梅西百貨 (M) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

I would like to thank you for holding and welcome you to today's Federated Department Stores conference call, being hosted by Karen Hoguet.

All lines will be listen-only until the question-and-answer session, and at the time we will give you instructions as to how you can use your phones to ask a question.

At this time, I would like to turn it over to your host, Ms. Karen Hoguet.

And your conference is also being recorded.

Good morning, and welcome to the Federated Department Stores conference call scheduled to discuss our first-quarter performance.

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 expectations and 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.

In today's call, I will discuss the highlights of our first-quarter performance and discuss our key expectations and assumptions for the second quarter.

While I know you probably would love more details on the May merger or the credit process, there is nothing new on either front to be discussed today.

As to credit, we still anticipate making a decision in the second quarter, and as for the May Company, we are still expecting a third-quarter close.

Now to the quarter.

We are obviously very pleased with our performance in the first quarter.

We went into the quarter concerned about the very strong 2004 performance that we were up against.

Many if not all of you expressed the same concern.

However, we were able to exceed our sales expectations by a nice margin, and we were able to really leverage the above-planned sales, dropping most of it to the bottom line.

This performance reinforced two key points to us.

First, making comp-store sales growth our top priority has clearly been the right direction, when you see the leverage in this business.

And secondly, our strategies for accelerating our comp-store sales growth, the four priorities, appear to be working.

For those of you who know me and the Company, you would not be surprised that I want to add a caution that this is only one quarter, so we should not be too bold about our success, and to remind you that the leverage is typically greatest in the first quarter, due to the fact it is naturally an unproductive quarter.

But we are very pleased, and do feel as if we have momentum.

Sales in the first quarter were $3,605,000,000.

On a comparable-store basis, the increase was 2.6%.

And remember, comp-store sales were up 6.9% in the first quarter last year.

Sales were strong in jewelry, handbags, cosmetics, men's and women's sportswear, juniors and kids, and weak in the big-ticket home areas -- furniture, bedding and floor coverings.

We did begin to see some improvement in the small-ticket home categories, most notably luggage and housewares, which is very encouraging.

Sales of our private brand merchandise were also very strong in the first quarter.

Geographically, our strength was pretty widespread, with the exception of the central part of the country, where we saw weaker performance.

Our gross margin rate in the first quarter was 40.3%, up from 40.1% last year, or 40.3% last year excluding the store closing and consolidation costs.

This was somewhat better than expected.

Remember that last year's gross margin rate, excluding store closing costs, was 110 basis points over the prior year, so we had expected our gross margin rate to be under pressure this year.

Inventory in the quarter was down 2.4% versus last year, which did contribute to the better gross margin results.

SG&A in the quarter was $1.2 billion, essentially flat with last year in dollars.

Therefore, as a rate, SG&A improved 60 basis points.

Excluding last year's store closing costs, SG&A dollars increased 1.7% this year, but as a percent of sales, still improved 30 basis points.

Increases in our credit profitability had the largest positive impact on the expense rate in the quarter.

Operating income in the first quarter was $252 million or 7% of sales.

This compares to $217 million or 6.2% a year ago.

Interest expense in the quarter was $54 million, $6 million below last year and slightly better than expected, due to our strong cash position.

Tax expense was $75 million.

Net income was $123 million, up 27% versus last year.

Average diluted share count in the quarter was 172.8 million shares.

No shares were repurchased in the quarter.

Diluted earnings per share was $0.71 per share, up 34% over a year ago.

Excluding last year's store closing and consolidation costs, diluted EPS was up 20% this year.

Cash flow before financing -- meaning cash provided by operations less cash used by investing activities -- was an outflow of $5 million in the quarter, versus an outflow of $37 million in the quarter last year.

So cash flow was also strong in the quarter.

It really was a great quarter on all fronts, and we are very proud of our results.

As we look to the second quarter, we do not expect to give back any of these good results from the first quarter, but we also are not projecting to continue to exceed plan.

We are still expecting a comp-store increase of 1% for the quarter and EPS on a diluted basis of $0.80 to $0.85 per share.

We continue to expect a flattish gross margin rate in the quarter, excluding last year's $13 million of store closing and consolidation costs.

SG&A in the second quarter is assumed to be flattish in dollars, excluding last year's store closing and consolidation costs.

We are not discussing projections for the back half of the year until we make the credit decision and until we better understand the timing of the May transaction.

Having said that, the fundamental Federated assumptions discussed when we provided guidance in conjunction with the release of the fourth-quarter earnings have not changed.

I will now open the call for your questions.

(OPERATOR INSTRUCTIONS).

Wayne Hood.

So we can get a sense of leverage in the model, if you were to strip out credit in the first quarter, what happened to the expense rate as a percent of sales, or store-level expense rate or however you would like to look at that, ex credit?

You know something?

I don't know the answer to that, and that's not something we would disclose.

Jeff Stein.

A question with regard to May Department Stores -- I'm kind of curious.

Yesterday on their conference call, they that they are already going to start to make commitments for next spring by June or July; in fact, they have got to be pretty much finished.

And I'm wondering, if the deal closes as expected in the third quarter, how soon will it be before you can begin to impact their merchandising?

Well, it depends on the leadtime of the individual merchandise lines.

For example, there are some categories in private brand that will take longer to impact, and we are probably talking about fall of '06 before we can impact that.

Other businesses, such as juniors, which has a shorter leadtime -- hopefully, we can have some impact by the second quarter.

But a lot of spring will be bought by the time this deal closes.

And the second question, kind of housekeeping -- I think, when you guys provided your initial guidance for this year, you were assuming somewhere in the area of $20 to $25 million of costs associated with FAS 123.

And I presume that will not be adopted now until 2006.

So should we be adding the effect of that back into our model?

That decision has not yet been made.

Gregory Fowlkes.

It looks like inventory per square foot numbers continue to come down, and I'm assuming that price points are still trending up.

I know AUR was up about 6% in Q4.

First off, how do you feel, overall, from a unit inventory standpoint?

Second, can you update us on AUR trends, and can we assume that inventory levels will continue to come down?

Average unit retail was up a little over 3% in the first quarter.

And we are very comfortable with the inventory levels, and in fact, they may still come down slightly.

What we are trying to do is accelerate our turnover as we go forward, and looking particularly at replenishment areas where we think we may be holding too much stock.

So we are continuing to look for opportunities to do that, but not at the same levels that they have been coming down in prior years.

Is some of that going to be systems-driven?

I know ProfitLogic is something you all have installed at Bloomingdale's.

Is that something we could see rolled out to Macy's?

No.

Well, we have a home-grown process that we call 20/20 that has been rolled out to the Macy's divisions already, which is not as sophisticated as ProfitLogic, but we think it's having some very good results, in terms of focusing the merchants on marking goods down faster and also impacting what is on order.

So, in other words, if a certain trend is selling, the merchants are focused on buying more of that and canceling and reallocating trends that are not selling.

So we find that it's helping sales, margin as well as turnover.

So it's actually got a broader impact than what ProfitLogic does, which is focused much more on the markdown piece of that.

Bob Drbul.

On the credit, could you just talk about the penetration in the first quarter, with the launch of the new card and the national branding campaign, and if you had anything different that happened on the credit side?

Yes.

With the launch of the Star Rewards program again, as well as the Macy's name, we did have a nice increase in penetration in the first quarter that, again, we feel very good about.

As you know, we are trying to shift more and more of our promotional efforts to the proprietary cardholders.

And so that is helping penetration, as well, but also allowing us to develop, in essence, a deeper relationship with our credit customer.

And can you just talk about at all what you learned so far with the -- besides the solid quarter and the national branding campaign, and if you would -- are you going to fine-tune it further?

Should we look for anything different this quarter, as the year progresses?

Well, it's frankly too early to judge.

But at least so far, it should look strong.

And one final question is just on the Home business.

Could you just provide an update in terms of what you think we should be looking for as this year progresses now on the Home side, and any changes to the outlook from that initiative?

Well, we said all along that it would be fall of '05 before we would start seeing the real payoff, in terms of sales trends in the Home Store, and we are still on track to do that.

And as I mentioned, it was encouraging to begin to see some of the categories in the Soft Home business already begin to feel a little bit stronger in the first quarter.

So we still do hope that the fall will be benefited by that.

Teresa Donahue.

I had two questions.

First of all, the gross margin rate in the first quarter -- I believe it was probably the highest you have had in many, many years.

I was wondering if you could give us some sense as to where you guys think structurally your gross margins could go, given ProfitLogic and improved inventory management.

And secondly, I just had a question relative to the May inventory situation, whether some markdowns on merchandise already bought had been included in your charges and expectations for '06 internally.

Let me start with the first question.

In terms of gross margin, as you know, we had expected this year's gross margin rate to be essentially flat.

Obviously, the first quarter was better than that, which makes us encouraged.

We frankly don't know, as we roll out 20/20 more, if there is or how much upward potential there is in the gross margin rate.

Remember, though, that given the competitive situation in which we operate, any time we can give more value back to the customer, we are looking for those opportunities.

So, again, I don't think over time you should expect anything better than a flattish gross margin rate.

In terms of your second question, I'm not sure I understand it.

We did expect to take a lot of markdowns as we transitioned the May inventories to the ongoing Federated assortments, if that's your question.

Okay.

So what they indicated yesterday, in terms of anticipating being bought out to spring -- you would have anticipated that in --?

Oh, absolutely.

I mean, we are running independent companies.

Dana Cohen.

Just on the gross margin -- it's not a lot, but just give us a sense of the pieces that are driving it.

Is it IMU?

Is it markdown?

Is it private brand?

And then, on the SG&A, you are talking flattish for Q2.

It was up almost 2% in Q1.

What should we be thinking is the underlying growth rate of SG&A?

In terms of the gross margin component, it's a little bit of everything in the first quarter.

But where the good news came in was in terms of markdowns, and that's related in part to 20/20 and those efforts, is primarily where that -- but it is sort of across the board.

And frankly, when sales are good, you obviously are going to take less markdowns -- for the obvious statement for the day.

And I think that was a big part of that, as well.

Your second question, in terms of SG&A -- as you think about it, and as we gave guidance for this year, there were some items that were going to negatively impact this year -- particularly, for example, retirement expense.

Now, in the first quarter, we were able to offset that and do a little better.

But our guidance has been that SG&A, excluding store closing costs, as a percent of sales would be up slightly year over year, as a result of these increases.

As a percent of sales or dollars?

As a percent of sales.

Adrianne Shapira (ph).

Karen, I just had a few questions.

You had mentioned average unit retail up 3%.

And as we recall, it was up about 6% last quarter.

So, clearly, the traffic looks like it has improved pretty dramatically from the fourth quarter.

Is that a function of the national brand marketing campaign, or what's your thoughts there?

We don't always look at it as being traffic and average unit retail.

It's frankly average unit retail and number of items and transactions, which could be a surrogate for traffic, but you don't know that.

But again, as we have been looking to upscale our assortments, that was not going to continue forever.

And so the good news is that we have been able to produce sales growth even as that begins to grow a little bit less aggressively.

So I think it bodes well for the future.

And then the next question -- you had mentioned replenishment opportunities as you go in and look to improve turn on your inventory.

Can you give us a sense how many categories are on replenishment, and how many you think have the opportunity to shift that way?

I don't know how to give you an estimate of how big the potential is.

We are still looking at that.

Stacy Turnof.

Can you first of all walk us through the 19 million for the store closing and centralization costs -- if you can give us a breakdown between SG&A and gross margin?

Give me a second;

I'll have to look that one up.

And these are all from last year.

Last year in the first quarter, it was 4 million in margin and 15 in SG&A.

Now, just jumping over to Reinvent, since you haven't really mentioned it, have you seen anything different in this quarter from your Reinvent initiatives, in terms of buying patterns, sales or traffic?

Well, now that the reinvented stores represent over half of our volume, it's a lot harder to tell you exactly how they are doing versus the others.

But we clearly think that the Reinvent initiatives are doing great things for our sales.

And then, lastly, what is the benefit of using ProfitLogic at Bloomingdale's versus your 20/20 tool?

Is that something that you might think about rolling out to Macy's?

That's a question that is, frankly, very hard to answer in a simple way.

There are pros and cons of both, and I don't know where we may end up someday.

Filippe Goosens.

Karen, I actually have three questions today.

The first one -- with the new bankruptcy law now passed, do you expect any kind of pickup in filings before that new law kicks in?

We are not seeing an impact on that.

Second, when Jones New York reported their earnings earlier, they reported -- or they indicated basically that retailers are starting to change the way they order their footwear, in order to improve turnover and flow of product.

Can you share with us, perhaps, what you are doing in that space?

Well, in all cases -- and, again, I don't know exactly what they were referring to.

But we are constantly trying to buy better and focus more on what is selling and closer to need, as ways of improving turnover.

And then, finally, with Congress now starting to look at potential safeguards for imports from China, what are you seeing in terms of price deflation as a result of this increase?

And then, finally, do you have a view on CAFTA (ph) at all?

I don't know on your last question.

And we have not really seen much impact at all.

Christine Augustine.

What led to the Company's decision to accept Discover credit cards?

And my second question is, how would you characterize the promotional environment currently?

The promotional environment -- I don't see that there is a big change.

I'm not quite sure how to judge that, but there's nothing out of the ordinary going on.

And as to Discover, if there's opportunities to grow our sales and profitability, I'm sure those were taken into consideration in that decision.

And could you share with us what percentage of the monthly balance is the required minimum payment on your proprietary cards?

I don't know the answer to that.

Laura Starr (ph).

My questions have been answered; thank you.

Deborah Weinswig.

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

In terms of -- we've obviously discussed a lot of topics over the quarter.

But in the last call, we talked about kind of decreasing the promotional environment at Bloomingdale's.

And obviously, there's been a decrease.

Can you talk about any kind of -- you talked about the promotions of proprietary cardholders.

And then just kind of update overall between Bloomingdale's and Macy's on the promotional front?

Again, you talk about a decrease in promotional environment.

I guess we don't really look at it that way.

What we are trying to do is try to give more value to our better customers, and get them to shop more with us -- again, as part of building the relationship.

And that is true for Macy's and Bloomingdale's.

And along those lines, are you also doing more in-store events?

And obviously, are you communicating more with your existing customers and your proprietary cardholders about those events, as well?

I'm not sure that there's more happening in terms of in-store events.

(Indiscernible) opportunity.

At this time, I am showing there are no further questions.

Great.

Well, thank you all very much.