梅西百貨 (M) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Federated Department Stores earnings conference call. As a reminder today's conference is being recorded. Now for opening remarks and introductions I would like to conference over to Karen Hoguet. Please go ahead, ma'am.

Thank you. Good morning, everyone, and welcome to the Federated Department Stores conference call scheduled to discuss our fourth-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 Web site, www.FDS.com beginning approximately two hours after the call concludes.

Please refer to the investor relations section of our Web site 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.

This is an exciting day for the Company. To start with, we're very pleased with our financial results for the fourth quarter and for 2006 as a whole. We're so proud of our organization for exceeding our profit and cash flow expectations even with lower than expected sales. And we did this while completing all scheduled components of the May integration without any major complications.

We did not produce the sales we had hoped for in the former May doors but the trend is definitely improving and we feel good about our ability to deliver the expected 2% to 3.5% comp store sales increase in 2007, which, as you know, includes both the Macy's and former May Company doors.

Because of our confidence in the Company's future, we also announced this morning a $4 billion increase in the authorization for our stock buyback program. Roughly half of this amount has been completed through an accelerated program, as I will discuss further in a few minutes.

And last, but certainly not least, as you saw, we are recommending to our shareholders that they approve in our annual meeting in May the change in the Company's name to Macy's Group Inc. By changing our corporate name to reflect the huge transformation our Company has undergone, we will be able to leverage the identity of our largest brand among all of our constituencies. Of course Bloomingdale's remains a very important part of the Company.

Let's talk first this morning about the fourth quarter and the full-year results. I will then talk about our key planning assumptions for 2007 and the announced increase in buyback authorization. And then of course I'll take your questions.

Sales in the fourth quarter were $9.2 billion, within our expected range of $9.1 billion to $9.4 billion. As we have discussed in our sales releases each month in the quarter we were very pleased with the outstanding performance in the legacy Federated doors that produced a 6.1% comp store increase. And we were disappointed with sales in the former May or as we now call them the new Macy doors. However, it's important to note that the trend in those doors has improved.

Gross margin rate, excluding inventory valuation adjustments in the fourth quarter, was 40.9% or flat with last year. This is consistent with our expectations. Fortunately, a good inventory shortage experience offset the added markdowns needed to clear inventory in the former May doors that resulted from the weak sales.

SG&A in the quarter was 25.2%, down 180 basis points from last year's 27.0%. This is well below last year and better than we expected due in large part to the earlier achievement of synergy. We were close to an annual run rate of $450 million in the fourth quarter, which is higher than we expected. In other words, we achieved more of the synergies earlier and exceeded our $175 million expectation for 2006.

In addition, retirement expense was below our assumption in the fourth quarter. Clearly, this fourth-quarter expense performance will be hard to beat in 2007.

Operating income excluding May related inventory valuation adjustments and integration costs was $1.4 billion or 15.7% of sales in the fourth quarter. In the quarter, we booked May-related inventory valuation adjustments of $10 million and integration costs of $167 million. The integration costs were higher than expected in the quarter due primarily to timing differences. For the year as a whole, our onetime costs were below our guidance. The inventory valuation adjustments were $178 million versus the expected $200 to $225 million. And the May related integration expense for the year was $450 million, which was the low end of our guidance of $450 million to $500 million.

Interest expense the quarter was only $49 million but remember that included a $54 million gain relating to our bond tender offer.

Tax expense in the quarter was $451 million or 37.2% of pre-tax income. This is slightly lower than the 37.5% expected due to year-end adjustments and miscellaneous settlements with taxing authorities.

Income from continuing operations was $760 million or $870 million, excluding the May-related inventory valuation adjustments and integration costs.

Average share count on a diluted basis in the fourth quarter was 523.7 million shares. We ended the fourth quarter with a basic share count of 497 million shares.

Fourth-quarter earnings per share on a diluted basis excluding May-related inventory valuation adjustments and integration expenses, was $1.66.

For the year as a whole, let me just focus on five key financial highlights. First, sales. The sales of $27 billion were slightly below our original expectations. This incorporated above plan performance at the legacy Federated stores resulting from continued progress on our four priorities and great performance at Bloomingdale's. Obviously, this performance is relevant because it is these strategies which are being executed in the new Macy's stores. However, the sales in the May doors, as you know, were weaker than expected. We are doing the right things in these new stores but it has taken longer both to build a customer base and also for sales associates, store executives, as well as customers, to get used to the changes.

Number two, EBITDA. EBITDA as a percent of sales was 13.1% in 2006 excluding May-related inventory valuation adjustments and integration costs, as well as the gain on the sale of the credit portfolio. We are on track to achieve our goal of hitting EBITDA of 14% to 15% of sales in the 2008/2009 timeframe.

Number three, EPS. In spite of missing sales, our earnings per share was $2.30 versus our original guidance of $1.72 to $1.85 excluding integration expense and gain on credit. Now, if you exclude the nonrecurring and unplanned tax settlement in the second quarter and the impact of the debt tender in the fourth, earnings per share this year was $2.08, still above our original expectations for the year, adjusted for the stock split.

Some of you have called us this morning wondering why EPS was below last year. Please remember that in 2005 we only owned May in the back half of the year, which is, as you know, by far the most profitable part of the year and the share count was only impacted by the May acquisition for part of last year.

Number four, asset dispositions. We brought in pre-tax cash proceeds of approximately $4.5 billion in 2006 between the sales of the May and GECC credit portfolios, Lord & Taylor, David's Bridal and the overlapping real estate and other miscellaneous assets.

And five, our stock buyback program. We bought back $2.5 billion of our stock during the year or 62.5 million shares. The average price paid during the year was $40, which we believe represents a great investment for the Company.

Those are just the financial highlights. I know many of you have heard my summary of key 2006 accomplishments before. But I just cannot talk about 2006 without reminding you of just how much we achieved this year in terms of the integration.

As of mid-February, of '07, all of the systems have now been successfully converted. The division consolidations are behind us; the May corporate offices wind-down has been complete; private brand was rolled out to the May doors; this fall, in 2006, the penetration of private brand in the May doors already reached 17% as compared to 18.6% this fall in the legacy Macy doors. As we have said, these goods have met great acceptance in the new doors. For the full year, private brand penetration in the legacy Macy's doors increased slightly to 18.2%.

The assortments were transitioned in former May doors to achieve greater localization, including the good, better, best and lifestyle mix, which we believe is warranted. We believe our assortments and, therefore, the sales trends, will continue to improve as we gain more experience and understanding about our new customers.

The logistics network is in the process of being integrated with no significant unanticipated issues thus far. The Macy's credit cards, along with our Star Rewards loyalty program, was rolled out to the May customers. And the penetration of proprietary card usage reached 41% in the May doors in 2006, up 560 basis points over last year, although still approximately 500 basis points below the legacy Federated doors. This trend bodes well for the future given our ability to better communicate to our proprietary customers and the increased loyalty that our proprietary cardholders demonstrate. And of course we accomplished the name change of all of the May stores as well as the beginning of our national advertising strategy.

I really can't say enough about how proud I am to be a part of an organization that accomplished all of this. This involved unusual commitment levels, long hours and personal sacrifice. You as shareholders or followers of the Company should feel good about the 200,000 plus people who pulled this off. We recognize that we still have lots of challenges ahead of us but as you can see from our accomplishments this year, we are up to the task.

As we look to 2007, our top priority is to drive comp store sales growth while making continued progress towards our EBITDA rate objective. In 2007, we're expecting total sales of $27.1 billion to $27.6 billion and a comp store sales increase of 2% to 3.5%. The total sales growth is lower than the comp increase due largely to the fact that 2007 has one less week than fiscal 2006.

As you saw in the press release we're planning to open six full-line stores in 2007 and two furniture stores. This sales assumption will require continued improvement in the trend in the former May doors versus 2006 as we go through the year. The trend has been improving since mid December and we believe our expectation to be reasonable, but we, like you, will be watching our sales trends closely and we will react with receipt and expense reductions if we turn out to be wrong.

Our comp store sales expectations by period are 2.5% to 3.5% comp store increase in the first quarter, 1.5% to 2.5% in the second quarter and 2% to 3.5% in the fall season. The higher expectation first quarter over the second quarter relates to the shift of a promotional event into the first quarter as well as Mother's Day that falls early in the second-quarter period this year, putting some of the related business into the first quarter.

And the total sales dollars are assumed to be the following by period. First quarter, $6 billion to $6.1 billion; second quarter $6.1 billion to $6.2 billion; and the fall season $15 billion to $15.3 billion.

For the full year we're expecting gross margin rate to increase modestly. While we expect gross margin to increase versus last year, in all of the time periods, the biggest increase is planned in the first quarter due to the fact that the quarter last year had the weakest performance.

With SG&A, we're currently expecting relatively flat performance as a rate for the year as a whole. Our plan incorporates achieving the $450 million or more of synergies with the incremental synergies over 2006 front-end loaded, as you would expect. And if we achieve comp store sales growth at the upper end or above of our guidance, hopefully the SG&A rate will be lower as well as we leverage the sales growth. We are assuming close to a full point of improvement in SG&A as a percent of sales in the first quarter, less improvement in the second quarter, a flattish rate in the third quarter with an increase in rate expected for the fourth quarter.

The fourth-quarter expectation relates to the fact that most of the synergies were realized by then in 2006 but as you might imagine we're not satisfied and in fact are still working on opportunities to reduce expense in the fourth quarter and, therefore, the year as a whole. Since that quarter just ended, we have not fully been able to look for opportunities for 2007 in the fourth quarter.

Included in the assumed SG&A is approximately $1.36 billion of depreciation and amortization. We are assuming roughly $330 million in the first and second quarter and about $700 million in the fall season. This assumes our capital budget of $1.2 billion for 2007. So our EBITDA as a percent of sales is assumed to grow in 2007 versus 2006. And we're still assuming it will be 2008 and 2009 before we achieve our stated 14% to 15% objective. This is consistent with what we have told you in the past.

The remaining May-related integration costs are assumed to be approximately $100 million to $125 million for the full year. Almost all of these costs, however, will occur in the first half of the year. These relate primarily to the final systems conversions that took place earlier this month and the continued integration of our logistics operations.

As you think about interest expense and share count for 2007, remember that we announced and included in our guidance a $4 billion increase in our authorization. So the total is now $4.17 billion to buy back stock. And while this is more aggressive than prior authorizations our balance sheet is strong. We worked with the rating agencies in advance to be sure we would not jeopardize our solid investment-grade rating with this announcement. As this indicates, we believe in our future and that buying our stock at current levels will prove to be a great investment for the Company.

In fact, we entered into an agreement to buy back 45 million shares in an accelerated program, which reduced our share count as of today. We are assuming in our guidance that in addition to the accelerated program, we utilized the open market or perhaps other negotiated transactions, to buyback the remainder of our authorization later this year. Utilizing the open market gives us the flexibility to adjust the amount and the pace, depending on the stock price as well as if for any reason our business is either stronger or not performing as we expected.

Interest expense in 2007 is assumed to be approximately $530 million. This reflects assumptions for the added costs associated with financing our $4 billion buyback program as well as a nonrecurring $54 million gain achieved in the fourth quarter of 2006 related to the debt tender offer and the $17 million impact of the tax settlement and interest expense in the second quarter.

By period, our expectations for interest expense are -- in the first quarter, approximately $20 million; in the second quarter, approximately $130 million; and in the fall season where the third and fourth quarters combined, approximately $280 million. The annual effective tax rate is assumed to be 37.2%. Remember, the $80 million tax settlement that was booked in the second quarter of 2006 as you go to build your models. These planning assumptions would result in diluted EPS of $2.45 to $2.60 for the year 2007; $0.15 to $0.20 per share in the first quarter; $0.40 to $0.45 in the second quarter; and $1.85 to $2.00 in the fall season. 2007 will clearly be another big year for the Company.

As I have said earlier, we remain cautiously optimistic about our sales outlook based on recent trends. Five of the key factors behind our optimism are the following. One, the significant increase in usage of our May credit cards in the former May doors will enable us to build relationships with these customers through more effective communication. Two, the ongoing roll out of our Reinvent Program in the former May doors. Three, the increased time in job for all of the former May associates in terms of learning about Macy's systems, policies and ways of conducting business. Four, customers in the May markets are getting used to our strategy for delivering value, which depend less on coupons. This is probably the most challenging of all the issues we face. We know it takes time to retrain customers to recognize good values without coupons. But as we know from our Macy's experience, it can happen, and it is an objective worth pursuing. And fifth, the introduction of the Martha Stewart line this fall, as well as the continued success of our private grounds and exclusive lines in both the old and new Macy's doors bodes well for our sales trends in 2007.

As I said earlier, we are cautiously optimistic about 2007. We believe that the legacy Macy's and Bloomingdale's stores will continue their strong performance and that the May store trends will continue to improve. And as comp store sales trends accelerate so will the EBITDA rates and cash flow generation. As we look beyond 2007, we are less cautious about our optimism and believe that we will continue to build our brands and enhance shareholder value as Macy's Group.

Thanks for your interest in Federated and I will now open the call up for your questions.

(OPERATOR INSTRUCTIONS). Deborah Weinswig, Citigroup.

As we think about the gross margin guidance for 2007, I just want to make sure, it sounds a little conservative and if we think about the fact that you'll have a full year of Federated's private-label, the new Macy's doors, the use of [20/20] at the new Macy's doors, which should also theoretically help markdowns, and obviously a host of other kind of positives, can you help us understand what maybe we're not thinking about?

Well, the issue, Deb, is remember, we're focused on giving the customer value. We're not focused on growing gross margin rate. We would much rather offer the customer value and get the rewards in comp store sales growth. So I think that's probably what you're missing.

That's very helpful. Secondly, you said on the last earnings call that soft home has stabilized in the third quarter and you expect it to make more progress in the fourth. Did you see what you would have expected in the fourth and how are you thinking about 2007?

Yes, we have seen continued progress in the home store, both in the legacy Macy doors as well as the new Macy doors, which is really encouraging. And we do expect that to continue to improve. And obviously we expect a big benefit from the home store as we introduce the Martha Stewart line in the fall season.

Dana Cohen, Banc of America Securities.

A couple questions. Turning onto the gross margin, I think you made a comment that I think it was shrink was better than expected in the fourth quarter; is that correct?

That is correct.

But would it be also fair to assume that the merchandising margins at the legacy Federated doors were better than expected given the comp?

You know something, we don't track it that way, so I really don't know. But as I think about it I would think those would be better. But in the May doors remember we are dogmatic about clearing old age inventory and not carrying things over to a new season. So we took a lot of markdowns given the weak sales in the May doors.

Okay. And then given that SG&A came in almost $100 million better in terms of dollars, was that primarily synergies that drove that?

I believe it is, Dana. We're still analyzing it because it was much better than we had expected.

So the offset in terms of -- I'm now sort of moving down the P&L to EBIT -- would have been probably profitability if the legacy May doors were below expectation given the sales and the gross margin?

No, I'm not willing to say that. I don't know.

Okay. And then looking out to '07, I mean SG&A dollars in the quarter were at a run rate of I think of like $270 below LY. Just help us to think about how we model '07 given SG&A dollars running down so much year-over-year.

Well that's not going to happen in 2007. SG&A as dollars will increase in each of the time periods. And as you can tell from my comments, in the first half of the year because we're not year rounding on the synergies happening yet, you should expect bigger increases -- I'm sorry, lower increases than in the back half of the year when in 2006 we were already experiencing the synergies.

I guess I don't quite get why you would not at least see SG&A dollars down in the first three quarters since the synergies seem to have gotten pulled out in the fourth.

No, the synergies came out all through the year, Dana. It's just that by the fourth quarter we had hit the run rate. So we expect dollars to go up in each quarter, not as much as the sales growth, obviously, because as I said we're expecting almost a point of improvement in the first quarter.

Stacy Turnof, Merrill Lynch.

Good morning, Karen. A question again on synergies. When we look at modeling in that for the next couple quarters, given the fact that part of that $450 million occurred in the fourth quarter how should we look at that? Is it really primarily going to be spread out through the next three quarters?

I'm not quite sure how you're building your models. I have it just in the SG&A numbers. So within that guidance where you see the rate improving almost a point in the first quarter, less in the second and flattish in the third, that's how I would think about modeling total SG&A.

Okay, that's helpful. And then my second question is, can you give us any comment on how your February home sale has done, particularly at the May stores?

Not until we report the month next week.

Charles Grom, JPMorgan.

What has changed in the May doors in your view that has led to the improvement I guess over the past 60 days? Is the home area improving and the key driver? Or is the customer just getting more comfortable with the offerings since the banner change in September?

We are seeing improvement in all parts of the business. So I really think it's just time. I think we just expected the stores -- the customers -- to respond immediately. And it does take time for people to absorb change and understand. And so I think it's time more than anything else.

Okay, just as a follow-up to that, I'm just curious as to why you see comps up for the full year up 2% to 3.5% when I think formally you were outlining at least 3%. Is it the May doors not doing as well as you thought even though they are improving or is it something more macro?

No, it relates to the trend we're coming off of in the fourth quarter. You know I'm still hoping to do the upper end of that guidance. But as we're thinking about reality, we thought it made sense to have a broader range.

One last one on merger and integration costs. Just curious as to why there was such a delta between what you guided to and what the end number came in at. I know you said timing; was that entirely it? And I guess if you could just provide some granularity there.

Sure, a couple of things. One is that you will recall we were running under year to date. So some of the things that did not happen earlier ended up happening in the fourth quarter. That is largely the reason.

Anything specific that wasn't running on time?

No, it's just -- you know, with one-time costs, it's very hard to predict the timing. So for example some of the write-downs on real estate relating to warehouses. We had to wait until decisions were made, and those decisions were made a little bit later. But really nothing and obviously not impacting the achievement of the $450 million.

Adrianne Shapira, Goldman Sachs.

Karen, you had mentioned that you had discussions with the rating agencies. Any sense you can share with us how much debt capacity you could assume and still maintain investment-grade status?

No, I mean, I really can't comment. You would have to talk to the agency.

Okay, but any metrics that you're thinking about that you're comfortable with to target that we should be thinking about?

Obviously, it's all the normal credit ratios and it's a balance of all of that. The leverage amounts, fixed charge coverage. It's all the normal credit ratios.

Okay and then just on the buyback, can you just help us think about the pace of the cash flows? You had mentioned the $4 billion completed this year but just any sense of cash flow out-paying -- paying down this buyback, how we --?

I cannot tell you that; I cannot help you there, but what I can tell you what we've assumed in the guidance, which is that the roughly $2 billion or the 45 million shares already happened, and that the remaining roughly $2 billion will be -- is assumed in the guidance to be bought back over the back half of the year.

Okay so the first $2 billion is out?

Correct.

Thank you.

Bob Drbul, Lehman Brothers.

Just a couple questions on the May doors. When you look -- first of all can you give us the blended numbers on 2006 that we will be comparing against when you give us the '07 guidance?

No, because it really wasn't part of the comp base last year.

Okay. And then the second question is when would you expect the May doors to start to -- the legacy May doors to start to comp positive in your assumptions?

You know something, I'm not tracking it that way anymore so I don't even know how to answer that.

And then for full year 2006 can you talk a little bit about the advertising expense and where it came in on a dollar basis or percentage basis and how to think about it in '07?

I don't have that number yet for 2006, but as you know, it will be in the 10-K when we report. And in terms of how to think about it for '07, as you know, we do not expect a significant reduction in marketing expense other than what has already happened in the overlapping markets. But we are really investing in marketing to both build the brand while we're still keeping the sales promotion cadence that we've had in the past. So I would not expect any marketing savings in 2007.

Okay, and then just one final question. When you look at the performance of your private-label business, has your targets at all changed in terms of where you think that business can go? And I guess when you look at '07 in general or '08 and '09, can you just maybe walk us through how you think that would progress?

My guess is that we'll increase slightly but what we have really been focused on is exclusives also, not just private brand. So for example, Martha Stewart is not technically a private brand. But, that's part of what we call exclusives, and we're going to continue to build that. I don't know how far we will go there but obviously we love having differentiated assortments. So, we would like to continue to push the penetration of exclusives, private brand and limited distribution product, which in '06 together was about 35% of our sales.

Okay. Are you contemplating any more door closures with Federated or the whole doors, Macy's or Bloomingdale's?

We're not expecting anything significant. As you know, every year, we look at underperforming stores and close those that are underperforming. But I don't expect a significant number at any point.

David Glick, Buckingham Research.

Good morning, Karen. Congratulations on Q4 results. A quick question on the cost savings. Previously your guidance for the synergies was $175 million in '06 and $275 in '07, if I got those numbers correct. How much did you realize in '06 and what is left is incremental for '07?

It's really hard to measure that with any precision, David. So clearly we achieved more than the $175 million in 2006 and that's why SG&A did better than what we had expected. And within the plans that I have talked to you about in the SG&A guidance, we know has at least $450 million. So what the precise number is, I'm not sure I can tell you that at this point.

I guess, I'm getting a lot of questions on this and myself is the degree to which you exceeded the $175 million. Was it substantial, significant? I'm just trying to get some color as to really how much more -- how much you exceeded that in some qualitative way?

I think it was substantial.

So probably the majority of the cost savings were realized in '06; is that fair?

You know, David, I don't want to get pinned down too specifically because I don't know. But clearly more than the $175 million, but there is still a lot more to happen in the first half of '07 also.

Just to follow up on the former May doors. Can you give us some color on the degree of improvement as you proceeded through the fourth quarter? And is it possible to give us some measure, whether it's relative to plan or relative to last year, just a sense of how much they have improved and what you think --?

Let's just say they have improved enough that we're comfortable with the guidance we're giving you for the first quarter.

Okay. And the biggest drivers for the improvement, was it home or execution?

It was across the board. That's why I said earlier I really do think it's time that elapsed and given customers and associates time to get used to the change.

Great, okay. Again, congrats and good luck for this year.

Thank you. I appreciate it.

Teresa Donahue, Neuberger Berman.

My question has been answered for now. Thank you.

Dana Telsey, Telsey Advisory Group.

Good morning, Karen.

Hi, Dana.

Can you talk a little bit about minimum wage increase? Does that impact the business at all or how have you accounted for it? And on the CapEx a breakout of remodels, new stores, how are you seeing it this year? Thank you.

There's really no change in the CapEx. Obviously, of the $400 million we spent on conversion we're not doing this year. So if you sort of strip that out in terms of the mix between new stores and remodels and technology and direct to customer, it's pretty much as it has been; not a lot of change there.

And I admit, Dana, I don't know the answer on the minimum wage. Historically, that has not been a big issue for us because our people are above that level, but I don't know the answer to your question.

Thank you.

Michelle Tan, UBS.

I've got a follow-up question on the synergies. I believe you said that you were in the fourth quarter at a run rate of around the $450 million. It seems like there are opportunities still in the first half of the year with a number of DC closings still scheduled and I think the systems conversion in the Midwest still ahead. Could you kind of elaborate on some of the areas of potential additional savings in the first half?

Yes, I mean, we've said that systems are now all converted as of the beginning of February so that happened at Macy's North and Macy's Midwest and that is now done, and the distribution center integration is ongoing. And in fact, you're right, that is another source of the added savings in '07 versus '06. And that is why the SG&A estimates for the first and second quarter are a lot more aggressive than the back half of the year.

Okay. And then from a total savings standpoint, that does imply that there should be something; I know you're saying at least $450 million now. But does that imply that we should see something in excess of at least that $450 million?

Correct.

Okay. And then also, just to understand on the buyback, is that being funded from the cash on the balance sheet and cash from operations? Or is there some additional debt that is associated with that?

The $2 billion that we've just completed will be funded with cash on hand and commercial paper. However, as you look through the year we have about $650 million of debt maturing. So we will be refinancing that as well as funding some of the additional buyback.

One final question. Just on the May stores or the converted May stores versus the legacy Federated. Can you give us any sense of the average unit retail gaps between those two sets of stores and whether you have seen that close at all with the change in the assortments at the May location?

Yes, there is a gap; yes, it has begun to narrow; and I don't know the specific numbers. But that clearly was part of the strategy here as we moved their doors to our mix of good, better, best. So we still see opportunity from that, which should help, obviously, drive the comps.

Right. Do you see -- I'm not sure if you have this color or not, but the May customers, in terms of where they're shopping on the price point mix -- do you see them starting to convert more to those higher price points?

We absolutely are. If you think about what sold well in the May doors, it was some of the better goods, the status brands, the private brand, the differentiated product. I don't know why there's this impression that May customers are different than the former Macy customers. They're the same! So exactly what's working in the Macy's stores will work in the May doors.

And you know, by the way, as you know, we don't assort our stores sort of in a one size fits all. We have lots of stores that are in more moderate trading areas that were Macy doors just like we have May doors. But there's this perception of a big difference in the customer. There really isn't.

Right. No, that's very helpful. Thank you very much.

Michelle Clark, Morgan Stanley.

You had mentioned that the comp trend at the May Company doors has been improving since mid December. Does that include February month to date? If it does, is the rate of improvement in February consistent with what you've seen in January as you transition from more full-priced sales?

It does include February but I'm not going to say a lot about February sales until next week.

Okay, so it does include February. Secondly, what are you guys doing specifically to get the customer to notice better value in the stores?

A lot of it has to do with marketing. A lot of it has to do with sales associate training, so that they can say to a customer, this is a great value; you don't need a coupon. A lot of it has to do with the communication we can do as these customers have opened up Macy credit cards as part of the Star Rewards program. And part of it is being patient and just letting time evolve.

It is important that people know that even though Macy's uses coupons a lot less than what May had done, we still offer a fabulous value to the customer. And in part, as I responded to Deb Weinswig earlier on the call, value is a very important part of what we are offering differentiated assortments at good value. It's just helping that customer to understand it through sales associates as well as marketing.

Great, thank you.

(OPERATOR INSTRUCTIONS). Jeff Stein, KeyBanc Capital Markets.

I'm wondering if you could just kind of walk us through the structure of this $2 billion stock transaction that you've just completed. A, what date was it completed? And B, under what conditions will there be an adjustment to the dollar amount I guess that you have purchased?

Sure. Essentially we executed this transaction for the 45 million shares in two pieces. And the only difference between the two pieces really is the degree of control we have over the maturity. So for half of those shares, we have signed an agreement and in essence it's gone into auto pilot. We have very little to do with it and that agreement will be terminated sometime between two and five months from now.

On the other half we do have control over the time period and while we suspect we'll get it done in around the same time we do have more flexibility there. And in both cases when these agreements are terminated we will pay more or less for those shares depending on what the stock price does between now and the termination date. And at that time we will settle either in stock or in cash.

Okay, so can you tell us what you have baked into your guidance in terms of a settlement price?

No. That would tell you what I think is going to happen with the stock price.

Okay. One more question real quickly. Can you give us kind of your guesstimate in terms of growth in working capital for the year?

Yes, I think we're expecting to see inventory begin to grow slightly. We do still expect to have turnover improvement, but with a sales increase that we're talking about, we do think there will be some increase in inventory for the year. Obviously payables reacts to the receipt levels that we have also. (multiple speakers)

And the sale of the tuxedo rental business, I presume that has not closed yet, and when it does, how much money will come into the till?

It has not closed yet, and as you know, the price for that was $100 million. And that will be reduced by the amount of deposits that have been received for tuxedo rentals to come.

Right.

So, when we had hoped to close it at the end of January that was a fairly small number. When we think we will close it, the deposits will be a bigger deduct only because that's the middle of prom season and wedding season. So my guess is it will be somewhere -- and I don't know for sure -- around $70 million.

Rob Wilson, Tiburon Research.

Yes, thank you. On the last conference call, you mentioned inventory levels at historical May stores were running lower than the Macy's stores. How does that look today?

I don't remember saying that they were lower. So I'm not quite sure what I am responding to. But they're now being run identically, so inventory levels should be -- on the same -- based on the sales expectations across the Company.

Okay. When Martha Stewart launches in the fall, do you expect your home business penetration will increase? And is that penetration around 15% for your total home business?

Yes, we expect it to increase, and I think it's around 15%; I've not looked at the year-end numbers, so I'm not positive. But it's that ballpark. But for sure we would think it would increase due to some of the new categories that we expect to come with Martha.

Thank you. That does conclude our question-and-answer session. I would like to turn the conference back over to Ms. Karen Hoguet.

Great. Well, thank you all, again, for your interest and obviously if you have more questions Susan and I are both available to answer whatever you may have. And have a good day. Thanks.

Thank you. That does conclude our conference for today. Thank you very much for your participation. Have a great day.