梅西百貨 (M) 2005 Q2 法說會逐字稿

I'd like to thank everyone for holding and welcome you to today's Federated Department Stores conference with our moderator, Karen Hoguet.

I need to remind everyone that today's conference is being recorded for playback purposes, and that today's conference will be conducted in listen mode.

Ms. Hoguet, I will turn the conference over to you.

Good morning, and welcome to the Federated second-quarter earnings call.

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.

I also want to add a non-legal disclaimer here, which is that, as you probably can tell from my voice, I have a terrible summer cold.

So if I don't sound upbeat this morning, that's the reason.

Today's call actually will be very simple.

We had a quarter consistent with our expectation, and we are waiting until the May deal closes to give guidance for the fall season.

As you know, we still expect the May merger, as well as the Federated credit transaction, to close in the third quarter.

We were pleased that we achieved our original expectation of 1% comp-store sales growth in the second quarter, and that we produced earnings consistent with the high end of our guidance.

The EPS of $0.84 was 95% above last year and 33% above last year excluding the costs associated with last year's debt repurchase.

There were no real surprises in the quarter.

It was pretty much as expected when we discussed our outlook during the first-quarter earnings conference call.

Some of the highlights of the quarter were as follows.

Sales -- total sales were $3.623 billion in the quarter.

Total sales were up 1.2% over last year, with sales in comp stores up 1.1%.

Sales in the quarter were strongest in Florida, with above-average performance also at Macy's West, Macy's East and Bloomingdale's.

Sales were weaker in our central division and in the Northwest.

Private-brand merchandise continued to demonstrate strength across the entire store in the second quarter.

If we look at it by merchandise category, sales continued to be strong in center core categories, most notably cosmetics, shoes and handbags.

Home sales continued weak in the second quarter.

Within apparel, the women's areas were stronger than men's and we saw renewed strength in juniors.

Gross margin rate -- as you saw, our gross margin rate in the second quarter was just slightly below a year ago, excluding last year's store closing and consolidation costs.

Inventory was down close to 3% at the end of the quarter and continues to be in very good shape, both qualitatively and quantitatively.

SG&A -- SG&A in the quarter was essentially flat in dollars with last year, excluding store closing and consolidation costs.

As a percent of sales, SG&A was down 40 basis points on the same basis.

Operating income was, therefore, $291 million or 8% of sales versus last year's $245 million or 6.8% of sales.

Excluding last year's store closing and consolidation costs, operating income last year was $276 million or 7.7% of sales.

Interest expense -- at $54 million, it was a little better than expected, due to higher cash balances, and it was $65 million lower than last year, $59 million of which is due to the costs associated with the debt repurchase last year.

Cash flow in the first half of the year from operating activities was $665 million, up $79 million over last year.

This is due primarily to higher net income.

Net cash used by investing activities was $44 million lower than last year, due primarily to lower CapEx, lower growth in the Visa portfolio, partially offset by last year's collection of a $20 million note.

Therefore, cash flow before financing was $428 million, which was $123 million better than last year.

In addition, approximately $100 million more cash came in from option exercises than a year ago.

And in the first half of the year, we repurchased no stock, nor was there any material debt reduction.

Therefore, on the bottom line, we increased cash by $531 million in the first half of the year versus last year, when we used $320 million -- so a spread of about $850 million.

We ended the quarter with close to $1.4 billion of cash on our balance sheet.

As I said earlier, we were pleased with our results in the second quarter, and even more so with our results for the first half of the year.

We have stayed focused on executing our four priorities, and have continued to make progress, even with the pending May acquisition.

As we look to the fall season, we are only giving our comp-store sales guidance at this point, which, as you know, is 3% for the Federated divisions -- 3% in the third quarter, 3% in the fourth quarter and, obviously, 3% for the fall.

Once the May transaction has closed and we have had a chance to discuss May management's expectations for their business this fall, we will provide guidance for the combined Company.

Keep in mind, though, that we do not intend to make any material changes to the May Company operations this fall.

As I mentioned earlier, we still anticipate a third-quarter closing of both the May merger and the Federated credit transaction.

As you saw Terry Lundgren said in our press release, we are all looking forward to the beginning of a new era for this company, which will be a period of positive long-term change that will benefit our customers, our employees as well as our shareholders.

With that, I will open the call up for any questions you may have.

(OPERATOR INSTRUCTIONS).

Adrianne Shapira, Goldman Sachs.

Karen, could you just give us a little bit more color on the gross margin?

As you said, it was down about 8 basis points from a year ago, and I know you had been planning --

Yes, we had been planning for that, Adrianne, so it's really not that big of a change.

But could you perhaps break out the components, initial markup, markdowns and especially -- it seems like in the first quarter, you had tremendous success with the 20/20 (ph) rollout on the margin line.

So any updates are?

Well, 20/20 is still a remarkable success.

But remember, the benefits there are primarily on sales, a little bit on margin and on turnover.

And as you can see, comp-store stocks continue to be down versus prior year.

So 20/20 continues to be a spectacular success for us.

And in the quarter -- I mean, it's down slightly.

I guess markdowns were a little bit higher than expected, but essentially what we had expected when we gave the guidance in the first quarter.

And then, on average unit retail, I know it was up 3% last quarter.

This quarter?

It's up again.

It's up about 4% for the spring season.

And then just -- recent comps have been a little bit choppy.

Can you just give us an update what you think the consumer's appetite is going into fall?

Are the fashions exciting enough to keep her engaged, and --?

The only month that was choppy was July.

And frankly, July is really a clearance month.

If you think about how strong our business had been earlier in the year, we just didn't have as much clearance to sell.

You know, that was a particular problem with private-brand merchandise.

So I really am not overly concerned about sales.

Jeff Stein, KeyBanc Capital.

I'm wondering if you might comment on the early results from the Home store relaunch.

It sounds like perhaps you might be falling a little bit short of expectations there.

And I'm wondering, if that's the case, how much might be attributable to just the weak macroenvironment for Home and what, if any, mistakes perhaps that you may be learning from here early on.

It's a complicated subject.

Home obviously has continued to see weakness -- interestingly, no weaker than it had been prior to our consolidation decision.

So we don't think anything that we did has made our Home business weaker; it just hasn't strengthened as much as we had hoped at this point in time.

I think part of that just has to do with what's happening in home goods in general, particularly big ticket.

But in addition, I think we would all say that, while the strategy for consolidating Home was absolutely the right thing to do, the execution of that and the cultural change is taking us a little bit longer to make progress.

We do expect Home to pick up some in the balance of the year, but, again, we had hoped it would be doing better by now.

So we are still hopeful.

Some of the new product has come in; you may have seen some of the Provence product that is doing very well.

So we do feel good about the changes that are happening; it's just taking a little bit longer and in an environment that appears to not be very conducive to Home sales.

Deb Weinswig, Citigroup.

Actually, my questions were on Home, as well.

Can you maybe just talk a little bit about the recent appointments of both Tim Adams and Michael Osborn?

I think that both Tim and Mike are clearly amongst the best managers we've got in the Company.

And with the increase in the size of the Home operation as a result of the pending May merger, we wanted to get a two-person team in there and also put our best talent there.

And I think with Tim and Mike, we have done that.

And obviously, Florida has been a very strong performing region for you.

In terms of Tim's replacement, can you maybe also address that, as well?

Yes.

Julie Greiner, who replaced Tim, had been running stores at Bloomingdale's and is very strong.

And interestingly, we were down there last week for our semi-annual visit, and she has hit the ground running.

And we all feel very good about the team there.

There is a lot of continuity under Julie's level, so we are not at all concerned about risk there.

Her partner, Trip, has been there for a while -- very strong, so I really don't see an issue there.

Dana Cohen, Banc of America.

Terry recently commented that you guys were starting to meet with some of the May organization;

I think there were some early meetings maybe six weeks ago.

Can you give us an update on what's going on there?

Yes.

Essentially, we're having what we're calling meet-and-greet meetings.

It's giving Terry and Sue and some of the rest of us an opportunity to just talk to the May organization about what Federated is all about -- talk about our four priorities, a little bit about our culture, how we operate, et cetera, et cetera.

I have been at some of those meetings, particularly in St. Louis.

And frankly, we are just trying to get out and put human beings and faces behind the people that will be running the new combined Company.

And how many of these meetings or how many divisions (multiple speakers) --?

I knew you were going to ask me that.

Most of the divisions have been covered, and the others are scheduled, I believe, in the next week or so.

So we will have covered most of the operation shortly.

Gregory Fowlkes, Morgan Stanley.

First off, your inventory continues to come down, and it looks like your payables are actually up.

And I was just wondering if that's a timing issue or if you are already starting to realize the benefits of increased scale?

No, I think it's a timing issue.

And we are not anticipating any benefits in payables as a result of increased scale.

And then, just following up on the gross margin question, with inventory per square foot continuing to come down over time, and I'm assuming that there's a clearance component to that that continues to shrink, yet gross margin sort of seems -- the expansion seems to have flattened out somewhat.

Do you think that your sort of maxing out, in terms of gross margin expansion at the Federated business, or --?

Well, we have said for a very long time that we expect gross margin to be flattish, in large part because we are driven to give the customer more value, so that we can drive and accelerate comp-store sales.

Frank Henson, Bear Stearns.

I just had two questions.

One, I was wondering if you could just give the fixed-income community some guidance with respect to how you plan to finance the May acquisition.

And I understand that you've announced plans to sell the credit card operation, but I still understand that there is probably somewhat of a funding shortfall.

Are you planning to come to market with a bond deal, or --?

There is actually not much of a shortfall at all between the excess cash on hand and the credit sales that will happen over time, though.

So day one, we will have to finance in the short-term markets some of the need, and we are putting together a bridge facility to do that.

But in a very short time, all of that acquisition-related debt will be gone between the sale of credit, the cash on hand as well as the sale of the stores that we have already announced we will be disposing.

So it's comfortable to say that you will not be coming to market with a bond deal?

None are anticipated at this point.

And my second question relates to your relationship with Jones Apparel.

On their conference call, they had highlighted that some major department stores were -- that they were seeing a significant reduction in receipts from department stores, and I was wondering if you could just talk about your relationship with them and the presence of their merchandise in your stores.

Have you cut back on your buying?

What are your plans as you look toward your merger with May Department Stores?

I really can't comment at all on our plans with any particular vendor.

In general, as part of 20/20, obviously, we are trying to, frankly, keep the receipt flow going, but work it through the system faster.

But again, I can't speak specifically to Jones.

(OPERATOR INSTRUCTIONS).

Christine Augustine, Bear Stearns.

Could you discuss the reason that accounts receivable are up 7% at the end of the quarter versus the sales gain of 1?

Yes.

Our credit business continues to be very strong, and in fact, our penetration in the first half of the year is up about 160 basis points over a year ago.

So credit continues to be a very good business for us, and that is shown in the receivables going up.

Would you attribute that to the relaunch of the Macy's card and the Star Rewards program?

I would.

I think that has had a big impact on that.

And, as you know, one of our priorities is focusing more on our best customer, which is our credit card customer.

So those strategies appear to be working.

You mentioned the AUR mean (ph).

So is it fair to say, then, traffic is down and that the ticket or the size of the transaction is up, generally speaking, for the first half?

Well, it's not a question of traffic.

It's the number of transactions.

So be careful.

Traffic is not the other variable with that, but obviously the number of transactions is lower. (Multiple speakers).

And finally, do you think you are starting to see any type of leverage in your marketing spend, based on the conversion of the nameplates to Macy's?

You know, the truth is we are focused right now on building the Macy's brand and not on getting that leverage, so it's really premature.

But would what be a longer-term goal?

It's possible.

I don't know that I would call it a goal.

Right now, again, we are just focused on building the brand.

Robert Drbul.

As you look to the May transaction, can you talk a little bit about how fast you think you can turn their private-label business around?

They had significant markdowns again this quarter.

And the second one would be just in terms of how long exactly do you think it will take you to remerchandise the store, with all the Macy's type products?

And the answer will vary by family of business.

Obviously, the leadtimes are different.

But our assumption is we're hoping to have a major impact on the assortments by third quarter of next year and certainly for the holiday season.

It will take that long, though.

And that's true for private brand and regular brand.

(OPERATOR INSTRUCTIONS).

Ms. Hoguet, at this time, there are no further questions in the queue.

Good.

Thank you all, and we look forward to talking to you more as these various transactions close.