梅西百貨 (M) 2006 Q3 法說會逐字稿

Good morning, and welcome to the Federated Department Stores' third-quarter earnings release conference call.

Today's conference is being recorded.

I would now like to turn the call over to your host, Ms. Karen Hoguet.

Thank you.

Good morning, and welcome to the Federated Department Stores' call scheduled to discuss our third-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 a discussion and reconciliation of any non-GAAP financial measures discussed this morning.

Keep in mind that all forward-looking statements are subject to risk and uncertainty 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.

The third quarter was a big one for us.

September 9th marked the culmination of all the hard work and effort that went into preparing all of the former May doors to be converted to Macy's.

The brand launch was very successful and we are very proud of what we accomplished in the first year of owning the May Company.

While we would have liked to have seen more progress in the performance of our new Macy's or former May doors post-launch, we did see a lot of progress and reason to be confident about the future, especially in the soft goods part of the business.

Customers in the former May doors responded well to our private brands and the market goods that were more interesting and more differentiated.

And, as you know, we were pleased with the sales performance of our legacy Macy's doors and Bloomingdale's, as well as the profit performance of the total Company.

Sales in the third quarter were $5.9 billion, which in spite of the weakness in the new Macy's doors, was still within our expectations, albeit at the low end.

Our comp-store sales gain, which is the legacy Federated doors, was 5.9% in the quarter, and this exceeded our expected range of 3% to 5% for the quarter.

The fact that our legacy stores are doing so well reinforces the belief that our strategy supporting our four priorities are working.

We have momentum in both Bloomingdale's and the legacy Macy doors, which is really exciting.

Within our legacy stores, sales were strong in the quarter across soft goods, with particular string experienced in ready-to-wear, handbags, hosiery, shoes, sleepwear and cosmetics.

Men's and kids both had decent sales performance in the quarter, and the soft Home business stabilized, with strongest trends produced in luggage and housewares.

The big-ticket business continued to be tough in the third quarter.

It is important to note that private brand merchandise sold well in both the new and the old Macy stores across all families of business, which gives us confidence in our vision.

In the new Macy doors, it was the Home Store that was by far the most disappointing.

Soft goods performance was actually okay.

There is a lot working well in these stores.

The Home business was hurt by the long lead times needed for ordering goods, the lower promotional intensity at Macy's as compared to the May Company, the learning curve by sales associates with the new merchandise, as well as the general industry softness in home categories.

We should have expected it to be harder and take longer to turn around the May Home business, but we do expect progress in the fourth quarter.

It is important to also note that the legacy Macy doors are now doing better in Home, which is really encouraging.

By division, Macy's Florida and Bloomingdale's had the strongest overall sales performance, while Macy's East, Macy's Northwest and Macy's South did well in their comp stores.

Macys.com also had a great quarter.

They are clearly benefiting from the spread of the Macy's name and the national advertising.

While the trend in the new Macy doors, primarily in the Home category, is not what we had hoped, we have confidence in the long-term strategy.

The extensive change in the stores -- physical, the assortments, the systems, the processes and people -- certainly cost us business in the third quarter.

We still have a lot of work in front of us to continue to create a quality selling culture and to execute correctly the localized assortment in the new Macy doors.

We do feel very well-positioned for the fourth quarter.

We are learning about what is selling best, and we have adapted with more receipt emphasis in those businesses.

We have invested in significant clear distortions of key items and we will have strength in marketing to help drive traffic to our stores.

We are really geared up to show our customers what a great national gift store really can be.

The sales associates in the new Macy doors are getting more comfortable with the new assortment and the new systems and processes.

Our value for the holiday period will also be very compelling, particularly in the Home Store.

Gross margin in the third quarter, excluding integration-related inventory valuation adjustments, was 40.3%, down 0.1 point versus last year's 40.4%.

This is about what we expected.

SG&A was $2.094 billion, or 35.6% of sales, excluding integration-related costs.

This is up 0.1 point over last year's 35.5%.

While our expense dollars were below what we had expected, because of the sales being at the low end of guidance, the rate increased and was higher than a year ago.

The synergy savings were in part offset by options expense, higher retirement expense, as well as the sale of the May credit portfolio.

Additionally, we flexed expense less than usual in the former May doors, most notably in selling, as we try to build our business there.

The 2006 number includes depreciation and amortization of $315 million, which is what we had expected.

Operating income before and integration-related valuation adjustments and costs was $279 million, or 4.7% sales in the third quarter.

This compares to $270 million, or 4.9% of sales last year on a comparable basis, also excluding a $480 million gain on the sale of credit receivables.

Integration-related inventory valuation adjustments were $28 million in the quarter and integration expense was $117 million.

Interest expense in the quarter was $104 million versus the expected $115 million.

The improvement was due primarily to higher-than-expected cash flow.

The tax rate in the third quarter was lower than the expected 37.5%, due to adjustments being more favorable in our fiscal year 2005 federal income tax return and the settlement of various state tax examinations.

Income from continuing operations was $20 million, or $110 million, excluding integration-related costs.

The average share count on a diluted basis was 549.9 million shares.

EPS for the quarter on a diluted basis, excluding integration-related costs and the inventory valuation adjustment, was $0.20.

This is the high end of our guidance of $0.15 to $0.20 per share.

We are pleased that we were able to deliver earnings at the high end of our guidance with sales that were at the low end.

On a year-to-date basis, we have produced over $2.8 billion of cash before financing, and most of that cash either went to repay debt, $1.5 billion, or to buyback stock, $1.1 billion.

We have bought back 27.9 million shares this year.

We still have $1.6 billion left in our authorization, and of course can go back to the Board for additional authorization, as needed.

As you know, going forward, most of our cash will go to buying back stock, assuming it remains of good value, as it clearly is currently.

Looking to the fourth quarter, the bottom line is we are making no changes in our guidance.

We continue to expect 3% to 5% comp-store gains in the fourth quarter, and total sales dollars of $9.1 billion to $9.4 billion.

As we said at the end of the second quarter, we still expect a flattish gross margin rate and an improved SG&A rate versus last year, both excluding integration-related costs in the fourth quarter.

Depreciation and amortization costs are still expected to be approximately $330 million in the quarter, and interest expense is still expected to be approximately $115 million.

Earnings per share from continuing operations, excluding integration-related costs on a diluted basis, are still expected to be $1.40 to $1.50 per share in the fourth quarter.

Integration-related inventory valuation adjustments are expected to be approximately $35 million in the fourth quarter and integration costs approximately $75 million.

These estimates will lead to annual numbers below our original guidance.

However, we still expect about $1 billion of cash costs due to the items that were booked through goodwill.

As you know, we are in the midst of a tender offer for $750 million of our bonds.

Along with an anticipated new issuance of approximately the same amount, we expect to reduce our cash interest and rationalize the combined debt portfolio.

However, we do not expect there to be much in impact on book interest or on total debt outstanding.

At this time, I do not have any information for you on the upcoming debt issuance or the progress of the tender offer.

As you can hear, we are optimistic about the potential of this company.

We are on track to deliver the financial results that we expected and guided you to earlier this year.

We have hit every deadline in the May transition, and our legacy doors are performing very well.

We now need to strengthen the trends in the former May doors, primarily in Home.

Looking beyond this transition year, we expect to produce comp-store increases of at least 3% per year, and EBITDA margins of 14% to 15% in the 2008 to 2009 time frame.

I know it's tempting to accelerate expectations based on all of our optimism, but we shouldn't get ahead of ourselves.

We knew from the beginning that the integration process would be complex, and we have taken that into account in our guidance.

Rest assured, we are absolutely focused on execution against our four strategic priorities, and we will continue to follow that roadmap for success.

Now, what questions can I answer?

(OPERATOR INSTRUCTIONS).

Deborah Weinswig, Citigroup.

Karen, you mentioned that the May customers had responded well to the Federated private label.

What is the percentage of private label right now at the legacy May doors, and when should we expect that to be at the same level as the legacy Macy's doors?

I don't know what it is currently in the third quarter, but historically, it was more like 12% and -- or 13% versus our 18%, and Marshall Field's was at the 9% level.

So clearly, there’s growth in there.

And our thought was it would take two to three years to get the penetration the same in the old Macy doors -- I'm sorry -- the old May doorsas the legacy Macy doors.

The reason for that is thatyou don't just want to throw the product and force it on the customers prematurely.

No, that makes a lot of sense.

Then you had also mentioned this idea of value for the holiday period, which would be compelling, especially in the Home Store.

Can you elaborate a bit on that?

The fourth quarter is always an important time to offer great value.

In the Home Store, that is particularly true.

So that is something we always do as we move into the fourth quarter.

We did learn a lot from May Company last year in the fourth quarter- they did a terrific key item business that we are emulating and together moving forward with this year, which is driven by very good value.

The reason I had asked is there has certainly been in the media a lot of discussion about the idea that promotions and discounts will be stepped up during the holiday season.

So I just wanted to kind of get your insights in terms of how we should think about maybe third quarter versus fourth, from a promotional perspective?

The fourth quarter is by definition more promotional than the third.

I mean, always.

So I don't think there's anything unusual about this year.

I think that there has just been a lot of questions around it, so I just wanted to get that cleared up.

So, that's very helpful.

Michelle Clark, Morgan Stanley.

One, are there any regional differences in the performance of the former May Company doors?

Second, can you comment on the level of markdown activity at the former May Company doors?

There really is not huge differences across the May doors.

I had heard last week there was some rumblings about ,I think it was,Southern California had been weaker, which is not true.

It's an overall former May problem.

Sure, there's regions that are better than or worse but there's no major learnings from that.

So it's an overall issue.

The question on level of mark-down activity at May of, one, relative to your plan, and then second, relative to year-ago levels?

What is going to happen in the May doors as the sales have been weak, particularly in Home, will be more mark-downs than what we had anticipated.

But the blend, as we look at our forecasted margins for the fourth quarter, is still the same.

So I don't see any dramatic shifts there.

Stacy Turnof, Merrill Lynch.

You talked about Home being weak and private-label apparel being strong.

How about some of the other categories -- accessories, men's shoes?

What's going on there at the May division?

No, soft goods is all of that, I'm sorry, including women's apparel, men's apparel, center core.

It's really the non-Home parts of the business where there have been much better results.

And in the Home area, could you maybe give us a little bit more color on -- is it across the board in all categories that's weak?

Or, is it more of the furniture-type items?

It's really more across the board.

Any comment on inventory levels between the legacy stores and May?

In total, we are pretty comfortable with the inventory levels in both places.

In some of the May legacy stores, we think the inventories are light, and we think that may have contributed to the sales trends.

But overall, I would say the inventory levels are in good shape.

Adrianne Shapira, Goldman Sachs.

You had mentioned as far as offering very good value in fourth quarter around Home at the new Macy's doors.

Can you tell us, did you take any of the early markdowns related to the third quarter?

No.

I was talking about planned programs for the holiday shopping period.

Then just share with us -- you shared with us what's offsetting the synergy savings.

Can you just give us maybe the pace of the synergy savings, where they're coming from, are they tracking to plan, and how comfortable are you with where you are year-to-date?

We're very comfortable that we will achieve the $175 million of synergies this year, and at least $450 million next year.

Most of what -- in fact, everything that we were going to achieve this year was achieved by the third quarter.

So we are really at the run rate for the fourth quarter, and there will be slightly more savings next year, as you can tell.

It's not only annualizing the savings this year.

But most of what we are accomplishing has been accomplished on the synergy side already.

Dana Cohen, Banc of America Securities.

Going back on the gross margin, with the Company being flat, as I recall, last year, you had May for September/October, but not August, which was -- it was just a promotional month.

Does that sort of imply that the gross margin, on and apples-to-apples basis, was up year over year?

Because this year, you had the promotional month and you were flat.

You know something?

I don't know.

I haven't looked at it that way.

This is what we had planned the quarter at.

Right.

I just was thinking about it, and in light of the fact that you did have a mark-down month in there and you came out flat, it seems to imply an underlying benefit to the gross margin.

But maybe you can get back to me on that.

My second question is -- going back on the top line, given your comments, does that imply that apparel was on plan, or was apparel still [like] to plan?

Well, soft goods is really what I was referring to.

Apparel was very close to being on plan.

Soft goods in total was close as well -- not on, but close.

In terms of Q4, you sound more optimistic about Q4.

What will be different in Q4 than Q3?

Well, Q4, as retailers, is what we live for.

As I have listened to all the conversations about the marketing, about the key items, about the in-store execution -- and we have had a track record of having very good fourth quarters vis-a-vis third quarter.

So I feel really good about what's happening.

We will see, but the trends going in on the legacy doors have been very good, and I think there is enough that's going to change in the May doors that we're going to feel a lot better.

Just specifically, though, what do you think changes in Q4 in the May doors?

Well, you're going to have gotten assortments better, because you're going to have known what's sold in August, September, October.

You're going to have more marketing, as you always do in the fourth quarter.

You're going to have these value-oriented key items, which will be good.

And, we will have had another three months under our belt, in terms of the store people understanding the new assortments, the new systems, the new processes, which should help also.

There's a lot of change that has happened.

And, I think with more time under our belts, we will get better.

When should we see the impact of the new marketing person?

When will we see her marketing efforts?

She has been involved since she joined.

The first real campaign that will be hers from soup to nuts will be in the spring season.

But that's not to say that she hasn't been involved in the third quarter, and has obviously had a bigger impact on the fourth.

Bernard Sosnick, Oppenheimer.

Could you give us a little bit more finite guidance with regard to the SG&A for the fourth quarter?

The rate of decrease would seem to have to accelerate versus the third quarter, and yet, you said that most of the synergies have already been in place.

I would assume that there'll be an absence of launch costs or various other things.

So, could you help us out on the rate of decreased SG&A?

I have given you the guidance we're going to give, so I'm sorry I cannot be more helpful.

What other changes might there be beyond the synergies?

That are unusual?

None.

Okay.

There was not heavier advertising in the third quarter of significant degree because of the launch, or was there?

No.

Finally, if I could just -- is there any impression in terms of your market research that the message to the May customers has not been fully or clearly conveyed, that Macy is not more of an upscale retailer by a large measure?

Might there be some misperception among former May shoppers?

We're still looking -- I have not seen that research yet that we have been doing post-launch, so I cannot answer that question.

Maybe that is the perception –but I don't know at this point.

The reality, though, Bernie, is that's not the case.

But as you know, we have to deal with perceptions as well as reality.

Jeff Stein, KeyBanc.

I'm wondering if you could just talk a little bit about the fourth-quarter expectation in terms of top line, in the sense that it would seem to me that the die is pretty well cast, and that perhaps the May doors will continue to under-perform in the fourth quarter.

In order to make your guidance for the fourth quarter, do the core doors have to continue to beat expectations in order to get to that 140 to 150 range, based upon the way you have the plan laid out now?

Let's address the sales guidance.

If the May doors continue to underperform, as they did in the third quarter, the Federated, legacy Federated doors will have to do better than that to get to the sales range, as what happened in the third quarter.

Is that what you're expecting currently?

I am just kind of curious as to the way that you have the quarter laid out internally.

Jeff, it's a very difficult time to forecast, and we have different scenarios.

We'll see as we get into the quarter.

As you look at 2007, Karen, and you look at kind of a 3% comp, if you were to kind of dissect that a little bit, where do you see the May doors contributing on the comp side for next year?

What we said, first off, is 3%“plus” comps.

So I don't know what the plan will be yet, and obviously won't know until we get through the Christmas period this year.

So until then, I won't be able to answer that question.

Can you bring us up-to-date on the status of the Bridal business, and if you're close to completing a transaction there?

Obviously, I cannot say anything until we complete the transaction.

Christine Augustine, Bear Stearns.

Is there anything that's unique about the systems or the processes in the Home area that would cause those associates to be slower to get up to speed?

Well, a couple of things.

One is that there have been very dramatic changes in assortments in Home.

Home often requires very experienced selling people so that they understand the product attributes.

So I think that's one thing that would make a difference.

The big-ticket systems change is much more complicated than the rest of the store, so that would be another answer, Christine.

Are you doing anything -- I guess I'm just thinking about regional support for the stores.

Is there any way to kind of bring in experienced salespeople from the Federated side in the fourth quarter to cross-pollinate?

Or, is it more a matter of additional training for some of those May stores?

I think it's frankly a matter of time.

I think our store people have done a spectacular job of bringing the May people on board at all levels of the organization, and have really -- I have been in a lot of the former May doors, and have been so impressed by the fact that they are now ambassadors for the Macy brand.

So I think it's a question of time, as opposed to anything else.

We will obviously continually be training and watching for those situations, but the attitude and the effort I think will pay off in the end.

It's just taking a little more time.

The Martha Stewart launch -- I know that's not until next year -- but that is all doors, correct; or, is that going to limited doors initially?

All doors, and it will be extraordinarily exciting when it’s launched at the end of next summer.

Would you be willing to comment on your traffic trends, and whether there's any variation between legacy Federated and May?

You know something?

We don't keep those, so I couldn't answer the question.

Okay, then how about AUR?

Could you --?

I don't have that data.

Liz Dunn, Prudential.

Is it fair to assume that the underperformance in the Home Store was both sales and margin, and therefore, can we assume that excluding Home, gross margins were up?

Then, is there any color you can share or any qualifications of what percentage Home is, and was there a big change there versus the legacy May business?

We don't comment on margin by category.

But in terms of percent, it's around 15% of the store.

Bob Drbul, Lehman Brothers.

One of the comments that you made was that the May customer was used to more of a highly promotional cadence.

As you look to the fourth quarter, could you maybe just elaborate a little bit on how you would plan to address that in the May doors?

Well, it's true for the whole company;

I mean, for the fourth quarter.

The fourth quarter is much more promotional than the third quarter, so there will be less dramatic difference in the May doors.

But there's not going to be special promotions in May versus -- new Macy versus old Macy doors.

You know what's interesting, and I should clarify this -- people often think that when you're less promotional, there's less value in the store.

One of the things that on the Macy's side, and the reason we have been so successful as we have reduced public promotions, is that we have been giving the customer value in other ways throughout the store in everyday prices.

So please don't read fewer promotions as higher prices, less value, or even higher gross margin rates, which some of you have intimated.

We just think it's a clearer way of pricing to the customer to give better value day-in/day-out than having these major coupon events.

As you know, we have been doing this on the Macy's side, and have been very successful at transitioning the customer.

David Glick, Buckingham Research.

Up to this point, your national advertising has been very strong, in terms of the Macy's branding message, with obviously some value messages as part of your share of advertising.

Will you use your national advertising platform in the fourth quarter to convey a stronger value message relative to your approach in Q3?

Since you have a national advertising platform this year, and you didn't last year, is that a real sales-driving opportunity?

Yes, we are, and yes, we hope so.

So yes, that is a sales-driving opportunity, in your opinion?

-Hope so

Michelle Tan, UBS.

On the SG&A, you mentioned that the dollars were less than you expected, and it doesn't sound like a lot of that was because of the expense flex.

So can you give some color as to why that was?

Did you realize synergies a little quicker than you expected?

No, I think it is the expense flex, other than selling.

That's really the answer.

So the synergies in terms of the timing too were basically what you anticipated?

Then one other question, just on Home, as you look at the mix in the third quarter versus the fourth quarter,is Home typically a bigger piece of the third quarter than fourth quarter, or the opposite, or is it about the same?

You know something?

I don't know the answer to that, sorry.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about -- as you look at the Home area, any thoughts on allocation of square footage to Home and any adjustments that you see going forward?

Also, as you look out to 2007, how do you look at the allocation of dollars of CapEx and marketing spend being different in '07 versus this year?

In terms of the square footage allocation, on the Macy doors, we're very comfortable with how it's allocated in total, not just Home-related.

On the May doors, over time, we may tweak the allocation.

Frankly, less related to Home and more trying to get more space into the center floor area.

In terms of I am not sure I understand the question concerning capital allocation next year.

Obviously, we don't have to spend the conversion capital that we're spending this year.

But taking that out of the mix, the breakdown would be fairly similar to what it has been in the past.

And on the marketing spend?

I'm not sure -- allocation in terms of what?

As you look at the legacy doors of Federated -- the Bloomingdale's doors -- are you spending the same amount this year in those doors as you had, or do you think you see marketing spend going up?

It's going to be -- I don't know the answer.

It's a really complicated question, because this year, we had the two nameplates for a while this year until we changed in September.

So I don't know how to answer that question.

How is Bloomingdale's in San Francisco doing, given the new mall opening?

I’m glad you asked.

That is a spectacular store, and any of you who are going to be in San Francisco, please do stop by.

It is a spectacular store physically, but more importantly, it really represents what Bloomingdale's is trying to do on the merchandising front, and the people in that store are so wonderful.

It's just terrific.

I'm glad you asked, Dana.

Thank you.

[Sam Karsik], [Edison] Capital Partners.

I have a quick question about your -- you mentioned Home sales.

I have a quick question about Watch and Jewelry.

Can you comment on sales there, both in the old and new Macy's stores?

We don't comment on all categories.

We just break out some that are doing better than others.

(OPERATOR INSTRUCTIONS). [Todd Jones], Legg Mason.

Just a clarification on the Home percentage of sales.

You said it was around 15%.

Is that the case for both the new May stores and the legacy Macy stores?

Legacy Macy are a little bit higher and the May are a little bit lower.

Okay, so going back to your answer a couple of questions ago, we could expect sort of that bifurcation to continue with the May doors maybe going down a little bit more?

Well, ideally, they're going to be the same.

We will bring May up to the May up to the Federated level.

Now, not in the fourth quarter, but over time, there's no reason to think that a legacy Macy door will look any different than a former May door.

[Bill Monoman], Barclays Capital.

It's actually Tom O'Neill from Barclays Capital.

Just a quick fixed-income question.

There was one article in the Wall Street Journal over the quarter noting that one equity investor thought it made sense for you to go private.

Given Federated's history, the ongoing integration and the rebalancing of your debt maturity security schedule, it doesn't seem like a great time for that kind of transaction.

I was just wondering if this is something that you're considering.

Well, I think the key thing to say, as you've heard, is that we are committed to keeping our investment-grade status.

So I think that probably answers that question.

Teresa Donahue, Neuberger Berman.

In terms of store productivity, sales per square foot or whatever, how much improvement is needed at the old May doors to figure into your 14% to 15% long-term EBITDA target?

My impression is they're about 10% below the legacy Macy doors at this point.

I don't focus on sales per square foot that way.

But in terms of the comp growth, obviously, we need to get the productivity of those stores back up to where they have been historically.

Typically, the faster the comp-store sales grow, the easier it is to get an improvement in EBITDA margin.

I guess I was also figuring, and as a follow-on to Dana Telsey's question about what you're thinking about the space allocation, et cetera.

At this point, there are not major changes expected in space allocation.

It's really tweaked.

John Barrett, Columbia Management.

Just a follow-up sort of on that last question, and in terms of looking to get to that 14% to 15% long-term level.

Can you give us any read on the margin improvement in 2007, sort of what you have learned, and the mix coming from gross margins versus SG&A?

I really am not going to be able to answer that question until we get through the fourth quarter.

As you know, it's such a big part of our year to be commenting until I see that, I think, is tricky.

Right.

I just look at this as sort of -- I mean, this quarter and even next quarter, sort of a -- you're consolidating a lot and then sort of a neutral on margin here.

But just looking out, based on what are you your doing in the stores with accessories and in apparel -- are you more comfortable with gross margin, driving more of it next year?

I think I am going to wait and comment until we get through the fourth quarter.

Kim Gallee, Pioneer Investments.

I was wondering if you could talk a little bit -- you seemed to intimate earlier in the large-ticket Home department that it had to do with the selling cycle.

Could you talk a little bit about maybe order trends relative to delivery trends, and how that might have compared to the overall sales pace in Home?

The issue's the same.

It's the same.

So, it is not an issue then, with a lag between the orders and the delivery?

No.

I mean, there is, obviously, a lag.

But the big-ticket business has been weak.

The second question is -- somebody asked about mark-downs, and given that the comp performance was fairly strong in the legacy Macy's doors, could you comment a little bit on mark-downs at the May divisions versus the Macy's division, and did we see perhaps a somewhat worse mark-down trend at May and a somewhat better mark-down trend at the legacy Macy's stores?

I don't track it anymore split that way in terms of margin, but commonsense would tell you the margins did better where the sales were stronger.

In terms of systems and mark-downs in general, I think Macy's has historically had a better mark-down system than May.

Could you just maybe talk about the impact of your systems on May's performance there?

It's really not a system issue, it's a discipline.

We instituted a process that we called 20/20 that forces the merchants to look at the bottom 20% of their inventory based on sell-through in the top 20%.

It has forced them to take mark-downs quicker than they otherwise would have, and in some cases, deeper to address that bottom 20%.

At the same time, it has led to discussions with the market, or ourselves in the case of private brands, about reorders on the top 20%.

So that's not really a system, it's a discipline.

Interestingly, I spent yesterday in St. Louis with our new Macy's Midwest organization, and they are finding this process of 20/20 to be very helpful, as they're going forward.

So I do think that's going to help in the legacy May doors.

But apart from the terminology of whether it's a system or a process or a discipline, how has that impacted mark-down trends at May?

Well, so far, it's just going in, so there's no impact yet.

But, what it really does is it helps sales because you're clearing out stuff that's clogging the floors faster and reordering the goods that are selling.

So it really helps comp-store sales.

It should lower mark-downs somewhat, and it speeds up inventory turns.

So it's not just looking at the margin line.

Finally, you commented earlier that May door merchandise was being actively tweaked based on what was selling and what wasn't.

Realistically speaking, given where we are in the calendar, how much tweaking can actually be done to affect the fourth quarter?

Remember, we started tweaking, and we are constantly tweaking.

So when things weren't selling in August or early September, we were reacting.

That's what good merchants do.

So you cannot completely overhaul an assortment, but you can make changes.

Again, that's what any good retailer would be doing.

Sure, I know, but just given your inventory turn speed and the lead times and so forth, it would strike me that there's probably not a whole lot that can be done for the fourth quarter.

Well, on the margin, there's things you can do.

If you miss a fashion trend, that's probably harder, but that isn't the issue here.

Bernard Sosnick, Oppenheimer.

I wonder if you could revisit for us some of your earlier comments, because you were talking about exciting momentum in the legacy Macy stores and the ready-to-wear as selling well.

Could you amplify a little bit on that, and maybe etch out for us a little bit better why the May stores may not have participated with ready-to-wear, or whatever, or maybe they did, and how that might affect the fourth quarter?

I think the key thing, as I have said, was that in the May doors, the soft goods, the non-Home part of the business did significantly better than the Home.

And in some of the private brand and the market goods, where the assortments were more interesting and more differentiated, the products sold very well in the May doors.

The Macy doors, which are obviously much more established in these lines, have done even better.

But we do think that what we're doing in the May doors is the right answer.

It's just taking a little longer than we had hoped, obviously driven largely by Home.

If we look at the soft lines in May, would they have approximated your plan?

I was asked earlier, and the answer was, they came close but didn't make it.

Okay, the entire soft line.

That is, including soft home -- I think you said that it didn't make it, including soft home, but apparel was better than that.

No, I said soft goods, as opposed to Home, was off plan, but not by a lot.

Home was off by a lot and apparel did very well within the soft goods mix.

Christine Augustine, Bear Stearns.

For the end of the year, do you anticipate inventory levels to kind of be flattish, or do you think they could be down kind of the similar magnitude that we've seen here at the end of the third quarter?

Then, could you just update us on where you are with the planning and allocating function at former May?

That's all rolled into the divisions that they report into now?

Could you just update us?

The planning and allocation, which you all remember May Company didn't do.

Their assortments were far more consistent location to location, whereas we at Federated have always tried to localize assortments far more and tailor them to the needs of the individual trading area.

We have done that through a planning and allocating organization.

For the divisions that were integrated into a former Macy division -- so Filene's, Hecht's, Rob-May, Foley's -- in those cases, the legacy Macy planning and allocating groups took those stores over.

In the case of Macy's North, which is the former Marshall Field's, and Macy's Midwest, which was the former Famous-Barr -- in those cases, we have put in planning groups, and they are getting up to speed.

It's new.

It's different.

The merchants have to operate differently.

The planners are obviously getting up to speed.

We have spent a significant number of resources from the legacy Macy divisions into the news division to help them get up to speed faster.

So I would say a lot of progress is being made, but they're obviously not as proficient yet as the legacy Macy division.

Then just expectations for inventory by the end of the year?

You know something, Christine?

I don't have that in front of me, so I don't know how to answer that.

[Elizabeth Armstrong], [Alliance Bernstein].

Could you just break down for those of us that haven't been in a lot of the new May stores what the presentation of Home is relative to what the presentation would look like in a Macy's door?

I know that it is somewhat different, depending on the individual market of the May, so I'm just trying to get a sense on how that is.

And then also maybe, if you could do on apparel also?

It should be identical.

There shouldn't be any differences in a store, just because it's a May store.

As you pointed out, we do assort stores differently based on good/better/best, or the lifestyle of that trading area, but a good traditional store that was a May door will look the same as a Macy door, or a better neo-store look the same, whether it's Macy's or May.

Any guess, then, on why the Home is lagging relative to the apparel?

Well, I mean, how well assortments work in an individual trading area, or how the receipt levels were?

It's really the execution, as opposed to the strategy.

So I would tell you that the home assortments today don't look as good -- not for a strategic reason, but more for execution.

But Home in May, traditional May stores, is not as strong as Home in traditional Federated stores.

Is that --?

It tells you the execution was done less well compared to the assortment

John Barrett, Columbia Management.

This is the first year-to-year we have seen with a consolidated balance sheet.

You saw a nice improvement in your payables inventory number versus October of last year.

Are there any -- any permanent changes or benefits you're getting with vendors that are structural in nature, in terms of pushing back on terms that we should expect?

Because it's a nice flow-through to your cash flow.

No, there is really nothing happening on that front.

So that improvement from 83% to 91% --?

I'm going to have to look at it and see if there's anything unusual.

Ms. Hoguet, it appears there are no further questions.

I would like to turn the conference back over to you for any additional or closing comments.

Thank you all very much, and to the degree you have more questions as the day goes on, feel free to call Susan or me.

Again, thanks for your interest.

That does conclude today's teleconference.

Thank you for your participation, and have a great day.