梅西百貨 (M) 2004 Q3 法說會逐字稿

I would like to thank everyone for holding and welcome you to today's conference with our host speaker, Karen Hoguet.

I need to remind everyone that today's conference is being recorded for playback purposes.

The conference will also be conducted in a lecture mode.

And at the end, we'll take questions from the floor.

Ms. Hoguet, at this time, I'll turn the conference over to you.

And thank you for calling the Sprint Conference Center.

Thank you.

Good morning, and welcome to the Federated Department Stores conference call scheduled to discuss today's release of our third-quarter earnings.

I am Karen Hoguet, CFO of the Company.

Any transcription or 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 2 hours after the call concludes.

Please refer to the Investor Relations section of our web site for discussions 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.

We are very pleased with how the third quarter ended, which allowed us to exceed our expectations.

Earnings per share on a diluted basis was 42 cents a share, up 17 percent over last year's 36 cents per share.

October turned out to be a great month.

We performed strongly in markets across the country.

We also experienced more post-hurricane rebound in Florida than we had expected, but not enough to offset the negative impact in September.

Let's now go through some of the details.

Sales in the quarter were $3.491 billion, essentially flat with last year.

On a comp store basis, sales were up 0.4 percent in the quarter.

Sales were below our original expectations of 1.5 to 3 percent comp store growth in the quarter due to the weakness in August as well as the impact of the hurricanes.

Apart from the hurricanes, the trend improved as we progressed through the quarter.

Our October sales were consistent with our original expectations, which gives us comfort as we head into the very important fourth quarter.

There were two stores opened in the third quarter -- Arbor Place in Atlanta and Rancho Cucamonga in southern California and there were no store closings.

By division, our best sales store performances in the quarter were experienced at Bloomingdale's, Macy's West, and Burdines-Macy's, which is now called Macy's Florida.

By family of business, we saw strength in the quarter in the center core areas such as handbags, jewelry, and cosmetics, as well as in kids.

Both men's and women's apparel did strengthen in October.

Gross margin in the quarter, excluding markdowns associated with the home store consolidation, was 40.2 percent, up 20 basis points over last year's 40.0 percent.

Including the home store consolidation markdowns of $14 million, or 40 basis points as a percent of sales, the gross margin rate was 39.8 percent.

While consistent with our guidance at the end of the second quarter, we were pleased with the gross margin rate given the soft sales we experienced early in the quarter.

Inventories were down 3.3 percent at the end of the quarter, and are in very good shape as we head into the fourth quarter.

SG&A in the quarter was $1.216 billion, down 0.4 percent below last year.

As a percent of sales, SG&A improved 20 basis points.

Excluding $22 million of store closing and consolidation cost this year and $29 million last year, what we call ongoing SG&A dollars were essentially flat with a year ago.

In spite of the added costs associated with the hurricanes, we were able to bring expenses in lower than we had expected.

The lower-than-expected expenses resulted from strong credit performance and lower expenses spread throughout other parts of the business.

Operating income in the third quarter was $175 million or 5.0 percent of sales.

This is essentially flat with last year in both dollars and rate.

With a comp store sales increase of only 0.4 percent and $36 million of store closing and consolidation costs, or 1 percent of sales, we're pleased with our operating income performance.

Interest expense in the quarter was $55 million, down from $61 million last year, due largely to the tender offer of our 8.5 percent notes completed in the second quarter.

Tax expense in the third quarter was $46 million.

Net income was $74 million, up 10 percent over last year's $67 million.

The diluted share count was 174.4 million shares, down 6.1 percent from last year due to our share buyback program.

In the third quarter, we utilized $336 million of our cash to buy back 7.4 million shares.

Year to date, we have utilized $687 million to buy back 14.6 million shares.

This resulted in third-quarter diluted earnings per share of 42 cents, which was up 17 percent over last year.

Cash flow in the quarter also continued strong.

We did experience our normal seasonal buildup of working capital and our CapEx spending and buyback program remain on track.

So far, we have spent a total of $375 million on CapEx, which is typical for this time of year, and we still intend to spend the $600 million for the year as a whole.

Our expectation for share repurchase for the year as a whole continues to be in the range of $700 to $900 million.

Remember as you look at our cash flow that last year, we benefited from lower income tax payments resulting from the use of Fingerhut net operating losses.

That is the primary reason why cash flow before financing activities was $217 million below last year.

As we move into the fourth quarter, we continue to expect comp store sales to increase 1.5 to 3 percent.

Because of the calendar this year which favors December over November, we expect November to be flat to up 2 percent, while December we are expecting to be up 1 to 3 percent.

Gross margin is expected to be flattish to last year in the fourth quarter.

In that quarter, we expect approximately $4 million of home store consolidation markdowns.

As you will recall, this year we told you that we had expected $18 million of these markdowns this fall and $14 million of those were taken in the third quarter with the remainder in the fourth.

We expect SG&A in dollars to be up around 2.5 to 3 percent in the fourth quarter.

Included are $18 to $20 million of store closing and consolidation costs consistent with our prior guidance.

This compares to $12 million of store closing and consolidation costs booked in the fourth quarter last year.

We expect this to be the end of the costs associated with the Florida integration and home store consolidation.

We are assuming interest expense of $58 million in the fourth quarter.

EPS is still assumed to be $2.45 to $2.55 per share in the fourth quarter.

This compares to last year's $2.50.

However, remember last year in the fourth quarter, we booked a $38 million adjustment to our deferred tax liability, which was worth 21 cents per share.

So excluding this tax adjustment, last year's EPS in the fourth quarter was $2.29.

Together with nine months of actual, this guidance for the fourth quarter would result in an annual EPS of $3.73 to $3.83 compared to last year's $3.71 per share, or $3.51 per share excluding the fourth-quarter tax adjustment.

On this basis, our guidance would result in growth of 6 percent to 9 percent.

And if we exclude store closing and consolidation costs in both years as well as the costs associated with the debt repurchase in the second quarter, annual EPS on a diluted basis given our fourth-quarter guidance would be up to 16 to 19 percent.

Clearly, if we achieve our fourth-quarter guidance, it will have been a terrific year.

And I certainly do not want to jinx our performance at this time of year.

But I do think it's important to recognize our financial performance in terms of sales, earnings, and cash flow, which year-to-date has been strong relative to our expectations and relative to the performance of our peers.

In addition, we have positioned ourselves better for 2005 and beyond.

We have made progress on our 4 priorities.

And we recognize that there is much more progress yet to be made.

For those of you who are less familiar with our story, just briefly, our 4 priorities are -- 1, assortments to be more differentiated and better edited; 2, simplification of our pricing; 3, improve the in-store shopping experience; and 4, to have marketing that is more creative and more cost-effective.

In addition, this year we've centralized our home store operation, the benefits from which we still expect to begin to occur in 2005.

We are very excited about the progress that our new organization is making.

It was clearly the right decision, although there will also clearly be bumps in the road given this new way of operating.

As we told you when we made this announcement, you will begin to see some change in the fourth quarter, and even more so in the spring of 2005.

But it is not until next fall, fall of 2005, that you will see truly dramatic change.

And last but certainly not least, we are very excited about the conversion of all of our headquarters stores to the Macy's name.

While it is very hard to quantify the benefits of the change, there is no question that there will be some.

As you can tell, we're very excited about what we have accomplished so far, and even more excited about where we're headed.

And with that, I'll take your questions.

(OPERATOR INSTRUCTIONS) George Strachan, Goldman Sachs.

Great recovery from the results earlier in the quarter, Karen.

The sales pickup in October -- do you think this is primarily fashion-related, or should we chalk some of it up to an easier comp combined with some pent-up demand from September?

And how does fashion look going into Christmas?

And what are you doing this year on the gift front?

May spent about 10 minutes on this subject yesterday, calling it "Gifts that Excite."

I think the surprise of the third quarter was how weak August had been.

And so the business did begin to pickup in September and October.

But it's consistent with where we thought the quarter was going to be.

So I think it's more that the bad business in August was the surprise.

And a lot of that had to do with the fact that we have far fewer clearance units on the floor this year because of the fabulous sales earlier in the year as well as with our lower inventory levels.

So August and early September are typically clearance periods, and we just didn't have the same quantity of clearance goods on the floor to sell.

And so, again, we feel good about the trends in the business as we head into the fourth quarter.

I'm not going to spend 10 minutes on all the various gift ideas in the store.

Needless to say, we have a very comprehensive strategy for the gift business, which obviously is the key priority as you head into the fourth quarter.

And that gets both in terms of having differentiated assortment, but also people on the floor to service the customers when they come in.

We were mildly surprised that gross margin wasn't even better, considering the inventory performance down 3.3 percent.

Does this reflect the September hurricanes?

And I know you had a lot of markdowns related to that.

And May, which had no exposure to the hurricanes, was up 80 basis points in the quarter on merchandising margin.

Well, the margins in Florida were clearly hit -- as a result of the real drop in sales in September as a result of the hurricanes.

So that's clearly a factor.

But again, we were consistent with what we had expected in the quarter.

I'm not quite sure how to account for the differences.

Deborah Weinswig, Smith Barney.

I think you touched on a bit in terms of George's question, but as we think about holiday and leveraging the benefits from the Macy's name, can you talk about what we might see there and anything else that you might be doing for holiday 2004?

Well, holiday this year will still have the hyphenated names in all of our regional operations.

So the advertising will be what we call a common framework or structure.

So the ads will look similar, but again, it will still be with different names.

So for example, I saw some of the commercials yesterday.

And there's different versions for the different stores.

But again, it's the same basic template for the advertising.

You really won't get the full benefit until next Christmas.

Okay.

And then in terms of where the company stands right now in terms of penetration of best value and what the outlook is as you look to 2005 for that kind of product line, as well?

The everyday value program is growing quite rapidly.

We started with a very low base a year ago -- close to 1 percent of our assortments.

And as you know, it has grown -- it grew last year somewhat.

And we're still trying to focus.

We're aiming to be sort of at 3 percent this year.

But we are still focused on our pricing strategy related to home.

And that may or may not dictate how big that number will become.

Jeff Stein, KeyBanc Capital.

2 questions.

First of all, wondering if you might comment on the quarter and year-to-date performance of the reinvent stores relative to the rest of the fleet, and also what benefit, if any, you might expect to accrue from relaunching your credit card next year and reissuing credit cards to all the Macy's customers.

Have you done in the past, and what kind of bump have you had in the past?

Let me answer the second question first relating to the relaunch of the Macy's name.

Obviously, as we go to change the names of our stores, we will be reissuing new credit cards to all of our credit customers, which should help our sales if that happens.

In addition, we are relaunching a new-and-improved loyalty program, which should also benefit us as we move through the next year, both in terms of the credit operations and also retail sales.

So we're really quite excited about that.

How much, Jeff -- it's really hard to give you a good answer.

And the reinvent initiatives?

The reinvents initiatives are by the end of -- actually, currently, by the end of the third quarter, will be in stores that are doing over half of our volume.

And again, by a year from now, we expect that to be -- over 70 percent of our volume will be done in reinvented stores.

The reinvented stores continue to outpace the total.

As I told you in the past, often it takes a little while before the bump to happen.

But it's relatively modest at this point, just because we have hit so many of the stores.

So we are very pleased with what we have done there.

Filippe Goossens, Credit Suisse First Boston.

Also our congrats here on the fixed income side. 2 questions; the first one -- yesterday, May spoke a lot about trying to reach better a younger customer.

Can you just share with us, 1, how your demographics look like in terms of your customers, and secondly, how you are doing with that younger customer base?

And I have a second question.

Well, in terms of that, we have been doing that for years.

I mean, I think a lot of what they talked about yesterday, frankly, are things we have been working on for awhile.

And we have done very well, both with the junior customer and also the younger female with our more contemporary areas.

So I think that's the strategy we've had underway for awhile, and we have done well with that.

And could you give us a breakdown in terms of x percent of your customer base is less or above a certain age group?

I don't know those statistics off the top of my head.

Okay.

Then the second question I had, Karen -- you know, you and I and other people have discussed this with you many times before.

But after what the Limited Brands did to our bondholders a couple of weeks ago, can you assure again the bondholders that, except for M&A activity, you remain solidly committed to your triple-B ratings, and that you will not use the balance sheet to repurchase shares on leveraged basis?

I think what I can say is that we are very committed to keeping the balance sheet as strong as it is today.

And absent some major strategic acquisition that I can't envision -- because we'd still consider that, but I always hate to be too forceful in that answer.

No, I think that would be very comforting for bondholders to hear, Karen.

David Griffith, Traditional Asiel Securities.

Could you address the gift card program, and what you're doing this year to differentiate, or have you updated it in any way?

We continue to experiment with new fixtures and new cards and new programs.

But as with everybody else, this has become an important growth business for us.

And we continue to try to maximize that.

And do you have any particular expectations as to how much more you will do in gift cards, or --

No.

Okay.

And then from a housekeeping point of view, where did you end up in terms of share count?

The basic shares of the end of the quarter were 167.9 million.

Gregory Fowlkes, Morgan Stanley.

It looks like inventory per square foot has been coming down for about 3 years now.

And you have seen, of course, any pickup in your both inventory and asset terms.

I was just wondering how much more room you think there is to take inventories down without adversely impacting sales and flattening your turns curve.

I don't know the answer to that question.

We continue to push to improve our turnover.

And at least so far, I have not heard anybody say that low inventories have impacted our sales.

So we continue to look for improved ways of improving our turnover, which could mean faster sales growth, making the inventory more productive -- it doesn't necessarily mean continue to bring inventories down (multiple speakers) year-over-year.

Anything else on the asset side that you think you can do to keep turns increasing?

Obviously, sales is a big lever.

But anything else there?

That's the big area of focus.

Dana Cohen, Banc of America Securities.

A couple of questions.

Just on the magnitude of the upside from October, help us understand -- just because earnings were up more than the sales increase, as you now look back, were you too conservative on the hurricane?

Just so we can understand on an ongoing basis sort of flow-through issues.

I think the hurricane hurt us on a net basis a little bit less than we thought it would.

So that's a piece of it, but frankly, a small piece of it.

I think the other issue was just that as the divisions were forecasting October, they were feeling blue coming out of August and, to a lesser degree, September, and I think just conservative in how they viewed the world in October.

And it ended up doing better.

Right, but relative to the earnings upside to sales --

And that's where it came from.

So they were conservative both on the top line and also the (multiple speakers)

And also the margin.

Okay.

And then just refresh my memory -- it looks like you've now had 13 million of home store expenses in Q2, 14, and then another 4.

There wasn't anything in Q1, was there?

You know something, I don't have that in front of me.

I will have to call you back.

I'm just curious, because you've said this was the last of it.

But I was just looking back in my notes;

I didn't see anything from Q1.

I thought there would've been something small, but there might not have been.

So as we look to next year then, barring any other changes, we shouldn't be seeing further hits on the gross margin from home, and probably a more normalized store closing --?

Yes, what I would tell you is gross margin should not be impacted after the fourth quarter.

And in terms of sort of our normal store closing program, which we constantly are looking at in order to obviously keep our store base appropriate, I would assume $25 million a year as sort of an ongoing.

So going from this year's number, which is significantly higher than that, to 25 million a year clearly gets us some upside in terms of earnings next year.

Robert Drbul, Lehman Brothers.

Can you elaborate a little bit in terms of the improvement that you have seen in the men's and kids' business, and sort of what you think (technical difficulty)

Well, it was actually kids that had been strong in the quarter.

And then as we moved into October, both men's and women's apparel picked up some.

And I think it's just -- in the case of kids, it has to do with our assortment and how the stores are looking.

Okay, and then just a follow up to the -- on the advertising side, you talked about just the focus on more cost effectiveness.

Can you really quantify the differences that you're getting with more in the focus on the national campaign this year versus last year?

This year, we're not going to be -- we'll be spending more in the fourth quarter than we did last year.

So that is really something that we will look to potentially leverage going forward as we change the names.

But that's not a fourth-quarter '04 event.

And can you quantify how much more you're going (multiple speakers)

I cannot.

Stacey Turnof, Merrill Lynch.

You talked earlier about the improvement in SG&A, with it being strong credit and lower expenses spread throughout the businesses.

Was the majority from strong credit?

And if you could talk a little bit about pensions and payroll and how that played in the quarter?

Well, pension is up considerably from last year.

But we had said that earlier in the year, so there's no surprise there.

I was focusing on relative to what we had expected, where was it positive?

And credit was by far the biggest factor with that in the third quarter.

And I just had a second question -- any update in terms of the China apparel quote as we are getting close to January 1?

No, honestly, we think that's a much smaller issue for our customer in our stores than the financial community seems to think.

But we will all see as we move into next year.

Linda Kristiansen, UBS.

I had a question.

Could you break down the comps in terms of average ticket and traffic, or at least some indication of what it was like in the third quarter and year to date?

The average unit sale was up about 4 percent in the third quarter, which is lower than it had been in the spring season.

But again, that relates to the clearance activity in the quarter.

Okay.

Also yesterday, May was talking about pricing power in the quarter, or just the general pricing environment, and talking about it pretty favorably.

Would you agree that the inflation -- or are you seeing inflation now versus modest deflation -- and your expectation for next year?

You know, it's hard to tell, because as we look at our average unit retail, part of that is coming as we're also focusing on higher-price-point goods.

So it's hard for me to tell what is deflation versus what is strategic.

Okay.

Also, just the number that's kind of floating around from some of that next year is a little bit of inflation-- is that what you see next year?

We have not assumed that.

Shari Eberts, J.P. Morgan.

Karen, just wanted to follow up on the credit.

Can you provide any more color in terms of what drove the upside?

Was it bad debt, or was it faster growth, or penetration --

Yes, yes, yes and yes.

It was a lot of usage on the proprietary card , with the penetration doing very well on the quarter.

It was lower bad debt.

It was lower operating expense.

And it was greater growth and profitability from the Visa portfolio.

And as you know, there's been a lot of speculation in the market regarding credit businesses, given the Dillard's transaction that closed recently.

Can you just update us in terms of your thoughts on that business?

Sure.

I think as you know -- again, let me just take a minute, Shari, and back up for people who may not be as familiar with this.

Our proprietary credit business today is split between us and GECC.

Macy's, prior to our acquisition, had sold their credit business to GE.

And so we inherited that agreement.

That agreement expires in April of 2006.

And in conjunction with that, we are reviewing various alternatives, ranging from buying back the GE portfolio and owning our entire credit operation to selling it all.

It's also possible that we could renegotiate with GE or another party and maintain the split ownership like we have it today.

And for those of you who have looked at these deals, there are numerous variations of each of those three broad options.

So it's a very complicated subject.

One thing that we know for sure is that a well-managed credit business is vital to the retailing success of the company, both in terms of sales and also profitability.

So this is something we will take very seriously as we look at various options.

Great.

And then just a last question.

You mentioned a share repurchase program of 700 to 900 million.

You're pretty close to the 700 million now year to date.

Can you talk about what would determine where you would fall in that range?

Is it just -- I'm assuming your cash flow will be strong into Q4.

You'll have the cash to do it.

But what would determine where you fall out?

To some degree, it's market conditions, it's cash.

Beyond that, I really can't comment.

Christine Augustine, Bear Stearns.

Karen, with regard to a comment you made answering an earlier question about the fourth quarter and plans to have more people on the selling floor, I just wonder what that was on a relative basis to last year.

Do you mean more versus last year, or just sequentially you would hire more because it's the holiday season?

It's a little bit of both, and it varies by market.

Is there a market or a division that you plan to focus more on?

Or is it spread out, or --?

Well, it is spread.

Certain areas -- for example, Macy's East, has had a need to bring more people onto the floor.

So that's one in particular.

But there's other markets throughout the Company.

Because it looks like from your SG&A guidance that -- ex the 18 to 20 million of the various store closing and home consolidation charges, that SG&A is only going to be up probably 1.5 percent.

So I just wondered if that was factoring in these extra people?

Within our guidance, that is.

And how would you characterize the competitive environment right now just in terms of the pricing?

Are you seeing rational pricing, irrational -- what does the promotional picture look like?

Personally, I haven't heard a lot of discussion about it, which leads me to answer that it is rational.

I mean, some of our competitors have been increasing the couponing activity that they have done this year at the same time that we've been reducing it.

But given our sales trends, it doesn't seem to be having an impact.

And are you still down about 20 percent or so year over year on the couponing?

Yes.

Rob Schwartz (ph), JL Advisers.

Rob Schwartz.

My question has been answer thank you very much.

Teresa Donahue, Neuberger Berman.

2 questions.

First of all, I was wondering -- relative to Bloomingdale's expense trends, both Neiman Marcus and Nordstrom have double-digit comps in October.

I'm wondering where Bloomingdale's fell in relative that.

And secondly, with respect to the performance on the expense line, if I look at this quarter versus the last quarter, would there be any changes in accruals or timing there that might have shifted some of the spending forward into the second quarter in hindsight?

Let me answer the second question -- not that I am aware of.

So I don't know how to answer that.

I haven't looked ateverything.

But nothing that I know of any magnitude.

In terms of Bloomingdale's, remember that those competitors that you are talking about don't have the home store business that Bloomingdale's has.

And that business in general, as everybody knows across the country, has been slower growth.

So if I look at Bloomingdale's apparel business, soft business -- as compared to those competitors, they are comparing quite nicely.

Wayne Hood , Prudential Financial.

I had actually three questions. 1, you had mentioned that you expect your gross margin to be flat in the fourth quarter, yet it was up 20 basis points or so in the third, and up very strong in the first.

With inventory down and comps improving, are you just being conservative in that fourth-quarter expectation?

I don't think we are.

Last year, we had a good performance in the fourth quarter.

So we will have to see.

But I don't think we're being conservative.

And as you looked at the Florida stores, can you give us some sense -- I know you had recovery kind of as the quarter ended in terms of the sales growth and probably margin.

But were the margins up down their year-over-year, or still down?

And just thinking that in the context of next year, what potential rebound we could see out of that division and its impact on potential positive impact on third-quarter earnings for next year?

Florida -- I think it's relatively small in terms of next year.

Their margins were worse than what they had expected.

But this has been one of our best-performing divisions all year.

So I'm more worried year rounding on spectacular years than I am thinking about the third-quarter opportunity.

But I guess relative to the other quarters, there would be opportunity in the third.

And then my final question -- when you think about the spring coming up, you're up against a 6.9 percent comp store sales increase.

As you look at this spring receipts, are you expecting them to be flat, down in light of that comparison?

Or can you give us some qualitative -- how you're kind of looking at that now?

One of the things we're trying to factor also into our first quarter and spring planning relates to the question asked earlier about the relaunch of the credit card program with Macy's, which should help our sales and offset at least some of the difficulty with that year-round trend.

But we're still refining our sales plan.

And with that will go sort of the fine-tuning of the receipts.

But at this point, the receipts are probably planned up just modestly the first quarter.

Jeff Stinson, FTN Midwest Research.

I was wondering if you could just talk a little bit about the increased investment in store payroll.

I know you talked about the holiday season -- kind of where do you see that on a sustained basis moving forward into '05?

And then if you could also give a little bit of color as far as -- I know you focused on the in-store shopping experience as one of your 4 initiatives.

What type of feedback have you gotten from customers as far as customer service this year versus last year?

In terms of -- I think, and maybe I –must have sort of exaggerated this increase in store staffing.

It is not a big overall strategy that's going to have a big impact on SG&A.

So I want to make sure people are not expecting that to be a big increase in SG&A -- that's not the case at all.

It was merely relating to December and the fourth quarter.

In terms of the in-store shopping experience, our customer satisfaction scores are way up this year over last year.

One of the things that we are getting most noted for is the reduced clutter in our stores -- taking the tables out of the aisles, cleaning up the signing.

And that appears to be leading to some big increases in how the customer is viewing the shopping experience.

George Strachan, Goldman Sachs.

Thanks for taking another question, Karen.

Could you review your thoughts on a substantial dividend increase?

And I'm obviously asking that because May with a 3.6 percent yield is selling about where you are on next year's estimates with a 1 percent yield.

And clearly, your comps have been far better.

And now that the elections are behind us, it looks like the tax policy will remain favorable to dividend payers and recipients.

It's obviously something we constantly are looking at.

Clearly, we give a very large amount of cash back to the shareholder every year.

We have chosen to do it more through buybacks.

But it's been, as you know, very consistent as opposed to dividends.

But it's something we are constantly looking at.

That was the last question in the queue at this time.

Good.

Well, thank you all very much.