梅西百貨 (M) 2008 Q1 法說會逐字稿

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

first-quarter earnings release conference call.

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

Please go ahead, ma'am.

Thank you and good morning.

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 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.

Sales in the first quarter were $5.75 billion.

On a comp store basis, our sales declined 2.6%.

We are very pleased with our performance in the quarter relative to our competitors.

This gives us comfort that the strategies we are executing are right, and that customers are responding well to our offering.

However, the overall economic environment remains challenging as all of you know.

Geographically, our sales were strongest during the quarter in the northeast and in Texas, while our weaker performances were on the West Coast and in Florida.

Additionally, our direct-to-customer business was strong in the first quarter.

By major family of business, feminine apparel continued to be the toughest category in the quarter, while Men's and center core did relatively better and I would say that Home was mixed.

Our strongest businesses in the quarter were Men's Furnishings, Men's Collections, Young Men's, cosmetics, fashion jewelry and watches, handbags, mattresses and housewares.

The weakest categories were as I mentioned earlier, Women's ready-to-wear and home textiles.

I should note, however, that not all of Women's apparel was weak.

We continue to see more strength in the contemporary and denim-based brands.

More casual looks are what is selling, especially value-driven pick-me-up items that refresh the customers' wardrobe.

Serious outfit and structured career dressing are not selling as well.

And while value appears to be important in this economic environment, highly desirable premium brands are selling very well.

I should also add that our private brands performed well relative to other brands in the quarter since they do represent affordable fashion for our customers.

Gross margin in the quarter was 38.6%, down 120 basis points from last year.

We had expected a decline due to the weak sales, as well as the need to commonize assortments in the consolidated divisions.

At the end of the quarter, our inventory was down 4%, demonstrating our continued discipline with regards to managing our inventory levels.

SG&A dollars were down $10 million versus last year, but up 90 basis points as a percent of sales; however, included in the SG&A was a $23 million charge for a potential settlement of litigation related to a wage in hour class-action lawsuit in California.

The settlement is contingent upon final agreement and court approval.

This increased SG&A by a rate of 40 basis points.

Excluding the settlement reserve, SG&A was there therefore $33 million below last year, demonstrating our expense discipline.

However because of the sales decline, the SG&A as a percent of sales was down 50 basis points.

We benefited in the quarter from lower depreciation and amortization, which was $315 million this year and $329 million a year ago.

We also benefited in the quarter from some early departures in the consolidated divisions.

And as always, we worked hard to respond to the weak sales environment.

Negatively impacting SG&A in the quarter were higher costs related to our investment in the direct-to-customer infrastructure and lower income than last year from our credit portfolio.

While we sold our credit business to Citi, our economics are still impacted by the profitability of the portfolio albeit to a much reduced degree than had we not sold it.

The key challenge with our credit portfolio is the fact that bad debt remains high, and we are now experiencing additional bankruptcy exposure.

We and Citi are working together to take actions to mitigate the risks.

Operating income before division consolidation costs were -- was $117 million in the first quarter.

We booked $87 million of division consolidation related costs in the quarter primarily related to severance and relocation.

Last year in the first quarter, we had $36 million in May Company integration costs.

Interest expense in the quarter was $136 million versus $125 million last year.

The tax benefit in the quarter was $47 million, which is higher than our ongoing rate due to a $10 million tax settlement in California.

Our net loss, excluding consolidation expense was $4 million.

Average share count in the quarter was 420.9 million shares.

We did not buy back any stock in the quarter.

We, therefore, lost $0.01 a share in the quarter excluding the division consolidation costs.

And excluding the legal settlement of $0.03 per share, EPS would have been a positive $0.02 per share.

Net cash provided by continuing operating activities was $21 million this year versus a use of $370 million last year for a positive year-to-year spread of $391 million.

And cash used by continuing investing activities was $99 million, which was $68 million unfavorable to last year, primarily due to the disposition last year of After Hours as well as the May-related asset sales.

CapEx and capitalized software was $108 million this year, below last year's $150 million.

We ended the quarter with $366 million of cash on the balance sheet.

We continue to be pleased with our cash flow, which is strong even in this challenging economic environment.

During the first quarter, we completed the division consolidations and transitioned to the new regional structures in the former Macy's North, Macy's Midwest and Macy's Northwest geography.

This included a systems conversion as well as the building of our new organization.

We are very pleased that we were able to source almost all of these new positions with internal very strong talent.

We have been very busy communicating the changes internally as well as with our vendor partners.

And we are now moving on to training the new regional and district organizations.

The positive energy from the increased focus on localization and the voice of the customer is incredible.

As we look forward, we are expecting the economic environment to remain challenging at least through the third quarter.

Our annual guidance for year-over-year change in comp store sales remains minus 1% to plus 1.5%.

We will need earlier and also stronger recovery if we are to hit the upper end of this range.

Like you, we do not know when the environment will improve, and, therefore, the key will be maintaining flexibility.

What that means is that our merchants must stay liquid and be conservative in placing inventory orders, and we also have to have contingency plans in place to be ready to reduce expense and CapEx further should our sales trends not start to improve.

These are challenging times where our culture of being disciplined will be rewarded.

We are expecting better gross margin results the remainder of the year relative to last year than we experienced in the first quarter, largely because our inventories were purchased after our sales expectations had been lowered and also because we now have the division consolidations behind us.

Our hope is that gross margin will be flat to up slightly for the remainder of the year, but to some degree that will depend on the sales trend.

SG&A in dollars is expected to increase during the remainder of the year, even with the $60 million cost savings from the division consolidations.

This is related primarily to lower-than-expected credit income, the investment in our direct businesses, and expense associated with our stock-based compensation.

We still expect depreciation and amortization for the year of approximately $1.3 billion, interest expense still of 560 million to $580 million, and an annual tax rate of 37%, although as you saw in the first quarter, it could vary dramatically by quarter.

We are expecting to book an additional approximately $63 million in division consolidation costs this year, bringing the total for the year to approximately $150 million, consistent with our guidance when we made the announcement.

And as you saw in the press release, we still expect annual EPS excluding consolidation costs to be in the range of $1.85 to $2.15.

The bottom line is that we are managing at least as well as any other fashion retailer through this very difficult economy.

We are staying flexible so that we can react to changes in the environment quickly.

Meanwhile, the My Macy's localization initiatives are providing a way for us to be channeling positive energy into the business.

We also have some interesting new merchandising and marketing programs on deck for Fall, including Macy's 150th birthday celebration and the launch of Macy's as the exclusive department store retailer of Tommy Hilfiger apparel.

At some point, the economy will turn around, and we will be very well-positioned when it does.

Now what questions can I answer?

(OPERATOR INSTRUCTIONS) First to Christine Augustine with Bear Stearns.

Hi, Karen.

How are you?

Good, thanks.

I am kind of curious about your affirmation of the 1.85 to 2.15.

Just given the economy and the uncertainty, why not just affirm sort of toward the lower end and see how the year plays out?

I am just wondering kind of what your level of confidence is in that upper end?

I think as you heard on the sales front, Christine, we are going to need to start seeing the economy improve, and perhaps have a stronger recovery than many of us are thinking in order to achieve the higher end of the sales range.

Without achieving the higher end of the sales range, it will be harder to achieve the higher end of the earnings range.

Having said that, it is only the first quarter.

And could you update us on your thoughts with regard to the debt that is coming due later this year?

Yes, we have $650 million of debt that comes due in the September-October time frame.

And, we are thinking about refinancing that.

Okay.

And then finally, did you take early markdowns in the quarter on the Women's Apparel because some of the competitors have announced that.

I was wondering if that was partially what factored into the gross margin erosion?

I don't know what you would call early.

All of our markdowns are taken as a function of rate of sale.

If things are not selling, we take our markdowns on a timely basis.

And we are extremely disciplined about maintaining the aging of inventory.

If something is not selling, it will get marked down.

I don't know if that is early or late relative to what you are thinking.

I was just thinking about some -- some of the breaks have happened earlier.

So I just wondered if you had to kind of follow suit?

Again, I don't know.

We really do try to focus on markdowns relative to what's selling and what isn't.

Okay.

Thank you.

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

Hearing no response I will move to the next question and Bob Drbul with Lehman Brothers.

Good morning, this is Hillary Morrison calling in for Bob.

Karen, can you talk about your -- have you factored input cost inflation into your annual guidance and if so an you give us a little color on your expectation for that?

Yes, we are beginning to see some increases in some of the raw material cost like cashmere, leather, cotton, as well as overall inflation, but I don't think it will have a meaningful impact until 2009.

And then also, can you talk about your expectation for the level of coupon days relative to '07 that is incorporated into your gross margin to be--?

It is about the same.

Great, thanks.

We will go next to Adrianne Shapira with Goldman Sachs.

Thank you.

Karen, your comp performance clearly is impressive versus your peer group.

Perhaps you can give us a little bit more color in terms of traffic, ticket pens and perhaps monthly -- just a sense of how it trended during the quarter and where it finished at the end the quarter?

Yes, the average unit retail continued to go up in the quarter.

I don't have good traffic data because it is a question of traffic and conversion.

So I don't really know how to address that issue, but obviously there is fewer units being sold if it went up and total sales went down.

If you think about it by month, February and March were weaker than April, relative to our expectations as well as relative to last year.

Okay.

Any sense in terms of early Mother's Day and how -- since April?

I don't want to make too much of a short period of time, but early May has started off well also.

Great.

That's helpful.

You just mentioned that clearly you have contingency plans in place in terms of expenses and CapEx if things don't improve.

Can you perhaps shed some light in terms of what those are and quantify that?

I can't, sorry.

It is all over the board in terms of where we would find savings.

Okay.

Any pull back on the My Macy's program in that event?

Absolutely not.

Okay.

And then just lastly, as you mentioned, I mean, clearly the higher end of the comp plan hinges on a stronger recovery.

Can you just give us a sense in light of that, how are you planning inventory.

You obviously have done a terrific job heading into Q2 but if the higher end of the range perhaps is a little bit a little dicier, just give us a sense of how you expect inventory trends, how you are planning it, where you would like to be as you head into the second half?

Well, as I mentioned earlier we are trying to stay flexible in terms of our inventory purchasing so we are planning towards the lower end of the guidance in terms of what people should be thinking in terms of expense and inventory.

Great, thank you.

We will go next to Jeff Stein with Soleil Securities.

Good morning, Karen.

Wondering -- you talked a little bit about how your private label brands seem to have outperformed the market brands and wondering, too, though on the margin side, given the fact that you are not in a position to get the kind of relief from your vendors on -- on markdowns on private labor, did your private labor margins suffer more than branded margins during the first quarter?

Jeff, I don't have that data in front of me.

Usually that is not a big issue.

Okay.

Can you talk a little bit about the Bloomingdale's Catalog and your decision to eliminate that and how that is likely to effect the direct sales and profits.

And maybe just discuss a little bit your rationale behind that decision to eliminate that.

Sure.

The key there is that Bloomingdales.com has a huge potential.

And we think that is where we should be investing our resources as opposed to the Catalog.

And it will have a minor impact on sales and no impact on profit as we discontinue that in 2009.

Okay.

Thank you.

We go to Deborah Weinswig with the Citigroup Investment Research.

Good morning, Karen.

Good performance in a difficult quarter.

Thank you.

Can you talk a little bit about with My Macy's, the support you are getting from vendors and how you are working with them?

Also, is there anything that you are doing to share more info in terms of sales trends with your vendors?

Yes.

I mean, let me take a step back on the vendor subject.

A couple of weeks ago, we had meetings in New York with over 750 of our key vendors trying to educate them on what we are doing with My Macy's, because obviously we want their partnership to help us in the field both to understand what we need to bring to those stores in terms of assortment and then making sure the vendors will be able to provide that, but also frankly, to the degree we are reinvesting in our field organization, we would like them to do that as well.

I would say the response has been very positive.

Like us, they have realized the sales potential from this, and that would be good for both of us.

Separate and apart from My Macy's, we have also been working on a project to provide the vendors with an easier way of getting more information about their sales in our stores.

And that is happening also.

It will be piloted later this year.

Would that be something similar -- a few out there who have kind of basically provide the visibility to the vendor of rate of sale et cetera by store level they want at region.

Is that kind of the direction you are headed in?

I suspect so, Deb.

I am not the expert there.

I suspect we will do it even better since we have the benefit of looking at what everybody is doing today.

Okay.

There were a few press releases out yesterday regarding some store openings.

Can you elaborate a little bit on that 120-square-foot format that was mentioned.

Is that an off-mall format that we can expect to see as a future growth vehicle?

Well, as you can imagine there aren't a lot of regional malls being built in this country.

The opportunities are in more of these lifestyle centers which tend to support a smaller door.

And so I think our growth going forward will be more of these smaller formats in the lifestyle centers.

Okay.

Last question.

You touched a little bit in terms of discontinuing the Bloomingdale's category and obviously a lot of investment and a good return with regards to the Internet strategy and it was strong this quarter.

Can you just talk about how you see that continuing to progress over the next few years?

Well, as you know we are expecting to do $1 billion this year in volume in our direct businesses, and we expect it to continue to grow significantly from there.

Great, thanks so much and the best of luck.

Thank you so much.

We'll go next to Liz Dunn with Thomas Weisel Partners.

Hi, good morning.

Let me add my congratulations.

I guess, is there any way you can give us the magnitude of what you are seeing on the -- on the credit income for the balance of the year and how much Citi is seeing in terms of increase in delinquencies?

No, I am sorry, that is not public data.

Okay.

Is there any sort of regional trend to call out relative to that data?

I have not looked at that trend regionally so I don't know the answer to that.

Just a follow-up to the last question about the store openings.

Is there any concern that you have about opening in markets that -- that have notably soft relative to the rest of the country.

Do do you think that the issues that we are seeing relative to the housing market are short-term in nature or if those -- if those issues last for a longer period of time, are you kind of comfortable with those openings nonetheless?

We are very comfortable.

We have obviously done a great deal of analysis of the sales potential in these markets that frankly offer the highest growth potential of -- they would be in the highest growth markets, Phoenix and Las Vegas.

We feel very good about the long-term prospects.

And as always have been very disciplined in analyzing the opportunity to make sure they will earn good returns on capital.

Okay.

Great.

Good luck.

Thank you.

We will go back to Liz (sic) Cohen with Banc of America Securities.

Karen, can you hear me now?

I can, thanks, Dana.

Great.

Couple of questions.

The tax rate benefit, was that $0.02?

I believe it is.

I actually didn't calculate it, but, yes.

Okay.

Just because I couldn't get to net income.

The key with the tax settlement, though, is that is going to be an ongoing kind of issue every quarter, and when we give you guidance for the tax rate for the year, that was included in there.

Yes, it is pretty material this quarter because it is a small quarter.

Absolutely.

And then just help us think a little bit more on the SG&A because all those things you are talking about as to why SG&A dollars will be up in the subsequent quarters were true for the first quarter too.

So rate of change.

What's really different from first to second quarter so the dollars go from being down to up?

Well, again, I was giving guidance for the remainder of the year, not just the second quarter.

Depreciation is not favorable in the back half of the year.

And, also, the investment in the direct business increases as the year goes on in dollars because of the sales so that's a bigger factor when you are looking only at dollars.

And so those will be the primary deltas as we move through the year?

Yes, there are a lot of little things.

I think you all sometimes lose sight of the amount of detail that goes into a SG&A number, but there are lots of items in there.

But the biggest deltas would be those.

And just in terms of first-quarter numbers, operating profit, excluding all the items down, $68 million, -- and it is all at the gross margin level.

Were there any major variances by division?

Or is it similar to where you are in terms of the comp trends?

It is similar.

As you know, this business is very dependent on sales and frankly that is why we were pleased with that minus 2.6 because that bodes better for the remainder of the year as you think about that relative to our peer group.

The differences in margin will vary typically at sales dip.

Okay great, Thank you.

We will go next to Todd Duvick with Banc of America Securities.

Good morning, Karen.

Hi, Todd.

Quick question on the cash flow statement.

Significant turn-about from a year ago and looks like a big item was in the increase in accounts payable.

Almost a $450 million variance year-over-year.

Can you just talk about maybe some of the terms that you are working with in terms of your vendors and how that might have changed or is there something else that's going on?

It has not -- the terms of the vendors have not changed at all.

To some degree it has to do with receipts in the first quarter this year versus last year, because it is a function of where were payables at year end and where are payables at the end of April.

And sort of both pieces of that but there have been no changes in terms.

Okay.

I guess going forward, can you just give us a little guidance in terms of if you expect any other major variances in cash flow or how do you expect cash flow to hold up compared to a year ago?

We have not given guidance on cash flow.

Okay.

Finally with respect to the debt refinancing that you mentioned earlier, I assume you can come opportunistically at any time.

Are you planning to tap the debt financing market or refinance with commercial paper closer to time?

The issue on refinancing would be the debt capital markets.

Okay.

Again, I don't know if we will or won't do that, but that's what I meant by that statement.

Okay.

Very good.

Thank you.

You are welcome.

We will go next to Steven Kernkraut with Berman Capital.

Hi, Karen.

Hi.

Just a quick question in terms of your inventory position.

You ended inventory down 4% but I'm assuming you got it a lot more balanced so you got rid of a lot of the women's merchandise, women's apparel merchandise that you needed to.

As we go forward in the year, when you're saying you want to get inventory in balance with sales.

We should be expecting inventory to be down in the mid single digits on a continual basis over thee next few quarters or is there going to be an increase because of the consolidation effect?

There should not be an increase.

I don't have the forecast in front of me Steve, but this should not been increase.

Should not be an increase?

Right, right.

Can you just comment.

Home textiles weren't doing that well.

Can you talk about how some of the exclusive brands that you brought in, the Martha Stewart line, the new Tommy Hilfiger lines, how they are doing in the stores?

Yes.

Martha Stewart is actually doing very well.

And obviously we learned through the Fall, making it even better for this year, and we feel very good about that product.

While with Tommy, it is still early, it is doing very well even in the weaker apparel market.

Okay.

Okay.

Thanks very much.

We will go next to John Patrick Walsh with Wachovia.

Good morning, Karen.

Good morning.

Historically you guys used to finance your working capital bills with receipt pay.

I am wondering as you look out towards the third quarter this year, what your plans are going to be for financing that?

Should we look for you draw down your revolver or maybe potentially do a bigger more permanent financing in concert with the other debt that's coming due?

I think the key thing is a short period of time where we will have a higher financing need as you are alluding to.

And to the degree there is A3 Commercial paper we might access that.

But clearly we have the bank working capital facility exactly for this reason.

There is going to be plenty of liquidity and we haven't sorted out what we will do because we will have to judge market conditions at that time.

Right, right.

And then also, I guess, as you are looking at your various stores, obviously you have some that are performing better than average, some below average.

I am just wondering the current environment is it exacerbating the underperformance of some of your underperforming stores and how that might impact you in terms of pruning some of the underperforming stores?

I think the key thing is we are constantly looking at our underperforming stores both for ones that should be closed and others that we think we can improve.

So there's really nothing new with that.

We will look at the results as we get through the year and see.

We have been pretty disciplined about closing underperforming stores though so I don't expect -- there has been a rumor circulating that we are going to announce a major store closing program.

And I don't envision that.

Okay.

Thank you very much.

We will go next to David Glick with Buckingham Research Group.

Good morning, Karen.

Good morning.

Wondering if you can give us additional color on the division consolidation process?

Clearly you got through the first quarter in great shape.

I presume the systems have rolled over.

I am just wondering if you can give us more color on that?

The steps you have taken to mitigate the disruption in the divisions that are now going to be managing a lot more stores, and also how the new planning and allocation systems are rolling out?

I think the key thing is the consolidations have gone well.

We consolidated the systems for all three divisions last weekend and our systems group working with the division did a fabulous job with no glitches.

So we feel very good about that.

And from a people perspective, the organizations -- the new organizations have been put together, and as I said, almost all the jobs are filled already with internal high-quality talent.

So we are feeling very good about that piece of it as well.

The key to mitigating any disruption risk really gets to the My Macy's structure and we are feeling good we will be able to mitigate any disruption there.

Great.

Thanks a lot.

Just one -- one follow-up question as you kind of get through the second quarter you are starting to come up against -- the time period last year where you reversed course a little bit in terms of -- restored some coupon days that you had been planning cutting.

I was wondering how do you think about your comparisons going forward since we are now coming up against that time period a year ago?

Well, there's no change in the promotions this year so I don't know if that is going to impact us.

Great.

Thanks a lot, Karen, good luck.

Thank you, David

We will go to Dana Telsey with Telsey Advisory Group.

Can you talk a little bit about the program, Martha Stewart is successful.

I think 19% of the business.

Where do you see that going?

And you just made an announcement last week about International opportunities.

What your thoughts are there?

And just lastly from the real estate perspective of remodels and how that is progressing?

Thank you.

In terms of private brands, as I had mentioned earlier they are doing well and it was 19% of the business last year.

As I answered a question a few minutes ago on Martha, that continues to perform very well.

That is not a private brand.

It is what we call an exclusive, but also doing very well.

In terms of the International announcement, as you might imagine, we get numerous inbound inquires about International expansion opportunities.

We have taken Dan Edelman, who is an extraordinarily experienced Macy's executive to spend full time just studying the opportunities for both Bloomingdale's and Macy's.

This is really -- so that frankly Terry, me, others will spend less time on this and allow Dan to really learn.

It doesn't mean I expect any significant International announcement soon.

Our focus right now is entirely on building the comp store sales in this country but we would be remiss not to take advantage of an opportunity in International four, five years down the road.

Thank you.

Your last question I am not sure I understand relating to--?

Real estate.

How are the store remodels going?

Half of your 500 million is being spent on remodels.

How -- how many more stores do you need to do on the remodels and what's -- are you getting a expected sales benefit even though the economy is not great?

Are you seeing any expected sales benefits from the remodels?

The remodels will be an ongoing program forever and ever and ever.

We just have to constantly reallocate space to fit trends, make the stores look better, fresher, et cetera.

That will continue forever.

At least through last year, the returns we were getting were consistent with what we had expected when we approved the capital.

We tend to do that once a year so I haven't looked at it over the last couple of months but I suspect those stores continue to do just fine.

Thank you.

We will go next to Wayne Hood with BMO Capital.

Good morning, Karen.

A couple of things.

You mentioned that early May sales started off pretty well which would lead you to believe a little bit more optimistic.

At the same time looking at the circulars and so on, you have got some pretty steep markdowns, in entire stocks and collections and so on.

So I'm just wondering -- it's better but there's an expense of doing that right now.

So is it really better without those promotions?

The promotions are comparable to a year ago.

You were 40% to 60% off on on the entire collection.

Whatever you are seeing there is really not a big difference.

As you know we are aggressive about clearing what is not selling.

You frankly have no choice but to get rid of the goods, but I think we are managing it well and not adding promotions.

We are getting the sales without that.

Okay.

Second question comes back to the financing piece.

Would you consider doing a bigger deal during the summer and pulling forward some of the maturities that are coming due next year in light of that rates may be higher next year or will you just do the refinancing piece that you have got this year and not pull any forward?

I can't comment.

Obviously we are cognizant of the future refinancing needs too, and so we'll look at market opportunities and decide what to do.

My last question relates back to Liz's question about credit.

In light of the problems that the credit card providers are experiencing in Florida and California.

They have begun to tighten underwriting there, borrowing limits and so on and such a big exposure there.

To what extent Citigroup's possible tightening in those markets would slow sales growth for you?

There will clearly be actions taken that may, for example, reduce the approval rate slightly, but at this point, we do not see that as having a risk to the sales line.

Is the assumption that the default ratios and delinquency ratios would peak in the back half of the year?

I believe so.

Okay.

That's all for me.

Thanks, Karen.

We will go next to Eric Miller with Lehman Brothers.

Good morning, thank you, Karen.

My questions were actually already answered on the funding strategy.

Thank you.

You bet, thanks

We'll go next to Uta Werner with Bernstein.

Good morning, Karen.

I was wondering if you have any expectations on the tax rebate check and to what extent you might see a benefit later in the year?

We don't have any expectation for seeing a benefit.

We would like to, but realistically I don't think we are going to see a big percentage of those checks.

Okay.

You mentioned earlier that you had a conference with your 750 key vendors in this tough environment, what is your assessment of the health of these vendors and to the extent that you will be able to work with them comfortably through the rest of the year as the economic environment continues to be tough?

We have confidence that we will be able to work with the vendors.

So I don't -- that is not a concern of mine.

Thank you very much, Karen.

We will go next to [Kai Yin] with New York Life.

Pretty much all my questions have been answered.

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

A couple of quick questions for you.

Are you seeing any change in shopping patterns in terms of the days of the week, or anything else like that, number one?

Number two, several of your competitors have had to deal with inventories on a slightly more delayed fashion than you all.

And I'm wondering what you are seeing competitively out there?

Finally, following up on the real estate questions.

The four stores that you announced in the Southwest, are there going to be any offsetting closings to those or are you just bringing a net exposure of that area up?

Thank you.

In terms of changes in shopping patterns, Michael, I have not heard that we've experienced anything there.

So I don't know, but I have not heard that.

In terms of our competitors dealing with inventories.

We have not seen that that has had an impact on us.

Typically when a retailer gets overinventoried and starts taking markdowns that doesn't have a big impact on us so I am not too concerned.

In terms of the stores in the northwest those are incremental additions.

We will go next to Charles Grom with JPMorgan.

Hi, thanks, Karen.

Earlier you alluded to how you expect gross margins in the rest of the year to improve more so than what you did in the first quarter.

Does that mean you expect GPN to be up or just, perform better than the first quarter?

What we said -- again this relates to sales trends.

But we would hope that they would be flattish to up slightly.

Overall basis points up -- up or flat slightly is what you are saying?

That's what I said and that is related to sales trends.

So the two are linked.

Okay.

So if you come in closer to the high end of the comp range, then we would expect GPN to be up?

I am not going to be that specific.

Okay.

I was wondering if you could give us a sense of how Blooming's performed in the quarter given what we are hearing from some of the other high-end luxury retailers?

Like the other high-end retailers, Bloomingdale's had a tougher quarter than they had had.

Still doing better than Macy's, but worse than they had been doing.

Okay.

Fair enough.

Last question.

You mentioned that I believe last August started calling at home as a much better area.

This quarter it was mixed.

Wondering is it because you are facing some tougher compares or if there was some product miscues or if it's just some general softness from some of the discretionary categories?

I think big ticket home continued to be strong, particularly mattresses.

In the small ticket area as I said housewares was very strong.

Textiles was weaker.

I would still say in total Home was okay.

Okay, thanks.

We will go next to [Steve Sirrel] with [Conning Asset Management].

Yes the stores you plan to open this year will they be owned or leased?

Those are not stores that we are opening this year, the ones that were announced yesterday.

Those will be open in future years.

But just any -- any new facilities that you are opening this year?

You know something, I don't know the answer to that, which are owned and which are leased.

I suspect they are all owned but I don't know that for sure.

Is a sale leaseback transaction something you would consider as a way of raising financing?

Well, we would consider anything, except usually those are not beneficial to the Company from a financing perspective.

Okay, thanks.

(OPERATOR INSTRUCTIONS) We'll go to [Jag Darfix] with [Holden].

All right, thank you.

It is [Jack Dracos], I was wondering if you could comment.

You mentioned your private label brands have been performing better than most of the other -- most of the vendors, was that at full price sell through or is that at markdowns?

That is yes and yes.

It is a combination.

Was that at first mark through or second markdown.

Both.

And if you could comment about any future -- at least in this fiscal year -- any future consolidation cost or any future restructuring charges you can foresee?

Well, we talked about the fact we would have $150 million this year of which $87 million has been booked.

The remainder will be booked over the next couple of quarters.

Okay.

Thank you.

We will go to Christine Augustine with Bear Stearns.

Karen, on the My Macy's and the divisional consolidation and this whole new structure how long will you -- do you think at this point you will monitor before potentially adding it to the entire chain?

I don't know, Christine.

One of the issues is it will take until early next year for the new planning structures to have an impact on the assortments.

So we will just have to see as we go.

Okay.

So you probably -- I mean earliest maybe 2010, right.

Because you have got to get through all of '09.

I can't comment.

We will just have to see.

That is the logical answer, but we may get a quick win sooner and feel more optimistic.

And then I can follow-up with Susan on this, but I know on your site you got your store count and footage as of March 1.

I am just wondering if there's any kind of -- if anything else happened in the rest of the quarter for the store count and the footage?

I don't think so.

But I will have Susan call you to be sure.

I can follow-up with her on that.

Thank you.

You bet.

(OPERATOR INSTRUCTIONS) We'll go to [Mark Flanagan] with [Wellington].

Karen, going back to the financing issues for a minute.

Can you just talk about what your own goals are from a rating standpoint.

You've seen some migration down.

And then related to that any strategies or thoughts you might have in terms of improving your access to the financing markets over time in terms of guidance you can give on credit metrics, et cetera.

I think the key thing is as you know being an investment-grade Company is very important to us.

And last year when we did the big stock buyback announcement, we had actually worked with the agencies in advance to make sure that we would have a BBB rating, so that were there to be an economic downturn, we would be able to be downgraded a notch and still be investment grade.

So nothing has changed in terms of our desired ratings.

We like the BBB territory so, again, if something happens like is happening this year, we can sustain a downgrade and still be investment grade.

And the key in terms of credit metrics is to achieve the ratios that would allow that to happen.

And are you willing to provide what you think those are?

Well, again, we can talk about what Moody's and S&P and specific adjustments they make, et cetera, et cetera.

We could do that at some point.

Again if we can achieve our stated objectives of the 2 to 3% comp increase with the EBITDA rates in the 14 to 15% range, every credit ratio will fall into place.

Thank you.

We will go to Michelle Clark with Morgan Stanley.

Hey, Karen, it is actually Chi Lee calling for Michelle.

A clarification question.

When the guidance for FY '08 was provided I belive there was the expectation that buybacks would resume in 2008.

Can you give us a sense of what positive impact you had embedded into that guidance from buybacks?

I can't.

That was just one of the factors that was considered then.

Okay.

Thank you.

With no other questions, I would like to turn the call back to Miss Hoguet for any additional or closing comments.

Thank you all for your interest in Macy's and we look forward to talking to you as we continue through the year.

Take care.

That does conclude today's call.

Again thank you for your participation.

Have a good day.