梅西百貨 (M) 2010 Q1 法說會逐字稿

Good morning and welcome to Macy's, Inc.

first-quarter earnings release conference call.

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

Please go ahead.

Good morning and welcome to the Macy's call.

I am Karen Hoguet, CFO of the Company.

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

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

Please refer to the Investor Relations section of our website for discussion and reconciliation 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.

On today's call I will summarize the key components of our performance in the quarter and then talk a bit about our outlook for the remainder of the year.

At the end I will then take your questions.

As we discussed at our analyst meeting a few weeks ago, we are feeling increasingly confident that our strategies are right and our execution is better than ever before.

The combination of My Macy's with its focus on customer centricity, localization and field empowerment, combined with the one Macy's unified structure, is even more powerful than we had expected.

Total sales in the first quarter were $5.574 billion, And our comp store sales increased 5.5%, which is well above what we had expected at the start of the year.

As you recall, the total sales now include revenue associated with the sale of private brands to third parties and sale of unsold goods at the end of their selling period.

These items do not, however, impact comp store sales.

In the quarter sales exceeded our expectations in virtually every Macy's market, at Bloomingdale's and also on the Internet.

Sales from the Internet were up 34% in the first quarter.

We are continuing to expand our view of the Internet opportunity to make it even more a part of a multichannel strategy for both Macy's and for Bloomingdale's.

Customers are increasingly using both channels for parts of their buying decisions, regardless of where the transaction itself occurs.

We believe our Internet operations will continue to fuel significant growth for both of our brands.

Other than Herald Square, which is performing exceptionally well, it was our smallest volume stores that achieved the biggest increase versus last year in the first quarter.

This is very exciting to see, and it shows that My Macy's is working.

Overall our sales were strongest in men's and in home, along with many businesses in women's like updated apparel and fashion watches, which were also very strong.

Private brands and exclusives continued to have very strong performance in the first quarter.

Our sales were less strong in the young businesses during the first quarter.

The gross margin rate in the quarter was 39.4%, up 130 basis points over last year and 80 basis points over 2008.

And the accounting changes hurt us by 10 basis points in the quarter, so we actually did a little bit better on a comparable basis.

We are very pleased with this performance, which resulted from a combination of the strong sales, good inventory management, and the strong private brand performance.

Inventory at the end of the quarter was down 2%.

SG&A in the quarter was $1.993 billion, which was $37 million above last year.

This was below our original expectation, even with the higher than expected sales.

As a percent of sales SG&A was down 180 basis points, or 170 basis points excluding the accounting change, versus last year, demonstrating the leverage in our business.

Operating income was $203 million, up from $24 million excluding division consolidation costs last year, and $117 million in 2008 on that same basis.

As a percent of sales operating income was 3.6% this year compared to 0.5% last year and 2.0% in 2008.

We had a great first quarter relative not just to 2009, but to 2008 as well.

Interest expense in the quarter was $162 million.

And remember that the quarter included $27 million of $0.04 a share of costs associated with the $500 million of debt that we repurchased earlier in the quarter.

Taxes in the first quarter were $18 million, which includes $4 million for the reduction in deferred tax assets due to the enactment of the recent health care reform and the elimination of the deductibility of retiree health care payments.

Net income in the quarter was $23 million, or $0.05 per share on a diluted basis.

The diluted share count for the quarter is 426.2 million shares.

This earnings per share compared to last year's loss of $0.16, excluding the costs associated with division consolidation, for a $0.21 improvement.

With the better-than-expected sales and profits, cash flow generation was strong as well.

Cash flow before financing, defined as cash used by operations and investing activities, was a use of $193 million in the quarter, which was about $136 million worse than last year.

Although remember this year we accelerated a pension contribution of $325 million into the first quarter.

So the pension contribution this year versus last year was $295 million.

So had we not accelerated that contribution the cash flow would have been $160 million favorable to last year.

Also in the quarter we used cash to repurchase $500 million -- $505 million in debt, and we still ended the quarter with over $980 million of cash on the balance sheet.

We feel great about how we started this year, which is why we raised our annual guidance a few weeks ago.

While we continue to see strong sales trends, we don't want to get ahead of ourselves.

This is why we feel it is premature to raise annual guidance further at this time.

We do expect to have more visibility on the back half of the year once we get further into the second quarter.

As you think about the monthly sales in the second quarter remember that sales in the month of May will be negatively impacted by the timing of Memorial Day.

The Sunday and Monday of the holiday weekend moves into fiscal June, as compared to being in May last year.

This is assumed to hurt our sales in the month of May by 2.5 to 3.5 points.

This shift will obviously benefit June.

But remember, June is a five-week month, so the percentage benefit will not be the same as what we get hurt in May.

And all of this washes out for the second quarter.

Let me share with you a few of our planning assumptions for the second quarter.

First, we expect gross margin in the second quarter to increase over last year.

Remember that the accounting change negatively impacts gross margin in the second quarter.

In fact, had the changes been in effect last year, our gross margin rate would have been 50 basis points lower, as you can see on our website.

However, we are expecting the increase to be enough that it will still be higher than last year on a reported basis.

SG&A is expected to be relatively flat in dollars to the first quarter, and like in the first quarter, this will mean higher dollars than a year ago.

Part of this relates to the accounting changes.

Interest expense in the quarter is now expected to be approximately $130 million, benefiting both from strong cash flow and debt repurchase completed earlier this year.

This hopefully helps you understand some of our key planning assumptions for the second quarter.

We are off to a great start this year, and we have every expectation that it will continue.

Our organization has just recently passed its first anniversary together.

We couldn't be happier with our new team, the progress we have already made, and the potential that lays in front of us.

The My Macy's culture and its structure are making an enormous difference in our business.

With that, I will open the call up for any questions you may have.

(Operator Instructions).

Deborah Weinswig, Citigroup.

In your opening comments you say that SG&A was less than expected in the quarter.

Can you elaborate or provide some additional color on that?

Yes, quite a bit had to do with some timing shifts, primarily in advertising.

And some of it had to do with lower than expected real estate costs and utilities, where we are getting slightly lower rates than we had expected and better consumption.

Then also we have heard a little bit more at the analyst meeting about how the buyers are editing for growth.

What is the timeframe for that, and what categories are they starting with?

How should we think about that impacting sales?

And what are the overall implications of the editing at the store level?

I think we are just beginning in this process, so the improvements that we expect to see will probably not hit in a significant way until later this year.

But as we have said, we got benefits from the My Macy's rollout as early as the fourth quarter.

We think it is beginning to happen in -- happened in the first quarter, as well as we go forward.

But the edit for growth component of it will take a little bit longer.

Then last question.

Obviously, 2010 has been off to a great start.

Would you say that has been driven more by traffic or ticket, or how should we think about the component of sales and how that has played out?

It has been driven so far by traffic or items purchased.

The AUR in the first quarter was down a little bit.

So we are seeing customers coming back to the store quite strongly.

I think part of it is from the economy being stronger than we had anticipated.

And I think part of it is things that we are doing in the store that are attracting customers who may have been in other stores previously.

That's a huge positive.

Thank you so much, Karen, and best of luck.

Michelle Clark, Morgan Stanley.

The first question, obviously the additional color on second quarter, very helpful.

Can you give us a sense of what type of comps you're looking for, what is embedded in your assumptions for 2Q?

No, we really aren't giving guidance for the remainder of the year on sales.

Okay, so sticking with the 3 to 3.5 for the full year?

Correct.

Then if you take a look at your first-quarter comp performance clearly outpacing now the peer group average, can you give us a sense if you guys have been able to take a look and see where the biggest marketshare gains are coming from, whether it be commentary on specific competitors and/or merchandise categories?

Clearly we are winning across-the-board, particularly in home, men's and women's apparel.

As I said, the younger businesses were a little bit weaker.

So my presumption is we are gaining share, particularly in men's, home and women's, which is the lion's share of the store.

But any commentary on where you think that is coming from from a competitive standpoint?

No, I would really rather not comment.

Okay, fair enough.

Then last question, obviously other department stores in the space saying that they are going to go out and take marketshare this year.

I am just wondering what you are seeing from a competitive standpoint, if you take a look at pricing and the environment today?

We are really not seeing any changes in terms of pricing or promotion.

And don't really expect to see it.

Any changes you're talking about relative to the fourth quarter?

I don't expect any.

Obviously, I can't predict what others are doing.

Okay, great, Karen.

Thanks and best of luck.

Liz Dunn, Thomas Weisel Partners.

I must say congratulations on a great quarter.

I guess, looking at the small stores which are doing so well, is it -- are those stores -- or small volume stores -- are they small volume stores because they have just historically underperformed or are they in smaller markets?

How should we think about the opportunity with those small volume stores?

Then do you have any update on what we should expect for inventory and gross margin as we move through the balance of the year?

I think your prior guidance was that gross margin would be flat in the back half.

We are not getting any more guidance on gross margin, but we are really not seeing any major change from what we had said earlier.

We had expected most of the gross margin improvement to happen in the first half of the year.

And in terms of the small stores, they are both.

Some of them are smaller stores that have underperformed, others are smaller markets.

But in all cases they didn't get the proper attention because they were small.

So we see a lot of upside coming from those stores just trying to both understand them better and localize the assortments more.

And also from the reduced span of control, huge benefits happening there.

Then any additional thoughts on your inventory plans as you move through the year?

Sorry, I didn't mean to skip that.

I think as we move towards the year we would expect to see, as you have already seen in the first quarter, less of a decline versus prior year, so maybe flattish as we move through the year.

Again, with comps 3, 3.5 for the year that it still would represent very good inventory turn improvement.

Okay, great.

Thanks, good luck.

Bob Drbul, Barclays Capital.

Two questions that I have.

The first one is, when you look at a lot of the new exclusive arrangements that you have been announcing the last few months, can you talk about the margin implications of what you're bringing in as exclusives versus what you're editing out, and how we should think about that from the gross margin perspective?

The second question is, just give us any updated thoughts on the sourcing costs for the back half of the year, even into next year.

On the exclusives, as with our private brands, the objective is really to build brands that carry high credibility with our customers and have sales potential.

But it is really more focused on offering unique assortments to drive sales.

Obviously, that helps margins as well, but that is not the primary purpose.

So, again, it is less a gross margin issue, more how is it going to drive comp store sales.

Does that answer that question before I move on?

Yes, excellent.

In terms of the sourcing costs, we are really not seeing any impact in terms of our gross margins for the fall season, although we think it will be more challenging as we move into 2011.

Fortunately we have a terrific sourcing operation, and I think they will minimize whatever impact there will be as they manage through the situation.

Charles Grom, JPMorgan.

It is Paul Trussell on for Chuck.

Given your comments earlier about SG&A expenses, there being some timing changes, how should we think about your second-half outlook?

Your previous view was for flattish SG&A.

Again, we are not giving any guidance on the back half of the year.

The one thing I would tell you is look at the website in terms of the accounting change, because that naturally would lead to a higher margin, and for a higher SG&A just because of that accounting change.

Okay.

Now turning to cash, obviously you guys in the first quarter spent on debt repurchases.

The pension contribution, how should we think of your use of cash over the balance of the year, should we anticipate any further retirement of debt?

I think the key thing is as we go through the year if cash is very strong and there is an opportunity, maybe.

If not, we will hold onto the cash though to pay down that debt as it matures in '11 or '12.

So in either way that cash is being earmarked for debt repayment.

So either we will actually do it or we will hold onto it to pay it down as it matures.

Then lastly, I just want to ask about your comments in the release this morning.

The part you said that you would hold guidance steady because of macroeconomic uncertainty.

Is there anything to read into there, anything you have seen recently that causes a pause?

No, there is absolutely nothing for you to read into with that statement.

The key is obviously the first quarter was considerably stronger than what we had expected as we started the year.

And again, that is why we raised our guidance just a few weeks ago.

So we are continuing to see strong sales trends.

We just don't want to get ahead of ourselves.

While the economy has been stronger than we anticipated, it is unclear how strong it really is.

However for the part of our performance that is driven by things we have done internally, My Macy's, One Macy's, that obviously will continue.

So, just -- again, we had just raised guidance a couple of weeks ago.

I would not read too much into that.

Todd Duvick, BofA Merrill Lynch.

I had a quick question for you, and I think I know the answer to this based on your previous response.

But S&P just upgraded your credit rating to high double-B yesterday.

Correct.

Congratulations on that.

At the same time they put a high bar in terms of what it would take to get to investment grade.

And I guess the first question is, does that dampen your enthusiasm in terms of targeting an investment grade credit rating?

We are still intending to become investment-grade again.

So I guess the answer is no.

So in terms of the near-term cash uses, I think you just answered that.

So if it makes sense to repurchase debt, you may look at that this year, otherwise just wait until it matures?

Correct.

Okay, fair enough.

Thank you.

Bernard Sosnick, Gilford Securities.

I would like to clarify a little on SG&A.

Going to be website for the second quarter, your adjusted SG&A dollars were [18.66].

And if I heard you correctly, you said that second-quarter SG&A in dollars should be about equal to the first quarter of this year.

That is what I said.

So the dollar amount over [18.66], I come out to 6.8% increase.

It doesn't seem right to me.

Well, that is what I said, and part of it relates to some timing shifts into the second quarter.

Remember, in the first quarter last year the divisions had not yet been consolidated.

So that in the second quarter those savings had already occurred, so we are up against post-consolidation last year.

But you are interpreting what I said correctly.

Okay, thank you.

The other point I wanted to make is you went over a lot in great detail at the conference with regard to merchandising and all the great things you're doing.

I am wondering though if you could crystallize in just a little bit what you're going to remodel the stores, improve what is going on?

You did a great job with cosmetics at Bloomingdale's, but you are over 800 stores.

So what are your thoughts on improving the appearance of the stores, upgrading?

It is a hard question to answer quickly.

But we have a series of things going on to do that.

At the lowest level would be what we would call minimum standard projects, where we are going into stores that just frankly are not to having the Macy's name attached to them, and cleaning them up.

We've got programs to do that across the country and to tap all of our stores that have what we call low asset scores.

The second piece of it relates to putting money into parts of the store where we think there is a huge sales potential, whether it be men's, whether it be cosmetics, accessories.

That is happening in many stores across the country as well.

So what you're going to see versus the Company in the past is significantly more smaller remodels and fewer of the major redos and expansions of an entire store that are a lot more expensive.

We find we get a much better return when we go in and focus on a brand or focus on a vendor or a category of business.

And then the last place we are spending money is in the signature businesses that we had talked about at the analyst meeting -- cosmetics, jewelry and shoes.

So we will spend extra money in those, obviously, because we think they are signature categories.

I guess the last place we where are also investing, or beginning to invest in the stores also, is in the world of technology to also improve the shopping experience.

So, for example, the new registers that will have been rolled out across the Company as of the second quarter are enabling us to do what we call search and send, so that customers can utilize the Macys.com inventory while they are in store.

And we think the potential for that is tremendous.

So it is sort of a long answer to the question, but we are trying to both maintain the minimum standards and go after sales growth opportunities where we see them across the country.

Thanks.

I appreciate that, because you can really see the difference in the stores already.

Glad to hear it, and we are trying.

Lorraine Hutchinson, Bank of America.

You mentioned that AUR was down slightly, and I just wanted to try to get a little more detail into that.

Is that just your customer making a decision to buy at a lower price point or is it a conscious sort of inventory decision to skew toward the lower priced items?

I think it is a combination of lots of things, including mix, so I wouldn't read too much into it.

But I suspect as we go through the year the AUR will go up somewhat.

Then you mentioned that the young businesses were a little weaker than the rest of the chain.

Are there any initiatives in place to try to move those back up toward the chain average?

Yes, there are.

I can't be specific, because I confess I don't know them.

But there is a lot of attention being paid to those businesses.

Jeff Stein, Soleil Securities.

Karen, you have been talking about the growing importance of the Internet, and I am wondering what percentage of your customers would you estimate now are multichannel customers?

I don't know that statistic.

We will try to get it for you.

But it is growing considerably.

As you know, there is a growing group of people that are back and forth all the time.

Okay.

Secondly, I am curious what percentage of your sales would you estimate are generated by your smaller stores?

And do you have any -- could you give some sense in terms of what qualifies as a smaller store?

Well, I don't have the percentage in front of me.

There is all different definitions, whether it be under $25 million, under $15 million.

The statistics for the first quarter are the same regardless.

Okay.

Any estimate at this point in terms of what the new health care reform may end up costing the Company?

No, you see what is going to cost us this year.

That has already been included in the tax number for this year, but we don't see a significant impact until 2014.

Adrianne Shapira, Goldman Sachs.

I just wanted some clarification on the SG&A.

It sounds like Q2 mid-single-digit increases is what we should expect.

Maybe you could give us some color or how much of that increase is related to the timing shift that you referenced?

You know, I don't have that specific number.

A piece of it is, but obviously not all of it.

Again into the back half, when we think about the timing shift is it just in Q2 or does it bleed into the back half as well?

Well, the timing shift -- bleed into the back half a little bit, but it really doesn't change the guidance that I had given earlier because of the magnitude of the expense base in the fall.

Ken Stumphauzer, Sterne Agee.

First, just one clarification question.

That $15 million on the cash flow statement under other in the Investing section, I think in the past that it at times has been proceeds from insurance.

I was wondering if that was the case this quarter, and if so, whether that flowed through the income statement?

You know, I don't know, and no, in terms of the income statement.

But we will get you the answer as to what it is.

Then secondly, at the analyst day there was a lot of time spent talking about the various systems that have been implemented over the past year and a half or so.

I was wondering if you could maybe just talk about the long-term margin implications of those systems implementations?

Our sense is it is going to be positive, but I have no clue how to quantify how positive.

Do you know like maybe how long the residual benefit will be?

Is it something that is going to be multi-year or something you'll see the benefit over the course of a year?

I can't tell you that.

I don't know.

Then finally, you had alluded to kind of increasing the cooperation or interplay between e-commerce and the retail brick-and-mortar stores.

I was wondering if you could just elaborate on that?

Not yet, but we will when we can.

We are working on an accelerated growth strategy that will grow both brands, Macy's and Bloomingdale's, regardless of channel.

David Glick, Buckingham Research.

Congrats on the quarter.

I will take one last stab at SG&A, and then I have a question on the home business.

I think probably most analysts had been modeling about a low single-digit increase for the year, excluding D&A, and just based on the shift into -- between Q1 and Q2.

Is that still a reasonable expectation for the year or should we be thinking about modeling a little bit higher?

Then secondly, your home business clearly is a standout relative to your peers.

I am just wondering how much of that is -- you would attribute to the various initiatives, whether it is My Macy's or the assortments, sales promotion, Internet, etc.?

Let me answer the second question first.

We are really doing a fabulous job right now in the Home Store.

I would attribute it to a team that had been unified earlier.

So I think they were better able to take advantage of the My Macy's opportunities, because remember, we had centralized home a couple of years before we changed to the new structure.

So I think, frankly, it may be an indicator of just how much My Macy's can help as the organization that for the rest of the Company has been unified for just one year does better.

But home is doing fabulously, big ticket, small ticket, really across-the-board.

Then the SG&A question for you.

I don't look at it excluding D%A, I could, but I can't do it on the spot.

You can do it including.

There is really nothing that has changed from the guidance we had said before.

We had told you when we ended the fourth quarter to expect increases in the first half, and flattish in the second half.

So the only thing that has changed in the second half is the accounting change.

But I would make the same statement if you restate the fall.

Okay, that's helpful.

Thank you very much.

Good luck.

(Operator Instructions).

Lance Vitanza, Knighthead.

I apologize if you already covered this, but the $325 million of payments that you made to the pension, does that satisfy what you plan to do for the year, or do you still anticipate making other payments over the balance?

It satisfies what we intend to make for the year.

It doesn't mean that at some point we wouldn't make a further contribution, but there will be no additional required contribution.

How will you evaluate whether or not -- I mean, you've got a lot of cash right now.

I certainly expect you to generate more over the balance of the year.

What is sort of decision process in terms of whether or not you go ahead and you make those voluntary contributions from here on out?

I mean, again, all of the excess cash that we are generating is being held to either pay down debt in '11 and '12 or increase the funding on the pension plan, which is also required.

So it is just a question of what is the best economic decision.

Dana Telsey, Telsey Advisory Group.

You mentioned a lot -- it seems like this quarter has been mentioned a lot the smaller stores and the improvement in the impact of smaller stores have had.

Any quantitative or qualitative examples of the uptick that you're seeing and the sustainability of it?

Thank you.

I am not quite sure how to answer that.

The sustainability though we think is real.

Again, with the greater attention these stores are getting, we are seeing huge potential in terms of upside.

Now, by the way, as we talk about the smaller stores, I don't want people to think that they are doing so much better than the medium size or larger doors.

They are doing better, but all of our doors have been performing very well, because it is our belief that My Macy's actually helps all size stores.

It is just the group that we have had trouble lighting a fire under had been the smaller stores, and that now seems to be happening as well.

With no other questions in queue, I would like to turn the call back over to Ms.

Hoguet for any additional or closing remarks.

Thank you all for your support.

And if you have further questions, just give Susan or me a call later today.

But thank you.

That does conclude today's conference call.

Thank you for your participation.