梅西百貨 (M) 2005 Q4 法說會逐字稿

Hi.

Can I have your attention, please?

I would like to thank you for holding today and welcome you to your Federated Department Stores conference call.

I would like to remind all participants at this time your lines will be in a listen-only mode.

Today's conference call is also being recorded for future playback purposes.

At this time, I will turn the conference call over to Karen Hoguet, and thank you for using the conferencing service.

Thank you.

Good morning, and welcome to the Federated Department Stores conference call scheduled to discuss our fourth-quarter 2005 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 reconciliation 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.

Before we discuss the numbers this morning, I want to take a minute to talk about our other announcement made earlier this morning.

To maximize the potential of the national Macy's, we believe we need to take our marketing to an all-new level.

Since Peter Sachse became Federated's first-ever Chief Marketing Officer about three years ago, he has done a great job at working with our divisions to evolve to the Macy's name and increasing coordinate our marketing and sales promotion efforts across the Company.

Having worked in many divisions, including being President of what is now Macy's Northwest, he had the ability to help transition to a more national approach to marketing.

As a result of these efforts, plus now the addition of the May Company Stores, we are now ready to push even harder to establish Macy's as a leading American consumer brand.

We are so pleased that Anne MacDonald is joining our team as our new Chief Marketing Officer.

She joins us from Citi's Global Consumer Group, and has worked at Pizza Hut and at two ad agencies, Ayers and Grey Advertising.

With a foundation led by Peter, laid by Peter, and the partnership with our division marketing executives, we have high expectations for Anne and the corporate marketing team.

We are also excited about Peter becoming Chairman and CEO of macys.com.

With the national Macy's name, the opportunities for macys.com are enormous.

As we announced last month, we are investing approximately $130 million in capital over the next two years in infrastructure improvements and service enhancements to help us grow this business.

We already have a strong macys.com team, led by Kent Anderson, in place.

And Peter's leadership skills, along with his merchandising and marketing experiences, will be very helpful as we further build that business.

These are both great moves that will enable us to build the national Macy's brand.

2005 was a big year for Federated.

We completed two major strategic transactions -- the acquisition of May Company and the partnering with Citigroup on our credit business.

We have positioned ourselves to compete more effectively going forward, and at the same time, enhance our profitability and cash flow generation.

And with all that going on, the Federated divisions produced operating income on a comparable basis ahead of what we expected to produce in the year and well ahead of 2004, in both dollars and rates.

And we did this in spite of producing lower sales than we had expected.

And on top of that, the May operations, which we acquired in late August performed better than what we expected when we closed that deal.

Let's first spend a few minutes now talking about the fourth-quarter.

And then I will make a very few comments about 2006, although there is nothing really to add to what we said on our conference call on January 26.

And of course, I will then end by opening the call up for your questions.

Our fourth-quarter sales were $9,571,000,000, up 87% over a year ago.

On a comp store basis, Federated sales were up 1.1%, which was the low end of our 1 to 2% guidance.

May doors contributed sales of approximately $4.5 billion in the fourth quarter.

We had guided you to expect May sales of 4.6 to $4.7 billion in the quarter, but remember that that guidance included Lord & Taylor.

Had Lord & Taylor been included, May sales would have been $4.9 billion, well in excess of what we expected.

We were very pleased that the May divisions generated stronger-than-expected sales.

Remember, though, that our expectations, based on the year-to-date trends at the time the transaction closed, were low.

Remember, we had expected comp store declines of 5 to 7% for the fourth quarter.

As we look at the quarter, sales were strongest in dresses, handbags, shoes and fragrances, while the Home Store continued to lag.

We have the strongest results at Macy's Florida and Bloomingdale's among the Federated divisions and at Foley's, Hecht's, and Famous-Barr amongst the former May division.

Gross margin for the combined company was 40.9% before inventory valuation adjustment, equal to last year, or down 10 per basis points, excluding last year's inventory valuation adjustment related to Macy's Home Store centralization.

Remember that last year's results in the fourth quarter include pre-May Federated only.

This year, 2005, the Federated divisions’ gross margin rate was particularly strong in the quarter, due in part to great shortage results.

The former May Company's gross margin rate was less strong due to markdowns taken to clear unwanted inventory.

Federated ended the year with inventories down versus a year ago and in good shape from an aging perspective.

This is the old Federated divisions.

And while we made progress with the May inventories, we will continue to work to improve both the quantity and the aging as they transition to our standards.

Also impacting the fourth-quarter margin this year was $25 million of inventory valuation costs associated with the May integration, which, as you have seen, are broken out on the P&L.

SG&A in the fourth quarter, which excludes May Company integration costs, was 27.0% of sales in the fourth quarter of 2005 versus 26.0% for Federated last year or 25.8% last year, excluding store closing and consolidation costs which were part of SG&A.

This year's SG&A rate was negatively impacted by the sale of Federated's credit business to Citigroup.

Remember, the SG&A goes up, the interest expense goes down.

So the impact on EBITDA is negative, but much less so when you look at a pretax income number.

But in the fourth quarter, this change in accounting resulting from our sale of the receivables was worth approximately $36 million or .4 points as a percent of total sales in the fourth quarter.

We also booked in the quarter $79 million or 0.8 points as a percent in non-cash charges as we fair value the May assets and liabilities.

By the way, as you go to model the fourth quarter of 2006, note that approximately 70 million of this 79 million will not be included in SG&A in the fourth quarter of 2006.

Excluding these two items, the SG&A rate would have been flat in 2005 versus 2004.

May Company integration costs booked in the quarter were $106 million.

This, combined with the $25 million of inventory valuation adjustment already discussed, results in a total of $131 million, which is within the expected range of 100 to $150 million for the fourth-quarter integration-related costs.

Operating income from continuing operations, excluding integration costs, was $1,325,000,000, up from $763 million a year ago or $776 million, excluding last year's store closing and consolidation charges.

As a percent of sales, operating income on this basis, excluding last year's store closing and consolidation costs and inventory valuation adjustments, was down from 15.2% last year to 13.8% this year.

This drop can be explained almost entirely by the sale of credit and the non-cash adjustments associated with increasing May assets to their fair value.

We are very pleased with this operating performance.

Interest expense in the quarter was $127 million, which was below our expected $160 million. 17 million of this is due to a settlement of the IRS exam for fiscal years 1998 and 1999.

The remaining variance results from stronger-than-expected cash flow in the quarter.

Tax expense in the quarter was $389 million or 36.5% of pretax income.

This is lower than the expected 37.7%, primarily due to $10 million of reduced taxes due to the settlement mentioned above and other examinations.

Average share count on a diluted basis in the fourth quarter was 277 million shares.

Earnings per share on a diluted basis from continuing operations was $2.45.

On this same basis, but also excluding the May integration costs, EPS was $2.74 in the fourth quarter.

So, as I said, we are very pleased with the quarter's results.

But I know you are all asking, why did we beat our original estimates by so much?

As you know, we beat our original guidance, adjusted to exclude Lord & Taylor, by $0.39 to $.49 a share.

The first factor causing the variance is the IRS tax settlement, which, as I mentioned, impacted both interest expense and tax, which was worth $0.08 a share.

The remaining variance would be split roughly 70 to 75% due to higher May operating income than what we expected, driven primarily by the higher sales, and to a lesser extent, lower expense.

And the remaining variance is due to better Federated operating income driven by higher gross margin and lower expense.

Our operating cash flow remains strong, and we have repaid a significant portion of the short-term debt issued to acquire May Company, leaving our debt to cap at year-end at 43%.

As of year-end, we had approximately $1.2 billion of commercial paper outstanding.

We are glad to be coming off a strong finish to 2005, but that has little bearing on the expected 2006 results.

There is really nothing to add or modify at this time from the guidance we provided on January 26.

As we said then, 2006 will be a transition year as we integrate divisions, transition systems and convert the names of all the May doors to Macy's.

We remain confident that the combined business will be a premier national retailer, capable of achieving historically high EBITDA rates adjusted for the sale of credit portfolios of 14 to 15% in the 2008 to 2009 timeframe, while generating significant cash flow.

And with those comments, I will now stop and take your questions.

Deborah Weinswig, Citigroup.

In terms of the Home Store centralization, can you provide additional details in terms of what has happened versus your expectations and what we should expect in 2006?

You know, as we have said repeatedly, the Home Store has been a disappointment.

Now, we don't think the performance has been any worse than it would have been had we not centralized.

But we are not getting the improvement that we had hoped when we made the decision to centralize Home.

I think in hindsight, the centralization was going to be more difficult to execute with the five different Macy's marketing calendars, and we are in the process right now of re-looking at those processes to help get more of the division-by-division focus and decision-making and free the merchants up in the central group to do what we really intended for them to do, which is be out in the marketplace to find the best, most exclusive, special, wonderful product.

So we are hopeful that the results will improve in 2006, although it obviously has taken longer to get better results than what we had anticipated when we centralized.

Okay.

And then last question, with regards to May, can you provide some additional color in terms of what you think are the drivers with regards to better-than-expected performance in 2005?

I mean I think when we closed the transaction in late August and we looked at their sales trends relative to last year and relative to plan and thought about the division consolidations that we were announcing in September, we became very concerned about what that might do to their business in the fourth quarter.

And frankly, it is a tribute to the May divisions and the May organization that they were able to perform better than what we have expected at that time.

Remember, our expectations were for a comp of down 5 to 7%, and they ended up producing a comp about a 1/10 above last year.

So significantly better, and that is what really drove most of the improvement.

Now, a lot of that volume was driven by additional markdowns.

But nonetheless, often, you can take markdowns and not get the sales.

So that is really it.

Unfortunately, that really doesn't translate into 2006 in terms of better performance.

We obviously expected significant improvement in the first half of the year and certainly in the second half of the year.

So while the fourth-quarter May results are great in terms of the additional cash flow it provided, it doesn't really give me greater confidence about 2006.

Thanks so much, and congratulations again on a great quarter.

Adrianne Shapira, Goldman Sachs.

Karen, clearly, we are all expecting clear benefit as Federated's leverages its better -- best practices merchandising across May.

But I'm wondering -- a key Federated hallmark is the ability to flex expenses when sales come in a bit light like we saw this quarter.

When do you think that best practice could be shared at May?

I think it will be shared very rapidly.

If you think about it, the four May divisions are being integrated into Macy's.

So that will happen very quickly.

And frankly, that has been a good practice of May as well, I believe.

So I think both companies have a tradition of good expense control.

So that is not something I worry about not happening going forward.

Okay.

And then my next question, you had talked about working with consultants, kind of culling demographic and psychographic data to match just your May doors to Federated.

Can you share with us what you learned, and maybe as you more appropriately assort these stores, could you give us a sense percentagewise how many were under-assorted and could clearly benefit from a trading-up of assortments?

That is a hard question to answer quickly.

As we look at stores, we look at them in terms of what we call their good/better/best, which relates to price points, but also lifestyles and whether they are traditional, neo- traditional, contemporary, or fashion.

And we cluster stores accordingly.

So what we had done last summer was to take our view of how the May stores were being assorted currently and how we think it should be realigned going forward, given the demographics and lifestyle characteristics of those markets.

And there is fairly dramatic change within the May stores from good to better and best and from traditional into more of the neo kinds of lifestyle looks.

So it will be fairly dramatic as we move forward.

Jeff Stein, KeyBanc.

I'm wondering if you might share with us what kind of impact the better-than-expected shrinkage had on the fourth quarter, and would that give you confidence to accrue for shrinkage at a lower rate during 2006, and has that been baked into the guidance?

Yes, we are not quantifying exactly what the impact was, Jeff.

Remember, it has a big impact in the fourth-quarter because it relates to inventory from before that.

So it is sort of a year-end adjustment, and we do have a low shortage accrual embedded in our 2006 plan already.

I don't think it is as low as we ended up producing in '05, but it is very close.

Okay.

And Karen, can you talk a little bit about your ad spending budget?

Given the fact that you just hired a new Chief Marketing Officer and it is understandable you want to promote this as a brand, do you have any thoughts on ad spending as a percent of sales for the combined companies on a go-forward basis, and how that would compare against what Federated had been spending stand-alone?

I think it is a tough question to answer, Jeff, because it is confused by markets where we have overlapping rotations and we will be closing stores.

But clearly we, and Anne as well, are committed to bringing down marketing as a percent of sales by spending our dollars more efficiently over time.

The specific numbers have not yet been decided.

And also, shifting more of that advertising into branding and national marketing as opposed to some of the more traditional ways of advertising for a department store.

Dana Cohen, Bank of America.

A couple of questions.

First is, can you just remind us how long are these clearance sales going to be going for?

Through March, I think, into the beginning of April.

And then the second question is, when are you going to move to the national calendar and then would be the first debut of the marketing?

Well, for the old Federated divisions, the calendars in 2006 are almost common.

So that is already happening within the old Macy's divisions.

And starting in September, when we re-launch the Macy's brand-name by converting all of the May doors to Macy's, that is when those doors also will be incorporated.

So what would it be?

Like Labor Day weekend type of promotions would be the beginning of it?

Next weekend, the weekend after that, I believe.

I don't have the calendar in front of me.

But it is around the 9th, 10th.

Okay.

And then last question.

I believe the merchandising week was a couple of weeks ago would have been the first time the merchants would have gone to buy for Federated -- for the May divisions.

Any feedback from them in terms of how that went and sort of just how it is working?

It actually started last November, which was the first buy that we tried to do for the combined company.

And we have had multiple markets since then, primarily in the private brands.

I think it is working well.

One of the things that we are focusing a lot of attention on is trying to bring the new May people that have joined us "on board."

And we had two two and a half day sessions here in Cincinnati a couple of weeks ago to bring people in, meet all of our senior managers, hear about what makes Macy's tick, here about the four priorities, and I think the organizations are working well together, even at this early stage.

Christine Augustine, Bear Stearns.

Could you just clarify on the logistics for the "going out of business" sales?

Once they are done, you will still have markdowns probably higher than a year ago because there is inventory at May -- the ongoing stores that is going to get converted.

Is that correct?

Separate them into two subjects.

In the "going out of business" -- and it is really clearance sales because they are not really -- it is clearance sales.

In the clearance sales stores, those will end on a certain day.

For the stores that are not in clearance mode, we will be taking markdowns throughout the spring season to clear and transition the inventories as we Macy-ize them.

Okay.

So once you've finished the clearance sale, do you just job out whatever is left, or do you kind of try to -- do you do any sort of consolidation, or do you just sort of say, here is the end date, and we are shutting -- now we are shuttering the store?

I am sure at the point at the end of time, that merchandise goes somewhere.

Okay.

Can you comment at all on this potential strike at Macy's Herald Square?

All I can say is, obviously, we are in negotiations, and we hope that we can reach an agreeable solution without a strike.

And then just finally, on the inventory position at quarter-end, I know you mentioned shrink was a big part of your gross margin, but what about the markdown tools that you have got?

The 20-20, for example.

Would you say that was as you expected for the year or better than you expected --?

20-20 overall has helped sales and has sped turnover and has increased gross margin slightly.

As a result, we believe in part of 20-20.

So I do think the markdown performance is better as a result of 20-20.

But that had been assumed in our plan.

Bob Drbul, Lehman Brothers.

My first question is on the "going out of business" sales, is that all going to be incorporated in your markdown assumptions, or will there be a lot of vendor support through that process?

First off, they are not "going out of business" sales.

They are clearance sales, and I don't think we will get vendor support there.

Okay.

On the store disposition transactions that you have announced so far, will you have anymore on the transactions like the Westfield transaction that you swap stores?

Do you expect many of those to take place going forward?

Many swaps?

Yes.

I don't anticipate any others at this point.

But there are still some stores that are not spoken for.

Okay.

Great.

And then the final question that I have is, on the May inventory, you talked a lot about the Federated store inventory year-over-year.

Can you give us the percentage declines that the May stores were down on receipts at the end of the year?

You know something, I don't know that number, Bob.

I am sorry.

Michelle Tan, UBS.

On the consolidation of the back office operations that is set to kick off soon, March 1, can you let us know whether we are going to get any further clarity on the progress there in terms of headcount reduction?

Had not planned to do that.

The truth is it has all been factored into our guidance for 2006.

And then also, on the fourth quarter, you gave us the delta between the original guidance and the 2.74 reported number.

Can you give us a little more clarity also on what has changed between the 2.60 to 2.65 guidance?

I started to do that, and then I thought oh, it will get too complicated. (multiple speakers).

In the 2.35 to 2.60 to 2.65, that first increase?

No, the second one.

From the 2.60 to 2.65 versus what you reported at 2.74.

Okay.

I am trying to split it.

So that first (multiple speakers) was a combination of the tax settlement, as well as some improvement in May and the Federated improvement.

The 2.60 to 2.65 to the actual 2.74 it was almost entirely May company improvement. (multiple speakers).

Therefore, hence, the surprises.

We understood Federated.

And May company's forecasting was different than ours.

I am just glad it went that way.

Okay.

Thanks.

That's helpful.

And then just one final question.

On the liquidation sales, can you tell us anything on any surprises so far in terms of disruption at your other locations?

No, I think it has been as we expected.

Some, but not as much as you would think.

But really, no big surprises at this point.

Christine Augustine, Bear Stearns.

You know what, Karen, could you just explain the share count?

Because if I am not mistaken, the guidance, I think, was 2.80 and it was 2.77.

Is it just something to do with options dilution?

Yes.

Was it the May side where you didn't have as much dilution as you thought, or can you clarify that at all?

I don't know the answer to that, but obviously, we knew how many shares we had issued as a result of May.

So I don't know.

There are no other questions in queue at the time.

Well, thank you all very much.