梅西百貨 (M) 2009 Q3 法說會逐字稿

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

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

Please go ahead.

Thank you.

Good morning, and welcome to the Macy's, Inc conference call scheduled to discuss our third quarter earnings, which we released earlier this morning.

I am Karen Hoguet, CFO of the company.

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

A replay of the call will be available on our website, www.macysinc.com, beginning approximately two hours after the call concludes.

Please refer to the Investor Relations section of our website for discussion and reconciliations of any non-GAAP financial measures discussed this morning.

Keep in mind that all forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the company's most recently filed Form 10-K and Form 10-Q.

Our third quarter performance exceeded our expectations, driven by our improved sales performance.

Our comp store sales decline of 3.6% improved almost 6 full points from our spring trend.

On a two-year basis, the third quarter comp store sales were down 4.8%, which represents a 1 point improvement relative to the first six months of the year.

That is very encouraging, and as I will discuss in a few minutes, bodes well for the very important fourth quarter.

We were also pleased that we were able to produce these sales at a higher than usual incremental profit rate.

I will start today by highlighting some of the key components of our third quarter performance and then I will discuss our updated outlook for the fourth quarter.

Sales in the quarter were $5.277 billion.

We continue to see strong results in the My Macy's pilot districts relative to those stores that were not converted until this year.

This continues to be very encouraging, particularly as these stores year-round on last year's improved performance.

The pilot districts in total still outperformed the legacy doors by 1.9 points.

We expect to begin to see the impact of My Macy's out there the company in the coming months, and therefore making this comparison will no longer be as meaningful.

We are gaining confidence that this unique structure that provides such terrific local input will give us a real competitive advantage.

Geographically, sales continued to be strongest in the Midwest relative to a year ago, but we saw improved performance in every region.

Bloomingdale's had a particularly strong quarter relative to expectations and the year to date trend, and both of our dot-com businesses had fabulous quarters.

Our multi-channel strategy is really beginning to take hold.

In the quarter, the average unit retail was down about the same percent as comp store sales.

This decline in average unit retail is about the same as it has been year to date.

That would indicate that the transaction volume and presumably traffic improved in the third quarter relative to the spring season, when the sales declines far exceeded the reduction in the average retail.

By family of business, we had strong performances in moderate sportswear for both men and women, coats, shoes, home textiles, housewares, and mattresses.

In addition, we experienced improved trends in cold-weather goods, like hosiery, dress accessories, and men's furnishing as you would expect with the colder weather, but we also saw improvement in the quarter in furniture, better sportswear, and men's collections.

Private brands and exclusive brands were also very strong in the quarter, as they have been all year.

Our ability to offer great fashion at great value in our own brands is really paying off.

The weaker businesses in the quarter included dresses, fragrances, men's shoes, handbags, and table tops.

The gross margin rate in the third quarter was 40.2% or 70 basis points above last year.

This is better than we had expected, demonstrating the potential when sales improve and stock levels are 7.4% below a year ago.

SG&A before division consolidation costs in the quarter was $2 billion or 2.5% below last year.

As a percent of sales, SG&A was 38.5%, up 50 basis points versus last year, due to the lower sales.

The expense dollars were below last year, due to the transformation to one Macy's, offset in part by higher stock-compensation expense, bonus accrual, and lower credit income.

We expected the expense comparison to last year to be more unfavorable than what we had experienced in the second quarter because, as you know, we year-rounded in the third quarter on the first wave of My Macy's consolidation savings that had occurred in early 2008.

Operating income before division consolidation costs in the third quarter was $88 million versus $84 million last year.

We are hopeful that this is the beginning of a new trend of producing growth in operating income.

Division consolidation costs in the quarter were $33 million.

Year to date, those costs were $205 million.

Interest expense was $137 million, down from last year's $143 million, and the tax benefit in the quarter was $47 million versus $31 million last year.

Our loss per share excluding division consolidation costs on a diluted basis was $0.03, which is $0.05 better than last year.

As a result of our strong cash flow this year, we now do not expect to utilize our working capital facility at all this year.

When we started the year, we had planned to access it a few times throughout the year, especially now.

This demonstrates both the potential of this business to generate cash, even in tough economic times, and also the benefit of our discipline and focus on managing cash.

In the quarter, or year to date, the cash provided by operating activities net of investing activities was $109 million as compared to a use of $289 million last year, or a $398 million spread.

We actually ended the quarter with more cash on our balance sheet than a year ago, even after paying down $964 million of debt this year.

In the quarter, as we had told you, we made a $60 million contribution to the pension plan, bringing us to $146 million contribution year to date.

As discussed in August, this was all that was required to achieve our desired 80% funding level as of 1/1/09.

We will most likely make another contribution in December, which in total will take us to the contribution level discussed at the beginning of the year, which was $295 million to $370 million.

As we look to the fourth quarter, we are cautiously optimistic.

We are encouraged by recent trends, and now expect the fourth quarter sales to exceed our prior plan, as sales did in the third quarter.

We are now assuming that comp-store sales will decline in the fourth quarter only 1% to 2%.

This would translate to minus 2.1% to minus 2.6% for the fall season, which is obviously much better than our prior guidance of minus 5% to minus 6%.

On a two-year basis, this fourth quarter comp-store sales assumption equates to minus 4.2% to minus 4.7%, which compares to the minus 4.8% I had mentioned before for the third quarter.

I would be remiss, though, not to mention that there is more uncertainty than usual in the environment.

We, like you, are trying hard to forecast what this environment will mean for holiday sales and profitability.

It isn't easy.

Unfortunately, we all are just going to have to wait and see.

All of us need be careful not to judge based on one day, one week, or even one month's business.

The key to managing in an environment like this is staying close to the details and reacting to trends by department, by vendor, and even by item.

We must react quickly to what is selling, and to what is not.

Fortunately, our new My Macy's structure is more nimble than we have ever been before, and this is allowing us to be able to make decisions faster than ever.

We are also now working in a much more collaborative way with our new vendors as a result of the new structure which is also helping, and our new field organization is enabling us to more quickly and accurately read the pulse of our customer.

This real-time feedback from our very experienced field organization is paying off.

Given last year's weak fourth quarter gross margin rate performance, we are anticipating a significant increase this year, but it is very hard to predict.

Given the third quarter's margin improvement, we have hope that it will recover significantly, but it is obviously hard to forecast in this environment.

We are still anticipating an increase in SG&A dollars and rate relative to last year as we had guided at the end of the second quarter.

Remember, we consciously shifted some selling and marketing dollars from earlier in the year so that we would be prepared to be more offensive in the fourth quarter.

The expense dollar increase in the fourth quarter also relates to expected bonus accrual this year relative to last year's bonus accrual reversal, the higher stock-based compensation expense due to the higher stock price as well, as last year's insurance proceeds from Hurricane Ike.

Without these three items, SG&A dollars are expected to be down slightly versus last year.

We are still expecting restructuring costs of $400 million, with the cash portion approximately $325 million to $350 million.

Assuming the comp-store sales achieve the improved expectation of minus 1% to minus 2%, we would now guide you to a range for earnings per share excluding the restructuring costs of $1 to $1.05, or for the full year, $1.01 to $1.06.

This compares to our original guidance for the year of $0.40 to $0.55 and our latest update of $0.70 to $0.80 per share.

We are well prepared for the upcoming holiday season.

Macy's and Bloomingdale's both will have outstanding assortments that deliver obvious value to our customer.

Marketing support will be strong.

The stores look terrific and have localized their offering to a greater extent than in the past.

Our inventories have been well edited to add clarity to the selling floor.

While the direction of the economy remains unclear, there is a sense of momentum at Macy's, Inc that we believe positions us to gain market share despite the environment.

And now we'll open the call up for any questions you may have.

Thank you, Ms.

Hoguet.

(Operator Instructions).

First question comes from Michelle Clark of Morgan Stanley.

Good morning, Karen, how are you?

Good, Michelle.

Good morning.

Good.

Question for you.

The percent of stores localized today versus what the goal is over the next 12 months?

And then I have a followup question.

Well, there are 69 districts in total.

In May of 2008 we converted 20 of the 69, and in May of 2009 we converted the remaining 49.

So at this point, the My Macy's structure is throughout the company, but it will take a little bit of time before the localized assortments are fully in the stores.

So we had said that we expected that to happen in spring of 2010, but like last year, we're hoping to get some early benefits in the fourth quarter.

Okay.

So I know that you said the goal is to get 10% to 15% per store localized.

How can we think about that today?

Is it 5% of the store that is localized?

I don't have a number on that.

My suspicion is it's more than that in total, although in some categories where we could react quicker, it could be that or more.

Okay.

And then the other question is on the SG&A line, can you give us a sense of how much of that $290 million has been realized?

Is the bulk of that done for the first -- for 2009?

Well, there's two pieces to the savings.

In the consolidations in the spring of 2008, we had said $100 million, of which $60 million was recognized last year.

So there was an incremental $40 million for the first half of 2009, and that has been realized, and we year-rounded on that as we get to the third quarter.

The second consolidation savings was from February of this year.

That was an additional $400 million, of which we expected to realize $250 million.

I think your $290 is that $250 million plus $40 million.

But the timing is a little bit different because the $40 million was all in the spring.

Right.

But the $250 million was later in the year.

As we forecast the fourth quarter, we will have achieved more than $250 million this year.

Hard to pinpoint an exact number.

And as we look to next year, the question is will the $400 million be the number?

Is it bigger?

And that's a harder thing to tell you until we're done with our 2010 planning.

All right.

Great.

Thanks, Karen.

And next is Steve Kernkraut of Berman Capital.

Hi, Karen.

I have a couple of questions.

One is with your sales being much more optimistic in terms of your comp-store sales being down only 1% or something like that.

I'm not quite sure why you are not assuming a more robust gross margin in assumptions, where you have 70 basis point improvement this quarter?

I mean, what are you seeing in the fourth quarter that's different?

And secondly, for 2010, shall we be assuming any more charges or one-time charges, or are we finished with that now during the fourth quarter?

Let me start with the easy part, which is the one-time charges.

We will be done after the fourth quarter.

At this point, we have transformed the company, converted the names to all Macy's, consolidated all of the divisions to one structure.

So that is all behind us.

The harder question is margins, and it's very difficult thing to project.

We are not expecting the fourth quarter to be more promotional than it was a year ago.

If anything, it will be the same or maybe a little bit less.

How that translates into gross margin rate, we'll have to see.

We obviously have never experienced a decline in margin like we did last year in the fourth quarter.

With our inventories low this year, obviously we expect to recover a significant portion of that.

Will it be all?

It's -- I guess if I put myself in the shoes of a merchant, it would be hard to commit to that improvement.

But if I take myself in to -- your shoes, my shoes, you might ask, well, why not?

And we'll just have to see how the quarter goes.

Okay.

Thanks very much.

And next we have Liz Dunn of Thomas Weisel.

Hi, good morning.

I think just to -- not to beat a dead horse on this gross margin question, but would it be appropriate to think about it as a similar rate of improvement to which you saw in the third quarter?

It's just that the guardrails here are so wide, and we're just trying to get a sense of how much opportunity your guidance suggests.

I would say my expectation is it will be at least as great as the improvement in the third quarter.

Okay.

And then just one question on your advertising.

I have seen one of the TV campaigns, the Nostalgia [source] campaign, and I think there's one with Martha and everyone else around a holiday table -- can you just talk through how much TV versus other promotional vehicles you'll have for the fourth quarter?

What is your approach there?

I don't know the media mix for the fourth quarter.

Obviously the television has become a more and more important part of our strategy as we become a national retailer, but I don't know the specifics.

Okay.

Thanks, good luck.

Thank you.

And next is Deborah Weinswig of Citigroup.

Good morning, Karen.

A few questions here.

Can you talk about the credit card performance in the quarter?

Interestingly, the usage on our card has continued to be quite good.

In the third quarter, it was actually a little bit over 50% or 1 point above last year, and year to date, it's about 48%.

So -- and more than 1 point above the prior year.

So customers are continuing to use the card, and use it more.

In terms of the performance of the portfolio, I would say that the delinquencies have stabilized, but write-offs -- and by the way, stabilized at a high level, and write-offs where there's a little bit of a lag continue to increase, which is why there is some pressure on the profitability.

But not seeing the deterioration we had seen a year ago and earlier in the year.

And it really seems online -- or multi-channel -- both that Bloomingdales and Macy's have hit an incredible run rate or inflection point, however you want to look at it.

Can you talk about -- there had been some investments in the business.

Could you talk about the traction that you have built with consumers, and how we should think about that going forward?

I think we have only begun to realize the potential of the multi-channel integration.

I think both websites from a functionality perspective are performing better than ever, look great, all kinds of upgrades to improve how the sites work for the customer.

The two new distribution centers are both operating very smoothly, so the logistics and delivery parts are performing better than ever, and I think the potential that still is yet to be completely tapped is, again, integrating it more with the stores.

We have been testing in Florida a capability called search and send, where a sales associate can go very easily onto the POS device and access all of the inventory in the dot-com warehouses to help satisfy a customer, whether it be for a size or color that we're out of stock in, or perhaps an item that is not carried in that store.

And it's working very well.

We're beginning to roll it out to the -- some of the Midwestern stores as well as Herald Square now, and we'll continue to roll it out in 2010.

Customers are increasingly using both vehicles to shop.

Sometimes they are preshopping online, going to the store to try things on.

Other times they walk through the store, they see something they want, don't have time to stop, go home and order it online.

So I think we're going to see this tremendous growth continue.

Okay.

Last question, can you discuss how Everyday Value is performing, and just give us a sense in terms of what percentage of your business that is at this point in the game?

Everyday Value is actually doing very well.

It's over 6.5% now, which again is relatively small, but in some categories is much more significant, and we believe it's an important part of our pricing mix to the consumer.

Great.

Thanks so much, and best of luck.

Thanks, Deb.

Next is Charles Grom of JPMorgan.

If I recall on the last call you spoke to SG&A dollars being down in the second half of the year.

Obviously the game's changed with your sales improving.

But if I assume a down -- let's say down 1.5% comp, and gross up maybe 40% to 41%, this would imply SG&A dollars up about 5% to 6% or about $135 million in the second half.

Just wanted to see if that triangulates with what you guys are modeling internally.

I'm not sure I really followed all of your logic.

Okay.

Just maybe a little bit of color exactly -- the magnitude of the SG&A dollar increase that you are expecting would be helpful just to better model the fourth quarter.

What we said is we expected to increase, and excluding the -- what I would call chunky items like the bonus accrual and stock-based compensation, we would expect it to be down slightly.

Okay.

And could you maybe go back -- we looked in your [Q].

We couldn't find how much the proceeds from Ike were last year.

Could you just quantify that for us?

No, we have not disclosed it.

Okay.

And I guess my second question would be on the $400 million of integration charges, just surprised that there would be so much in the fourth quarter.

Just wondering exactly what you are expecting, maybe a little bit of color by line item to be, and if there is any chance that that number could come in a little bit lighter?

We'll do that at the end of the quarter after it has happened.

Okay.

And last question would be after you guys make this next pension contribution, just wondering what you are thinking about cash priorities going forward?

Well, I mean the cash priorities have been obviously to spend the appropriate levels of CapEx, make pension contributions as necessary, but the excess cash after that will be used to pay down debt.

Okay.

Thanks very much.

And next we have Jeff Stein of Soleil Securities.

Question.

Given the fact that your sales are going to be -- let's say 2 to 3 points, or you are planning now for sales to be 2 to 3 points better in back half of the year than you were previously, are you at risk of having any significant out-of-stock positions in key items for the season?

Well, I think in every Christmas season, we end up out of stock in the most wanted items.

That's just normal.

But I don't see any risk of any -- I think you used the word significant, of stock outs as we go into fourth quarter.

What's been interesting is because we started the quarter with inventories down 7%, it has allowed us to bring in significantly more fresh goods than we would have normally been able to do in the fourth quarter.

So actually I think we'll be in better shape for the gifting items, because the receipts will be fresh and current for that, as opposed to leftover goods from earlier in the year.

Okay.

And can you talk a little bit about payroll?

Again, given the fact you have replanned the back half of the year, did you -- have you had enough time to reset your store payroll?

Will you have enough employees on the selling floor to service a higher level of planned business?

Yes, I mean -- just like we do on the merchandising side, on the expense side we're reacting to the business every single day.

So we have adjusted the selling expense expectations and payroll relative to what we're expecting on the sales line.

Got it.

Okay.

Thank you very much.

You're welcome.

And next is Bernard Sosnick of Gilford Securities.

Good morning, Karen.

Good morning, Bernie.

With regard to the unified buying structure, you had said you expect some significant benefits in the spring season, and today you mentioned terms such as [edited] assortment, clarity, collaboration with vendors.

Could you give us some color on how the unified structure is developing, and whether or not you are expecting more benefits than you might have three to six months ago?

And I think the benefits you're talking about are on the sales and margin line as opposed to the expense reduction.

Correct.

And I'll just say -- it's hard to tell, but we are very encouraged by the benefits in addition to the localization, which is what we had tested before.

So we think having one merchandising and -- organization and planning organization for the company has allowed us to better edit assortments, have a greater vision across the country, which I think is -- and the collaboration with the vendors, which I think is going to be tremendous.

And you would layer that on top of the My Macy's field structure, where we're getting the localized input on assortments -- I think the potential is huge.

I hope you realize it.

Let me ask about expenses.

I know you haven't planned that for next year, but significant expense reduction will be occurring next year.

You'll also probably be accruing for bonuses and stock compensation.

Off of the top of your head, does it seem as though there could be a decrease in expenses during the first half of next year?

I don't think that's the kind of answer I want to give off of the top of my head.

Okay.

Thank you.

Sorry.

And next is Lance Vitanza of Knighthead.

Hi, thanks for taking the call.

The $33 million in restructuring charges -- was that all in the SG&A line or was some of that in cost of goods?

No, that's all broken out separately on the P&L.

Okay.

I apologize.

And I know you talked about this earlier, but I missed it.

Could you go back over how much cash pension expense you paid in Q3 and how much you expect to pay in Q4?

That's not cash pension expense, that was the contribution.

I'm sorry, the contribution.

That was $60 million in the third quarter, which brings year to date to $146 million.

Earlier in the year, we had talked about a total for the year of being $295 million to $370 million, so the delta we would expect to make in December.

Okay.

And could you do the same for cash restructuring charges?

Well, we said that the year to date was $205 million, I believe.

And for the year as a whole, we were expecting $370 million, which is the $400 million from the restructuring, less the $30 million that had been booked in 2008 at year end.

Okay.

Terrific.

Thank you.

And next is Lorraine Hutchinson of Banc of America.

Thank you, good morning, Karen.

Good morning, Lorraine.

You commented on you being ready to take market share in a difficult environment, and I was just hoping you could walk us through some of your strategies for that, and perhaps what it means for either SG&A reinvestment and recovery or an elevated level of CapEx?

Well, I think the strategies primarily relate to improved assortments, better edited assortments, more with our private brands and exclusive brands which are doing well, as well as simplified pricing and obvious value.

I think those would be the key parts.

Obviously the My Macy's strategy with the localization should help us improve assortments tremendously as we go forward.

So those are the real key things we're focused on.

It's not driven by a lot of incremental expense or incremental CapEx.

Thanks, and then could you just give us an update on some of your private brands and exclusives -- how those have been performing versus expectations, and what we can expect down the road from those?

I mean, the private brands and exclusives are all doing very well throughout.

Inc, Hotel, Alfani, on the men's side also.

Great brands.

And then the exclusives with Martha, Tommy, Rachel Roy, all are also performing very well.

And any plans to rollout Rachel Roy to a broader base of stores?

Yes, we are working on the plans for next spring, and do plan to roll it out.

Great.

Thank you.

Next is Adrianne Shapira of Goldman Sachs.

Thanks, Karen.

One of the callouts that's seen meaningful change from the first half was the transaction -- I guess a proxy for traffic.

It seems as if we do the math right, you would have been trending down mid-singles in the first half, and it sounds as if it was closer to flat this past quarter.

Is that the right way to think about it, and help us think about -- where do you think you're seeing that pickup in traffic?

You had called out the Midwest -- it is a geographic shift?

Is it perhaps share from others in the mall?

Where do you think you are seeing that pickup in traffic?

It's hard to tell.

We're seeing it across the country, so it's not necessarily a specific geography base.

But if it's coming from people shopping more or not shopping in other stores, harder for me to judge.

No sense of whether it's the specialty, department store, off mall, back to the mall?

I can't say that.

Obviously we're watching competitors' sales pretty closely now.

Right.

And what is your sense there on the competitive landscape -- how aggressive is everyone out there heading into the holiday season?

I think everybody is equally aggressive.

I don't see any standouts that are doing anything more aggressive than others.

Okay.

And just on the inventory, obviously lean heading in to the fourth quarter, down 7.5%, and you are looking for the comps to be down 1% to 2%.

Help us think about -- is this spread reasonable, and should we start to as we assume as we head in to the first half, and perhaps continuation of better trends, when you'll start thinking about when is the right inventory plan?

When should we start to see some inventory build or commitment there, versus this down 7.5%.

Couple of things -- one is you have got to think about what was happening last year with the inventory levels, and as we year-round on the bigger reductions in inventory as we go through the year and start 2010, that reduction will be a lot less than 7%.

We expect to end to the year still with inventories well below a year ago, but not 7% below a year ago.

So one suggestion is think about it on a two-year basis.

Secondly, we do believe that editing our assortments and getting clarity on the selling floor is very important, and so how that balance between sales and stock decreases and increases will go, I can't tell you for sure.

Right.

I guess my question is just the lessons learned here in terms of being able to operate on leader levels going forward, clearly there are some learnings here that we would expect -- ?

It's a very important learning that we're all focused on.

Sales have been good.

Lower inventory, helps the gross margin rate, helps in-store execution.

The key always, as you know, Adrianne, is receipt flow.

So what you want is not to have this huge base of stock.

You want to just keep flowing in fresh goods to give the customer newness that he or she wants.

Right.

Okay.

Great.

Thank you, best of luck.

Thanks.

Next is Maggie Gilliam of Gilliam and Company.

Hi, Karen.

Could you discuss a little a bit the implications of the successful integration of the internet?

It seems to me that you are going to need less retail space.

I mean, this is also related to the lower inventories, and you have still got a lot of stores that are close together as result of all of the acquisitions.

And I'm wondering -- are we going to be seeing a new round of store closures at some point in the future?

At this point, I don't anticipate it.

Okay.

We have a limited number of stores that we close every year.

I would expect that to continue, and our hope is that the internet actually enables us to be more productive with our space and require less in stock room, which may also help us give more offering to the customer.

But we are not anticipating any major amount of store closings.

Thank you.

And next is Dana Telsey of Telsey Advisory Group.

Good morning, Karen.

Can you talk a little bit about how you are thinking of inventory at year end?

How you are planning?

And speaking of planning, any updates on the planning and allocation systems that you are implementing and how that process is going?

Thank you.

I think the planning and allocation systems are working well.

I think the users are learning to use them better and better and better, making tweaks as we go, so I think that is all progressing nicely.

As we have moved away from having all of the orders in the system from the old divisions to one order, it has helped our process enormously.

So I think all is moving along on that front, thanks to a lot of hard work on a lot of people's part throughout the organization.

In terms of inventory at year end, as I had said to Adrianne, we do expect to end the year with less inventory than a year ago, but not the 7% reduction that we have got as of the end of the third quarter.

Thank you.

And next is Mike Shrekgast of Longacre Management.

Just wondering if you could talk about -- goods coming out of China were indicated by some other competitors, down 5% to 7%.

Just wondering are you realizing that so far or is that something that is going to come through in 2010?

I don't know the specific number for us, but whenever we can get savings like that in this environment, we're trying hard to pass it on to the consumer.

And just a follow-up question on the pension contribution, any sense, yet, whether you'll need to make one in 2010, given where the markets have gone in the last six months?

Obviously we're still working on those calculations, and it gets complicated for us because of all of the people reductions that we have put in place this year.

Okay.

So I don't know the answer to that yet.

Okay.

And then any sense -- or could you guide a little bit on fourth quarter and the amount of free cash you are expecting to end with, or the amount of cash on the balance sheet you hope to end with?

I'm sorry, I can't.

Okay.

Okay.

Great.

Thank you.

And next is Bob Drbul of Barclays Capital.

Good morning, Karen.

Good morning, Bob.

Quick question.

On the sales trends, when you look at the way the year progressed overall, you said Midwest was good improvement in all regions.

Can you talk a little bit about California versus Florida, and where the biggest deltas in your sales trends have been in Q1 to where you ended Q3?

I have looked at it spring to Q3, and California has improved, as has Florida.

California more so, but as I said, we have improved everywhere.

And then on the -- in Q3, I'm not sure if you gave this or when you gave this, but back on the marketing spend, can you give us the change in marketing spending Q3 this year versus last year?

I can't.

It's obviously down, but that's largely because of the consolidation as opposed to impressions to the consumer.

Okay.

And just one last question, is -- can you talk a little bit about the couponing in the stores and the trends that you are seeing around consumers responding to the coupons?

Consumers always respond well to coupons.

They -- in my opinion complicate the shopping experience, but customers love them.

Okay.

Thank you very much.

And next is David Glick of Buckingham Research Groups.

Good morning, Karen.

Just two quick questions, what is the tax rate you are assuming in your guidance for the fourth quarter?

And secondly, you have covered a lot of the regional issues, but I was just curious -- have you reached a tipping point in your key flagship Manhattan locations and you're starting to see comp store increases in those key locations?

I can't comment on the specific numbers, but we are seeing improvement at 59th Street, Herald Square, as well as Soho.

And as far as the tax rate for Q4?

I don't have one for Q4, but for the year, as we've said, for the earnings excluding restructuring costs, we're expecting it to be around 35.5% for the year.

So you could back in to that.

Okay.

Thank you very much.

(Operator Instructions).

Your next question comes from Mark Kaufman of Rafferty Capital Markets.

Good morning.

Hi, Mark.

I just had a question about markdowns going in to the fourth quarter, vis-a-vis markdowns going in to last year's fourth quarter.

I think I'm hearing obviously that the merchandise is far more fresher this year in that regard?

Well, it's fresher, and there's less of it, so the markdowns should be a lot less than a year ago.

So that said, could I infer that the inventory as far as unit goes are even lower than a decline in 7.4% from a year-ago level?

No, not necessarily.

You can't infer that.

I don't have the number in front of me.

It would depend on what the average costs of the goods are.

Okay.

No, fair enough, as far as where the new goods came in.

I appreciate it.

And next is Bernard Sosnick of Gilford Securities.

Karen, with cash flow strong and not needing to use your lines for seasonal borrowing, could you give us some guidance with respect to interest expenses for the fourth quarter, and what your thoughts might be looking out in to next year?

Interest expense will be maybe just slightly below last year, and we're not talking about 2010 yet until we get a good handle on sales in the whole P&L.

Just slightly below.

You've paid down debt, you have extra cash, and you are not using the short-term borrowing.

I know that you are going to be contributing to the pension fund in December, but shouldn't there be greater decrease in interest expense?

Well, we didn't use much of the facility last year, Bernie.

Okay.

All right.

Thank you.

And next is Ryan Renteria of Karsch Capital.

Hi, good morning.

Good morning.

Of the $400 million in savings, you expected $250 million this year, and you are ahead of that.

Can you give us a sense either where you are now, or based on your guidance where you expect to be for this full year on those savings?

I think we have will have exceeded the $250 million, largely due to performance in the first half of the year, particularly the second quarter rather than adding to the run rate for the back half of the year.

And so as I said earlier, the question we're wrestling with is as we look at 2010, how will the expenses look relative to what we had thought earlier this year?

I assume you don't expect to achieve all $400 million this year, and there will be some left over for next year?

Correct.

Okay.

Thank you.

And this concludes today's question-and-answer session.

At this time, I would like to turn the conference back over to Karen Hoguet for closing remarks.

Okay.

Thank you all very much, and if you have subsequent questions, feel free to call Susan or call me.

Thanks and have a good day.

That concludes today's conference.

Thank you for your participation.