second question is more of a macro question, but going back over the years -- we have lost about 2.5 million jobs over the last four years, and now it appears we're transitioning to some job growth -- obviously, the caveat being we're seeing rising interest rates.

And I was wondering if you've looked at or gone back through various points in time where we have gone through job growth with higher rates, and what, if any, impact it has had on your business, if any?

Yours are hard questions to answer, because the history is -- there are so many other things that were going on during those periods of time.

Let me answer it sort of simply, which is we do think that the strong apparel business will continue through the fall season, because I think it's the core of what you're asking.

There are no further question in queue at the moment.

Great.

Thank you very much.