梅西百貨 (M) 2007 Q3 法說會逐字稿

Please stand by for real-time transcript.

Good morning and welcome to the Macy's third quarter conference call.

This call is being recorded.

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

Please go ahead.

Good morning, and welcome to the Macy's, Inc.

conference call.

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.macysinc.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 effect the company, including the risks specified in the Company's most recently filed Form 10-K and Form 10-Q.

We are pleased to have produced earnings at the high end of our expectations, $0.10 a share versus our guidance of $0.05 to $0.10, with sales at the low end of our expectations: $5.9 billion versus versus the guidance of $5.9 to $6 billion.

However, we would have been happier had our sales trends been stronger in the quarter.

We are encouraged, however, to see the business in many of the former May doors strengthening and to see the home categories continuing to perform well.

When we think about the reasons for the change in the trend in home, it is really a confluence of factors--the Martha Stewart launch, the introduction of the big ticket business on Macys.com, improved localization of assortments, and improved marketing, including internet advertising.

During the quarter, the center core categories of business also performed well, particularly sleepwear, watches, handbags and fragrances, all of which are important fourth quarter gift categories.

The men's business did okay in the quarter, although sales of basic seasonal commodities were slow, probably largely due to weather.

But men's collections and other differentiated products sold well.

The most concerning trend, as you know, was in women's apparel.

Some of this is clearly weather-related, but there does not appear to be enough in the fashion offering that is compelling.

There was some strength during the quarter in items where we made investments( fashion sweaters, jackets, and outerwear,) but basics did not sell as well as we had expected.

However, with the colder weather, this business has improved.

Gross margin on a recurring basis in the quarter was 39.3%, down 1 point from last year.

As you know, we expected a lower gross margin rate than last year during the third quarter, although this was lower than we had expected We took lots of markdowns in the quarter, particularly on ready-to-wear, to keep our inventories appropriately current.

SG&A in the quarter before May-related integrated costs was $2.120 billion, 1.3% above year ago in dollars and 0.3 points higher as a percent of sales.

We did a good job of managing expense in the quarter.

Depreciation expense in the quarter was $321 million, up $6 million versus last year, but a little lower than we had expected.

Operating income excluding inventory valuation adjustments and integration costs was $200 million this year versus $279 million a year ago.

There were no May Company-related inventory valuation adjustments this year in the quarter and last year there were $28 million, and the integration costs associated with the May acquisition were $17 million this year versus $117 million a year ago.

Interest expense in the quarter was $145 million, which is a little below the expected $150 million.

Book taxes in the quarter benefited by approximately $10 million of tax benefits related to the adjustment or settlement of tax issues.

With the adoption of FIN 48, our effective tax rate will vary more by quarter than it has in the past.

We now have to reflect discreet items as they happen in each quarter, as opposed to reflecting them in the annual effective tax rate.

This makes our quarterly tax rates harder to predict and they will be more lumpy than in the past, particularly in quarters with lower operating income.

Share count on a diluted basis was 438 million shares in the quarter, down 20% from last year's 550 million shares due to our stock repurchase activity.

Earnings per share excluding integration costs on a diluted basis was $0.10 in the quarter, again, versus our guidance of $0.05 cents to $0.10 cents and last year's $0.20 cents per share.

Moving on to cash flow; net cash provided by continuing operating activities was $285 million in the first nine months of the year, compared to $1.971 billion in the first nine months of last year, but please remember that the 2006 number included almost $1.9 billion in proceeds from the sale of a portion of the credit card portfolio.

Excluding that, operating cash flow in 2007 was $174 million higher than a year ago.

Our inventories at the end of the quarter are in good shape, and well positioned for the fourth quarter, both in quantity and quality.

Net cash used by continuing investing activities this year was $618 million compared to an inflow last year of $865 million.

Here too, though, you need remember that we had net proceeds from the credit card and other asset sales of $1.7 billion last year compared to $163 million this year.

Cap-ex through the third quarter was $781 million compared to $865 million last year, which as you recall, included the capital for the name change and store conversion.

We still expect to spend approximately $1.1 billion in this year versus $1.4 billion a year ago.

Net cash used by continuing financing activities was $602 million in the first nine months of 2007, compared to $2.345 billion last year.

During the first nine months of this year, we issued $2.9 billion of long-term debt, including $350 million issued during the third quarter and we repaid $647 million of long-term debt.

At the end of the quarter, we had $968 million in commercial paper outstanding, representing our seasonal working capital needs.

During the third quarter, we bought back 2.7 million shares of stock for a total of $84 million.

This brings the total buyback executed for this year to $3 billion and we bought back 72 million shares this year.

This compares to $1.1 billion in stock repurchases last year.

Given the current condition in the credit markets, we are carefully evaluating our options with respect to the timing of completing our remaining $1 billion authorization.

As a result, some or most of that $1 billion could end up being deferred into next year.

While we are optimistic about our prospects, and we believe that stock today represents a great value, we do need to balance this with the benefits of preserving access to all financial markets during these volatile times in the credit markets.

Let's move on now to the fourth quarter.

We have lowered our sales expectations, but not our earnings guidance.

We now expect total sales in the fourth quarter of $8.7 to $8.9 billion.

This is reduced from our prior guidance of $8.8 billion to $9 billion.

Remember that last year, the fourth quarter had an additional week in it, so total sales are expected to be down versus a year ago.

But on a 13-week to 13-week comparison, we are now expecting comp store sales to be down 2% to up 1%.

We are not giving specific guidance for November, since we view November-December as really one selling season, but do remember that this year's calendar has the early Thanksgiving, which will result in November sales increase over a year ago to be very dramatic, while December is expected to be down versus a year ago.

We are still expecting the fourth quarter gross margin rate to be above a year ago, and we're still expecting SG&A to also increase as a percent of sales.

For depreciation expense, we're still expecting approximately $335 million, and interest expense of approximately $140 million, and we're still expecting earnings per share on a diluted basis, excluding integration costs, of $1.70 to $1.80.

We are now expecting integration costs of roughly $60 to $70 million in the fourth quarter, most of which will be non-cash.

For the year as a whole, we underestimated the non-cash integration costs that we would be incurring this year.

Let me reassure you that this is nonrecurring expense associated with the integration.

We will be able to provide additional detail when we report the fourth quarter.

We believe we are well prepared for the fourth quarter.

Our inventories are in good shape.

We have a lot of newness in the stores, including the Martha Stewart Collection at Macy's.

The marketing for both Macy's and Bloomingdale's is fresh and compelling, representing a balance of brand and promotional messages, and we have very strong holiday events to focus attention on our stores and to drive customer traffic.

While there has been a lot written about the economy and the confidence level of the American consumer, we all will just have to wait to see how it actually plays out in retail spending for the holiday.

But we believe we have all of the ammunition in place to compete successfully through the season.

And with that, I'll open the call up for your questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go first to Deborah Weinswig with Citi.

Good morning, Karen.

With regards to the share repurchase, would the comments you made regarding the credit markets, would that also apply to the share repurchase activity that we saw in the third quarter?

No, you know, we had always expected to buyback about $3 billion before the fourth quarter, but we had just completed that a little bit earlier than we anticipated.

Okay, and then did the business come back -- I don't know how much you can talk about November, with kind of cooler weather starting to settle in around most the country, have you seen kind of the business pop back as you would expect it across categories?

Business has improved with the colder weather, which is good news.

Now, it's hard to predict November sitting here today, with the weeks we have to come.

So I don't want to make, I don't want to predict November, but at least as the weather got colder, business has improved.

Okay, and then last question, there's been a lot of discussion about kind of having a very promotional holiday season year-over-year.

What are your thoughts on that at this point in the game?

This -- holiday seasons are always promotional, so I don't expect there to be a dramatic change from last year.

Great.

Thanks so much.

And we'll go next to Uta Werner with Sanford Bernstein.

Good morning.

I wonder, Karen, if you could give us some guidance related to any more store openings or store closings coming up in the fourth quarter and then in the next fiscal year?

Thank you.

There are no store openings, I believe, happening in the fourth quarter.

I think all of the stores have been opened this year, and store closings, we announce as we make those decisions and no decisions have been made.

And for next year, you know, I don't have the store count in front of me, but I think it's around six or seven new stores for 2008.

And we'll go next to Adrianne Shapira with Goldman Sachs.

Thanks.

Karen, just as far as the fourth quarter guidance, no change, but you're tempering the sales outlook.

Is that because inventories are very clean heading into the fourth quarter?

Just give us a sense of what enabled you to deliver the original earnings guidance.

Well, you know, we -- as we've been thinking about the quarter we just refined SG&A, margin, all of the various components, and we believe we can still achieve those earnings with the lower sales.

Okay.

So in terms of the breakdown between gross margin, SG&A, what should we look for in terms of more of a lever to get you there?

I'm not giving more guidance on that.

Okay, and then, Karen, just last call you had mentioned that the upscale customer was still strong.

Can you just give us an update there?

It sounds as if perhaps recently some trends we're hearing out of Nordstrom, Bloomingdale's, it sounds like it softened.

Tell us what you're reading with that customer.

Bloomingdale's had a good third quarter, so you know, it's hard to tell what's weather, what's other factors, so I really don't know how to answer that, other than the fact Bloomingdale's had a good third quarter.

Okay, and then just lastly, any way to help us quantify that calendar shift between November and December?

You know, it's really difficult, so the answer is no.

Okay.

Thanks.

You bet.

We'll go next to Dana Cohen with Banc of America Securities.

Hey, Karen.

Couple questions.

First, following up on the prior question, you've said consistently that it would be hard to get incremental SG&A improvement in the fourth quarter because of how much you got last year.

I mean, has there been a change in that here in Q4 as you've refined your estimates?

No.

I mean as you heard me say, we're still expecting SG&A to be up as a rate year-over-year, so that's still an issue as we compare quarters.

But maybe not quite as big an issue?

Correct, but it's still an issue.

Okay, and then can you tell us, you know, with two-plus years into the combination, can you give us some sense of what the integration costs are that you're still looking at to the magnitude of the number you're talking about in Q4?

Yes, I think let's talk about it after we report fourth quarter.

Okay, and then lastly, can you just give us a sense of what you're seeing on the credit side?

I mean we know you don't own it, but, you know, what trends are you seeing in that piece of the business?

Yes, you know, credit, our penetration continues to go up, and in fact, in the third quarter, it was up 100 basis points over a year ago.

Year-to-date, it's up 250 basis points over a year ago.

So, you know, that's good news.

Our marketing around our credit card is going well.

We are experiencing rising delinquency.

You know, but we're also trying to mitigate that with collection strategies.

So we'll see as we get through the fourth quarter.

Great.

Thanks so much.

We'll go next to Christine Augustine, Bear Stearns.

Thank you.

Karen, I just want to be sure I'm clear on your outlook for 4Q.

If in fact because of what's going on in the credit markets you may push out the billion dollars roughly that's left on the buyback, then that -- my conclusion there would be then operationally, things are actually looking better than they were when you, you know, guided to this previously because there may not be as much buyback.

But please correct me if I'm wrong.

No, I mean, Christine, the truth is that's why we give a range of estimate.

If we don't buyback the billion dollars, obviously the operations are going to have to do better to get to the same earnings.

But that is part of the reason we give a range.

You know, it's not as precise as you all think to estimate earnings going forward.

So we do the best that we can as we provide guidance.

Okay, and then the other question I had was on the, on some of the improving trends in the home business that you're seeing, one of the things you mentioned was the better localization of the assortments, and I'm wondering if you would be willing to comment on, you know, sort of where you think you are.

I think it's three years since you centralized home.

How are you feeling about that whole process?

Is it something that you would contemplate at some point in the future for the rest of the divisions?

Well, let me first address home.

It is three years into the process, but we are feeling really good about it now.

A couple of weeks ago, I had the opportunity to spend a day at the home division and just listening to the merchants talking about how, how much they have learned about the fact that assortments are different store to store, even within markets, and how they are working to localize those assortments to meet the local needs, is terrific, and that's something we're applying throughout the Company.

There's a project under way that we call My Macy's, but it really is trying to focus on better tailoring our assortments door-to-door and I believe it's now happening at the home store.

Okay, and then just in the future, would you contemplate some sort of centralization process for the rest of the division?

You know, the key right now, Christine, is to get the comp store sales going.

And as long as we're localizing the assortments through our division structure, that's the way we will do it.

You know, with apparel it's a little trickier than home, for example, so we just continue to learn and, again, as long as the comp store sales continue to come the way we're expecting in '08 and beyond,, we'll, again, keep with our structure.

Thank you.

We'll go next to Jeff Stein, KeyBanc Capital Markets.

Karen, in the press release, Terry alluded to the fact that you've got a wide range of new and distinctive merchandise for the holiday season, and I presume that Martha is a part of that.

I'm wondering, is there anything else that you can call out that, that you're counting on that truly differentiates you for the holiday selling season?

Sure.

Let me mention a few things.

One, while I know it doesn't sound like it differentiates us is cashmere, but now that I've seen some of the variety and the new items that we've brought in that are cashmere, I would put that on the list of new and different merchandise in terms of sweaters, scarves, gloves, et cetera.

We've also got an expanded candy offering, including Frango's and a new private label line of chocolates, which absolutely are delicious.

Electronic picture frames, I think will be hot.

And then there's a couple of items on Macy's.com that I probably should point to.

One is a personalized EGC, where you can put your picture on an EGC to give as a gift.

This is something we've been experimenting with.

We're now gaining confidence and will begin to market it as we go to the fourth quarter, but I think that could be big.

And also, the Rwandan basket program on Macys.com continues to be important.

As you know those are hand woven basket and bowls that are made by women in Rwanda, that frankly is giving them real sustainable income, and by the way, the baskets are terrific looking.

So I think that's, again, another example of differentiated merchandise that we're offering within Macy's.

Okay.

Karen, you've called out several items from Macy's.com.

You really haven't commented on the growth of that business in third quarter.

I'm wondering if you could just provide us with an update on how that business is performing to plan and what kind of sales we might expect for the full year from dot-com.

Macy's.com is continuing to have very big increases versus a year ago and we continue to feel really good about that business.

I don't have the annual forecast in front of me, but we feel great about Macys.com.

Okay, and Martha Stewart, any sense in terms of whether or not this is driving new customers into the store?

Wondering if you might have any statistics to share with regard to opening up new credit card accounts with Martha purchases and so forth?

I don't have any specific statistics on that.

What's been interesting is not only has the Martha product been performing well, but we believe it's also driven people into our home departments, perhaps other parts of the store, and helped the overall home business.

So we feel really good about that, but I don't have any specific statistics yet.

Okay, thank you.

We'll go next to Liz Dunn, Thomas Weisel.

Hi, good morning.

I guess my first question is can you discuss any geographic differences in the comp trend you've seen and any color on what's driving those variances, and then related to the integration costs, I'm assuming your comments suggested that you'll be able to discuss in detail what sort of activities are still going on on the fourth quarter call.

But if you can't discuss that now, could you at least tell us whether or not there will be any integration expense beyond the fourth quarter of this year?

The May Company integration expenses will be done at the end of '07.

So that will be over.

And, yes, we will talk about it in the fourth quarter.

Okay.

In terms of your first question in geographies, you know, the weakest geography has been the Midwest in the third quarter.

That had not been the case earlier in the year in terms of the whole Midwest, and part of that relates, I believe, to markets where the Macy's brand is newer and it's taking longer to gain acceptance.

Okay, and anything in California or Florida to call out?

Florida's had a tougher fourth quarter than they had earlier in the year, but still on an absolute basis doing okay.

Okay.

And California's done fine.

All right, great.

Thank you.

We'll go next to Charles Grom, J.P.

Morgan Chase.

Thanks, good morning.

Karen, was there a shift in the markdown expenses from the calendar shift in 3Q that's bending the fourth quarter margin outlook?

Yes, that's what we had said in August when we talked about the guidance by quarter, we had said we expected the margin to be below a year ago in the third quarter, and above a year ago in the fourth quarter for that reason.

Okay.

That's not new news.

No, no.

Could you quantify that for us?

No.

Okay.

You know, if I look at the fourth quarter, you cycle a fantastic period from a year ago when margins were up close to 200 bips If my math's correct, if I don't model any buybacks in the fourth quarter it, implies about a 30-basis point decline, which if kind of two year stack, it looks pretty aggressive.

I'm just wondering if you can kind of give us some drivers there we should look forward to, to get that sort of margin improvement on a two-year basis?

There's nothing I can really point to at this time.

We'll talk about it at the end of the quarter.

Okay, then last, just to be clear on the merger integration costs of $60 million to $70 million, I want to make sure it does not include any expectations for future store closings.

It includes what we expect to have happening during the fourth quarter.

Okay, but you're not willing to comment on the store closings?

Correct.

Okay.

Thanks a lot.

We'll go next to Robert Wilson with Tiburon Research.

Yes, Karen, thank you.

How do you go from $150 million to $160 million integration costs to now $210 to $220 in a three-month timeframe?

Well, it's a combination of not anticipating all of the non-cash write-offs and making some new decisions.

Okay.

But again, most of the increase is non-cash.

Right.

It just seems like such a large increase in a three-month timeframe.

I understand.

Okay.

What tax rate should we sort of be using for Q4?

Well, you know, as I indicated, relating to the FIN 48, it's going to be much harder to predict that and we're not giving guidance by quarter for that reason.

Okay.

Well, thank you.

Sorry.

We'll go next to Bob Drbul with Lehman Brothers.

Hi, good morning, Karen.

Couple questions.

The first one is, can you just talk about any inventory adjustments that you've made going into the fourth quarter and just how you're thinking of inventories as you head into the spring at this point in time.

I'm not sure what you mean by inventory adjustments.

Did you have any major cancellations or did you push back inventory, you know, given the expectation for the sales that you have at this point?

We would never delay inventory.

We're always canceling and changing, based on what's selling and not selling.

So there's not any major structural change that's happened.

And in any given department, there's things that are selling.

There's things that aren't, and we try to react to our future inventories that way.

Okay, and can you talk about the traffic trends that you had in the third quarter and what your expectations are for the fourth quarter in terms of your comps?

We don't have a good measure of traffic to help you there.

Sorry.

Okay, and then the -- can you -- you talked about the new Macy's stores getting a little bit better.

Can you maybe address the spread on the legacy Macy's stores versus the new Macy's stores and sort of how that is trending currently?

Well, as we've said, that spread is narrowing, and we're feeling much better about the performance of most of the May doors.

Okay, and on the, on the private label and/or the exclusive side of it, have there been discernible differences in the legacy Macy doors versus the new Macy doors recently?

Has it gotten any better in terms of--

I don't have, I don't have the specific numbers in front of me, but the private brand has done very well in the former May doors, as well as the legacy doors relative to what else is in those stores.

So private brands have been well accepted in the former May doors.

Great.

Thank you.

Go next to Virginia Chambless with J.P.

Morgan.

Hey, Karen.

Could you just clarify a little bit your comments you made in the prepared section about wanting to maintain, I guess access to various forms of financing that, that perhaps you're referring to commercial paper and therefore, you know, commitment to your mid, triple-B rating?

Well, I mean I think you sort of said it.

We like access to the A2/P2 commercial paper market and I think given all that's gone on in the credit markets, that's probably a good thing to maintain, and therefore we're just being prudent as we go to spend that $1 billion.

Okay.

I mean is your commitment to that strong enough that perhaps if your operating results came in a little softer than you're expecting, that you would be willing to maybe apply a little bit more of your free cash flow to debt reduction to maintain your ratios, you know, to a level that the rating agencies are comfortable keeping you at mid triple-B?

I think the only thing we can really impact is the buyback.

Okay.

And this is all about balance.

And we'll just see as we go forward.

We'll go next to Michelle Tan with UBS.

Great, thanks.

Most of my questions have already been asked, but I was just wondering, in the Midwest as you look at some of the slower acceptance of the Macy's brand, can you give us any color on changes you're maybe making to the assortment to try to better target that customer?

Well, I mean we are doing there what we're doing everywhere, which is trying to better localize our assortment and get more of what's selling and have less of what's not and try to react.

Is there any kind of guidance on whether it's more moderate product, any particular vendors or anything like that?

Interestingly, the better product and the more differentiated product is what is selling everywhere.

Okay.

So, you know, we just need to continue to refine it.

It will happen.

Okay, great.

And then looking at the tax rate for next quarter, I know you don't know any -- you can't give us specific guidance number, but is there any way to get a directional sense of whether it's going to be a benefit or a drag?

What do you mean, I mean taxes almost always reduce--

No, I know, but relative to kind of a normal level of tax rate that we would expect.

You know what, I just can't predict.

I don't expect any major deviation because, remember, $10 million adjustment in the fourth quarter wouldn't move the needle.

Right.

Given the amount of operating income the problem is in a quarter like the third quarter, which has lower operating income, these relatively small adjustments for a company our size can become meaningful to a tax rate.

Okay, perfect.

That's helpful.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go to Michael Exstein, Credit Suisse.

Good morning, Karen.

Good morning.

Couple of quick questions for you.

Number one, there was an unfortunate incident where your Black Friday Ad got out onto the internet early.

Have you done anything to modify your promotional strategy to sort of keep the initiative in that regard?

Number one.

Number two; in general, can you talk about your advertising spend both in the quarter we just finished and what your anticipation is going forward?

Thank you ever so much.

Yes, no, obviously I'm not going to comment on our promotional strategy or we would have let the materials stay on that website.

By the way, they are no longer there.

And in terms of the advertising, the key is that our calendar this year is comparable to last year and when we think about the mix within that calendar, we are doing more promotionally versus brand than we did a year ago.

Does that mean more vendor co-op then?

It could.

Okay, and then finally, last, but not least, what is your -- you gave us an interest assumption in the fourth quarter.

What does that bake in for your buyback?

There is obviously a cause and effect relationship there.

It's actually not that big of an impact in one quarter.

Okay.

And I'm obviously not going to tell you what I'm assuming for the buyback.

All right.

Sorry.

Thank you.

You're welcome.

We'll go next to Dana Telsey with Telsey Advisory Group.

Good morning, Karen.

Hi, can you talk a little bit about the Tommy Hilfiger arrangement, the opportunities that provides you and if that could be done in other segments, perhaps women's apparel also, and just any update on the credit card penetration of sales in both the legacy stores and the converted stores?

Thank you.

Sure.

No, on the Tommy stuff, this is an extremely exciting initiative for us, and the Tommy brand is doing very well now in our stores, and to have this on an exclusive basis other than their stores is really terrific, and we do hope that there will be other agreements like this.

Okay.

Then on the credit card?

Oh, I'm sorry, yes.

That's okay.

On the -- interestingly, the difference between the legacy stores and the former May stores are really beginning to converge.

The legacy doors were about 48% in the quarter and the former May doors are 47%.

So I think it's really becoming a non-issue between the two.

Great, thank you.

We'll go next to David Glick with Buckingham Research.

Good morning, Karen.

Most of my questions have been answered.

Just one quick follow-up on the former May doors.

Is the improvement in the home business, as you've advertised more on those former May markets, is that really the biggest driver as you see the GAAP narrowing between legacy and new Macy's?

Well, as you know, home had been the biggest weakness last year in those stores, so obviously the improvement in home is helping those doors considerably, but other parts of the stores are, of the May, former May doors are improving as well.

Okay, great.

Thanks a lot.

Good luck.

Thank you.

We'll go next to John Barrett with Columbia Management.

Hey, Karen.

Hi, John.

Quick question, just on the credit card losses, can you quantify the rising delinquencies, like from what percent to what percent?

No, I can't.

Sorry.

And remember, those are now owned by Citi, so it's really less of a factor in our income this year than it would have been prior to selling the receivables to Citi.

Oh, I understand that, but you should have that information.

Having it, yes, disclosing it, no.

Okay.

Let me ask it this way, then.

Assuming delinquencies rise, the impact that that has on your P&L, you're getting a fee back on that relationship.

Yes, most of our income that comes from Citi for the receivables relates to the top line, in terms of opening and activating new accounts and through credit sales.

So the fact that our penetration is good and credit sales have been good helps that credit income.

There is also a profit sharing formula on the bottom line, but that's a very small portion of what we get paid.

Okay.

So rising delinquencies won't impact your SG&A?

It will, but not by as much as it would have had we owned the whole portfolio in the business.

Understand, but it's an impact on your SG&A?

Correct.

Okay.

In terms of your Cap-ex for next year, is it safe to assume that less will be expensed and more capitalized than in 2007?

I'm not sure I understand the expense--

Well, you'll spend $1.1 billion and there's a portion that's capitalized versus expensed.

No, that's all capital.

That's all capitalized.

That's all capitalized, not expensed?

Correct.

Okay, and lastly, you didn't comment on traffic, but could you talk about average ticket?

What was that up versus, or down versus last year?

Average ticket went up in the quarter.

I don't have the specific number, but it did go up.

Which is obviously a good trend.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We'll go to Christine Augustine with Bear Stearns for a follow-up.

Thank you.

Karen, what sort of trends are you seeing in terms of cost of goods sold?

Any inflationary pressures starting to creep into what the buyers are placing for, you know, the next couple quarters or maybe the spring season, if you can comment on that at all?

And then when the merger was originally closed, I, I think one of the areas that you addressed, or not you might be able to address over a longer-term period was the marketing spend.

And that at some point there might be some additional efficiencies, you know, assuming that the sales trends were where you wanted them to be for the former May store, so is there any update you could provide on your thoughts surrounding marketing spend longer-term?

Thank you.

In terms of your first question, it is a subject we're talking about more and more, but so far have not seen it reflected in orders for the spring.

But we are talking about it more as a potential subject.

In terms of the marketing spend, we continue to think there's an opportunity to bring that number down, but as you said, we were not willing to do it until we felt that the sales of the company were performing well enough that we could start tweaking advertising, and obviously that has not happened yet.

But it is still something that we would anticipate happening at some point, hopefully soon.

Thank you.

We have a follow-up from Robert Wilson.

Yes, Karen.

You mentioned on the last call that furniture had a good month in July.

How did furniture trend throughout the Q3?

Furniture had a great quarter.

And has continued to do well.

Okay, and when you report November comp sales are you going to provide an expectation for December?

Yes, because we'll be talking about the expectation for the period.

Okay.

Should we expect maybe a double-digit increase for November and a similar decrease for December?

I can't comment on either side.

Okay.

Fair enough.

Thank you.

You're welcome.

And Ms.

Hoguet, there are no further questions at this time.

Great.

Well, thank you all for your interest and if you have further questions, let Susan and I know.

Take care.

That concludes today's teleconference.

Thank you for your participation.