梅西百貨 (M) 2007 Q1 法說會逐字稿

Good morning and welcome to the Federated Department Stores first-quarter 2007 earnings release conference call.

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

Please go ahead, ma'am.

Thank you.

Good morning and welcome to Federated's call scheduled to discuss our first-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.

This was a disappointing quarter, due to the weaker-than-expected sales.

However, we were pleased that our earnings per share were within our guidance, in spite of the lower sales.

In February and March, our comp-store sales were only slightly lower than what we had expected.

However, in April, the gap to our expectations was wider.

Also, in February and March, the weakness was focused on the new Macy's or the former May doors, and the Home business, particularly furniture.

However, in April, the weakness was more widespread and included apparel areas in both the former May as well as the legacy Macy doors.

It is hard to say how much of the April weakness in apparel was due to weather, but clearly it was a factor.

In early May, apparel sales have rebounded somewhat, but we need more time to judge the underlying trend.

For the quarter as a whole, sales were $5.9 billion versus our expected $6 billion to $6.1 billion.

The sales performance was good during the first quarter in the legacy Macy doors, in spite of April, at Bloomingdale's and online.

We opened six new stores in the first quarter, five Macy's and one Bloomingdale's.

During the quarter, our business was strong in dresses, juniors, handbags, shoes, young men's, luggage and mattresses.

Also, the more contemporary looks in ready-to-wear and men's both sold well in the quarter.

The weakness businesses in the first quarter were furniture, all of the seasonal businesses as well as the traditional moderate businesses, including structured career looks.

We remain confident that our strategies are right and our execution is on track.

We have dug into the details of the business, as you would imagine, trying to figure out what, if anything, we need to do to improve the trend.

As we examine our business in the former May doors, we do see customers responding positively to so many of the new parts of our assortment -- the private brands, the status brands and our exclusive lines.

That gives us confidence in our assortments overall.

However, we do need to communicate more effectively, particularly with our new customers, and we need to bring more customers in these new trading areas in to try the Macy's store.

While we are having success in building a larger proprietary credit database on the converted May customers, we need more time and information on their shopping habits to be more effective in our marketing to them.

Therefore, until that happens, we are going to have to advertise more in the public media rather than direct-mail.

Our promotions will need to create more urgency for these customers to react.

These marketing issues are particularly critical in Home areas that tend to be driven most by promotional offerings.

We are hoping that these changes will help accelerate the business, starting in late May.

Gross margin in the first quarter was 39.8%, up 100 basis points over last year, excluding May-related inventory valuation adjustments.

We are very pleased with that performance, particularly in light of the weaker sales.

SG&A in the quarter was $2,113,000,000 or 35.7% of sales.

This is 60 basis points below last year.

While we achieved SG&A dollars below what we had expected for the quarter, the rate was higher than expected, due to the denominator, i.e.

sales, being lower.

We achieved savings in the areas impacted by the synergies like merchandising, logistics, advertising and general management.

However, there were also planned increases in expense that did offset some of the synergy savings, most notably in selling expense.

We also had startup costs associated with our new direct-to-customer facility in Portland, Tennessee, as well as the preopening expenses associated with the new stores.

Remember also that we sold the May credit portfolio last June, and actually a piece of it in late May.

This negatively impacts SG&A until we year-round on the change.

Additionally, depreciation and amortization expense of $329 million in the quarter, which was almost identical to the expected $330 million.

However, it does represent an increase from the $316 million a year ago.

So all of these offsets to the synergies were planned.

As I said, the SG&A dollars came in well below what we had expected, but we were not able to offset the impact of the weaker sales when you looked at SG&A as a percent to sales.

Operating income excluding May integration costs in the quarter was $244 million, up 64% over last year.

As a percent of sales, operating income excluding the May-related integration costs was 4.1%, up 160 basis points over last year.

One-time integration costs in the quarter were $36 million.

Interest expense was $125 million.

Tax expense was $31 million.

So we ended up with income from continuing operations in the first quarter, excluding integration costs, of $74 million versus $7 million a year ago.

The average diluted share count in the quarter was 476 million shares.

EPS, excluding the May-related integration costs, on a diluted basis was $0.16.

This compares to $0.01 per share a year ago on the same basis, and our guidance of $0.15 to $0.20 a share.

Including the May-related integration costs, EPS from the continuing operations in the first quarter was $0.11 per share versus a loss of $0.13 per share a year ago.

Cash flow from continuing operating activities in the quarter was a use of $370 million versus a use of $114 million last year.

The increased use was due primarily to the fact that our credit business was sold, and therefore we did not generate cash this year from the normal reduction of receivables that happens in the first quarter.

Additionally, last year in the first quarter, we were liquidating a significant amount of inventory, which we obviously did not repeat this year.

If you look at the balance sheet on a year-over-year basis, inventory was up about 1% versus a year ago at the end of the quarter.

Cash flow used by continuing investing activity was a use of $31 million, as compared to a use of $84 million last year.

The proceeds from the sale of After Hours and other properties offset the higher CapEx in the quarter.

The higher CapEx in the first quarter was due to the fact that a larger number of new stores opened in the first quarter, and we are still on track for our annual CapEx spending of $1.2 billion.

During the first quarter, we issued $1.6 billion of debt, $1.1 billion of five-year debt at 5.35% and $500 million of 30-year debt at 6.375%.

We also entered into two accelerated share repurchase agreements on February 27th for 45 million shares.

This utilized just short of our $2 billion of the $4 billion authorized by our Board earlier this year for stock buybacks.

Credit Suisse has notified us that it completed the variable portion of our accelerated share repurchase for 22.5 million shares this week.

The second part of the accelerated program, which represents a second 22.5 million shares, is still going on.

So that's the summary of the highlights of our first quarter.

As I started by saying, we were disappointed in our sales, particularly in the month of April.

Given the sales performance, we were very pleased to have achieved earnings within our expected range of $0.15 to $0.20.

Don't lose sight of the fact that this is only the first quarter, which, as you know, is the smallest quarter of the year from an earnings perspective.

As we look forward, we are encouraged about our sales trends.

First, with the warmer weather, trends have improved.

Second, we are taking action.

We are going to redirect more of our marketing to public media, which should help drive traffic, particularly to the former May doors.

Three, the comparisons in the former May doors should get somewhat easier as we move through the second quarter.

While the May doors operated last year on the May promotional calendar with the frequent couponing, in the second quarter, as we were transitioning inventories, the receipt flow did start to be more irregular as we moved into June and July, which should give us opportunity relative to the first quarter.

The last factor, number four, is the fact that more time has passed since the May stores were converted to Macy's.

Our research is showing that customers are both understanding and, more importantly, liking Macy's more and more.

Our store associates in the converted doors are getting more comfortable with how we operate Macy's stores.

Offsetting these four positive factors, however, could be weakness in the overall environment.

But it is hard to judge that based on just one month.

We have, however, moderated our sales expectations slightly for the second quarter, given this uncertainty, taking our total store guidance to $6 billion to $6.1 billion, versus our previous guidance of $6.1 billion to $6.2 billion.

As you saw in the press release this morning, we lowered our comp-store guidance slightly for the second quarter to being flat to up 2% from prior guidance of up 1.5% to 2.5%.

As a result of the potentially lower sales, we have expanded the range of earnings guidance to $0.35 to $0.45 before the May-related integration costs from what had been $0.40 to $0.45 per share.

This compares to last year's $0.49 per share, excluding May-related integration costs and gain on the sale of receivables, or $0.33, which is really the most comparable number, which excludes the tax settlement we booked last year in the second quarter.

So the apples-to-apples comparison is $0.33 in 2006 in the second quarter to the $0.35 to $0.45 as our guidance for the second quarter of 2007.

With our internal planning as well as our external guidance, we are trying to balance the trends we saw in April with the positive signs we had seen earlier in the year, combined with the actions that we are taking to improve where our performance has been disappointing.

We still expect to achieve our annual earnings guidance of $2.45 to $2.60 before May-related integration costs.

At this point, we are holding to our sales guidance of $15 billion to $15.3 billion for the back half of the year, with a comp increase of 2% to 3.5%.

With so many good things happening this fall, including the year-rounding on the promotional changes in the former May doors, the launch of our Martha Stewart line and the additional time operating these former May doors, we feel we will be able to perform well even if the economy ends up softer than what we originally expected.

We appreciate the time you take to understand our progress through the final steps of our integration.

We remain confident about our strategy for the long term and about the shareholder value we are capable of continuing to create.

Now, I'll stop and take your questions.

(OPERATOR INSTRUCTIONS).

Deborah Weinswig, Citi.

In terms of the new Macy's doors, can you just talk about or help us maybe understand in more depth what is different versus your original expectations, traffic, ticket, categories of performance, just anything else that we can use to help understand?

I think it's primarily a traffic issue.

The average unit retail is going up significantly in those stores, maybe a little slower than we would have thought.

But I think the bigger issue has been traffic, and it has been a whole lot weaker in the Home Store than the rest of the store, in terms of our business.

That's why, as we think about more public advertising, we think that will help draw people into the stores.

I'm not sure how much color you can give us around the performance of Bloomie's.

We've seen such amazing performance out of competitors such as Nordstrom's or just by the closest publicly traded competitor.

How should we think about their performance versus the competition and what opportunities exist there?

If you looked at Bloomingdale's excluding Home, they look very comparable to the competition.

So their performance has been strong although they, too, have had weakness in Home; that hasn't just been with Macy's.

But from an apparel and accessories perspective, their numbers look like the competition.

So we continue to feel very good about Bloomingdale's.

As you know, Bloomingdale's has opened quite a few new stores, most notably downtown San Francisco last year; San Diego; Chestnut Hill in Boston; South Coast Plaza, which opened during this quarter; and then Chevy Chase opens later this year.

All the stores that have opened have opened very strong, and we feel very good about, now, the expansion potential for Bloomingdale's.

So I think those plans could develop over the next, say, 6 to 12 months.

Michelle Clark, Morgan Stanley.

Can you tell us if you're seeing regional differences in performance across those new Macy's locations, presumably given a more challenging macroenvironment in the the Midwest --?

That's absolutely not the case.

You're not seeing Midwest stores, the new Macy's stores, perform below new Macy's stores in other regions?

Correct.

That is absolutely not the case.

Unfortunately, we're seeing weakness pretty much across the board; there's no regional difference.

Can you provide us with some insight into inventory levels, both at the legacy Macy's doors and the new Macy's doors?

Yes.

Whenever you have a weak apparel month like April, there are going to be some pockets of inventory that is too high.

But in total, we're pretty comfortable with our inventory levels, and as we move through the second quarter, we'll be able to liquidate the inventory we need to liquidate.

So there's really no concern in terms of the inventory levels.

What assumptions are you making in terms of consumer strength in the back half of the year?

I don't know exactly how to answer that, but the original numbers assumed that there wouldn't be any economic weakness relative to the first half of the year.

As we've looked at our plans and again, given April, there's enough good news offsetting the bad news that we're still comfortable in total with the number, but we will continue to watch trends, obviously, very closely.

Charles Grom, JPMorgan.

Could you elaborate a little bit more on the public advertising change, and what it's going to involve and whether or not it will come at the expense of other marketing vehicles?

Most of it will come at the expense of other marketing vehicles.

Some of it, I suspect, will end up being incremental in terms of advertising spend, but most of it we will offset elsewhere.

So what vehicles will it come at the expense of?

Like some of the couponing?

No, no, no.

It will be public as opposed to private sales, and it will be more television, obviously, as we are trying to drive customers into the store.

Could you elaborate a little bit more on what you're seeing in the month of May -- I know it's only two weeks in -- maybe by product category or geographic region, that gives you a little bit more convection?

No, we don't comment mid-month.

On gross profit margins, as you said, they were up better than expected.

Can you walk us through the three or four drivers and how sustainable they are?

One of the biggest factors was last year, we had a very disappointing gross margin in the first quarter, which, by the way, was the opposite in the second quarter.

We had very good margins last year in the second quarter.

So keep that in mind as you are modeling.

I do not expect much, if any, probably not at all, an increase in gross margin in the second quarter.

In terms of what happened in the first quarter, most of it is just year-rounding on weakness last year.

The continued strength in the business in the legacy doors has helped gross margin.

On the merger integration, I believe you said on the last call $100 million to $125 million for the full year.

I think you said 50% of that would be in the first three months of the year, which really didn't materialize.

Can you give us a little bit of sense for the cadence on that line for the rest of the year?

Well, what we said is almost all of that expense will happen in the first half of the year.

There will be some small numbers in the back half, but most of it should happen, certainly, by the fall season.

Adrianne Shapira, Goldman Sachs.

Can you talk through some of the planned increases on expenses that offset some of the cost savings, maybe the size of it, and perhaps drilling down on the investments on selling expense?

It seems as if the payback is not happening because the top line -- we are not seeing the positive results in the top line.

Could you maybe help us --?

You don't know what the top line would have been, had we not done it.

So I don't think it's fair to conclude that hasn't been the case.

Dollars, by the way, on selling -- what happened is when sales didn't happen, we didn't cut selling expense at the same rate.

So it's not that we're spending more dollars in selling, we just didn't cut it as dramatically to maintain the same selling expense as a percent of sales in the first quarter.

The biggest error, if you want to use the word error, that I've heard as I've talked to investors and analysts over the last couple of weeks on SG&A is forgetting the fact that we sold the May credit business midyear last year, and that has a significant negative impact on SG&A .

In addition to that, obviously, depreciation is forecasted to be higher, as well as the one-time cost associated with the new stores and the direct-to-customer facility.

Those are really the

Just going forward on the selling expenses, can you give us a sense of where you're planning?

Obviously, now that you adjusted comps down slightly in the second quarter, similarly the selling expense has moderated?

As we said when we reported the fourth quarter, we expect SG&A rate to continue to go down in the second quarter but by less than in the first quarter, so that would not change, and as we move to the back half of the year, little if any improvement.

Talking about the efforts to drive traffic, it sounds as if it's going to be a little bit more promotional, especially on the Home.

Talk about the margin implications to that?

It is going to be a little more promotional, and we think we factored that in as we've looked at our margins for the second quarter.

Dana Cohen, Banc of America Securities.

Just a couple things, first, on the second quarter.

The guidance assumes no spread between comp and total.

Why should that be, with the new stores coming on?

That's not true.

I think it's rounding.

Just in terms of just going back on this SG&A, given the fourth-quarter performance, you had the issue with the credit card in the fourth quarter.

It would seem to me it has to be the other issues which are the delta coming into Q1.

Is that a fair way to look at it?

I'm not sure I understand (multiple speakers).

Well, if you sold the May card in the second half of last year, it would have hit you in Q3, it would have hit you in Q4, so that's not different.

No, no, no.

That's not an issue in the back half of the year.

That's only an issue in the first half of the year.

In the back half of the year, we had a spectacular fourth-quarter SG&A, and it's going to be hard to beat it.

No, no, no.

But what I'm saying is in Q4, your SG&A dollars were down $275 million despite the May credit card issue.

So the rate of change between Q4 2006 to Q1 2007 can't be the credit card; that's the same issue.

It has to be incremental stores and all the other things you talked about.

So, as we think now going into Q2, that has to be the same, plus it sounds like you are going to spend more on marketing.

A, I'm not following you with the fourth quarter to the first quarter; I'm not quite sure what you're saying.

But factually, you're correct -- the SG&A in the fourth quarter would have been negatively impacted by the credit sale, so that the performance was even stronger than what you might have thought, had you forgotten that.

Then as we go Q1 to Q2, you don't have the expenses for the six new stores.

But on the other hand, it sounds like you're going to be spending more on marketing.

At this point, I don't know if it's going to be incrementally more or covered elsewhere.

That's potentially the case, but it's not huge dollars.

Help us think conceptually about what this new marketing means.

It sounds like you want to drive sales, but on the other hand, is this going to be more promotional types of events than what you would have done with the credit cards?

I just want to understand just conceptually how you're thinking this through.

Some events that might not have been with advertising on television.

We will now have television.

In other cases, it was going to be a proprietary cardholder event, which will now be public.

Those would be the kinds of changes that would happen.

So does that mean that it's a more expensive type of event to the P&L?

It depends on the sales.

It depends on the incremental plus sales you generate.

I'm talking on a rate basis.

It sounds like it's probably a lower margin.

No, not necessarily.

Again, it depends on how much incremental business you drive.

Advertising more than covers itself; it's a question of to what degree.

So you can't judge that until after the fact.

You are not assuming in Q2 that gross margin is going to be down?

I'm not assuming it's going to be up.

We'll see, as we get through the quarter.

Stacy Turnof, Merrill Lynch.

Could you comment a little bit more about the friends and family promotion on your business?

I know it's only been a week or two since sales were reported, but any better data on why it wasn't as successful as you had anticipated?

Well, we have all kinds of theories, but I don't know that we know definitively.

So I really don't think I should answer that, since there's nothing definitive.

Was there a difference between the May stores and the Federated stores?

Can you make any (multiple speakers)?

It didn't do great either place.

Could you update us on where you are from a credit card penetration at the May doors?

I know it was, I believe, at 41% at the end of 2006.

Yes.

In the first quarter, the May store penetration was 44.1%, up 740 basis points over a year ago and 370 basis points better than what we had expected.

So it still is 180 basis points below the legacy doors, but it did improve significantly.

How much did private-label go up this quarter at May, or was it pretty much at that 17%, 18% rate?

It was pretty much at the same rate.

Bob Drbul, Lehman Brothers.

It's actually [Hillary Morrison] calling in for Bob.

When you look into this fall and begin to anniversary the launch of new Macy's stores, what percentage of your mix we'll comprise of new brands compared with last year?

Specifically, can you give us a sense of what percentage of new brands will be private-label and what percentage of branded products will be different than what was initially launched in new Macy's?

I don't know the answer to that, but I don't know of any big changes, other than the Martha Stewart launch.

Also, are there any initiatives you have to improve the Home business?

Well, one of them we've been talking about, which is the promotion and the public advertising.

That's the biggest.

Bernard Sosnick, Oppenheimer.

I'm curious about the weakness across the board in moderate.

Could you give us some (multiple speakers)?

No, I said moderate traditional.

Ah, moderate traditional.

Right.

Oh, it wasn't across the board.

No, no, no, no, no.

So in the moderate, you would have your private brands, which you say have been doing well and have been well-accepted at the May doors.

Yes.

Things that are more unique, more fashionable, are selling better now.

It's the traditional basics that are not doing well.

Now, historically you have always excelled, as May did, at battening down the hatches with expenses when the economic climate was murky.

I'm sure you're doing quite a bit of that at present.

Or is it not really being the case?

Because if you're increasing advertising, I would imagine you're doing quite a bit to cut expenses elsewhere.

That's correct; we are.

Federated historically, as you know, is very good at adjusting inventory plans as well as expense if we thought business was tough -- much harder to do, by the way, in the third month of a quarter, when it gets a lot tougher.

But as we broadened our comp guidance and lowered it a bit for the second quarter, you better believe we are all over that expense and receipt subject.

Teresa Donahue, Neuberger Berman.

My question has been answered.

Christine Augustine, Bear Stearns.

On the SG&A, will you have any additional startup costs for the online business for the rest of the year?

How about preopening, or is that just in the first quarter?

There's only one -- there's two furniture stores, and then the Bloomingdale's Chevy Chase store opens in the fall, so there's not a lot left on that.

In terms of the preopening expense, obviously the distribution center has opened.

But until we start using at full-bore next year, there's some negative leverage.

So it is costing us something in terms of SG&A throughout this year.

On the 80 stores which you initially planned to divest, how many do you have left?

You know something?

I don't know.

It's not a huge number, and I'll check and get back to you.

But the issues there -- correct me if I'm wrong -- are just there's some leases that you are trying to negotiate on, or --?

There's a certain number of stores that are closed, and that we're working on real estate deals to sell.

There's also a handful of stores where we have operating covenants, and so we're continuing to operate two stores in a mall.

There's some of those being resolved as we speak, but there are still some of those.

Interestingly, in some cases -- for example, the Houston Galleria, where we now have two stores, both stores have done very well.

So we are rethinking even, do we want to sell the second box, since they are doing well with, by the way, duplicative assortments.

Wow.

My final question is on furniture.

Just thinking about that business over the next few years, you are obviously committed to it at this point.

But is it up for debate as to whether or not you should be in that business at all?

No, it's not up for debate.

We think it's a business that we have a competitive advantage with.

We obviously have not proven that to be very beneficial over the last couple of years.

But we think we knew some of the problems, and we do think it's getting a little bit better, based on orders that have been written but not delivered yet.

But we'll see.

Liz Dunn, Thomas Weisel Partners.

My question relates to gross margin.

Can you just talk about some of the drivers of the gross margin strength and gross margin performance at the new Macy's doors?

Then, related to that, one of your vendors indicated that their retail partners are requiring higher margins.

Can you discuss that?

I don't know the margin in the May doors versus the Macy doors, so I can't really help you on that.

I don't know what vendor you are referring to.

Liz Claiborne.

I don't think they've said we're requiring higher margins.

We're requiring higher margins than their product has been producing.

But it doesn't mean higher margins from what we've always expected.

Okay, interesting.

Their press release just said retailers are demanding higher margins.

Well, we are, than what they have been producing.

Okay, not than historic levels?

Correct.

Do you think that is an opportunity over time to -- obviously, you're moving more of your business to private-label, and that produces stronger gross margins.

Is there a thought that maybe the vendors might need to keep up with some of those increases?

What the vendors have to do is produce product that sells and has a good sell-through.

I'm much more focused and we're much more focused as we are working with vendors on that issue, rather than having huge increases in gross margin rate.

Michelle Tan, UBS.

First, as we think about the expenses that you are cutting related to the synergies, is there any lumpiness in how those were historically incurred over the course of the year?

Or was it a relatively even distribution when you were incurring those costs between first quarter versus fourth quarter?

That's something I don't know the answer to that.

My guess is it was not lumpy, but I don't know that.

Then also, I was curious -- it seems like the specialty retail sector has been very promotional in this first quarter, as you mentioned some of the weakness that we saw in April.

Any sense of whether that had an impact on your business and the promotions that you had to use in first quarter?

I don't think so.

I had not heard that discussed at all.

(OPERATOR INSTRUCTIONS).

Rob Wilson, Tiburon Research.

You talked about gross profit margin being flattish in Q2.

Can you talk about the back half of the year?

Yes.

For the back half of the year, we are not expecting dramatic increases.

So my guess is it will be flattish for the remainder of the year.

We still are in the process of all the detailed planning for the back half, but that's my best guess today.

Also, the May integration costs -- can you tell us what those were in Q1?

Yes, $36 million.

Yes, but what does that --?

Oh, I'm sorry.

I apologize.

I don't have that breakdown in front of me.

My guess is it had to do with some severance costs, some write-downs of properties.

If you want, I'll get that list and get back to you.

Okay, and we're going to see more of that going forward?

In the second quarter, primarily, and with just a smattering in the fall season.

David Glick, Buckingham Research.

I was just curious -- as you navigate the next three quarters, clearly it's tricky.

You're confident in the second half, cautious in the second quarter.

I'm wondering if you're differentiating your approach in the second half in Q3 versus Q4, whether maybe you are pulling back on your internal plans in Q3, whether you're taking the same approach to advertising and managing SG&A in Q3 versus Q2, just to kind of keep yourself locked and loaded for the important fourth quarter?

I'm just wondering how --

Well, you always are trying to protect the fourth quarter.

But we've got a lot of good things in the third quarter, most notably the Martha launch.

So I think we're looking at both quarters as opportunities.

But are you changing your approach to going with more public versus private in Q3, or are those plans still under review?

Those plans are under review, but we're not looking at it differently between three and four, at this point.

So is it fair to say that you're going to look at the response you get in the Memorial Day timeframe, into June, and course-correct from there?

Correct.

Michael Exstein, Credit Suisse.

Did you take any markdowns or begin accruing more aggressively for markdowns in the first quarter as you get ready for the second quarter to clear the inventory?

Is it possible that you don't need as many overlap stores in places like Southern California and Boston as you once thought, from the way the trend of the business is going?

Do you have a third one?

Yes.

The third one, just in general --

I don't know if I can remember three.

Sorry.

The third one is just Women's Wear ran a story yesterday about an experimental mall that you're going to be participating in, in Wilmington.

I was just wondering what the details were on that.

Let me go backwards, and I already forgot the first one.

But the last one, on Epicenter, it was a Lord & Taylor box we had.

So we, in essence, are letting them put this in that property, and in return for that we get a small participation.

So it really was just the use of a Lord & Taylor box for that.

In terms of the overlapping markets, at this point, no, we don't think that there's an opportunity to reduce the number of stores we have in any of the overlapping markets.

The stores are not doing that badly, that we would reach that conclusion.

As you know, we pretty aggressively review underperforming stores.

At this point, that's not the case.

Finally, in terms of accrual for markdowns --

Got it.

No, the way our markdown process works is that we are taking markdowns on a regular basis on what is selling.

So yes, we took a lot of markdowns in the first quarter to get the inventory in shape and in the right aging categories for the second quarter.

So we did take a lot of markdowns.

Did you up the accrual attached to that in the first quarter?

What do you mean, accrual?

Are you accruing markdowns --?

No.

Okay, you're not.

Okay.

(OPERATOR INSTRUCTIONS).

Jeff Stein, KeyBanc Capital Advisors.

Just a clarification on the marketing spend.

Let's say, for the balance of the spring, that you are ramping marketing spend.

Are you going to be focusing on any specific segments of the store?

For example, are you going to be advertising Home?

It will be both total store and Home.

With regard to the $450 million cost save on synergies, that has been a fairly solid number for quite some time, and I'm wondering at this point, is there there any upside to that number that you might be willing to quantify?

As you get farther away from the time of the acquisition, tracking that $450 million exactly becomes more difficult.

In the key overhead areas where there's going to be synergies, all of that is pretty much behind us.

So there's really not going to be an update.

To the degree it was higher, there have been offsets.

So again, at this point, I would focus on our overall SG&A guidance to help you model the rest of the year.

John Barrett, Columbia management.

A follow-up on gross margins, the strength you saw, up 100 BPS.

Your answer was interesting, that it was mostly coming from legacy Macy's.

But it seems to me that last year you had peak promotions at former May doors.

It seems to me that it was peak liquidation about a year ago.

So --

No, wait a minute.

No, no, no.

I don't think you understood my answer or I said it incorrectly.

What do you think I said about the gross margin?

That most of the improvement came from strength at legacy Macy's.

Sorry, that's not the case.

You are right that a lot of the margin improvement was from the May doors, where we were liquidating last year.

But the legacy Macy doors did very well in margin as well and did improve.

Sorry, I was not clear there.

That's helpful.

Sorry about that.

No, it's my fault.

Just within that, how much of it was better mix versus just --?

I don't know the answer to that.

The shrink levels -- did they improve sequentially from Q4?

Well, remember, we take inventory in January.

So until then, it's an accrual.

Any comment, if you can, on credit trends?

I know it's outsourced now, but credit trends within your portfolio?

Do you see any sequential deterioration, Q1 from Q4?

At this point, no, not really.

I have to say it's still hard to judge, because a year ago we were transitioning a lot of the processing to Citi.

So to some degree, changes that happened in that transition may be masking other trends, but at this point we're not seeing much at all.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone.

Can you give us an update on the progress on localization of merchandise and assortments?

Where do you see yourselves there, and how is it going?

Last call, you talked a lot about training of the sales associates.

How is that proceeding?

Any further updates on the integration of the logistics network?

In terms of the localization of the assortments, that is just an ongoing process that we're getting better and better at, but still have a long way to go.

But there's really no update on that subject.

What was your second question?

Training of sales associates.

That has been proceeding, and that is just going to be ongoing and training and retraining.

So obviously, it sure doesn't look like it impacted sales in April.

But as I mentioned earlier on the selling expense, don't know what it would have been, had we not done it.

But we'll continue to train and retrain there.

In terms of the logistics network, we're continuing to make progress in consolidating the warehouses, but that is not done yet, at this point.

David Ravera, Jennison.

Let me ask the question about SG&A a different way.

Your guidance is for SG&A rate to go down less than the Q1 rate in Q2, and potentially not much at all in the second half and particularly the fourth quarter.

Given that I guess the run rate of savings should be increasing at this point, why isn't that disappointing, I guess, to company management?

Why should the run rate be increasing?

I think you entered -- you said $175 million last year.

You had a run rate of $450 million for this year.

I'm of the naive mindset that if you are actually saving that money, we should be able to see more of it through the P&L; it's not really savings if you spend it all back.

No, except that you saw it in the second, third and fourth quarter last year.

So the increment on this year is not $450 million.

It's a much smaller number.

No, but you are still -- if you are at a run rate, you should have some benefit.

No, not as you get in the back half of the year.

There's not much at all.

Okay.

Will the dollars at least be similar, so if the sales come in better than planned, then we get leverage?

Well, obviously, if sales do better you will for sure see leverage.

Let me ask this way.

On a dollars basis, what sort of percent increase at all in SG&A would you be looking at in the back half?

Our detailed planning isn't done yet.

I'd rather wait and do that when we do the second quarter.

It appears that there are no further questions at this time.

Ms.

Hoguet, I would like to turn the conference back over to you for (multiple speakers).

Thank you all very much.

Obviously, if you have more questions, call me, call Susan, and we'll do our best to get them all answered.

Thank you, though.

This concludes today's conference.

We appreciate your participation, and have a nice day.