梅西百貨 (M) 2008 Q3 法說會逐字稿

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

third-quarter 2008 earnings release conference call.

Please be aware that today's conference is being recorded.

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

Please go ahead ma'am.

Thank you.

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

conference call scheduled to discuss our third quarter earnings.

I am Karen Hoguet, CFO of the Company.

Any transcription or other reproduction of the statements made in this call without our consent is prohibited.

A replay 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 affect the Company including the risks specified in the Company's most recently filed Form 10-K and Form 10-Q.

In the third quarter, as a result of the worsening economic climate, we experienced an unexpected weakening of sales trends as compared to the first half of the year.

We were pleased however that we were able to still outperform our key competitors throughout the quarter as we have done all year.

But we did have to lower our guidance for the fall season on October 10.

Our third quarter performance sits within that revised guidance.

Sales in the third quarter were $5.493 billion.

On a comparable store basis, sales were down 6% for the quarter.

The slowdown in trend relative to the first half of the year was experienced broadly across categories of business and also across geographies.

The most significant negative trend change in the quarter happened in the furniture and mattress businesses and at Bloomingdale's.

However, while the sales trend weakened, Bloomingdale's still continued to outperform the more upscale competition in the third quarter.

We also saw in the quarter a resurgence in sales of moderate goods led by strength in private brands like Karen Scott, Style & Co., American Rag and Green Dog.

The cold weather categories also did relatively well between cold weather accessories, cold weather home textiles, outerwear and boots.

We believe that those areas were boosted both by fashion trends and also due to the fact that they're practical purchases.

Our everyday value priced items also did very well in the third quarter.

And in the month of October our average unit retail decreased for the first time that I can remember.

Another concerning trend in October was a slip in our regular priced business.

Earlier in the year the weakness in sales was more in our clearance than regular priced businesses.

All of these factors point to the fact that consumers are pulling back in reaction to the economic weakness.

This should not surprise any of you.

Geographically, our business was strongest in the Northeast and in Texas during the third quarter.

New York City was still our strongest market but it did soften some in the second half of the quarter.

The weakest geographies continued to be the West Coast and Florida.

On a positive note, we did begin to see improved performance in many of the My Macy's districts including Chicago, Pittsburgh and Columbus in the third quarter.

Over the past few months, the corporate management team has made formal two-day visits to four of the My Macy's markets and numerous other unannounced visits to stores involved in the My Macy's pilot.

All I can say is that the passion and energy in those markets have to count for something.

It is really still too early to judge the potential lift from the My Macy's localization strategy.

In most families of business, we haven't been able to impact our assortments in a significant way yet due to lead times and ordering.

But we are cautiously optimistic that the My Macy's regional structure will significantly improve our sales trends over time.

Gross margin in the quarter was 39.5% up 20 basis points versus last year.

Remember that last year in the third quarter our gross margin dropped a full point.

Needless to say, we're taking more markdowns than we had planned to keep our inventory current.

Inventory at the end of October was down approximately 2.5% on a comp store basis.

SG&A in the quarter was $2.085 billion or 38% of sales.

This is down $36 million or 1.7% versus last year.

However, due to the sales drop, SG&A as a percent of sales increased 210 basis points.

We were able to reduce our expense dollars versus last year in spite of higher expenses for the infrastructure driving our multi-channel strategy through the Internet and lower credit income.

On the positive side, in addition to the savings from the division consolidations completed earlier in the year, we benefited from lower retirement expense due to reduced headcount from earlier consolidations, the impact of the lower stock price on stock based compensation expense and from lower marketing expense in the third quarter.

We consciously shifted marketing dollars from Q3 to Q4.

Operating income excluding onetime costs in the quarter was $84 million or 1.5%.

Division consolidation costs in the quarter were $16 million for a total of $129 million year-to-date.

We're still expecting a total of $150 million this year in division consolidation costs.

Interest expense was $143 million and we had a tax benefit of $31 million.

The net loss excluding division consolidation cost was $0.08 cents per share with average share count in the quarter 421.3 million shares.

Cash flow year-to-date continues to be strong.

Net cash provided by continuing operating activities was $317 million, up from $285 million last year.

Cash used by investing activities was $606 million versus last year's $618 million.

And remember, last year the cash from invested activities benefited from proceeds from both the disposition of AfterHours and the duplicate May Company locations.

Between these two categories of asset dispositions, we generated $137 million less cash this year than last year.

Capital spending year-to-date was $131 million lower than last year.

For the first time this year, we borrowed $120 million under our bank credit facility on October 31.

We currently have $150 million outstanding and expect to need more than this for just a few days over the next month.

These borrowings will all be repaid in early December.

Now comes the harder part of this call, trying to give you insights into what we are expecting for the fourth quarter and how we are approaching planning 2009.

This has to be the most challenging business environment that I have experienced.

We do feel very prepared for the next 60 days.

Our assortments are looking great and full of great values and newness.

Our price points are sharper than ever, our promotions are powerful and marketing is strong and our stores and sales associates are providing better service than ever before based on our consumer surveys.

But we can only control so much.

We will have to see how it plays out but we still hope to improve on our third quarter sales trends.

And don't forget the calendar shift this year and last year's very strong November.

As a result we are expecting the month of November to be down low double digits even though we expect the quarter to be down 1 to down 6%.

And like all holiday seasons that I can remember, it will be a nail-biter.

We won't be able to protect the season accurately until we are through it at the end of December.

We are expecting continued gross margin pressure in the fourth quarter given the sales environment and please do also remember that last year our gross margin in the fourth quarter was 70 basis points above a year before, 2006.

So we have a tougher comparison this quarter unlike the third quarter.

SG&A in dollars is expected to be above last year in spite of what we accomplished in the third quarter due to higher Internet related costs, lower credit income and higher marketing expense.

All of this though has been factored into the guidance we have given.

We are expecting the fourth quarter earnings per share to be between $1.10 and $1.30 and annual earnings per share to be between $1.30 and $1.50 before division consolidation costs.

Having said that, if our sales performance does not improve from the October and third-quarter trends, we would be at the lower end of both sales and earnings.

But as I said we do remain hopeful that we can do better.

But, while we're hopeful for the fourth quarter, I have to caution that we are less confident about spring 2009.

We will be [year-rounding] weakness but we are increasingly concerned that we won't see the improvement that we had anticipated as recently as a month ago.

Now that doesn't mean we are expecting further deterioration but we may not get as much improvement as we had hoped.

But until we are through the next 60 days, we won't know how to guide you about 2009.

But I will tell you that we are taking a conservative approach and planning those longer leadtime items.

For example as you saw in our release this morning, we have reduced our 2009 capital.

We've taken the capital budget from $1 billion to approximately 550 to $600 million.

This compares to approximately $950 million expected to be spent in 2008.

The reduction was helped by the delay in new stores which saved us approximately $160 million but we are delaying and canceling other projects as well in an effort to conserve cash in this challenging and uncertain environment.

We're also reducing our plans relating to merchandise receipts and our expense budgets for both spring and for fall of 2009 given this uncertainty.

If trends improve, we will be able to add back some of these capital projects and order more merchandise.

But at this point, we don't see any upside in being optimistic.

That said and amid all of the bad news, we do have some things to feel good about and I would like to conclude with those.

First, as poor as business is, we did outperform our key competitors again in the third quarter on a comp store sales basis.

Secondly, we are extremely well prepared for the holiday season.

Our stores are looking great.

There's a lot of newness in the assortments.

We have great value on deck and the marketing campaigns at both Macy's and Bloomingdale's are strong.

Third, our cash position is strong, in fact stronger than last year at this time.

And we have more than enough cash and borrowing capacity to handle debt maturities in 2009 should we decide not to refinance.

And last and certainly not least, our organization is enthusiastic and motivated to perform as well as the economy will allow through the holiday season and beyond.

Thank you all for your interest and now what questions do you have?

(OPERATOR INSTRUCTIONS) Robert Drbul, Barclays Capital.

The first question I have is around when you look to the debt that you have coming, is it -- from your perspective today, would you expect to use the credit line?

Is there a timeline that you think that we should think about as you look given this situation in the credit markets today?

Well, it's a question of cash and the credit markets.

So again we will look to refinance some of that debt or all of it, again depending on how we're looking at 2009.

But I can't really help you in terms of a timeframe.

Spring season is when we -- as we come through November into December, that's when our cash flow is highest.

So it's really not until the back half of next year where cash becomes -- where we need to tap into the credit facility.

Great.

And then a bigger picture question as you look to the end of this year and into next year.

Could you address any more potential store closings?

There's just been a lot of discussion around -- in the industry around that and I just wanted to see if you had any updated thoughts on the current store base that you have and how you are thinking about it.

Yes, I mean we have always been aggressive at looking at our store base and closing any that are not contributing on a cash basis and then we have a comprehensive analysis we do many times during the year especially in a year like this.

As in all other years, we do expect to close some stores.

I do not expect it to be a number any bigger than a typical year's closings.

I have heard rumors of 50, I' heard a rumor of 90.

Those are just -- I don't know where they're coming from.

So I would expect closings but nothing unusual.

Great, just one final question is on the marketing spend from the shift from Q3 into Q4, can you quantify how much of that that you shifted?

No, I can't.

Good luck Karen.

Thanks (multiple speakers)

Michelle Clark, Morgan Stanley.

First question is on the vendors.

Are you noticing any change in willingness from vendors to provide markdown support?

We have not yet.

And then the second question -- wondering if you've had any recent updated discussions with the rating agencies.

Have not yet either.

Okay.

But your commitment there is to continue to remain to be investment-grade?

It is our objective to be investment-grade.

Over the longer-term we would like to go back to being BBB flat or maybe even triple BBB+ but we recognize in this environment that's going to take some time.

Okay, great; thanks and best of luck.

Thank you, appreciate it, Michelle.

Jeff Stein, Soleil Securities.

Wondering if you could talk about first of all seasonal hiring and if you have made any changes with regard to the fourth quarter plan there or are you just going to tough it out and make sure that you can serve the customer?

Secondly wondering given that you're making some adjustments to your spring of 2009 receipt plan, that has got to be based on some type of a sales forecast or outlook that you have at this point.

Are you willing and do you think it's prudent to plan the spring down to last year?

In terms of seasonal hiring, we are refining our plans depending on the needs of individual stores that are still doing a significant amount of seasonal hiring.

And one of the positives, if there is a positive from this environment, is we to think we will be able to hire a higher quality person.

So that could be helpful to us as we hit the fourth quarter.

In terms of the sales forecast, yes we are obviously dealing with numbers as we are refining our merchandise receipt orders.

And I do think it is likely that the spring will be planned down.

I just can't be more precise than that right now.

Lorraine Maikis, Merrill Lynch.

I was hoping to hear a little bit more about the CapEx cuts.

What types of projects will be cut above and beyond the new store growth?

Is it renovations or systems?

Can you give us a little more clarity on that?

Frankly, it's a little bit of everything.

We are obviously cutting back maintenance that doesn't have to be done this year.

We're cutting back some remodels that aren't strategically critical.

We're cutting back some technology although I confess we're continuing to fund systems and our Internet business fairly aggressively.

It's really across the board.

Charles Grom, JPMorgan.

Just a follow-up on the last question.

How many stores are you planning to open next year?

I think the number is four of which one is a replacement store.

Okay, great.

And then just question on the balance sheet composition of your goodwill.

I know your auditors looked at it the second quarter.

But if you could maybe give us a little bit of clarification on how much of the goodwill is allocated for any private-label trademarks that you have as well as the May acquisition from (multiple speakers)

That's not part of goodwill.

I mean the goodwill is allocated across our various operating entities but there is a separate category of intangibles that includes (multiple speakers) private brand.

Okay and then your auditors are not planning to do another review anytime soon until the next (multiple speakers)

We're constantly looking.

Remember, and without trying to get into too much detail on the accounting.

But there is sort of a two-step process with looking at goodwill.

One is evaluating the discounted cash flows going forward relative to the entities and we have passed that consistently.

And the last one is just sort of a hypothetical question.

If we were to fast forward to the fourth quarter of next year and trends continue to stay weak and let's say hypothetically you do [trip] one of your two debt covenants, could you just clear the air on what the ramifications are if that scenario were to present itself?

Let me start by being really clear.

I don't know that I agree with your assumptions that that will happen in the fourth quarter of next year.

But let me assume that you're right for a minute, even though I would disagree.

If that's the case, you go back to the table with the banks and you try to renegotiate the bank facility.

My guess is if that would happen, we would be able to renegotiate possibly a smaller facility than $2 billion and for sure more expensive than what we're paying today.

But I don't think it would be likely that the bank would walk away from us.

No, that was my point.

I was just trying to say hypothetically if it were to happen.

Yes, I just wanted to be clear.

I'm not getting to the same conclusion that there will be a break.

But should that happen, that is what would happen but that's what we would do.

We would work with our banks.

Obviously all of the banks in our credit facility we have close relationships with which theoretically should help in that situation.

Great, thanks a lot Karen.

Deborah Weinswig, Citibank.

With regard to SG&A for 2009, I think you said for the fourth quarter we should expect dollars to be up year-over-year.

How should we look out to 2009?

That is a good question.

Obviously we're trying to reduce expense as much as we can.

But I don't think it's likely to be below 2008.

So there will be some increase.

I can't tell you today what that will be.

Okay and then with regards to the Internet, obviously there's been some investment there.

I think we have heard that trends there have kind of exceeded same-store sales.

Can help us understand where you are with regards to the Internet and what your plans are longer-term?

I mean the truth is the dot com business continues to grow faster than the comp store sales and do well.

We are also moving towards more of a multi-channel strategy.

Remember when you buy on the Internet, you can return to our stores.

So that negative gets deducted from store sales, not from the Internet sales.

So it's frankly getting very murky between the two definitions.

Also we're testing now in Florida of the ability of being in the store and having a sales associate say we don't have that in stock, let me get it for you on Macy's.com, which so far seems to be working very well.

So we are encouraged by not only what dot com can do on its own, but more importantly how it's being integrated into the marketing and merchandising for the stores as well.

Okay and last question, last quarter you provided some very helpful insights into My Macy's with regards to some specific examples.

Can you talk about maybe some wins in the third quarter?

You know something Deb?

I don't have any My Macy's stories top of my head today.

There are lots of them and I apologize to any of the My Macy's people.

There are lots and lots of good things happening, merchandising successes where we have put goods in.

And interestingly, we were in Chicago a couple of weeks ago and part of that was premium denim and at the same time, Levi's.

So again, trying to tailor assortments both up and down to get what that Chicago customer wanted and that denim business is now doing significantly better.

That's one example.

But I confess I don't have a long list sitting here today.

Okay, well thanks; very helpful.

Once again, best of luck.

Dana Cohen, Banc of America Securities.

Two questions -- on credit just -- can you give us an update -- I mean no surprise given what's going on with all the card companies.

But can you give any quantification as to what you're seeing in your numbers?

And then second, when you said that the My Macy's business was getting better, are those areas that you highlighted, is that absolutes improvement or relative to the rest of the business?

Let me start with the second question which is on the My Macy's districts.

It's absolute performance versus what they had been doing earlier in the year.

So I can't tell you it's great performance necessarily in some of these markets, but it is a significant improvement from where they were.

That's been the good news.

And we are feeling very encouraged by that even though we had said to ourselves and to you, don't expect to see much until spring.

We are beginning to see some traction there.

In terms of credit, that continues to be a challenge.

Interestingly, penetration or usage on the card continues to rise.

That probably means our best customers are sticking with us most in this environment.

It may also have to do with credit availability and tapping other lines.

But the penetration is up versus what we had expected and versus last year.

However, things like bad debt, bankruptcy, write-offs, all of those continue to trend down and in fact the payment rate also came down in the third quarter.

So like others in this business, we are concerned.

Fortunately we have Citi as a partner which both benefits us in times like this in terms of the P&L.

And also they have an expertise in this business and are making decisions based on a broader portfolio than just ours.

But where do they stand in terms of credit availability?

So far I would say we have made minor tweaks.

But given the pressures of the profitability, I suspect we will be looking to make other changes as we head into 2009.

Adrianne Shapira, Goldman Sachs.

Thanks Karen, just two questions.

Your comments about the fact that moderate price points are -- you've seen a resurgence in AUR coming down, can you just share with us thoughts in terms of how you are thinking about positioning merchandise heading into the spring '09, perhaps the everyday value, what percentage of sales that represents today and what it can grow to if that's where the customers' appetite is?

Right, I mean we're still looking at that.

It also impacts our marketing plans because customers are saying to us they want value.

By the way, value doesn't mean lowest price.

It really does mean value and quality all at the same time.

But we are reviewing our spring plans, having watched this.

And by the way, those changes really happened in the second half of the quarter.

So that's relatively new information.

Any sense in terms of the everyday value offering what that accounts for as a percentage (multiple speakers)

It is still relatively small.

It's about 6%.

Okay and no targets?

No, targets; no.

Okay and then just the second point following up on the credit questions, assuming you're having these ongoing conversations with the rating agencies, could you share with us what perhaps could expedite perhaps rating maintenance or perhaps ratings upgrades in that what would they find more constructive?

Debt paydown or perhaps building cash on the balance sheet?

You know something?

I can't speak for them.

You'll have to talk to them directly.

Lance Vitanza, [nighthead].

First question I have is regarding your comp guidance down 1 to 6% in Q4.

I'm just wondering -- I mean comps were down 6% in Q3 and it seems to me that the world looks a heck of a lot worse this quarter than last.

What are the drivers that would lead to your outperformance I guess just relative to the deterioration that we're seeing in the rest of the consumer spending environment.

I think there's three parts to that.

One is last year the business softened in the fourth quarter.

So on a two-year basis the comparison looks different.

The second I would point to is the fact that our marketing shift from the third quarter to the fourth quarter we hope will drive business incrementally in the fourth quarter.

And the third is the softer factor which is we tend to do well in holiday periods and we're very prepared for the holiday season, but customers tend to like to come shop at Macy's over the holiday period.

They often prefer to give the Macy's box or bag than some of our competitors and we've typically done well.

So that's the reason for the greater optimism about the fourth quarter.

But also as I mentioned, once we head into the first quarter, that shifts.

Fair enough.

And the other question I had with respect to the gross margin improvement in Q3, I really found that to be a terrific performance, 7% topline decline and yet you improved gross margin.

I did hear your comments about the favorable comp but still that seems very impressive.

Can you talk a little bit more about what other drivers there may have been with respect to that outperformance?

Look, this is a very experienced management team that has been forecasting sales and reacting with inventory and our inventory aging has been in good shape.

We have been taking our markdowns on a more timely basis all year.

The reason we were able to increase the margin this year in the third quarter I think relates as much to last year as anything.

But nonetheless I put our merchant team up against any in terms of managing inventories, markdowns and margin because.

Terrific and last but not least, is there anything drawn currently under the revolver?

Yes, it is $150 million.

150, does that include LCs or are there conditional additional LCs (inaudible)

No, that is separate but that is separate from the line and that is a (multiple speakers) tiny number.

Todd Duvick, Banc of America Securities.

I wanted to follow up with a question, I guess some of the questions that have already been asked on the balance sheet and some of your comments.

So far this year you have put share buybacks on pause.

You're now cutting capital spending targets for next year.

So I guess what I'm wondering is if you can provide us any guidance for how much cash you expect to generate in terms of total cash flow this year?

And if you would consider -- it sounds like you'd consider paying down debt if that's what it would take next year to preserve your credit rating.

Can you just comment on those?

Let me do the second part first which is yes, we would consider paying down debt; and no, we don't forecast what the cash will be like at the end of the year.

But yes -- no, no, no.

We're going to do what we need to do to maintain the investment-grade rating.

And do you currently have any plans to visit with the rating agencies in the near-term before (multiple speakers)

We don't comment on the rating agencies in that specificity.

We talk to them all the time.

Fair enough, thank you very much.

Uta Werner, Sanford Bernstein.

I wonder if you can tell me a little bit more about inventory.

You mentioned I think earlier that comp store inventory is down 2.5% but comps are down minus (technical difficulty) Can you just comment a little (technical difficulty) the difference?

Sure, we did bring some inventory in early so that we would be ready for the holiday season.

We wanted to make sure that in the replenishment business we were in stock and ready to go and have the stores set up for the beginning of November.

So it's seasonal buildup more than it is any issue that have run into?

Correct.

My second and last question would be related to tourism.

I remember that Macy's in Harold Square is one of the favorite tourist sites.

I wonder to what extent the comps that we have seen recently indicate that maybe there's less tourism coming through the flagship stores and that maybe as it's anniversarying big numbers from last year.

I think that is -- and again this is anecdotal as opposed anything statistical.

But New York did slow down in the second half of the third quarter.

So I suspect it has to do with tourism but I can't tell you that definitively.

Sam Poser, Sterne, Agee & Leach, Inc.

Just a quick follow-up on the inventory levels.

When you said that you're expecting negative low teens comps in November and then you're bringing in inventory early to set up for holiday, if the customer is not going to be there, why do you need the inventory early?

Well you want to be ready for the November/December period altogether and when we look at our inventory on a two-year basis, we feel perfectly comfortable with it.

Can we expect that the inventory -- would that correct itself at the end of November?

End of December.

And so you've basically cut receipts out of the middle and left it up front?

Well, we accelerated them; so, yes.

Matt Wiederrecht Bond Street Capital.

I just wanted to confirm one thing on the Citigroup supporting your credit card program.

They haven't changed any of the requirements that they had for potential borrowers, have they?

You mean for credit card holders?

Correct.

Yes, we have tweaked a little bit the approval rates.

But -- and remember we have the proprietary card and the Visa card.

We tweaked it a little more on the Visa side than the proprietary card but not in any significant way which by the way, we would have done also had we still owned the business.

What about credit limits?

That has been tweaked a little bit.

But again I would put in the category of tweak.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about the private brand?

What drove the improvement in the moderate private brands and how do you look at the tax rate going forward?

And just lastly, level of clearance inventory versus last year versus previous quarters, how's that doing?

Thank you.

There's a lot of questions in there.

In terms of clearance inventory, we are down versus a year ago.

Again because of managing the inventory so well this year, that is the case.

So I think that answers that question.

In terms of private brand, some of it has to do with the economy and some of it has to do with some strategizing and product design that we have improved.

For example, Karen Scott has recently been redesigned as a line and just looks fabulous.

Style & Co.

denim is on fire; again, a function of great value meaning a terrific fit which is obviously important in denim, a high-quality product and also at a fabulous value.

I think that's your question.

The tax rate?

There's no change from the guidance earlier in the year.

Michael Exstein, Credit Suisse.

Karen, thank you for your lucid discussion on your financial strategies going forward.

I think that helps us all.

Two quick questions for you.

One is can you talk to us about what the trends are in terms of the Internet business?

Is it accelerating, decelerating?

Is there anything to read in terms of it being a predictor for the in-store activities?

And second, what do you see from your competitors in terms of their inventory levels and promotional levels and how you're having to respond to them if any?

On the Internet, it did slow in the third quarter as well but at a higher level.

So I think it's just again consistent with what we're seeing with the consumer.

In terms of competitors, we think that depending on the competitor, some are very heavy in inventory and all are being very promotional.

But so are we and we do so (inaudible) every holiday period.

So when you said what are we doing in reaction, honestly we're sticking to our strategy and we think that that will help.

We are avoiding tit for tat because we don't think that will necessarily increase sales and will then be permanently in our (inaudible) to have to do in future years.

So I do think they're heavy in inventory in some cases.

David Glick, Buckingham Research Group.

Most of my questions have been asked and answered.

Just a follow-up on as it relates to cash flow, there's some lobbying efforts currently out there to delay contributions to underfunded pensions.

Obviously the returns this year is not helping the status of your pension.

Just wondering if you can comment on the current plans for '08 in terms of making a contribution.

That certainly in your filings was set forth as a possibility.

Just wonder if you could update us on that.

We earlier in the year and as shown in the 10-K had assumed that we would be making a $175 million contribution to the pension plan.

I'm going to try to do this simply and I apologize if I end up being overly complicated but I think there's some misunderstanding out in the marketplace about pension funding.

There are actually two definitions of funding.

One relates to expense and that's what you see in the 10-K.

The other is what is used for actually calculating funding and there are differences in the calculation.

At the end of 1/1/08 our actual funded status was 97%.

So at the time that we were estimating the $175 million contribution, you know, we were aiming to keep our funded status up in the 90s.

As a result of what has happened with the asset returns this year and continuing to happen, in order to stay in the 90s we would have to contribute dramatically more than $175 million.

However, we don't have to stay in the 90s.

Our sort of floor is an 80% floor because below that you would have to then notify the participants that the plan was underfunded to that degree.

So we have sort put that as a floor for ourselves at 80%.

So in order to achieve the 80% funding, the 175 may be adequate.

By the way, that $175 million would have to be contributed between now and September of next year.

They give you nine months to achieve the funding as of the beginning of 2009.

I know it's a little bit confusing.

So the short answer is sometime between now and next September we would make a contribution plan.

Estimate as of the beginning of the year was $175 million.

I won't know a real number until the liabilities are measured as of the end of this year which won't be until next summer.

So we will make a contribution at some point of that kind of magnitude, can't be more precise than that now; sometime between now and next September.

(multiple speakers) the mistake that people are making is using the accounting numbers to derive what has to be done from a funding perspective.

The accounting numbers obviously would have some negative impact on EPS in '09 but those would be non-cash?

Yes, but again remember that the impact of the market return this year gets smoothed over years.

So it doesn't impact us as greatly in '09.

Thanks a lot, I really appreciate the clarity (multiple speakers)

It's a complicated subject.

That it is.

Thank you.

Alessandra Rosenfeld, Brean Murray, Carret & Co.

I just have a quick question on premium denim.

Have you seen any weakness in that area?

You know something, I don't know the specifics of that.

What about like denim in general?

Is that (multiple speakers)

We don't comment in that level of specificity.

Okay, so let me just ask you for the moderate brands, you have -- basically you're saying that those -- are they -- sales are doing or the brands are doing the best right now in your opinion?

We were talking about the moderate private brands.

Right but (multiple speakers)

Some of the private brands that aren't moderate are doing well also.

It's just what changed in the third quarter was an increasing strength of those private brands.

Do you see this trend going on into the spring of next year?

I don't know that but at this point it would feel that way.

Liz Dunn, Thomas Weisel Partners.

I guess a question on the bank borrowing.

I know you said you have $150 million now and you will borrow a little bit more.

Can you just discuss that relative to last year's peak borrowing need which I think was in the beginning of November?

Last year, the peak borrowing was just under $1 billion and we will be nowhere close to that this year as you can tell by being at $150 million now.

Great, and then a follow-up to the markdown question that was asked earlier.

I think there was an article in Women's Wear today talking about vendors complaining that department stores were asking for markdown money earlier.

Can you talk about that and particularly in context of your comment that October regular priced business was down significantly (multiple speakers)

This is the time of year where both sides will begin to talk about the dance that goes on at this time of year every year.

I don't think there's money being asked for earlier but I think both sides are going to feel pressure in a year like this where business has been tough.

So there will be lots of speculation between now and the end of the year on this subject.

But you're not seeing anything unusual?

I don't think so.

Again, this is a -- we and the vendors have an interesting relationship and both sides will be trying to come to the right point of view here.

Look, we're in this for the long-term with our vendors and we believe passionately in maintaining good partnerships and we will do that.

But part of that is having us help each other out in these kinds of environments.

(Operator Instructions) Howard Bryerman, Evergreen Investment Management.

Can you just refresh my recollection of what are the bank maintenance covenants?

There are two covenants.

One is at EBITDA to interest which is set at 3.25 and as of the third quarter that calculates to 5.06 and our leverage test where the covenant is 0.62 and again it calculates to 0.49.

.

Where do you expect the leverage to be after the busy season?

We don't project that.

I noticed that you did say you wouldn't project free cash flow but do you disclose what you think cash would be at the end of the year?

No.

And then just finally, can you use the revolver to pay down subordinated debt if you need to refinance the '09's?

We could.

You could.

Just on the heels of -- obviously you have very strong relationships with your banks but this is --these are uncharted waters now and banks are obviously thinking about themselves before they think about their customers.

Are you confident that in 2009 should you need to draw on the revolver to refinance the '09's you can do that?

Remember as -- we're going to have a lot of cash.

So yes, if we use cash to pay down the debt, we will need to draw on the revolver more by next year.

But that is a year away and our hope would be that the credit markets would open up for us sometime between now and then.

Well, using my own calculation -- I'm in agreement with you but using my own calculations, even with free cash flow at the end of the year you still would need to go to the bank facility in order to retire the two issues that come due next year.

You will have to do your own math on that.

And again we have -- I mean, we wouldn't try very hard not to for lack of a better word abuse the privilege of our bank line.

As we think about it, when we refinanced the $650 million this year and at the time it felt expensive, obviously now it looks great; many asked why don't you just use the bank line?

Our answer was no, we don't want to overuse that line given our relationships there.

So they have no problem refinancing subordinated debt to them?

I can't speak for them but they know that we will do everything in our power to not abuse the line.

(Operator Instructions) Eric Miller, Barclays Capital.

Just briefly around just a follow-up on some of the questions around refinancing and as you think about obviously maintaining maximum liquidity, how do think about open market debt repurchases over time if you think about some of your paper trading in the low $0.50, $1.00 prices?

It looks like great deals.

But for right now I'm borrowing from the bank.

So let's get through Christmas and then we can have that discussion.

So next year as you think about whether to tap the banks or how you pay down your debt, is that something that you think about in terms of capital structure and returns?

That's certainly something to look at.

It does look extremely cheap right now but again as I said, we need to get through Christmas and see how '09 is looking before we come to any conclusions on that.

(multiple speakers) I think the truth is we're going to stay focused on running the business.

Right, but I was just following up on the comment you made around committed to investment-grade to the best of your ability.

Obviously you can't control what the rating agencies do in this environment.

But as you think about debt paydowns over time what the best returns would be, it would seem like some of your paper trading in the 50s and 60s would certainly seem attractive if you had that liquidity over the course of the next six, 12 or 18 months.

That's why we get through Christmas, see what the '09 looks like, see what the liquidity looks like and we will put all of those thoughts together.

Bernard Sosnick, Gilford Securities.

Karen, you've made very clear that merchandising success and better tailoring of merchandise locally has helped Macy's perform relatively well versus the peers.

The peers have had trouble, have increased the drumbeat of promotional advertising on TV and I'm wondering whether or not there are going to be some adjustments that are required an Macy's approach which has been to be somewhat quieter and use direct-mail.

Are these means of addressing customers and driving sales working as well and or might they need adjustment?

Well we do use a lot of television for our promotional efforts more and more since we converted all of the stores to Macy's.

So our marketing people are evaluating the effectiveness of not only every type of marketing, but also the specific events, trying to reallocate dollars into the ways that are working best.

But direct-mail still is working very well for us.

(Operator Instructions) We have no other questions.

I would like to turn the call back to Miss Hoguet for any additional or closing comments.

Thank you all very much for your interest and follow up with Susan or with me with any other questions you may have.

Thanks and have a great day.

That does conclude today's conference call.

Again, thank you for your participation.

Have a good day.