梅西百貨 (M) 2004 Q4 法說會逐字稿

I thank everyone for waiting, and welcome you to your Federated Department Stores conference call.

The conference is currently in a listen-only mode until the end of the presentation, when they will take questions and we will give instructions on how the attendees can participate.

As requested, we have begun recording for replay services, and we will turn it over to your host now, Karen Hoguet.

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Karen?

Thank you.

Good morning, and welcome to the Federated Department Stores conference call scheduled to discuss our fourth-quarter 2004 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, www.FDS.com, beginning approximately two hours after the call concludes.

Please refer to the investor relations section of our website 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.

We were very pleased with our performance in the fourth quarter and for the full year.

Our financial results demonstrate that we are making progress on our four priorities, and that these in fact are the right subjects on which we should focus.

In the fourth quarter, we produced sales of $5.1 billion, up 0.8 percent over last year on a comp-store basis.

This was slightly below our 1.5 to 3 percent guidance at the start of the quarter, due to a disappointing November and then snow and ice storms in both December and January.

Nonetheless, we achieved earnings of $2.55, which is at the high end of our original guidance.

This compares to $2.50 last year on a reported basis.

Remember, though, that last year included a $38 million or 21 cent a share adjustment to our deferred tax liability.

Without this, EPS last year would have been $2.29, and this year's EPS would represent an 11 percent increase.

Sales in the fourth quarter were strongest at Macy's Florida and Bloomingdale's, a continuation of the trends experienced all year.

By family of business, we saw strength in jewelry, cosmetics, handbags and kids.

And I should add that in the better and status areas, we continued to see strength throughout all parts of the store, as well as private brands that continued to do extremely well in the fourth quarter, as they had performed all year long.

In the quarter, the gross margin rate was down 10 basis points, due to the expected $5 million of markdowns related to the Home Store consolidation.

Without these markdowns, the gross margin rate was flat to last year, which was 110 basis points above the year before that, so a really very good performance, and this is what we had expected.

Inventory at the end of the quarter was down 3 percent, as we continued to better edit our assortment to both provide a less cluttered shopping environment, and also to enable us to focus more on new and unique products.

SG&A day in the quarter, in terms of dollars, was $1.3 billion, down slightly from last year.

As a percent of sales, SG&A improved 10 basis points.

This was better performance than we expected, due to lower store closing and consolidation costs than we had estimated and also lower ongoing expense.

The lower ongoing expense was due to stronger credit performance, lower advertising expense and other smaller reductions spread across other parts of the business.

While we did make a reclass on our balance sheet relating to the clarification of lease accounting, there was no impact to our P&L.

Interest expense in the quarter was $50 million, which is $8 million lower than we had expected.

Roughly half of this variance in interest expense was due to a stronger-than-expected cash position, and the other half was due to the reversal of interest reserves no longer required for tax examination and the receipt of interest refunds from the tax settlement.

Tax expense in the quarter was $273 million.

And remember again about last year's $38 million adjustment to our deferred tax liability, when you look at tax expense this year versus last year.

During the quarter, we utilized $212 million of cash to buy back 3.8 million shares, and in the fourth quarter, our average diluted share count was 172.4 million shares.

By the way, when you look at our cash-flow statement, you may notice a change in geography for the change in our Visa receivables.

Due to a recent SEC clarification, we have moved that item from operations to investing activity, but there is no net impact to our cash flow.

So that is a summary of the quarter.

Before moving on to 2005, let's take a minute to look at the highlights of the full year's financial performance.

There are five points I'd like to make.

Number one, our comp-store sales increase of 2.6 percent was ahead of our 1.5 to 2 percent guidance this time a year ago.

Two, our EPS of $3.86 compared to our guidance of $3.70 to $3.80 at the start of the year, which was subsequently raised to 3.80 to 3.90.

And this guidance did not assume the $59 million or 20 cents per share expense related to the tender for high-coupon debt completed in the second quarter.

Three, operating income as a percent of sales was up 20 basis points versus last year, reaching 9.0 percent of sales.

And excluding the store closing and consolidation costs, our operating income was 9.6 percent, up 40 basis points versus last year on a comparable basis.

The fourth highlight is that cash flow before financing was $780 million this year.

That is a significant generation of cash.

And remember, as you compare this to last year's roughly $1 billion of cash flow before financing, that last year we benefited from lower income tax payments, reflecting the use of Fingerhut net operating losses.

And lastly, the fifth highlight, we utilized this cash flow to return value to our shareholders by utilizing $901 million to buy back 18.3 million shares, or roughly 10 percent of outstanding shares at the start of the year.

We also increased our dividend by 8 percent to 54 cents a share on an annual basis.

And we repurchased $274 million of 8.5 percent debt at the end of the second quarter.

And even with all of these uses of cash, our debt-to-cap ratio at year end was 32.8 percent, down from last year's 34.5 percent.

And we delivered these financial results while we continued to make significant progress on our four priorities.

I thought it might be helpful to discuss, this morning, some of the ways we are in fact measuring our progress on each of these four priorities.

First, assortments -- over a third of Macy's assortments are now exclusive, with 17.4 percent of our sales coming from private brands in 2004.

We have made progress also moving our assortments a bit more upscale, and a 6 percent increase in average unit retail shows that progress.

And lastly, relating to assortments, inventory turns did continue to accelerate; and, as you saw at year end, inventories were down again 3 percent versus last year.

In terms of our second priority on pricing, we did continue to reduce our usage of public coupons across all of our divisions.

And we continued to roll out our markdown optimization tool of 20-20 , and we decided to expand the use of ProfitLogic at Bloomingdale's to help us make sure we were marking down our merchandise on a timely basis, and at the same time focusing on our on-order or the new merchandise coming in on the items that are selling best.

Our third priority, shopping environment -- as regards to that, we continued in 2004 to see significant improvement in our shopping scores from customers' direct feedback.

All divisions have now executed a 32-inch aisle to make it easier to shop our stores.

We have now rolled out the Reinvent initiative to 156 stores, representing over 54 percent of Macy's sales.

And by the fourth quarter of 2005, that total will be close to 200 stores, representing over 70 percent of our volume.

And we are also experimenting with new Reinvent ideas in areas of the store like Home and Intimate Apparel, and we are upgrading restrooms and testing many other ways to improve the shopping experience.

As we have said repeatedly, we view Reinvent as an ongoing process, not a project.

And then our last priority, marketing -- as you know, we rolled out our first national Macy's campaign this past fall, and we developed and are now in the process of executing our new Star Rewards loyalty program associated with our proprietary credit program.

And obviously, as we look to 2005 and marketing, it will be a big year, as we convert all of our stores to the Macy's name.

I could really go on and on, but I won't.

But I did want to give you a flavor of all of the exciting change going on across the Company.

We clearly began to see this hard work pay off in 2004, and we believe we have set the stage for a terrific 2005.

And while the discussion of the four priorities applies to Macy's, Bloomingdale's is also making a lot of progress on their comparable priorities.

They had another terrific year in 2004.

As this division continues to take the business more upscale, it has capitalized on the strength of the luxury sector.

The opening of our new store in SoHo has been a huge success, recognized throughout the industry as a breakthrough concept.

Bloomingdale's is in the third year of implementing its brand strategy, and the program has clearly improved the store environments, which are now easier and more compelling to shop.

We have also reduced promotions at Bloomingdale's for the third consecutive year, and reinvested unproductive marketing spend into more regular-priced brand advertising.

Interestingly, while Bloomingdale's appeals to a different target customer than does Macy's, our approach to driving our business is really very similar.

Our 2005 guidance and key planning assumptions, which we provided when we released January sales, are as follows.

One, we are assuming annual comp-store sales increases of 2 percent.

We are assuming a comp-store increase of 1 percent for the spring season; but, as you will recall, we are up against a 5 percent increase last year.

For the fall season, we are assuming a 3 percent increase in comp-store sales.

The gross margin rate in 2005 is expected to be relatively flat, compared to 2004 levels, excluding the store closing and consolidation costs from 2004, with some pressure expected in the first quarter, reflective of strength in the same period last year.

SG&A expenses as a percent of sales is expected to be up slightly from 2004 levels, excluding store closing and consolidation costs in 2004, impacted by an increase in pension and other retirement costs of approximately $30 million, and approximately 20 to 25 million of amortization expense in the second half of 2005, related to the expensing of stock options.

Depreciation and amortization, including the impact of the stock option amortization, is expected to be about $750 million to $755 million for the year.

As we have said, we are not anticipating any store closing and consolidation costs in 2005.

We will also benefit in 2005 from a reduced effective tax rate of 37.7 percent.

The reduction compared to the rate in 2004 of 38.3 percent relates to favorable resolutions of state tax issues and anticipated lower state taxes.

Given the above assumptions, we are expecting earnings per share of $4.55 to $4.65 for the full year.

This breaks down as follows -- 45 to 50 cents a share in the first quarter, 80 to 85 cents a share in the second quarter and then $3.20 to 3.30 in the second half of the year.

And I should add that CapEx is budgeted for the year at $600 million.

As I said a few minutes ago, we are very excited about the prospects for the Company in 2005.

We expect to benefit from the conversion to the Macy's name that will happen in early March, from our Home Store repositioning that should begin to impact our sales trends in the fall season, and from the continual progress we expect to make on our four priorities.

Before opening the call for questions, I want to start by answering two questions that I know will come up.

The first question I expect someone to ask is, can you give us an update on the process to evaluate alternatives for your credit business?

And the answer to that question is that that process is underway, as you know.

As we have said all along, this is a very important business for us, and we are very carefully evaluating our options, including the possibility of maintaining the status quo.

It is in all of our interest for us to take our time and make a good decision here.

We hope to have this resolved sometime during the second quarter.

And then, the second question is, would you comment on all the rumors about your plans to acquire -- pick your company -- May Company, Neiman's, Saks, et cetera?

As you know, we do not comment on speculation, and as such, I would really appreciate it if you not ask questions along these lines.

And now, I will open the call up for your other questions.

(OPERATOR INSTRUCTIONS).

Lee Backus, Buckingham Research.

First, congratulations, Karen, on a good quarter.

Could you talk a little bit more about your advertising and marketing plans for the new year?

Now, with the national Macy's -- you know, the rebranding -- complete, how much is factored into your estimates of savings on the marketing?

Or how are you viewing advertising and marketing in the new year?

I think, Lee, at this point, we have not factored in a lot of savings in '05.

Our hope is that we find ways of making that happen in '06.

Remember also in '05, there will be some added advertising associated with the name change itself.

So this year, I would not expect reductions, but that's certainly something we hope we can leverage better as we go forward.

Could you also comment on how the consolidation of Home is going?

Yes.

As we expected, there clearly have been some bumps along the road.

But I think almost a year later, we are very pleased with the decision to have done so.

And while we are still working to make the execution better than it has been, I have full confidence that we will get there.

Jeff Stein, KeyBanc Capital.

Karen, can you talk about your credit penetration at the end of the year versus prior year, and what you would expect to happen once you launch the national advertising program for Macy's?

Yes.

On the credit penetration, in '04 it was very strong.

In fact, in the fourth quarter it was almost 42 percent, well above a year ago.

And I might add also delinquency was below last year, as were write-offs.

So credit has been a good business for us.

As we go to expand the Macy's name and, as you know, relaunch one credit card across the country and the new loyalty program, our hope is that the penetration will at worst be flat and potentially grow some, from a very high 42 percent.

And can you comment on the fact that your store closing and consolidation costs were, it looks like, about $8 to $10 million lower than expected for the full year?

Is there going to be any residual carryover to the current year, or you were just overly cautious in your budgeting?

There will not be any carryover into '05.

I wouldn't say that we were overly cautious;

I think our people just were able to get more done for less dollars.

So it was really good management, as opposed to budgeting issues.

But having said that, there won't be any carryforward into '05.

David Griffith, Tradition.

you mentioned that you had a better-than-expected cash balance.

And, given where sales came in, what drove that?

Was that some of the credit things you just talked about?

Well, actually, credit hurt cash flow, because of the buildup in some of the balances.

Inventory came in below what we had expected.

Some of the payables were better than we had expected, and CapEx, as you know, was a little bit below the 600 million that we had expected.

And then, the other assets went up, and I think the footnote talked about liability adjustments for the pension plans.

Can you tell us a little bit more about that?

Yes.

We are now over-funded on a minimum liability basis, meaning that the market value of the assets is greater than what is called, in pension lingo, the accumulated benefit obligation, which is the liability we have incurred to date -- does not include any projection into the future.

So, as stated in the footnote, what happens is there is a net decrease in the minimum liability adjustment, and it triggers the balance sheet changes that you saw.

Gregory Fowlkes, Morgan Stanley.

Karen, can you talk a little bit about what your assumptions for inflation or deflation embedded in your forecast?

And also, some other retailers have started to see some cost declines year over year in apparel pricing, particularly in private-label.

Have you seen the same?

Have not seen that yet.

And I keep calling and asking the question, because so many of you have asked me.

But so far, we have not seen that.

And our assumption for price deflation during the year is 2 percent.

And then, could you speak a little bit about the assortment editing process, how you have gone about doing that?

Is it a question of lowering open-to-buys, instituting unit plans?

And then, I guess, with inventory per square foot down pretty much in the last five years, how much more efficient do you think you can get with editing your assortments?

We're hoping to get more efficient even from here.

A lot of the progress is coming in the basic or replenishment areas, where we just had too many weeks of supply on hand that you really just don't need.

That's a big source of the reduction.

In fashion areas, we tend to focus less on stock levels and more on receipts, to make sure we're constantly replenishing.

But it's the replenishment areas are the basic areas where we hope to continue to edit the assortment.

Robert Drbul, Lehman Brothers.

Two questions.

The first one is, can you talk -- on the Reinvent stores, you gave us an update there.

I was wondering if you could just elaborate a little bit, in terms of any traffic differences in those stores and average unit retail in the Reinvent versus the non-Reinvent stores, and what you're seeing there?

The second question would be, as you look into the spring from where we are today, several categories have had very strong runs within the department store side -- last year, specifically the spring, and throughout the year.

I just wanted to understand your level of confidence in the ability for certain categories to continue to perform at such a high level.

Well, what categories are you referring --?

Handbags and cosmetics.

We're confident those businesses are still going strong.

And again, as we think about the trends that have made them strong -- color, things like that -- it's still happening.

So we are hopeful.

Regarding the Reinvent question, I have not looked at the average unit retail in the Reinvent stores versus the not.

In terms of sales trends, they have tended to do better, but now that it's over 50 percent of the stores, it's a lot harder to track, because you are now in the stores that we operate.

One more question.

On the SG&A side for the fourth quarter, can you just elaborate a little bit more, maybe in terms of some of the advertising, the dollar number that you had lower, and sort of how that really trended for you, what led to the lower advertising expense?

I think it's just a question of as we refocus our advertising more on branding and less in some of the traditional promotional ways of advertising, we ended up spending a little bit less than we had historically.

Linda Kristiansen, UBS.

Two questions, one on the Home business.

In some of the stores where you've reset -- I guess there were two of them, one in Florida and one in New Jersey -- could you talk a little bit about what has happened to sales and performance in those Home segments?

Secondly, I was wondering -- I think you said average unit retail was up 6 percent.

So that suggests that traffic still continues to decline.

Could you comment on that?

Yes.

Well, on traffic, I think the math is obvious, if average unit retail is going up 6 percent.

So I think that is correct.

Are you concerned at all about the traffic?

Is it declining more rapidly, or has it stabilized, in terms of rate of decline?

Of everything I worry about, that's not high on the list -- again, because I think we are going to continue to get more from the customers that are in the store.

I think we're fine.

In terms of the Home question, the two stores you are referring to, I think, are Aventura and Garden State.

And actually, they are two different situations.

Garden State, in New Jersey, has been set up as a prototype, in terms of the assortments, but has not gone through a complete Reinvent.

Aventura has had the complete Reinvent.

And, Linda, it's really too early to judge.

Sales look good both places.

We have also reinvented Roseville and Rancho Cucamonga in California -- also, like Aventura.

But I think it's early to tell, but we are encouraged.

When you say Aventura has had the complete Reinvent, like what is -- can you compare Garden State and Aventura?

What is the major difference between the two?

Linda, I can't, but I know that we've put money into capital and changed the look of the store, as opposed to just changing the signing and the assortment, a more complete package.

Is it a little bit more upscale assortment at Garden State than what it was before?

I don't know the answer to that.

Christine Augustine, Bear Stearns.

Karen, for 2005 inventories, would you anticipate that they would likely be down again, maybe in the kind of low single-digit range?

Or if it's different, could you just give a little more detail?

At this point, they are planned to be somewhat flattish at year end, but I hope that we do better than that.

I think with all the efforts underway, we should.

And then, are there any new brands?

We have read a couple of things in the trade papers about maybe some new private brands in the men's area.

One, I think, is called Material London (ph).

Can you should any light on that?

Actually not.

You've stumped me.

Dana Cohen, Banc of America.

A couple questions.

On the AUR, you said it was up 6 percent for the year.

Can you give us some sense -- I presume it was stronger in the first half.

Can you just give us some sense of how it was first half versus the second?

It was, but I don't have those numbers in front of me, but you are right.

But it was up in the second half?

Yes

Okay.

And then on advertising, with the shift to the Macy's national name, what percent do you see, over time, of the marketing dollars moving to TV versus print?

I don't know the long-term plan, but clearly that is part of the strategy.

And how big of a move do you think we will see this year?

Very gradual.

And then, you gave a number, and I apologize -- I missed it.

Private brand was what percent of business?

17.4 percent.

Okay.

But a third of the business is exclusive, so that would include --

Brands and lines that are only in our store or one other department store.

Teresa Donahue.

In terms of your comp plans for the year, before you indicated, in response to Linda's question, that you were not concerned about traffic.

In your comp plan, what are you assuming about traffic versus ticket, and where would the ticket come from, if you are expecting price deflation of 2 percent for the year?

Terry, we have had price deflation for last couple of years, and our average unit retail has continued to go up.

So, while that sounds like a challenge, it is what has happened.

And we don't actually plan traffic versus average unit retail, so I don't really know how to address your question.

But you are probably not assuming it goes up?

No, because we are assuming the average unit retail continues to go up.

Fred Taylor.

Lord Abbett.

Thank you for the guidance for '05, and just a question on that.

Absent the two questions you did not want to hear about it, monetization of the credit card portfolio and an acquisition, the guidance you gave connotes excess free cash flow.

And could you -- do you have any thoughts at this point on how much of that would be directed toward debt reduction and stock repurchase?

Absent the two subjects we're not talking about, you can see that most of our excess cash does get utilized, in terms of stock buyback programs.

There is no more debt, really, to pay down, other than a $400 million asset-backed debt that comes due in the fall.

So that would depend on the credit decision.

But the lion's share of our cash is going to go -- again, absent the two conversations -- to buying back stock.

Right.

And would there be a governor on that that you want to maintain current debt ratings?

Our view is that we went to be a BBB+ company.

And so, as we tend to look at credit ratios, we will not purposefully buy stock back to the point that we may get downgraded.

But there's a lot of cash flow here (multiple speakers).

Thus far, there are no questions in queue.

Thank you all very much.