梅西百貨 (M) 2008 Q4 法說會逐字稿

Good morning, and welcome to Macy's, Inc., fourth quarter earnings release call.

This call is being recorded.

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

Karen Hoguet.

Please go ahead, ma'am.

Great.

Thank you.

Good morning, and welcome to the regularly scheduled Macy's conference call.

I am Karen Hoguet, CFO of the company.

Any transcription or other reproduction of 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 relation 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 10K and Form 10Q.

The economic deterioration that accelerated, starting in mid-September, led to depressed results in the fourth quarter and for 2008 as a whole.

But given that environment, over which we have no control, we were pleased with our results.

I would focus on two particular accomplishments.

First, our comp store sales growth exceeded that of our peers in the fourth quarter, and in fact consistently through the year.

This indicates to us that our strategies are resonating with the customer.

And second, we were able to conserve cash throughout the year, such that we ended the year with more cash on our balance sheet than we had planned at this time last year.

Although our sales were well below our plan, we reduced capital spending, expense, and inventory, all of which contributed to our strong cash flow.

We feel good about that accomplishment.

This morning I will take you through some of the details of our fourth quarter performance and our annual cash flow.

I will also fill in some of the keys assumptions behind our 2009 guidance.

The guidance itself has not changed since the announcements we made on February 2nd.

Sales in the fourth quarter were $7.9 billion, down 7% on a comp-store basis.

We were pleased in the quarter with the relatively strong performance in the My Macy's pilot markets.

While absolute results were not strong, the performance of these stores relative to the legacy doors improved significantly in the fourth quarter.

In the first half of the year, the My Macy's pilot regions performed five points worse than our other stores, but in the fourth quarter, the My Macy's stores performed 1.5 points better.

That's a significant trend change.

As we discussed on February 2nd, we were encouraged enough by the performance in the My Macy's districts that we are now rolling it out to all of Macy's.

We also had strong performance on the internet with a 24% fourth quarter increase.

We are seeing terrific synergy between the internet and our stores.

Customers shop in stores, and then buy online, or the reverse, or they buy online and return in the stores and do other shopping while they are there, or if they can't find what they want in the store, then we order it online for the customer.

This multi-channel integration is going to continue to help the company as we go forward.

On the negative side in the fourth quarter, we saw a significant weakening of trend at Bloomingdale's, and in New York City we saw a decline in trend for both Bloomingdale's and for Macy's.

For the quarter our strongest families of business were women's suits, fashion jewelry, cold weather accessories, shoes and housewares.

These are all categories of what I would call practical merchandise that's generally driven by strong value propositions and affordable newness.

The weakest performing categories were those with more discretionary luxury assortments, including bridge sportswear, handbags, watches, table top, Christmas trim, luggage, furniture, and fine jewelry.

Our average unit retail was down 2% in the fourth quarter, although it was flat for the fall season and up 2% for the full year.

Gross margin in the fourth quarter was 39.3%, down 230 basis points below last year.

We took significantly more markdowns than a year ago, and our inventory shortage was disappointing.

For the full year, shortage was up only about 20 basis points, but for the fourth quarter, which is when our physical inventory is taken, it was up 50 basis points.

But we did end the year with comp store inventory down about 7.5%, consistent with our sales trends as we head into 2009.

SG&A before consolidation and asset impairment charges in the quarter was $2.256 billion or 28.4% of sales, this is $26 million below last year, but up 180 basis points as a rate.

The rate increase is a function of the lower sales.

Our expense dollars came in well below what we anticipated.

Expense was below expectation due to lower stock-based compensation and bonus expense, lower four-wall expense due to lower sales, and a gain associated with the proceeds from Hurricane Ike.

These improvements were offset in part by lower credit income.

We were pleased, though, with our ability to react as we did to the weak environment by reducing expenses as we were able to do, given the sharp drop in sales in the back half of the year.

Operating income including integration and -- I'm sorry, excluding integration and asset impairment charges for the quarter was $647 million or 8.2% down from last year's $1.222 billion or 14.2% of sales.

In the quarter, we booked $58 million of division consolidation expense and store closing costs, and $161 million of asset impairment charges.

The $58 million has three components.

$17 million related to the My Macy's consolidation expense from last year, which brings the total for the year to $146 million compared to the anticipated $150 million.

The $58 million also includes $11 million related to the cash part of the store closing costs announced in January, and $30 million associated with the restructuring announcements of February 2nd of this year.

The asset impairment charge has four components.

First, $96 million associated with the writedowns of properties, whose book values were not supported by the stores' cash flow.

Most of these are properties that we would like to close but can't due to legal and other constraints.

Second, it includes $40 million associated with the property writedowns on the store closures announced in January.

We also wrote down our 11.4% ownership of The Knot by $12 million to current market value, and took a $13 million further impairment charge on the value of the Karen Scott and John Ashford trade names.

Interest expense was $143 million and tax expense was $194 million.

Net income was $310 million, and diluted earnings per share were $0.73, or $1.06 excluding the unusual items just discussed.

This exceeds our most recent guidance of $1 to $1.02.

These results of operation do not yet include a charge for goodwill impairment that currently is being determined, and will be reflected in our 10K filed on April 1st.

As you know, we have approximately $9.1 billion of goodwill on our balance sheet, primarily related to the May Company acquisition.

As a result of the deterioration in the economic environment and the resulting decline in our share price, we are in the process of reviewing the goodwill for impairment.

Due to the complexity of the process and the need to obtain third-party appraisals of substantially all of the company's assets, we cannot make an accurate enough estimate at this time to book the writedown.

We are, however, currently estimating the impairment charge will be between $4.5 billion and $5.5 billion, or between $10 and $12.50 per diluted share.

And as I said, the financial statements in the 10K will reflect the reduction.

And remember, that this goodwill impairment charge is expected to have no impact on our liquidity, or our covenants, nor our bond indentures.

At year end, we had $1.3 billion of cash on our balance sheet, which is more than we expected, and $723 million above a year ago.

During the year, our cash flow from operating activities less the cash used by investing activities was $1.088 billion, as compared to $1.442 billion in 2007.

Of the $354 million reduction, $255 million of that is due to the asset sales and the after hours disposition related to the May Company acquisition.

Excluding this, we produced cash flow before financing activities, only approximately $100 million less than a year ago, which in a year like this, we consider to be quite an accomplishment.

Managing cash has been and will continue to be a top priority.

So let's move on to 2009.

Needless to say, given the continued uncertainty and volatility, it is hard to set specific goals.

The key for us will be to perform the best we can, given the environment.

We are therefore focusing our efforts on producing comp store sales that continue to outperform our peers, while at the same time aggressively managing our cash like we did in 2008.

We are also putting a renewed focus on improving our return on investment.

We will be working to pull the levers that will help us return this metric to historic levels.

Some of those key levers on which we are focused include: one, increased sales in comparable stores; two, increased EBITDA as a percent of sales.

We are still aiming to reach our 14% to 15% goal, but given the economic environment, it is going to take a while to do so.

Three, maximize the productivity of our capital spending; and four, continue to edit our assortments and improve inventory turnover.

Like all retailers the recent sales decline have resulted in lost ground on our returns, and we need to work hard to become more productive again.

It will take time, but we do intend to get there.

We made a series of announcements earlier this month that together are expected to help us achieve those objectives.

Let me just quickly summarize them again.

One, we are rolling out the My Macy's structure designed to better localize our offering market by market and drive comp store sales; two, we are restructuring the company and cutting other expenses so that we can fund the My Macy's rollout in dollars as well as in talent.

The people part of this is very important because we believe that the merchandising and planning talent that we were able to take last year from the divisions that were being consolidated helped accelerate our success in the new My Macy's districts.

And remember that even after these investments back into the field, we are saving expense of $400 million on an annual basis, of which $250 million is expected to be experienced in 2009.

This will involve $400 million of one-time costs, of which $30 million was booked in 2008.

Three, we cut capital spending to $450 million from the $900 million spent last year and our original budget of over $1 billion.

Four, we are reduced our dividend, saving approximately $138 million a year.

And lastly, we completed a successful tender for $680 million of debt that was coming due later this year, saving approximately $7 million in interest expense.

We still expect to pay down the remaining $270 million when it matures in April and July.

So we feel good that we are managing as well as possible in this environment, never the less with the economy and retail spending weak, the sales and earnings outlook is not what any of us would like.

As you know, we are assuming a comp-store sales decline of 6% to 8% in 2009, and given that sales assumption, we are guiding to earnings per share on a diluted basis, excluding the restructuring-related costs of $0.40 to $0.55 a share.

As we said before, we expect sales to be tougher in the spring season than in the fall.

The good news is, if sales are stronger, which we believe is possible in the back half of the year, we are wired to convert a lot of that incremental volume straight to the bottom line.

Assumed in the guidance is an increase in gross margin rate in the back half of the year, due to the fact that we expect inventory to be at a level consistent with sales unlike in the fall of 2008.

Apart from that opportunity, we think it will be tough to improve our gross margin rate, given the economic environment and the resultant need to stimulate demand.

For SG&A, we are expecting lower dollars, but due to the assumed sales drop, the rate will increase.

We are assuming flattish interest expense for the year, and depreciation and amortization approximately $50 million below 2008.

Our tax rate is assumed to be approximately 37%, although, as you know it will very quarter-to-quarter.

As you think about cash flow projections for 2009, as opposed to the earnings, here are just a few of the key assumptions as of now.

First, we mentioned the CapEx of $450 million; two, the restructuring-related costs of $400 million.

While $30 million of this was booked in 2008, we are assuming all $400 million will go out in 2009 from a cash perspective; three, pension contribution.

In September 2009, we are expecting to make a $175 million payment, although as the actuaries determine the liabilities as of 1/1/2009, combined with the impact of the poor returns last year, this estimate could go up as high as approximately $250 million.

In addition, this year, we will be making quarterly contributions of $30 million per quarter.

We are now required to make these quarterly contributions, because we no longer have a credit balance based on our prior contributions above minimum requirements.

And the forth assumption is that in 2009, we expect inventory to continue to be a source of cash as it has been in 2008.

The bottom line is that given the assumed sales drop and the resultant EBITDA drop in combination with the costs associated with the restructuring, as well as the pension contribution, we expect lower cash flow from operating activities, net of investing activities, than in 2008 in spite of the much-reduced capital spending.

However, in 2010 and beyond, when the restructuring costs are behind us, we would expect to return to at least the 2008 levels of free cash flow generation.

In closing, I think it's important to note that Macy's, Inc.

has been very aggressive and proactive in addressing the challenges in our business head on, in doing what was necessary to prevent issues that could have become obstacles in the future.

We've made many tough decisions and taken what we consider to be bold action to both drive sales, profitability and also to preserve cash.

Given the opportunities we see ahead for both our Macy's and Bloomingdale's brands, we see Macy's, Inc., better positioned than ever for the future.

And with that I'll take your questions.

Thank you, ma'am.

(Operator instructions) We will go first to Charles Grom with JPMorgan.

Thanks, good morning, Karen.

On the $96 million charge for store impairment that you reported, how many stores are in that bucket that you described earlier?

You know something, I don't have the list in front of me.

I think it's around -- I don't think it's more than 10.

It's a relatively small number.

Okay.

And as I said most of them are the ones we have been talking about that we would like to close, but really can't.

Got you.

Okay.

And then on the cost savings that you outlined for the year, can you break down how much you think that will flow through the P&L by quarter for this year just to help us model that?

I don't have it specifically by quarter, but most of it -- very little will happen in the first quarter and then it will start to feather in with more of it in the fall, third and fourth quarter than the second.

Okay.

And then last question I have is just relative to your '09 outlook, can you give me a sense for the EPS sensitivity for every one-point comp move whether it's up or down if you have that handy?

I don't have it handy.

The way we normally think about it is when sales drop below plan, we try to save $0.15 of the dollar in expense, and when sales increase above plan, we try to add no more than $0.10 of the incremental sales.

So that may help you get a sense.

Okay.

Yes, my math I get to about $0.05 or $0.06 per --

I don't have that in front of me, so --

Okay.

Thanks very much.

Sure.

We go to Liz Dunn with Thomas Weisel.

Hi, good morning.

Good morning.

I had a question about the deterioration you saw at Bloomingdale's in the quarter.

Is there any more detail you can share on that?

Is there any kind of customer shopping patterns that you are standing out there?

Are they similar to what you're seeing at Macy's.

No, I think what is happening with Bloomingdale's it more like what you are seeing in the upscale segment.

The good news is they continue to beat the upscale competition, so they're good relative to their peers, Bloomingdale's doing well, and I think also they are getting hit by the weakness in New York City, with obviously two major stores here, at 59th Street and Soho.

Is the inventory situation at Bloomingdale's similar to where you are positioned with Macy's?

No, their inventory is down more as a result of their sales being weaker.

Both Macy's and Bloomingdale's are well positioned in terms of their inventory relative to their sales trends.

Okay.

And then finally, just a question on the mall environment overall with some mall operators shortening hours, and a lot of vacancy, do you see this posing any additional risk to your business?

We are not hearing that as being a major issue right now.

Obviously, in weaker malls it is not a good thing, but we have not heard that as a major issue yet.

Okay.

Great.

Thanks, good luck.

Thank you.

We'll go to Michelle Clark with Morgan Stanley.

Thank you, and good morning, Karen.

Good morning.

The first question in your comp estimate for the full year, down 6% to 8%, can you tell us what you are assuming in terms of share gains from competitors store closures?

And then the second question relates to credit, and specifically, what did you see in the fourth quarter in terms of penetration versus a year ago, charge-off, delinquency rates, and then the payment rate during the quarter?

Thank you.

In terms of -- we do expect to benefit from some of the store closures.

I don't have a specific number as to what that might be.

But obviously in any mall or market where we're in and there are store closures, we expect to get more than our share of that volume that's freed up.

Right.

And so some of that is embedded in your guidance?

Yes.

Okay.

In terms of credit, in the fourth quarter, we have continued to see an increase in usage of our card.

Yes.

So the proprietary penetration went up significantly more than we expected, about 190 basis points versus a year ago.

But like others with the credit business, we're clearly experiencing weaker trends in terms of delinquencies.

Yes.

Just like it's prevalent throughout the industry today.

And the payment rate, Karen, during the quarter?

Something -- I don't have that in front of me, but I do know it's down from a year ago.

Okay.

As it has been all year.

Okay.

That's helpful.

Thank you.

We go next to Lorraine Maikis, Banc of America.

Good morning.

Can you talk about your plans for private label in the context of My Macy's?

Do you expect that to increase or decrease as a proportion of your total store?

Last year private brand was about 19% of the store, and I think we continue to look for opportunities where there are voids in the market.

So I think it's early to be able to tell you whether there's any big opportunities, but I know Tim Adams who is now running our private brand operation is working very closely with Jeff Gennette the new Chief Merchandising Officer, Julie Greiner, the new Merchandise Planning Officer, to see if there are more opportunities, and I think we'll know more six months from now if there are more opportunities based on My Macy's preferences.

And then just to follow up, are you hearing from your customers that they want more entry price point products and do you expect to work with your vendors to provide those for them?

Honestly, what we're finding is value selling at different price points, so I don't think it's so much the opening price points per se.

But obviously, we're trying to work with our vendors to get the most desirable assortments we can with the most value.

Thank you.

We go next to Robert Drbul with Barclays Capital.

Hi.

Good morning, Karen.

Good morning.

I have got some questions on the pension.

Can you give us at the end of the period, the funded status, exactly where it was in a percentage number for that?

The problem with that is it takes the actuaries until midyear to get to that funded status.

As you know we're aiming to hit 80%, but we won't know until this summer right before we have to make the September 15th payment what that number will be.

Okay.

And just from a clarification perspective, I want to make sure I have this, are you saying that the pension contribution is between $175 million plus $250 million plus four quarterly payments of $30 million?

That's correct.

Okay.

And when you look -- as you look out a little bit further from the contribution perspective, for 2010 is there a way to think about that going forward for us?

Right now I'm focused on estimating 2009.

My guess is we will be continuing to make contributions.

Will it be at this level?

I don't know.

It obviously depends on what happens to the returns on the assets over the next year as well.

Okay.

And then just one final question on the New York exposure, is there a number that you would give us in terms of the percentage of your sales now that are generated from the New York City market?

You know something?

I don't know that percentage offhand, Bob, sorry.

Okay.

Thank you very much.

You bet.

We go next to Teresa Donahue, Neuberger Berman.

Good morning, Karen.

Quick question for you.

When you were talking about the performance of the already converted My Macy's stores you referenced a decline of over 5% relative to total stores in the first half reversing to a positive 1.3% -- 1.5% spread.

In the first half, were those stores considered to already be -- have been converted and have had the full benefits?

No, in the first half they had almost none.

Okay.

Remember, we announced it this year -- this time a year ago.

And we were putting the new organization in place early second quarter.

I just had lost track of the time.

Yes, no, I know.

It is hard to believe it was just a year ago.

Yes.

Thank you.

You bet.

We go to Jeff Stein with Soleil Securities.

Good morning, Karen.

I just want to make sure I understand on cost saves, you are expecting $250 million of the $400 million to hit this year?

Correct.

Plus you have got the incremental $40 million from last year.

Got it.

Okay.

And can you talk about the new merchandise from the 230 or so pilot stores that were converted last year?

Is the merchandise coming in yet, and are you seeing any signs of perhaps a further incremental lift?

It's too early to judge.

It has just been a couple of weeks in February.

So we'll continue to update you as we go.

Got it.

Okay.

Thank you.

We'll go to Bernard Sosnick, Gillford Securities.

Good morning.

Good morning.

With regard to the goodwill writedown, the asset impairment, the May stores were performing better, closer to the Macy's average as the year progressed.

Could you give us a little bit of insight as to why the impairment charge is as large as it is likely to be?

Yes, I think -- and I'll try to do this simply.

The way you determine step one of the goodwill charge is you project out cash flows and discount them back.

You then compare that value to the current market capitalization of the company, and the difference is what is called the premium between the two.

Yes.

And the accountants are uncomfortable if that premium is too high, so we're limited to some degree because that premium is somewhat set, and so therefore, you have a bigger writedown than you might have expected, because we're only allowed to assume a premium of, say, 35%.

And given how depressed the stock price relative to what we believe the long-term value of the assets, you end up with a bigger write-off.

Okay.

So it's the stock price --

It's really the stock price driving it, not the cash flows of the entity.

Yes.

That being said, could you give us a little bit of a picture of what the former May stores looked like relative to your expectations at Macy's, just so we have that?

We long ago stopped tracking that.

Yes, I know that.

I have no idea anymore what is the May store versus the Macy's.

That difference disappeared a long time ago.

Right, but --

And remember, the goodwill is based on the total company not just the May store performance.

Okay.

Okay.

All right.

Thank you very much.

That helps.

Okay.

If you have more questions, let us know.

It's complicated.

I will.

We'll go next to Uta Werner, Sanford Bernstein.

Good morning, Karen.

I have a question related to the malls you're in.

And I wonder to what extent you have been trying and/or successful in renegotiating some of the rents in the rental properties, and also whether you are seeing landlords increasing common charges in the malls, given that potentially some other tenants are falling out?

We have not seen an attempt to increase charges.

And remember, we have long-term agreements, and we also have not made a lot of progress in terms of reducing rent, again, because of the long-term agreements that we have.

There are a few isolated cases, but I would not say it has been anything widespread.

Several of my clients have asked, and so I'm asking you, to what extent the deterioration in the gross margin in the fourth quarter would have been a result of vendors being more reluctant to pay gross margin payments in the situations when you discount aggressively, and to what extent that is a signal for what is ahead in '09?

That really was not an issue.

The issue was that we took significantly more gross markdowns given the sharp decline in the sales in the fourth quarter, and the inventory levels were not that low as we started the quarter.

I can't comment on every single vendor negotiation, but we were very pleased with the partnership between Macy's and our vendor partners as we got through our fourth quarter.

And finally just a followup on the goodwill, is there a scenario here where potentially the entire goodwill is written off and therefore taking all of the equity of the balance sheet from a book value perspective?

I don't think so.

I think we have got a pretty good handle on the range that it will be.

So this could be the worst case, potentially better but not necessarily worse?

No, I think it should be within the range.

Okay.

Alright, well thank you, Karen.

I'll learn more as we go, remembering we have to revalue every single asset in the Macy's portfolio.

So there are some uncertainties, but you are somewhat bound -- I think it should be within this range.

Okay.

Well, thank you, Karen, very much.

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

Good morning, Karen.

Can you talk a little bit about the direct business and how the margin opportunities or structure, how is that different or not compared to the retail business, how it is changing in this environment?

Yes, the direct business is really the same as a retail business.

I mean, the truth is we manage it all as one, so it's really hard to give you any differences per se.

And in terms of just vendors overall, anything different on timing of flows, price points of flows, as you plan your business this year and into next year?

Not that I'm aware of.

Thank you.

We'll go to Lance Vitanza with Knighthead Capital Management.

Hi.

Thanks for taking the call.

I just had two.

The first is, can you give me a feel for how big New York City is in terms of percentage of revenue?

No, I'm sorry.

Bob had just asked that.

I don't have that on me.

Okay.

And what about -- I have been personally hearing anecdotes that stores are too thinly staffed and customers are leaving turned off.

Have you been hearing the opposite of that or have you been hearing that, or how do you gauge that and is that something you're about?

I'm also concerned about that if in fact that's happening, and as sales have declined there's also that risk.

The only thing I can tell you is that we measure very carefully through customer response letters, and feedback on websites, and in 2008, it went up significantly from 2007, so at least the scores that we track would seem to indicate that we're doing okay.

But when you have got sales results that we have had and the result in expense cuts, I do worry about the issue, but it seems not to be as bad as what you are implying.

Thanks.

We go next to Mike Shrekgast with Longacre.

Oh, thank you.

My question was answered.

We go to Todd Duvick with Banc of America.

Good morning, Karen.

Good morning.

I appreciate the guidance you provided on cash flow, and based on that, it seems like you are not going to have a material amount of free cash flow to the buy back additional debt if that were an option.

And so I guess what I'm wondering is, you pulled a lot of levers already in order to shore up the balance sheet and liquidity and maintain credit metrics.

Are there other levers that you have that that you can pull such as asset divestitures or other things that I'm not seeing?

There really aren't -- there's not a long list of major things we could do.

We could buy in more debt, but most likely would not do that until after we get through our peak borrowing next November.

Again, because given the uncertainty and the volatility in the environment, we are conserving cash.

Right.

So even though we know there are some good deals to be had if we wanted to buy it in now, chances are we're going to wait and see what happens with the environment.

Okay.

Fair enough.

Thank you very much.

We go next to Deborah Weinswig with Citi.

Good morning, Karen, and we all really appreciate the color on the My Macy's performance.

In terms of the dunnhumby relationship, we know it is early days, but can you please provide us an update there?

Well, I think we continue to work on developing tests to help us both in terms of how we communicate with customers, but also further into assortment and pricing and other issues as well, but it's just too early, Deb, to be more specific, but as you said, we're very optimistic that it is going to help us drive sales going forward.

Okay.

And then secondly, we just heard from another retailer this morning about their precipitous decline in online sales in the fourth quarter, which was definitely not your experience.

Can you please share with us what you think is driving your strong online business?

I don't know, honestly.

I appreciate that.

We're very pleased with it.

I think that the team working on Macys.com has done a terrific job of integrating it more and more with the store experience.

So I think that's a piece of it.

I think the site looks better than ever.

The assortments are sharp and more in stock.

I have to believe that helps, but I'm surprised.

And then last question, obviously a lot of focus in terms of expense reduction efforts.

How should we think about your leverage point going forward?

Well, at this point, I think we're taking a large chunk out this year, but then once that comes out, we'd be back to wanting comps of 1.5% or more before we could lever comp sales.

Okay.

Incredibly helpful, and best of luck.

Thank you very much.

We go to Andrew Berg with Post Advisory Group.

Hey, Karen, with respect to the restructuring costs and the $400 million, how much of that gets spent 1Q versus 2Q?

I assume that by the end of the second quarter it's all spent.

Well, most of it is spent in the first half of the year, but there will be some that continues in to Q3 and Q4, but it all should be spent this year.

I don't have a good estimate yet by quarter to even help you potentially looking at last year might help you a little bit.

Okay.

And on the cost for the pension, you said there would be the $30 million per quarter in addition to the lump sum that may be in September.

Correct.

The $175 million to $250 million.

And that's all just a cash flow item.

None of that flows through the P&L?

That's correct.

Okay.

Great.

Thank you.

You bet.

We go next to Adrianne Shapira, Goldman Sachs.

Thank you.

Karen, you had mentioned that you are intensifying your returns focus and you're targeting getting back to 2008 levels in terms of free cash flow.

Could you help us understand what that means for CapEx going forward?

You have CapEx of about $450 million, so what sort of normalized run rate would that imply?

That's a very good question.

We are working very hard right now with the new team to really start almost zero-based budgeting in terms of what the CapEx should be in 2010 and beyond.

I don't think we'll get back anywhere close to the $1 billion level, but it's frankly premature to give you a number once we turn the spigot back on what that might be.

Right.

Thank you.

And then just a question, as you said you're outperforming your peers, with comps down 7%.

You had mentioned, I think AUR down 2% does that imply traffic down 5%?

And if that's the case, perhaps help us understand how you are achieving better traffic trend than your peers.

Yes, and that was in the fall, AUR was up 2% for the year as a whole.

Flat for the fall and down in the fourth quarter.

Okay.

I think our assortments are compelling.

I think the limited distribution merchandise and the brands that we offer, both market brands and our own private brands, are special and the customer recognizes, not only the fact that it's affordable fashion, but also great value, and I think our stores are doing a better job servicing the customer.

Our marketing has been very successful.

The Believe campaign in the fourth quarter hit unprecedented levels in terms of customer reaction, and I think when you put it all together, I mean, frankly it going back to the four priorities that we focused on for the last couple of years that really are paying off.

Okay.

And that's helpful, and then just lastly, you mentioned you are expecting sales to be tough in the spring season, or heading into an Easter shift.

Any better color in terms of the near term how you would expect sales trend to flow in the near term?

Not really.

There's not a shift between quarters in terms of the sales, so we'll just have to see how it goes.

Okay.

Thanks, Karen.

You bet.

We go next to Christine Chen, Needham & Company.

Thank you.

Can you hear me okay?

Yes.

Wanted to see within women's are there certain product categories that are performing better than others?

Is contemporary performing better than traditional missy?

I think what we had said, at least for the fourth quarter, was that women's suits had done well.

I think more traditional looks are doing well, but there's success within contemporary also.

Can you comment on just how premium denim is doing and denim as a category?

No.

Okay.

Thank you.

We go next to David Glick with Buckingham Research Group.

Good morning, Karen.

Just a follow-up question on My Macy's.

In what your view what will be the first season where you'll have the full impact of the My Macy's buy where the districts will be able to roll up their plans on the Affinity system, and the merchants will be able to utilize them fully in front of their buys?

I think if we look at a year ago, we began to see some progress in the fourth quarter, so I'm hoping to see that, but it will be really be spring of 2010 before we can make a major impact in terms of merchandise.

Okay.

And that's why you are viewing the flow of comps this year similarly in terms of how the My Macy's districts performed in the pilot last year, and trying to use the same thought process in that the merchants won't -- in the My Macy's structure, won't have as much of an impact until later in the year?

Correct.

Okay.

And then just to follow up on gross margin, your inventories seem to be much more in line, you are expecting second half improvements.

Should we think of the first half as flattish in your view, or perhaps down modestly, in the second half, up modestly?

Any color on that would be helpful.

My guess is there would be a little more pressure in Q1 than Q2.

But it's just too hard to predict right now.

Okay.

Well, that's helpful.

Thank you and good luck.

Thank you.

(Operator instructions) We go to Rob Wilson with Tiburon Research.

Yes, thank you.

Karen, you have had about -- I guess to my account is $1.4 billion in restructuring charges since 2005, and we never really get a sense for what these costs are, what major buckets they fall into.

Can you give us some sense for maybe going forward the $400 million?

Sure.

I mean, the major costs relate to people and it's severance and relocation in all of these.

And beyond that, it's systems integration, some things like that, but most of it relates to people-related costs.

So no major like lease exit cost or -- that would be a major component of that?

No.

Okay.

And one other question is there a shift in marketing dollars in 2009 versus 2008, greater or lower than last year?

Well, given the sales decline, we will most likely spend fewer dollars, but obviously the rate will go up.

Okay.

Well, thank you.

We go next to Mary Gilbert with Imperial Capital.

Yes, I wondered if you could give us a little bit of guidance on the inventory reduction, or the net cash that you expect to generate from working capital.

Should we use the commensurate -- the decline in revenues that you are giving us, 6% to 8% decline or --

By the time -- it's hard to give you that answer today, because it will relate to what we're expecting for the sales trend in spring 2010.

Yes.

Because you'll want to end the year with the right inventory levels there.

So it's hard to give you a precise estimate right now, but I would say that we would want to end the year close to what we're expecting for 2010, which, obviously I don't know yet.

Got it.

I got it.

So in other words when we look at the inventory, we may not necessarily see a decline.

Is that fair to say?

Year over year, you should see a decline.

Okay.

It's just the magnitude of the decline?

Correct.

And then how should we look at cash taxes?

That's a hard one to help you with in terms of predicting, so I don't have a good estimate in front of me, but that's -- I don't know the answer to that.

Okay.

All right.

Great.

And then also on the timing of the rollout of My Macy's, is that rolling out immediately, and so that all of the regions will have that in place before the holiday season at the end of the year, is that correct?

What will happen is we're in the process right now of restructuring and building the new organization here in New York for the merchandising, marketing, etc., and finance and HR in New York and Cincinnati.

So that's all going on right now, as well as beginning to fill the district jobs that we hope will be filled early in the second quarter like we had done last year.

So hopefully that will be in place by the end of the second quarter at the latest.

Okay.

And then finally with regard to the comp store sales trends, so at the stores, comp store sales are running down 6% to 8%.

Is that correct?

We expect comp store sales to be down 6% to 8%.

At the stores.

I'm not sure what you mean by at the stores.

Well, I mean sometimes -- it doesn't include online, I guess.

Oh, it does include it.

Because, again, it is all being run as one business.

Right.

I understand.

So you don't separate what the trends are in the stores?

Correct.

Okay.

All right.

And then can you give us an idea of the magnitude of the declines at Bloomingdale's versus Macy's.

No.

Okay.

Alright.

Thank you very much.

You bet.

(Operator instructions) We go to Leah Hartman with CRT Capital.

Good morning and thanks for making my questions.

Just to follow-up on Mary's question about cash taxes, do you have that for the fourth quarter or not yet?

Well, I mean, you see the cash flow.

Yes, I did.

So that's all the information that we provide.

Okay.

And the cash rent expense for the year?

I don't have that yet.

Okay.

And looking rather far out, just on the timing of site selection as we see certain malls and store closures from competitors, as you look to -- at a new site, once you make a site selection, how long does it take for you to then open the store, if it's a previously built mall?

You are talking about moving into a competitor's store?

Just moving into a new market.

With a store that we have to build or a store --

No, a store that's already built that you'd have to --

So a competitor closes, we move in?

Yes.

It depends on the condition of the store.

There's no one answer.

Okay.

Thank you.

And we'll go a follow-up question from [Mike Shrekgast], Longacre.

Was just wondering when you -- do you know what kind of addbacks are added back in your covenant calculation, your adjusted net-debt to EBITDAR calculation?

Sorry, your net-debt to EBITDA calculation?

You mean what's added back into EBITDA?

What doesn't count are the restructuring charges up to -- starting in this quarter up to $500 million, plus --

And that's beginning this quarter?

Beginning in January, really --

Okay.

-- after the deal became effective.

Okay.

And then also any non-cash asset impairment charges or write-offs.

Okay.

Okay.

Thank you.

We go to a another follow-up with Rob Wilson, Tiburon Research.

Yes, Karen, I believe on the last conference call, a couple of weeks ago, you said you had no cash flow negative stores going forward.

Is that still the case?

No, we said we had no cash flow negative stores that we would be able to close.

There's a few that are cash-flow negative, but we can't close them.

Okay.

Thanks for clarification.

Also depreciation expense.

You said that's going to be lower by $50 million.

Why would that be this year?

Because the CapEx budget was lower last year --

Okay.

-- and this year.

Thank you.

At this time we have no other questions.

I would like to turn the call back to Ms.

Hoguet for any additional or closing comments.

Okay.

Well, thank you all.

And if you have more questions let Susan or I know and we'll do our best to provide answers.

Thanks, have a good day.

And again, that does conclude today's call.

Thank you again for participating.

Have a good day.