梅西百貨 (M) 2004 Q2 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 FDS conference call today with your host Karen Hoguet. (OPERATOR INSTRUCTIONS). Ms. Hoguet, thank you for using Sprint Conferencing. We will turn the call over to you.

Good morning and welcome to the Federated Department Stores conference call scheduled to discuss today's release of our second-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 Web site, www.fds.com, beginning approximately two hours after the call concludes. Please refer to the Investor Relations section of our Web site for discussion and reconciliations of any non-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 make a view brief comments about the quarter, as well as our key planning assumptions for the fall season. I will then take your questions. Sales in the second quarter were $3,548,000,000, up 3.3 percent over last year in both total and comparable store. While this year-over-year growth is slower than the 6.9 percent increase achieved in the first quarter, we were pleased with our performance.

On a two-year basis, we were actually up slightly more in the second quarter that the first quarter. On a two-year basis, we were up 1 percent in the second quarter versus .8 percent in the first quarter, and the gap between our comp store sales performance and that of other conventional department stores widened in the second quarter. It is an increase in average unit sales that continues to drive our growth. Our units sold were actually down slightly in the quarter.

Looking at our performance regionally and by major merchandise area, we would call out the following. Sales were strongest at Burdines-Macy's, Macy's West and Bloomingdale's in the second quarter. By merchandise category, sales in the quarter were strongest in women's and men's sportswear, handbags, jewelry, cosmetics, men's tailored clothing and luggage. The weaker businesses in the quarter included furniture, floor coverings, young men's and swimwear. Sales in the soft Home category continued weak in the quarter, but we did begin to see stronger performances, particularly in textiles, in the months of June and July. We remain very excited about the sales potential from the Home businesses, but as we said when the consolidation announcement was made, it will probably be 2005 before we really see a meaningful benefit.

Private brand performance continued very strong across the store in the quarter. As you know, this is really a great strength of ours. Gross margin rate in the second quarter was 41.1 percent of sales, up .1 points over last year's 41.0 percent. This year's gross margin included $13 dollars or 35 basis points as a percent of sales from markdowns associated with the Home Store consolidation. Excluding these Home markdowns, our gross margin rate would have been 41.4 percent or up 1.3 points versus a year ago.

We were very pleased with our gross margin results versus last year because it represented a very balanced performance. We achieved higher markup, a lower markdown rate and lower shortage as compared to last year. Relative to our expectations, we were positively surprised by our shortage results. We have continued to experience good shortage results as a result of technology investments we have made and our lower inventory level, which is both easier to handle and makes it easier for a securities staff to observe activity.

We ended the second quarter with inventory in very good shape both quantity and quality. Inventory as you saw on the balance sheet was down 2.4 percent at the end of July, and on a comp store basis, it was down a little more than that. SG&A expense in the quarter was $1,212,000,000, up 5.9 percent over last year which is as anticipated.

In addition to the higher sales related expenses, the increase reflects higher pension and other retirement-related costs, as well as higher consolidation costs. Our credit performance continues strong with improvement in bad debt in our proprietary portfolio. Included in the quarter were $18 million of consolidation costs versus $10 million last year. This is also $9 million less than expected due primarily to timing.

Depreciation and amortization were $178 million versus $173 million last year. Operating income in the quarter was $245 million, down from last year's $264 million. This decrease is entirely due to the fact that as already discussed we booked $21 million more in store closing and consolidations cost this year than last year.

Interest expense in the quarter was $119 million. This includes $59 million or 20 cents a share relating to our completed tender offer for 8.5 percent notes. We were able to buy in $273 million or 78 percent of the $350 million issue. The reduction of this debt is expected to reduce interest expense by about $4.5 million in each of the third and fourth quarters of 2004. These savings are net of our anticipated return on the invested cash that we would have gotten had we not retired this debt. This transaction was positive on a net present value basis in addition to being very accretive to earnings.

Excluding the charges to interest expense associated with the tender offer, interest expense was $60 million, down from last year's $65 million due primarily to the fact that we had paid off 450 million of another 8.5 percent data issue mid-quarter a year ago.

Tax expense in the quarter was $48 million or 38.2 percent of pre-tax income. Our effective rate for the year is still expected to be 38.4 percent, but as you know, it can vary slightly by quarter. Net income in the quarter was $78 million, down from $120 million last year. Diluted share count was $182 million, 5 million shares less than a year ago. During the second quarter, we spent $263 million to buy back 5.5 million shares. Year-to-date we spent $351 million to buy back 7.2 million shares.

EPS on a diluted basis in the second quarter was 43 cents a share or 63 cents excluding the 20 cent impact of the cost associated with the debt reduction. This is slightly above our guidance of 57 to 62 cents. For the first half of the year, net income was $175 million, which is up over last year's $166 million in spite of the additional $59 million of interest expense and $32 million higher store closing and consolidation costs. It really represents a terrific start to the year.

And like sales and earnings, the cash flow in the first half of the year continues strong.

Cash from operating activities was $229 million below last year, due entirely to the lower income tax payment last year resulting from the use of Fingerhut net operating losses. Net cash used by investing activities was $185 million this year versus $181 million last year. Net cash used by financing activities was $625 million this year versus 690 million last year. During the quarter of this year, we had $85 million of a 6.79 percent bond put back to us. The remaining $165 million of that 6.79 percent issue will now be outstanding until 2027.

We also successfully completed the tender for $273 million of the 8.5 percent debt as discussed earlier. Net debt to total capitalization was 34.8 percent at the end of the quarter. This is down from last year's 36.9 percent.

We are very pleased with our performance this spring season, and what has been particularly satisfying to us is that it has been all around good performance. We were better than anticipated on all components of our performance -- sales, gross margin, expense, as well as cash flow items. We were also pleased with the performance of each of our divisions. As we look to the second half of the year, we are still assuming comp store increases in the range of 1.5 to 3 percent in both the third and the fourth quarters, which would then translate to 3 to 4 percent for the full year.

Our gross margin rate is anticipated to be flat to up slightly in both the third and fourth quarters, excluding the expected $18 million roughly of Home Store markdowns associated with clearing the not going forward assortments. Almost all of those Home Store markdowns are expected to be taken in the third quarter. It is assumed that this will then result in the third quarter gross margin being below a year ago. SG&A expense is expected to increase around 2 to 3 percent in each quarter with a larger increase expected in the fourth quarter.

Store closings and consolidation costs are now expected to be $40 million in the fall. These costs are expected to be spread evenly between the quarters, so roughly 20 million in each quarter. This compares to last year's consolidation expense of $29 million in the third quarter and $12 million in the fourth quarter. Interest expense is now assumed to be roughly $56 million in the third quarter and roughly $60 million in the fourth quarter. This interest expense guidance incorporates the roughly $4.5 million lower interest expense in each quarter than it otherwise would have been due to the tender of our 8.5 percent debt. Tax expense is assumed to be 38.4 percent of pre-tax income.

Please remember as you look at last year's tax numbers that we booked a $38 million positive tax adjustment worth 21 cents a share in the fourth quarter. You may also need to review your models for share count in the fall given our expectations for a larger share buyback program this year than we originally had planned.

As we announced last month, we are expecting to buy back between $700, and $900 million of our stock this year. Year-to-date, as I mentioned earlier, we have prepurchased stock worth $351 million. We continue to view our stock buyback program as a good way of returning value to our shareholders.

As you saw in the press release, our EPS guidance is 35 to 40 cents for the third quarter, $2.45 to $2.55 for the fourth quarter, and $3.70 to $3.80 for the year. Our prior guidance had been for annual EPS on a diluted basis to be 3.80 to 3.90. If you adjust this for the 20 cent cost associated with the debt repurchase, the guidance would have been 3.60 to 3.70. Our new guidance is 10 cents a share higher than that.

Last year's annual EPS on a diluted basis was 371 or 351 excluding the onetime fourth-quarter tax adjustment.

We are very pleased with our performance this spring, as well as the tone of our business as we enter the fall season. Our strategies that are all focused on driving profitable comp store sales are being well executed and are working.

And with that, I will open the call up for your questions.

(OPERATOR INSTRUCTIONS). Deborah Weinswig, Smith Barney.

Good morning. You spoke about that private brand was strong. Were there any particular standouts in the quarter and can you also update us on how Men's INC is doing?

Actually INC and Men's INC were amongst the standouts in the quarter, as was the Hotel Collection, which continues to be extraordinarily strong in Home. But frankly private brand was strong across the store.

And can you provide additional color on the drivers of the 2 to 3 percent increase in SG&A in the back half of the year?

I am not sure I understand the question.

In terms of the SG&A increase that we expect to see in the back of the year, excluding the onetime charges, you had mentioned that for this quarter it was higher pension cost. Will there be any additional drivers in the back half of the year, or is it just based on higher sales levels?

The higher pension costs will continue, but in spite of that, we're expecting the SG&A to go up 2 to 3 percent. Again, as I had said, it will probably be up more in the fourth quarter because there are more store closing costs and consolidation costs this year relative to last year in the fourth as opposed to the third quarter.

Thanks so much.

George Strachan, Goldman Sachs.

Could you comment on the "Way to Shop" marketing campaign, how many markets it is in and what the early results have been and what the rollout looks like?

It is frankly, George, too early to judge. Since the holiday season, all of our broadcast (inaudible) bags, boxes will be consistent throughout the Macy's and Macy's hyphenated stores. But as of mid-July -- I think it was the 22nd of July -- all of the Macy's and Macy's hyphenated stores, as well as Macy's.com, are on one creative templet. So it really is too early to judge, but we're feeling good about it.

And could you just comment very quickly on the acceptance of the early fall color palettes -- lavenders and berries and green and so on? They are obviously not as exciting and vivid as the spring color palette. So how does it appear to be?

So far so good. As I said to you earlier, I think it is early to call, but we're feeling good about the fall fashion.

Great. Thank you.

Shari Ebert, J.P. Morgan.

Just another question on the SG&A. You mentioned in your remarks that it was on your plan, but I noticed the store closing costs came in low. I was wondering if there were some offsetting increases at the store level in terms of the expenses or how that fared?

As we had said when we did the first-quarter conference call, we did expect SG&A, excluding store closing costs, to be up higher this year versus last year than it was in the first quarter. So there is really no surprise there. It would have been up higher had the store closing costs been higher.

Okay. Can you give us a little bit more detail other than the pension in terms of what is driving that increase?

As I said, it is sales-related costs, the pension and other retirement-related costs. Depreciation was a little bit higher. It is fairly spread all over the place.

And then the 2 to 3 percent for the back half of the year, that is including the charges. So on operating basis it would be more in line with the 4 or 5 percent, is that right?

It is 2 to 3 percent including those charges.

Right. So the charges are down year-over-year, so the operating store level expenses are more than the 2 to 3?

Yes, but it varies by quarter.

Just last question in terms of the national advertising campaign, I was just wondering what your plans were for holiday on that front?

There will be one advertising campaign across the country in all of our Macy's and Macy's hyphenated stores in terms of the template. Items in pricing will vary by market and timing, but the creative look will be the same across the country.

Okay. Great. Thank you.

Jeff Stein, Key McDonald.

I'm wondering with the higher SG&A run-rate that you saw during the second quarter and the fact that you're looking for 2 to 3 in the back half of the year, are you adding any payroll to the selling floor?

In terms -- relative to what?

Well, relative to sales. In other words, is your selling payroll as a percent of sales going up?

I don't have that in front of me, but I would not expect it to be up, Jeff.

Okay.

And as we look to the fall, typically the selling expenses are pretty consistent with where we see the sales going.

In other words, strategically though, one of your initiatives would not necessarily be to raise the amount of selling payroll in the store, just to perhaps have better service levels in the store?

In fact, we have been delivering. Our service scores have increased, and that is without adding people.

Okay. Can you talk a little bit about receivables? Your receivable balance was up 8 percent, and I am wondering if you did see increased credit penetration during the quarter?

The proprietary penetration was relatively flat for the beginning of this year. Obviously sales are up, so that is a good thing, and also our Visa program has been expanded, which is attributing -- some of that growth is coming from that.

Okay and final question, Karen. The improvement you have seen in textiles recently, is that just a general pickup, or is that in any way related to the Home Store reorganization that you are undertaking?

It is a hard question to answer because we are still in transition. I have to believe that the new organization has had an impact. How much of an impact I cannot tell you. But the important thing is the business is looking better, the product looks good, hotel is doing extremely well, and so we feel good about it.

Dana Cohen, Bank of America Securities.

I'm just wondering if you can give us some sense on the gross margin? Q1 was up a lot. Q2 was up less. I know it was on plan, but I am just trying to get a sense of the differences by quarter because stores have not looked very promotional. You have had to shift to higher price points. AR has been going up. I am just trying to get a sense of the sequential delta by quarter?

You know, I don't look at it that way, so it's hard for me to answer. I suspect if you look back a couple of years, we have had a couple of great performances in the second quarter. So when you look at it year-over-year, that is impacting the numbers.

Yes, I was looking at that, but the first quarter is sort of -- I mean maybe it is just flattening out, but it still looks like first quarter was a bit stronger. Just when you look at sort of markdowns, trends, is there any sense -- maybe you don't have it in front of you -- but anything you can share with us on --?

I do not have any insight. I will look at it. It is not something I have looked at.

Thank you.

We are pleased that the margin was better than the plan. So from my prospective, that is how I measure the business.

Right. Okay. Thanks.

I will look at it though. If I find anything, I will holler.

Steve Madonna (ph), Franklin Advisory Services.

Thank you very much. I guess the seven years I have been following the Company I have always admired the Company's realistic efforts to enhance shareholder value in a relatively slow growth industry. Having said that, the spot price is strong the past 18 months. Now we've seen tremendous dilution come from stock options, and I think over the past few years you have averaged about 2 percent option grants, 2 percent of your current outstanding share base. It seems like we are a slow growth company. That is not very dilutive. Are you rethinking option grants in any way?

Yes, we are.

Okay, great. If I could get another quick question in. I wanted to touch on share and store closing and consolidation costs. Does that include the inventory valuation adjustment?

Well, I mean in the second quarter we took $13 million of markdowns. So yes, that probably is included. I did not add the two together. But I am sure that is the case.

Thank you very much.

Sorry.

Christine Augustine, Bear Stearns.

Could you provide us with an update on the "Reinvent" program? Did those stores outperform during the second quarter versus company average? And then just again review with us how many stores are going to be reinvented this year? Has there been any regional focus? And then are you still on track to have 70 to 75 percent of your volume coming from those reinvented stores by the end of '05?

The short answer is yes, but the longer answer is, by the beginning of the fourth quarter, we will have 153 stores "reinvented," which will represent over 50 percent of our sales. We are on track to achieve at least a 70 percent goal by a year from now.

How about just how those stores have done, either if you can talk about Q2 or even year-to-date versus the average on the comp?

Year-to-date they are still performing better than the stores that were not reinvented in terms of relative trends. They got a big bump in the first year after they done, but they are still on an ongoing basis performing over a point better than the non-reinvented stores. So there appears to be a short-term impact and then also continue to do better.

Terrific. Thanks very much.

Ken Vominkas (ph), Omega.

Since you have a lot of longtime charges, the natural accretion would be why not be more conservative on the accounting side and try to provide for some of these expenses on an ongoing basis?

I'm not sure I understand your question.

Well, you have a lot of charges, special charges (inaudible). The initial reaction would be, why not just incorporate it on an ongoing basis for provisions in the accruals?

First off, you cannot do that from an accounting prospective.

All right.

And the reason -- they are part of SG&A and gross margin, but because they tend to be lumpy, I think it is important for you all to understand how they happen by quarter. Obviously we cannot be perfect in predicting when things are booked. But at least you get a sense of the lumps and good quarter.

Right. Thank you.

Philipe Dusins (ph), CSFB.

Good morning. A couple of questions. We are seeing higher oil prices and interest rates are going up. There is some geopolitical uncertainty, but so far it has been a clear bifurcation in terms of the performance between the higher end and the lower end of the retail. Can you give us some color in terms of how you see the state of mind of your customer as we go into the fall season?

That is a tough question. I think the short answer is we are obviously comfortable with our guidance of the 1.5 to 3 percent. We think the customer will continue to platform well at retail, but there is obviously a lot going on in the world. But we are comfortable, and you layer on. The good fashion that we see coming makes us feel pretty good about the fall season.

So you have not seen the weaknesses that May alluded to yesterday where they said the June, July and now even August is still kind of soft. You're not seeing that basically?

No, we had a tough June slightly. We were about .5 point below where we thought we would be, so I would not call that a major deviation. But July came back. So you know it is hard for me to say. I think we need to see more time. I don't mean to be Pollyanna-ish, but at least so far -- and as you have seen, we have been outperforming them.

My second question, any change in terms of how you look at your credit card business following the sale of Dillards portfolio?

No. You know as you know credit is an important strategic business for us. As you know today, the proprietary portfolio is shared between the old Federated side and the Macy's side, which is owned by GE. In April of '06, we have the ability to terminate the GE agreement. So that may lead us to look at other options, but we operate the credit business extraordinarily well. As you have heard, it is performing quite well.

Okay and then the final question, early in the year you indicated that you would use less couponing just to make it a little bit more visible what the true value is that the customer gets. Any read of the customers reacting to that?

So far we think well. Spring this year we reduced the number of days with public coupons about 20 percent, and as you saw, sales continue to be very strong. So we're finding ways of giving value to the customer other than these big public coupons.

Thanks so much and best for the holiday season.

Robert Drbul, Lehman Brothers.

Good morning. On the gross margin, as you look out into the back half of the year and I would even say going forward, with some of the initiatives that you have underway, where do you see the biggest opportunity is that you guys can still do better and improve your gross margin?

Honestly we are not focused on improving our gross margin rate. We have been fortunate it has gone up. I think underlying that has been the very low inventory level. But as we look to opportunities in the future, you know we frankly do think gross margin rates should be considered relatively flat and that the opportunities are on the topline and then the ability to further leverage SG&A.

Okay. Thank you.

Theresa Donahue (ph), Neuberger Berman.

Good morning. Forgive me but I'm still a bit confused on the SG&A guidance for the back half. The 2 to 3 percent I understand you said includes charges, but I guess the way I am looking at it, and I may be wrong, that also assumes a deceleration in the rate of growth from the first half. And I'm wondering on an operating basis what accounts for the difference?

I don't know the answer to that question. I'm sorry. I will look at it and call you.

Karen Young (ph), Allstate Investors.

The run-rate of SG&A growth rate year-over-year was excluding the store closing costs and other charges for the first quarter this quarter and what the implied guidance is for the third and fourth quarter again excluding the charges both this year and last year?

What is the question?

I am trying to get a sense of on an underlying basis what your SG&A growth rate is excluding store closing costs and other special charges?

I don't have that by quarter in front of me, but you have got all the detail. You can calculate it.

On a run-rate going forward, what is your sense of what the growth rate should be on an underlying basis?

I don't know how to answer that question because it depends on sales levels and all kinds of other things. Had you asked me that a year ago I would not have known, for example, about the higher pension costs. So I'm not sure there is just an easy answer to that question.

What is the (technical difficulty)? Have quantified the pension cost?

We said it was 40 million more than a year ago.

Okay. And excluding pension, if you were to assume a 2 percent comp, would you expect that SG&A would increase in line with that?

Excluding items like pension, we have said that with the 2 comp we should be able to leverage expense on an annual basis.

Okay and is the pension cost higher because interest rates are still low and returns have come down, or have you been changing your assumptions, or what is driving the higher pension cost?

Related to the last couple of years, lack of returns in the market.

Okay and what is your current expected return and discount rate that you're assuming?

Don't ask tough questions on a day like today. I don't remember the discount rate. I will get that to you.

Lee Backus, Buckingham Research.

It seems that one of the key initiatives that you have going on is how you're handling clearance. When I talk to the stores, they sort of emphasize the handling of clearance. Could you discuss that and its impact on gross margin going forward and inventory levels going forward?

The biggest impact is going to be on sales lead frankly. I suspect what they are referring to is an initiative that we called 2020. I don't know if they refer to it by name. But this is something that actually a group of people here in Cincinnati developed, which is -- and it sounds very simplistic -- but looking at the top 20 percent of your assortment and the bottom 20 percent of your assortment. Obviously you focus your markdown activity on clearing the bottom 20 percent. The Bon-Macy's actually experimented with this first, and it has been very successful.

Interestingly while we started it as a way of reducing markdowns and it has helped our gross margin rate and turnover, the biggest benefit has come from helping us focus our on order better and, therefore, drive sales. So after the successful launch at the Bon-Macy's, we have now rolled it out across the Macy's and hyphenated Macy's divisions in a couple of families of business. It is seeming to have an impact on how we're handling clearance.

What will be its impact on inventories? Do think you can continue to maintain inventories at these kind of levels? Your inventories were down with an increase in sales. Can you comment on inventory levels going forward?

The easy answer is that clearly we would like to keep turnover improving. How much is really the question, and I do not know the answer to that yet you know. But clearly we should be able to continue to improve and speed up our inventory turn as we go for.

Michael Exstein, Credit Suisse First Boston.

Can you talk about the shift in some of the personnel into the Home initiatives and where you are on that, and specifically I guess Dr. Gribetz (inaudible) into the Home centrally and what his role will be? And what your sourcing people telling you in terms of pricing out of Asia for the first half of next year? And then one more follow-up question.

Let me just do the first two. I may forget. In terms of the Home organization, it is just a terrific group of people. Fortunately we were able to get amongst the best from the division. And frankly, there is some very good people that we were able to reuse in the division that for whatever reason could not relocate to New York.

So we feel great about the organization. Obviously Lester is a real talent -- I am trying to remember -- having spent his career at Bloomingdale's. So I think all of that is in shape.

Is there a risk that the Bloomingdale's business that it goes off track if Lester is diverted to the Macy's operation?

Well, I am one of Lester's biggest pants. But, Michael, it is hard to say that a division like Bloomingdales's or any division would be completely dependent on one-person, despite of the fact I think he is spectacular.

Your second question in terms of sourcing, I have not heard much conversation about that.

Then finally, there have been a couple of questions about what the impact of lessening promotions are. Is there any talk about going back to actually having one-day sales for one day as opposed to two days?

I have not heard that discussion.

Linda Kristiansen, UBS.

Actually I was also going to ask you about Lester's movement to Macy's Home. I guess I just follow-up and ask he was obviously hired into a very senior position in Home. So do you feel like all the hiring is on track and that everything is on track for the back half of '05 in terms of seeing something in the stores?

Yes, it is on track.

Okay. In terms of the mix of shifting people internally and bringing people in from the outside, is there a balance between those two, or is it mostly from internal movement?

I think there has been a balance. There has been a lot of people from the inside, but we've got quite a few very good hires from the outside as well.

Okay. Then just on the product, I guess last time I heard Terry speak about starting to see some new product in Home Tabletop specifically. But do you think it's broader than that? Do you think we are seeing more new product coming in the pipeline from vendors for Home?

We hope so, and that is what this team is pushing very hard on.

Will you be doing a lot of developing of your own product?

Yes.

Wayne Hood.

I just want to come back on the expense side a second. If you look at the return that you guys are expecting on your pension assets, it is about 8.75. I'm wondering with things as tough as they are, would you be reviewing maybe later in the year around the fourth quarter that you may have to increase your pension expense in light of what's going on in the marketplace right now and given that level of return that is expected on those planned assets above the 10 million that you expect in the fourth quarter or 40 million for the year?

We review that every year. You know at this point I don't see any reason to change it, but we do review it once a year around the fourth quarter. So we will see.

Okay and then the other thing, when you look at the second quarter and you strip out all the items year-over-year, it looked like the expense dollars were up 4 percent and that also would exclude the pension expense that you incurred. Should that be what we are thinking about? I mean everybody gets keeps getting at this issue for the back half of the year. You strip out those items in pension expense, then, indeed, dollar growth would be in the 3 or 4 percent range?

I haven't calculated that way. I thought I was been helpful giving you the total number. I will have to calculate it that way. I'm sorry.

Rick Levin, John A. Levin & Company.

During the Q1 conference call, you said you expected to incur $108 million of closing and Home Store consolidation costs. It sounds like that is consistent with what you're saying right now, which is about 36 cents a share. Is that right?

Yes, but it is not just the Home Store. That is also the integration of Florida and other closing costs. The store is about 70 million of that, but the 108 is still the total number.

If I take the 36 cents, plus the 20 cent charge on the debt, that gets you to sort of a normalized earnings of 430 to 440 for this year. Do you expect to have any onetime-related charges next year, or to what extent do you expect to have them?

When I normally guide people, and it's a very hard thing to predict, but we will always have store closing costs in a given year. We will not always have a Home Store consolidation. So if I think about that 108 million, as I think about modeling on an ongoing basis, and again there is nowhere predicting what could happen, but roughly 25 million of that is something I would assume in every year because we will continue to close stores and do things like that.

What would you say is your maintenance CapEx?

That's a very difficult question to answer. You have got the 600 million in total. Most of that now is going to reinventing our stores and remodeling. But what is literally maintenance is a much harder question.

And do you have any comments on May? May commented yesterday that August continues to be pretty weak for them. Have you seen any change in business from the July to August timeframe?

We don't comment mid-month. But as you have heard us say, we are expecting August to be flattish given the Labor Day shift.

Terrific.

Maureen Neff (ph), Luma Sales (ph).

I'm going to ask another expense question because as I looking at things, it seems to be people's greatest concern with your release today. You said just a short time ago about the ability to leverage expenses at a 2 percent. If you were to back out some of these things that we have been discussing, do you think that you leveraged your comps in the second quarter, and what is the expectation for the second half? I'm trying to strip out all the unusual things and the pensions and all the rest of it.

When I give that answer, it is on an annual basis. Frankly, quarter to quarter I do not focus on it as much. Obviously I think part of the problem is people did not really listen when we did the first-quarter call and told people to expect a bigger increase in the second quarter than the first quarter. That is a piece of the problem.

Things happen in quarters. It is just different -- you just cannot be that precise. That is why we try to give guidance that is helpful. So obviously it looks like we leveraged expense less well in the second quarter, but we will do a lot better in the back half of the year. But again I would look at it as the year as a whole.

And if anything there is always things that come out better and things that come out worse. As you look up a second quarter and even going forward, are there any expense items that surprised you on the upside that made it more difficult to leverage in the second quarter, health care expenses (multiple speakers)

We are not really surprised because we had expected it.

Okay.

I am sorry for sounding frustrated. I guess I am a little bit.

Okay, all right. I guess the problem is that people just were not expecting it as much as you were.

I know. I understand that.

Stacy Turnof.

From a brand standpoint, can you comment on how some of the major brands from Lauren and some Jones and Tommy have been impacting women's apparel, and what is your outlook on these brands in the fall?

In total because we do not comment brands by brand, but in total the new brands and the new fashions this spring has been very helpful to our business, and we expect it to continue in the fall.

And my second question is I know that this small store format has not been a focus for you with the exception of the furniture and the Home Store, but any new interest in opening up some of the smaller off-the-mall stores, and maybe comment on how your SoHo store in Bloomingdale's has been doing?

Well, SoHo is a completely different animal than when you're referring to a small store with that answer. In terms of small stores off-the-mall, either than in some unique great real estate situations, that is not a high-priority focus for us in terms of growth.

In terms of SoHo, it is a fabulous store. It clearly represents a lot of what is so special about Bloomingdale's. Keep in mind, though, that there's very few places in the country that could support a SoHo store, SoHo-like store. But we do think there may be some opportunity for a limited number of additional stores like that.

Thank you.

Ms. Hoguet, there are no further questions.

Thank you all very much.