梅西百貨 (M) 2006 Q2 法說會逐字稿

Welcome to today's FDS conference call with Ms. Karen Hoguet.

I would like to inform participants that their line will be in a listen-only mode until the question-and-answer session, and also that today's conference call is being recorded.

Ms. Hoguet, I'm going to turn the call over to you, and thanks for using the conference center, ma'am.

Thank you.

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

We were pleased with our second-quarter performance.

While our sales were at the low end of what we expected, we were able to produce those sales at a higher-than-expected gross margin rate.

This was the primary reason we beat the high end of our earnings guidance by $0.05.

Interest expense also came in better than expected, due largely to the higher cash flow from operations.

Our earnings per share on a diluted basis, excluding May Company merger integration costs and related inventory valuation adjustments and the gain on our credit sale, was $0.49 per share versus our guidance of $0.39 to $0.44 and last year's $0.42.

Sales in the quarter were just under $6 billion.

Comp-store sales in the quarter increased 4.6% versus our revised guidance of 4% to 6% and our original guidance of 3% to 5%.

We were very pleased with our comp-store sales this quarter, which, as you know, are the comp legacy Federated stores.

These are the stores that are operating with our strategies that we will be employing going forward.

Sales in the May stores were mildly disappointed, due to the disruption caused by Macy-ization activity in the stores, as well as the assortment transition.

This trend is expected to continue in the May doors in the month of August, as we work towards the September Macy's brand relaunch.

But remember that while we had hoped for slightly higher sales trends in the May stores, in total we were still within our range of expectations.

Given all the changes being made in the May stores, we are very pleased with that performance.

As we analyze the merchandise line performance, we're focused on the Federated doors, since their performance represents the ongoing strategies.

The stronger businesses in the quarter were dresses, cosmetics, juniors, young men's and luggage.

The weaker businesses were in home categories, most notably furniture.

As we look at performance by region, our strongest sales were at Macy's East, Macy's Florida and Macy's Northwest.

Until the conversion is complete in September, the trends in the former May doors are not meaningful.

As I mentioned earlier, we were pleased with our gross margin performance, and it was better than expected in the second quarter.

Our recurring gross margin, which excludes integration-related inventory valuation adjustments, was 42.1%, up from 41.3% last year.

Our markdown rate was lower in the quarter than we expected.

In hindsight, we needed fewer markdowns in the second quarter to get the May assortments to our aging standard than we had forecasted, primarily because we had taken so many in the first quarter.

Remember, for the spring season as a whole, our margin on a recurring basis was 30 basis points below a year ago.

Nonetheless, we are pleased that we were able to achieve the margin results that we did while transitioning the assortments in such a significant way as we prepare for September.

If anything, inventories in the May doors were a little light, particularly at the end of the quarter.

The inventory valuation adjustments booked in the quarter were $134 million.

SG&A in the quarter was $2,117,000,000, or 35.3% of sales.

As expected, this was higher than last year's rate, but by less than in the first quarter.

Depreciation and amortization expense was $314 million in the quarter, slightly lower than what we had expected.

May integration costs were $43 million in the quarter.

We also booked gains of $191 million on the sale of the GECC and May credit card portfolios during the second quarter.

Interest expense in the quarter was $99 million.

This benefited by approximately $17 million due to the tax settlement.

Remember that this settlement, both as you're thinking about interest expense as well as tax expense, will not repeat in future quarters or next year.

As I mentioned earlier, interest expense also benefited from the higher cash flow.

Tax expense was $41 million.

This benefited by approximately $80 million due to that tax settlement.

Excluding this, the tax rate would have been 37.5% in the quarter, as expected.

Income from continuing operations was $282 million, and net income was $317 million.

Average diluted share count in the quarter was 559 million shares.

We did resume our buyback program in June and bought back 8.1 million shares, for a total cost of approximately $287 million.

Our remaining authorization is approximately $383 million.

EPS on a diluted basis was $0.51 a share.

Excluding the integration costs and related inventory valuation adjustments and the gains on sale of credit, EPS on a diluted basis was $0.49.

The second quarter was a good one from a cash flow perspective as well.

We completed the sale of our credit portfolios for a total of $2,042,000,000 in pretax proceeds, net of the GECC repurchase.

Those transactions are shown in two places on the cash flow statement.

The GECC transaction is in the investing section, and the May portfolio sales were in the operating section.

In addition, we have now closed on the sale of 60 of the 63 announced sales of overlapping stores.

In the first half of 2006, we've brought in $443 million in cash from the disposition of property and equipment.

In total, we generated $2,521,000,000 in cash flow from continuing operations before financing.

This compares to $428 million generated in the first half of last year.

During the first half, we used $1,742,000,000 in continuing financing activities, which primarily was to repay debt.

As I mentioned a few minutes ago, we did resume our stock repurchase program in the second quarter.

We believe our stock to be a great value, and as a result, we believe it continues to be a good use of our excess cash.

As important as the financial results for the quarter, we also accomplished a great deal that doesn't show up directly or immediately on the financial statements.

We finished the systems conversion in all of the consolidated divisions on our time schedule.

These conversions went extremely well, thanks to great teams in our systems division and their partners in the retail divisions and other corporate entities.

We will convert the two former May divisions, Macy's Midwest and Macy's North, next spring, as planned.

The May doors are all being being Macy-ized from a capital standpoint, and we are working hard to equip the May store executives and sales associates with the knowledge to be great brand ambassadors.

We finalized the marketing plans for the Macy's brand launch in early September, and we also began to receive the new assortments late in the quarter.

While still early, the reads on the new merchandise in the May doors are all positive.

Let's talk for a minute about our expectations, though, for the fall season.

The bottom line is we are keeping our total sales dollar guidance at $15 billion to $15.5 billion, and raising our earnings guidance a few cents.

For sales, we are shifting more of those planned dollars into the Federated doors, based on the spring trend.

Our guidance for comp stores is therefore being raised from 2% to 4% to 3% to 5%.

Some of our other key planning assumptions include the following.

One, comp-store sales growth is assumed to be 3% to 5% in each of the third and fourth quarters, with total sales dollars expected to be $5.9 billion to $6.1 billion in the third quarter and $9.1 billion to $9.4 billion in the fourth quarter.

Comp stores, remember, continue to be just the legacy Federated comp doors until February 2007.

Two, flattish gross margin rates, excluding inventory valuation adjustments in both quarters.

Three, lower SG&A rates as a percent to sales than last year, with more of a reduction expected in the fourth quarter than in the third.

We are on track to achieve the expected $175 million of synergies this year.

Four, we are assuming depreciation and amortization expense of approximately $315 million in the third quarter and $330 million in the fourth quarter.

Five, interest expense is expected to be approximately $115 million in each quarter in the second half of the year.

This is higher than in the second quarter, due primarily to the nonrecurring tax settlement booked in the second quarter.

Six, the tax rate is expected to continue to be 37.5%.

These assumptions result in our EPS guidance on a diluted basis, excluding integration costs and valuation adjustments, of $0.15 to $0.20 in the third quarter and $1.40 to $1.50 in the fourth quarter.

Please note that this is the first time we have given guidance for third quarter and fourth quarter separately.

I know you all know this, but remember that you just can't add the quarters together to get full numbers, because of the fact that we are buying back shares.

As to other key planning assumptions, we are still expecting the following.

One, there is no change in our guidance for integration costs and inventory valuation adjustments.

We are still expecting $220 million to $225 million of inventory valuation adjustments in the full year.

Most if not all of the remaining adjustments are expected to be booked in the third quarter.

The integration-related costs for the year are still assumed to be $450 million to $500 million.

Cash one-time costs this year are also still expected to be approximately $1 billion.

CapEx is still expected to be $1.6 billion for the full year.

We're still expecting $550 million to $600 million on a pretax basis, or $400 million to $500 million on an after-tax basis, in proceeds from the sale of the overlapping locations.

The Lord & Taylor divestiture is still expected to close in the third quarter, and we expect to have an announced transaction for the Bridal Group sometime during the third quarter as well.

I know all of you would like us to be providing guidance now for 2007.

But, as in any other year and particularly this year, until we see the sales this fall, we are not going to be comfortable projecting sales and earnings for next year.

We do expect, however, to keep moving towards our goal as fast as we can of reaching EBITDA of 14% to 15% in the 2008-2009 timeframe, and we are on track to deliver the synergies of at least $450 million next year.

We are getting very excited as we approach September 9th.

There is going to be so much activity and excitement around Macy's as we relaunch the brand nationwide.

This will include the conversion of more than 400 former May Company doors to the Macy's nameplate.

We have been putting up Macy's signs on the exterior of these buildings over the past few months, but covering them temporarily with banners showing the current store names.

These banners will come down during the week of Labor Day.

Inside the converting stores, new Macy's merchandise assortments have begun flowing in.

We have been decluttering the sales floors and widening the aisles, and a number of the doors are being reinvented as part of our three-year plan to physically upgrade the May Company store base.

By the official brand relaunch date of September 9th, everything should be in place.

In that time period, we will be launching a significant Macy's brand marketing effort, national advertising, local events and special store promotions to drive traffic so shoppers can see what is new and exciting in our stores.

This includes both existing Macy's stores, as well as those being converted.

At this point, we are not discussing our specific launch marketing plans, but I think you'll be impressed when you see it.

Some national activity already has begun.

A good example is Macy's sponsorship of the third season of the Project Runaway show on the Bravo Network.

Our INC brand has played a central role in that show, and in particular the episode that ran last Wednesday, which was followed by special INC merchandise that was in our stores and on macys.com the very next morning.

A tremendous amount of work has gone into the May Company integration already, and we have accomplished everything we had set out to do on our aggressive timetable.

I cannot begin to tell you how proud I am of our organization.

I hope you are hearing the confidence and optimism we are feeling.

We certainly have a lot of work still to do, and we expect that our offering will continue to evolve and improve as we learn from customer reactions this fall.

But we do believe we have the right strategies, and we have a very talented team whom we and you can count on to execute the strategies and deliver the desired financial results.

With that, I'll take your questions.

(OPERATOR INSTRUCTIONS).

Dana Cohen, Banc of America.

Starting with the comp guidance for the back half of the year versus the May business, I guess I understand the rationale of saying that was the trend in the first half.

But, given the magnitude of the changes at the business, why are you assuming a similar trend in the back half, particularly at the May business, and also flat gross margins?

What has happened is because the May stores are going into the fall from a lower base, we're still expecting the same delta.

But because the trend in the spring is lower, we expect the fall to be lower as well.

But we're still expecting the same improvement; it's just from a lower number.

What about the gross margin as well?

Because one would think, with better product, the markdowns taken last year, shouldn't the gross margins get better?

You know what?

I think it takes time for customers to get used to new assortments.

So, as we've said, we do expect flattish gross margins, and we'll see.

Just one nit question.

On discontinued assets, why was there a sequential increase from the end of the year?

With the bid Lord & Taylor coming in, our numbers get adjusted.

Teresa Donahue, Neuburger Berman.

My questions have been answered, thanks.

Jeff Stein, KeyBanc Capital.

Just wondering if some of the observations we're seeing here in Cleveland, Ohio might be true elsewhere.

It seems that at the conference division, virtually the entire Home Store has already been converted.

I'm wondering -- the comment you made with respect to positive indications on the assortments early on in the former May doors, if that is referring in fact to the Home Store.

Also, could you comment on some of the newer things that we're seeing here in the Home Store, namely your Dorm Headquarters program?

It looks like you're kind of adopting, perhaps, best practices from May with their tech gifts department.

I'll hopefully remember all those questions.

In terms of the Home Store, it did convert a little bit faster than apparel.

What I was responding to was the private brands coming in.

I confess I don't know how Home is doing in those Kaufmann's stores.

My comment was relating to the private brands that were coming into the stores.

In terms of the Dorm Headquarters, it has done well but, like the rest of Home, not as well as we had liked.

But it's obviously a category we remain committed to.

Then, in terms of the tech gifts and just gifts in general, that was one of the best practices that we are taking from May.

We think, as they went through the fourth quarter last year, they did a better job on that gift business, and that is something that we're rolling out to all of the Macy doors.

Christine Augustine, Bear Stearns.

Can you address what sort of trends you're seeing in California?

Can you discuss, within your comp guidance, if you are assuming some transfer from the closed duplicate stores?

Did you see any cost savings in the second quarter?

Let me start with -- in no particular order.

Our sales guidance does assumed sales transferring from the closed doors into the Federated or May doors, depending on which one closed.

So that is part of the guidance.

In terms of California, as I mentioned, it was not one of the areas with the strongest sales, so that's really all I can say there.

In terms of expense savings, we are beginning to see expense savings, but at the same time, until the names convert, there is still some duplicate expense.

So, on the transfer, correct me if I'm wrong, but I think you were expecting maybe a third to go to the remaining Federated.

Is that what happened in 2Q, and do you think that will continue?

We have never given that guidance, because every location is different.

There's really not a rule of thumb.

But we did better in the base stores were there wasn't transfer, where it wasn't a closing of a duplicate location.

We did a little bit better than what we had expected, but we had expected big pickups.

So I think the answer is the Federated doors are doing well in both cases.

Deborah Weinswig, Citigroup Investments.

You had mentioned that you had hoped that we are hearing the confidence and optimism that you are, and we certainly have.

Being in the stores, you can certainly feel it; it's almost tangible.

But where have you been surprised by how things have progressed in the stores in terms of personnel, et cetera?

Especially, how is that translating or how should we think about that in light of the higher comp and earnings guidance for the back half?

You know something?

People ask us this question a lot, and I honestly can't think of anyplace we have had any significant surprises, up or down.

So I'm not quite sure how to address that question.

So, basically, everything has kind of progressed as expected.

Is anything on the personnel side, in terms of how the people in the May stores are reacting -- has there been anything kind of positive there?

Obviously, we all thought that an important part of this combination was attracting May talent, and we feel really good about the people that we have been able to attract and retain, and obviously contributing a great deal to the Company.

So that's good.

I think we have spent a lot of time training and educating the sales associates on the new private brand, so that if a customer came in and was used to buying Brand X, we actually put together what I call cross-reference tables to assist the sales associate to say, if you liked X, try Y. It fits the same or the styling is the same.

Hopefully, all of that pays off well as we go into September.

Bob Drbul, Lehman Brothers.

When you look at the May doors today, is there a percentage that you believe are like fully converted?

How close are the ones that are not done to where you want them to be as you head into September?

Most of them are not completed.

The assortments are going to continue to come in through the month of August.

So, again, I can't think of anywhere we would tell you is complete now.

I may be wrong; there may be one or two.

But this is going to be an ongoing process through August.

When you talk about the May inventories, where they ended last quarter and as you head into fall, are the May store inventories for fall going to be at a much higher percentage than Federated because they were so lean on inventories?

Or will they be sort of equally balanced?

We have frankly managed to receipt flow and sales expectations, so we have a sales expectation for each store, and based on that, a receipt plan that would be the same for a May store as a Federated store.

When you look at the private label offering in the month of -- let's say, for September, when you get to September, will it be at the level that you wanted to be at private label?

Or will you be ramping the private label offering up throughout the fall and into holiday?

We will continue to be increasing the private brand percentage in the May doors over the next couple of years.

It will take us that long to get the percentage up to the Federated average.

Just one last question.

Can you comment at all about the Marshall Field's division?

There has just been a lot of noise around a backlash in Chicago, or whatever.

Can you just talk a little bit to the performance and your expectations for that division when it converts?

You are referring to Macy's North.

I think, at this point, we will just have to see what happens in September.

We're fairly optimistic that when the Chicago customer, which is the only one of their markets where we have had that backlash, we're hoping that when they see that we're still keeping the best of Marshall Field's, but enhancing that greatly with all that Macy's offers, that the customer will be pleased and it will do good things for the business.

Obviously, we will have to see when we get to September.

Dana Telsey, Telsey Advisory Group.

Any progress or updates on selling the Bridal Group?

Any thoughts and plans there?

I think it was by the end of the third quarter that may be completed.

Also, as you look at the gross margin for the second half of the year, do you see the opportunities coming from increased private label percentage?

In terms of the Bridal process, that's going as we had expected, and expect to announce a deal by the end of the third quarter.

So there's no news there.

But it's ongoing, as we had planned.

In terms of the gross margin for the fall season, remember, as we think about private brand, we are not greedy in terms of gross margin.

We're trying really hard to make our private brand offer good value to the customer.

So, also, as you are building private brand, sometimes it takes a while for the customer to react.

Therefore, there could be more markdowns this fall.

So, again, we will see how the fall plays out.

But at this point, our best guess is that margins will be flattish in both the third and fourth quarters.

Michelle Tan, UBS.

Looking at the Federated legacy stores being a greater portion of the mix in the second half, does that change anything from a profitability standpoint?

Also, following up to Dana's question on private brand, looking at the old private brand that May had and what Federated is bringing in, we know Federated had stronger private label brands.

Can we also assume that those brands were more profitable than the private brands that May had?

Well, May had a different strategy with their private brands then we did.

Again, we don't focus on increasing gross margin on our private brand.

We're trying to increase comp-store sales, and that is a different approach than what May did.

So our margins are not going to be higher, necessarily, than the May margins, but it's going to sell a whole lot better.

That's really what we're focusing on.

I'm not sure I understand your first question.

The first question is basically, as you look at the mix of sales volumes --

You have seen our guidance.

That's really not a change there.

Dana Cohen, Banc of America.

My question has been answered.

Thank you.

David Glick, Buckingham Research Group.

Congratulations on the quarter.

You had commented on the strong divisions for the quarter being East, Florida and the Northwest.

I was wondering if you might give us some color on which were the underperformers.

What I'm trying to really get at is, are you seeing any improvement in the central swath of the country?

You had touched briefly on Macy's North, but are you starting to see some improvement in the Atlanta division?

How is St. Louis shaping up?

That's the first question.

Then, I'm wondering if you could give us some -- you said furniture was weak in the second quarter.

I know there's a big furniture event, which is an important event, at the end of Q2 -- and whether there are any signs of life there, in the furniture business?

In terms of furniture, we don't comment sort of mid-event, so we will see as we get through the month of August.

In terms of your first question, it's really too early to say.

I think we need to get the assortments converted, and I'm fairly optimistic that there will be trend changes in those stores as the assortments change.

How about in Atlanta, which was a pre-existing division, obviously, with more stores?

Has that business improved in that division, in sales?

We feel okay about what is happening in the core South stores.

So we will see.

Thank you, and congrats again.

Christine Augustine, Bear Stearns.

I wanted to also ask you about the AUR trends.

They were pretty strong in the first quarter.

Did they continue into the second quarter?

You know something?

I don't have that in front of me.

I'm sorry.

I suspect they did, but again, I just don't have the facts in front of me.

At this time, Ms. Hoguet, I'm showing there are no further questions.

Thank you all very much.

Take care.