梅西百貨 (M) 2010 Q2 法說會逐字稿

Good morning and welcome to the Macy's Inc.

second-quarter earnings release conference call.

Today's call is being recorded.

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

Please go ahead, ma'am.

Thank you.

Good morning and welcome to our conference call.

I am Karen Hoguet, CFO of the Company.

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

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

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

Keep in mind that all forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results 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.

We are very pleased with our results in the second quarter.

We exceeded our expectations in all key components of our performance -- sales, gross margin, SG&A, and cash flow.

This both demonstrates the benefits of our strategic initiatives at Macy's and reflects the continued strong performance at Bloomingdale's.

The key initiatives at Macy's include the new centralized structure and our My Macy's localization efforts.

Sales in the second quarter were $5.537 billion, and comp-store sales were up 4.9% in the quarter, which, like in the first quarter, exceeded our expectations.

Sales were strong in most categories of business in the quarter, with the only notable weaknesses in women's traditional career apparel and young men's, due particularly to tough denim performance.

The best sales results in the quarter were in men's, driven by collections, plus fashion watches, updated women's apparel, seasonal categories like swimwear, luggage, furniture, and mattresses.

Private brand and exclusive product also continued to achieve terrific growth throughout the store during the quarter.

Geographically, all regions did relatively well in the quarter, with the only cluster of weakness in some parts of California.

On a two-year basis, the strongest regions for us were the north and the Midwest, both of which were original My Macy's pilot regions.

Chicago has been particularly strong.

We find this to be very encouraging and demonstrates the ongoing benefits of the strategy.

Year to date, all 69 of our districts were at or ahead of expectations.

This widespread success is very encouraging.

Our Internet businesses continue to grow rapidly, and we are developing strategies to further accelerate their growth, including in the realm of mobile.

Both Macys.com and Bloomingdales.com are showing how important they are for driving store traffic in addition to producing great growth of their own.

We now have the capability in all Macy's stores to access the dot-com inventory to satisfy a customer.

We are finding tremendous excitement for this amongst both our store associates and our customers.

Bloomingdale's also produced great sales this quarter and continued to outpace its peer competitors.

The focus at Bloomingdale's has been on relationship selling, as well as the leverage of store inventory across all of their stores, both of which helped to contribute to the strong performance of the Company.

Gross margin in the second quarter was 41.9%, up from last year's reported margin of 41.5%.

Remember, though, that the accounting change related to sales to third-party retailers negatively impacts gross-margin comparisons versus last year.

On an apples-to-apples basis, assuming these changes had been in effect last year, we achieved 90 basis points of improvement, which is really terrific.

This points to the benefit of strong sales and well-controlled inventory.

We ended the second quarter with inventory about flat versus last year, which we believe positions us very well for the fall season.

The My Macy's approach has clearly enhanced our ability to more frequently have the right inventory in the right place at the right time, and the net result is a stronger sales and gross margin rate.

We also did better than expected in the second quarter on the expense line.

The SG&A of $1.953 billion is approximately $40 million below what we had expected at the start of the second quarter.

The major variances included lower stock-based compensation expense, due to a lower stock price than we had anticipated; delayed training expense; and lower marketing expense.

Some of the positive variances are timing related and will be reversed in the fall.

These shifts will be included when I discuss the assumptions for fall expense.

But even with this timing shift, we were very pleased with our SG&A performance in the quarter, as well as the first half of the year.

Compared to last year, SG&A in dollars was up 4.9% as reported and up 3.6% had the accounting change been in effect last year.

The increases in expense relate to a higher bonus accrual due to the strong spring season performance, lower credit income due to the impact of the regulatory changes, and higher sales variable expense resulting from the strong sales.

However, SG&A as a percent of sales was 35.2%, down 80 point -- 80 basis points on a reported basis, or down 50 basis points had the accounting change been in effect last year.

Operating income in this year's second quarter was $370 million, up $88 million or 31% over last year, excluding last year's consolidation-related expenses.

As a percent of sales, operating income was 6.7%, up 120 basis points over last year, excluding consolidation expense, or 140 basis points higher had the same accounting been in effect last year.

Interest in the second quarter was $130 million and tax expense was $93 million.

Net income was $147 million.

Earnings per share on a diluted basis was $0.35, up 75% versus last year, excluding the division consolidation costs in 2009.

This was clearly well above our expectations.

Our year-to-date cash flow has also been very strong.

We generated $164 million in cash from operating net of investing activities, even after making an accelerated pension contribution of $325 million.

Last year, we made the contributions of $60 million in the spring season and then, in the fall, approximately $310 million.

If we exclude the pension contribution from both years, cash flow before financing activities in the first half of the year would've been $177 million more than a year ago.

We ended July with $1.2 billion of cash on our balance sheet.

As we look to fall, we expect this momentum to continue, although it is important to note that we will be up against stronger last-year numbers.

We have raised our expectations for fall comp-store sales up to 3% to 3.5%, which, together with our spring season actual sales, results in new annual guidance for a comp-store increase of 4% to 4.2%.

This is up from our expectation of 3% to 3.5% most recently and well above our original guidance for the year of 1% to 2% as we started this year.

While we do recognize that there is risk in the economic environment, we believe this sales level is achievable, based on our recent performance and market share gains, as well as our strategy for the fall season.

During the spring season, the growth in total sales was roughly 200 basis points above the comp-store increase.

For the fall season, or the back half of the year, we are expecting the delta between these two measures to be less, more like 160 basis points, due to the timing during the year of private brand sales to third parties.

We are opening three department stores in the second half of 2010.

This includes the Bloomingdale's in Santa Monica, which opened very strongly last week, and two Macy's stores, both former Gottschalk locations in California, one in Palmdale and the other in Tracy.

We are also opening our first four Bloomingdale's Outlets, about which we are very excited.

We are assuming the gross margin rate in the back half of the year to be down slightly on a reported basis, or flattish to 2009 had the accounting change been in effect last year.

We are assuming SG&A as a percent of sales to decline in the second half of the year as we leverage the sales growth, but the SG&A dollars are expected to be up versus last year, but less as a percentage increase than what we've experienced in the first half of the year.

Also remember that last year SG&A would've been $47 million higher had the accounting change been in effect.

The increase in SG&A this year is due in part to higher pension expense, higher expense supporting the Internet business and its growth, a shift in the timing of marketing expenditures, and an increased investment in training of our selling associates, which I'll talk about in a few minutes.

And also, the expense in the back half of the year is also increased because of the sales growth that we are projecting.

Interest expense is expected to be approximately $255 million in the back half of the year, and we are still expecting to spend approximately $550 million in CapEx this year.

Given these key planning assumptions, our earnings per share guidance for the fall is $1.45 to $1.50, or $1.85 to $1.90 for the full year.

This is $0.10 above where we were at the start of the second quarter and $0.30 above where we were at the start of the year.

Obviously, we are moving in the right direction.

I feel a bit like a broken record as I talk about the key factors driving our success -- the My Macy's localization and field empowerment, combined with the faster, more nimble, more focused central merchandising and marketing teams, including our private brand organization.

This combination is clearly having a positive impact.

And this fall, we are adding one more element to our efforts, which we expect to further drive our top line -- a more engaged selling team in our stores.

By the start of September, we will have trained approximately 130,000 sales associates and managers on selling engagement.

We have never done such a comprehensive training effort before and we are very excited by the feedback we are already getting from our associates and from our customers.

A key component of the program is more intense coaching of our associates on an ongoing basis by our store and district management teams.

The start of back to school has been very encouraging.

We are especially excited about the launch of our exclusive Material Girl line, which is designed by Madonna and her daughter, Lourdes.

The initial selling across the country has been terrific and we believe the excitement being generated helps sales beyond the specific brand.

The buzz is incredible.

And our new Slade Wilder young men's brand, launched in mid-July, also is off to a very strong start.

As we look to the all-important fourth quarter, our team is more ready than ever before.

We have reinvented our gift strategy and will have a whole new level of newness, distinction, and value in all of our doors, along with a terrific marketing campaign.

We don't have a crystal ball on the economy, but we do have confidence that we can continue to gain share profitably, no matter the environment.

And with that, I'll take your questions.

(Operator Instructions).

Deborah Weinswig, Citigroup.

Karen, congratulations on a great quarter in what's turned out to be a great year so far.

In terms of -- and maybe we can use Material Girl as an example.

And you talked about at the analyst meeting your speed-to-market advantage.

But with such great sellthrough so far, how are you using your speed to market as a way to get back into business when you've had such strong sellthroughs so early out of the gate?

A key theme of the new organization, whether it be with market brands, exclusive brands, or private brands, is to increase our flexibility and to react when business is good.

Obviously, there will be some key items that are going to take a little while to get back into stock, but clearly we're working hard to make sure that we fill the holes on the floor right now.

Then, secondly, I think it was in May in three different districts that you rolled out a new loyalty program pilot.

I didn't know if you are at a place where you could discuss the early results.

You know something?

The early results are encouraging.

We have rolled out a test of the new loyalty program, as Deb said, in three districts, but it is way too early to judge the results.

And then, we've heard, actually from several different sources now, about some RFID work that's being done at Bloomingdale's.

I didn't know if you were in a position where you could talk about that at this point.

We do have an RFID test going at Soho in New York, and it is very interesting and, if the cost would ever come down, would have huge application, obviously, throughout the Company.

Then lastly, with the magic selling training, has it -- if you could put it on a scale, I guess, of one to 10 in terms of how it's met your expectations or however you want to think about it, would you say that not only from a training perspective -- obviously from a training perspective, you've got associates who haven't had, I would assume, new training in quite some time, and from a morale perspective, I mean, what has it really been in terms of the stores' organization and just how has it really changed the feeling on the selling floor?

It is way too early to judge.

They're just being trained now.

So I would say that, having been in the field a fair amount lately, the enthusiasm is very high, and associates are very excited by the training and the attention being paid to them.

How it translates into more sales, we will see as we get to the fourth quarter.

But at least so far, it feels very good.

Thanks so much and best of luck.

Bob Drbul, Barclays Capital.

I just have a couple questions.

First, can you talk a little bit about the traffic trends within the business?

And you talked about some encouraging results on the back to school.

I just wonder if you had any insights you could share around what you're seeing on traffic throughout the Company?

As you know, we don't actually measure traffic.

So, but if you look at our results this spring, the AUR was down slightly, which would mean there's more transactions.

So whether that's more traffic or more people buying more items, I don't know for sure.

But if you look at businesses that tend to be traffic measurers, they have done pretty well this year.

When you look at your expectations for the back half of the year, from a promotional environment scenario, where are you expecting around the competitive landscape?

This business has been very promotional for very many years, and we don't expect that to change.

So I expect this fall to be promotional, and we are locked and loaded.

Just one final question is on the comp expectations that you guys have laid out.

When you look at the two-year stack comp and you look at the second quarter and you're sort of guiding, it seems, flat on the third quarter and up two on the fourth quarter, is that -- can you just elaborate a little bit (multiple speakers)

What you really need to do is look at the three-year trends, which is at least the way we're looking at the business, because two-year trends as you go into the fall season aren't as meaningful.

So we are expecting, on a three-year basis, this spring was down 2.3%, and with our guidance, the fall would be down 1.8% or 1.9% on a three-year basis.

So there is a little bit of improvement built in, but we think that it's reasonable.

Dana Telsey, Telsey Advisory Group.

Congratulations, Karen.

As you think about planning inventory, how are you thinking about inventory plans for the back half of the year, given what sales are now and, obviously, the flat inventories?

And private brands gaining momentum, what percent of the total do you expect it to be from where it is now?

In terms of the inventory, we're feeling good about the flat inventories as we go through the back half of the year and expect that at the end of January they will be flat or perhaps slightly up, depending on how we plan spring '11.

But we feel as if there is sufficient inventory to drive the business this fall.

And obviously with the private brands' success, we do expect it to -- the penetration to increase this year from the 19%, roughly, that it was last year.

One last thing, on product cost, any impact on product cost, what we're hearing about raw materials, the end price to the consumer?

And I was out at Bloomingdale's over the weekend in Santa Monica.

It is a must go-see.

It looks terrific.

Thank you.

I would agree with that.

In terms of the product costs, nothing this fall, and for the spring, clearly our sourcing people and the vendors are dealing with higher raw material costs, in some cases labor, etc..

But, I don't think the customer is going to see much in increased prices.

Adrianne Shapira, Goldman Sachs.

Karen, just to drill down on the SG&A, it sounds like, as you mentioned, lower by about $40 million.

Not all of it timing shift, but if you could help us quantify how much was related to the delayed training and lowered marketing.

There's a lot of things that get shifted quarter to quarter, Adrianne, so I really don't have a number, but obviously that's been included in the guidance for the back half.

Most of the improvement, though, was not timing related.

Okay, that's helpful.

Then on sales, the upward revision to the back half, if you could help us parse out -- it sounds like online continues to be accelerating and it sounds like there's reasons to be encouraged in the back half.

It sounds like, year to date, online helped comps by about 0.8 percentage points.

How much of the upward revision, when you think about it, is related to online continuing to accelerate?

When you look at it as a percent of the whole, not a lot.

We do expect it to accelerate, but it's the store business that's driving the comps.

Then, just lastly, given that you are clicking on all cylinders, clearly gaining share, when you look out longer term, if you can maybe give us a sense of where you have thought [when] we had talked about getting to sort of previous peak margin targets on an EBITDA basis, how you think about that now, given that, as you say, you're further along than you would've thought this year?

It's all a function of sales growth, so if we can continue to achieve sales growth at these levels, we will obviously reach the higher EBITDA margins faster because of the leverage in the business, as you've seen in the first half of the year.

Okay.

So we'll get there faster, but no sense of any more clarity on timing.

Correct.

Okay, great.

Best of luck.

Wayne Hood, BMO Capital Markets.

I just had two questions, one was following up on Adrianne's.

I guess that you mentioned that the marketing expense, there was a little bit of a shift going on.

Is that shift impacting more the third quarter or the fourth?

How should we think about that shift impacting any one of those quarters?

It's actually both, a little bit of both.

So, one is not material than the other (multiple speakers) -- more material than the other?

Okay.

Correct, yes.

The second question, I guess, given the changes in the credit-card regulation, what impact is that having on new account growth for you as you think about the back half of the year and specifically into 2011?

I'm thinking that I recall there was $300 million in EBIT that it contributed -- the income contributed last year, so as you think about go forward, how are they going to drive new account growth, given what we hear is a difficulty doing that, given that some of these regulatory changes?

Yes, you're exactly right.

One of the biggest impacts from what the government has done vis-a-vis the credit business has been hurt on new accounts because of the approval rate being lower, and so that has hurt our new accounts.

But, fortunately, credit sales are still way above what we had expected, and while penetration in the first half of the year was slightly below last year, it's well above two years ago.

So, we continue to do well in the credit business, but not as well as we would like, given the new accounts as well as the other regulatory changes.

And we, as a result, expect the credit profitability, as we've said, to be less this year.

Certainly less than what we had expected.

Okay.

And less than last year.

Is there a chance that that can get back to where it was historically, you think, over time, or do you think we are taking a step down from a secular basis that we can't think about that piece contributing the way it did in the past?

We have to wait and see where the regulatory changes settle in.

Mike Shrekgast, Longacre Management.

Karen, I was just wondering, can you -- when you talk about gaining share in the marketplace, are you gaining share from other department stores or from -- more from the specialty area?

I would say both, and it varies by category of business.

Jeff Stein, Soleil Securities.

Karen, wondering if you could comment on the delinquency trend in the credit portfolio year over year and sequentially?

And also, can you quantify for us the impact of the Truth in Lending Act on your credit income?

In terms of delinquency, we are making progress, and each month has been below last year.

So that's good news.

The bad news is the regulatory changes are offsetting all of the good news coming from the delinquency and losses, and more.

Quantify in dollars in terms of the impact so far you've seen on credit income year to date from TiLA?

I can't really do that, Jeff.

Okay.

How about -- any thoughts in terms of where your healthcare costs may go on a kind of go-forward basis?

We're obviously studying it all very closely.

It will cause an increase, not for a couple of years, but at this point we don't know the magnitude of that number.

Finally, can you talk a little bit about some of the new brands you're rolling out and seem to have had success with [up]?

Material Girl, I noticed it's only going into about a quarter of your stores.

Wondering why that is, and given the early success, any plans potentially to accelerate that rollout to additional stores?

I'm sure that that will be the case.

Often with a new line, you want to start in a limited number of stores to perfect it and watch it closely.

Is the supply chain, I guess, accelerating enough at this point so that you could potentially accelerate that rollout this year to additional (multiple speakers)

I can't answer that question, Jeff.

I don't know.

Bernard Sosnick, Gilford Securities.

Karen, over the last two years you've made voluntary pension plan contributions of almost $700 million.

I'm wondering, where does the pension plan stand now in terms of assets relative to liabilities?

I don't know the answer to that because it requires a large amount of work on our actuary's part.

I do know that we will still be underfunded at the end of this year.

So we will continue to be making pension contributions over the next couple of years.

Do you foresee them roughly in the same amount as in the last two years?

I don't know at this point.

Lorraine Hutchinson, BofA Merrill Lynch.

I was just hoping to get some clarification on a comment you made about material cost pressures for next year, and I think you mentioned that you don't think the customer would see it in price points.

So I was just hoping you could share your strategy for how you plan to mitigate some of those cost increases?

What we're really trying to do is work at every angle we can, working with our suppliers, in some cases changing country production, in some cases taking a lesser margin, in some cases our suppliers taking a little bit less margin, and really trying to work it out.

The one thing we will not compromise, at least for our private brands, is the quality of the goods.

So that is one thing we have been insistent on.

But everywhere else, there may be pressures and cuts.

And then, it sounds like some of your vendors are hoping to put some limited price increases through.

Have you started those discussions with them yet?

You know something, I'm not close enough to that.

It wouldn't surprise me.

And again, a little bit of price inflation would not be a bad thing.

Agreed.

And then, just finally, the second-quarter comp outperformance, are you still seeing the smaller markets really drive a lot of those gains?

We are.

As we look at our smaller doors for the first half of the year, other than Herald Square had the biggest increases.

So, it continues to do well.

Ken Stumphauzer, Sterne, Agee & Leach, Inc..

I had one question as it pertains to SG&A, more on a go-forward basis.

In the past, you've spoken to incremental SG&A dollars being around $0.10 for every incremental dollar in sales.

This year, it looks like it's going to come in a little bit heavier than that, and that's despite some cost cuttings or residual benefits that you're receiving from the My Macy's plans.

Does that change kind of the leverage point going forward on incremental sales?

No, you know, as we've talked about some of the reasons for the increase in expense, whether it be the pension expense -- and also the impact of the regulatory changes with credit, those have put more pressure on the expense line this year.

But those are the kind of things that you would anticipate would fade away in the future?

Correct.

Secondly, in the cash flow statement, there was an asset sale.

Did that flow through the P&L?

No.

I mean, yes, it would have, but there was not a large gain.

Okay.

And when we attended the analyst day a couple of months ago, there was an allusion to starting markdown optimizations in some test markets.

I was just wondering if you could share any initial feedback that you've received from that?

We are testing it, and so far it is feeling very good.

Obviously, a lot more to learn and not really ready to claim victory yet.

But we think it will be powerful in driving sales and margin.

When do you anticipate that would be rolled out systemwide?

My guess is it will be a while.

It's a very complicated system and process.

So, we are still sorting that out and, again, watching the results of the test.

Okay, and then, I'm going to take one last stab at kind of the inflationary pressures.

Obviously, you'd feel some kind of pressure on your private-label goods.

But do you anticipate that you might see pressure on the rest of your nationally-branded goods just sharing some of the margin hit with your vendors or do you think that's something that would be borne by them alone with price increases?

I can't speak to that.

Michelle Clark, Morgan Stanley.

Karen, it's actually Chris Cuomo here, calling for (multiple speakers) Michelle.

Thanks for taking my question.

I just wanted to talk a little bit on the topline big picture here.

A lot of headlines over the past few months about double-dip recession.

Just curious, have you noticed anything in terms of a buying behavior of your consumers that would suggest that they are changing their buying behavior as a result of some weakness?

Are they buying closer into need, shifting out of better categories into lower price points, stuff like that?

There is nothing like that happening that I've seen or heard about.

Okay, fair enough.

How about, then, just longer term on the gross margin front?

You know, on your analyst day, you did -- at your analyst day, you did discuss a number of initiatives to move gross margins higher.

I'd like to know the size allocation and planning initiatives.

Just curious, in light of the fact that you are guiding to flattish gross margins in the second half, should we presume that 2010 is potentially a peak in gross margins or (multiple speakers)

Mathematically, it will be a peak.

Whether it stays a peak, I don't know yet.

We'll know more in six months.

How do you think about those initiatives hitting the P&L?

Is it within the next 12 months?

What's the timing in that?

I think it continues to impact.

And one of the questions I've gotten a lot lately is, are the benefits from My Macy's a one-shot deal or will it continue to build?

And the answer is clearly it will continue to build as the sizing initiatives get utilized more, and all of the localization efforts do take time and are ongoing.

It's not like you do it once, then it's over.

So all of these initiatives are driven, Chris, more to drive sales and gross margin rate.

But, at least so far, we're finding there is also a benefit on the margin line.

Got you.

Okay, and just maybe one last one, I was just curious if you could expand a little bit on the performance of Bloomingdale's, presumably it's still outcomping Macy's.

Any notable callouts in performance at Bloomingdale's?

No, they have continued to beat their peer group and doing very well.

And the stores, the online, and obviously we're looking forward to the outlets opening this fall.

Great.

Thanks for your time, Karen.

Charles Grom, JPMorgan Chase & Co..

Just to clarify on Bob's question earlier, when you talk about a three-year stack, you're averaging, right?

You're not adding?

Correct.

Is that (multiple speakers) how you guys calculate your average?

Yes.

And then, just thinking about the lift that you guys got from the Internet of 50 bps in the second quarter, July was the first month you had the search and send function.

Any sense for how much business you've turned away because of the inability to do search and send historically?

And what do you think the opportunity could be in the back half, and I guess what's embedded in the 3% to 3.5% deal?

Yes, and the search and send sales are in the stores.

Okay, so they're separate from the comp numbers?

Correct, correct.

But still, the opportunity.

Could you just elaborate on (multiple speakers)

The opportunity, we think, is -- we think the opportunity is tremendous.

What we're finding is not only our associates using it when we're out of stock in a size or a color, but they're also using it to sell goods that aren't in a particular store, which is terrific.

So I think the opportunity is enormous and will continue to grow.

The last question I have is on the cash opportunities.

Under the new bank covenants that you set back in December of 2008, you are restricted from the distribution of equity interest and -- I think around $230 million or 50% of cumulative net income.

Just wondering if you've given any thought towards renegotiating those lines so you can use the cash not only for debt paydown but eventually returning to some buybacks?

The bank line is sort of irrelevant right now in our decision-making.

We are reducing debt by choice, not because of the bank covenant.

And expect to continue to do so through this year and next.

Michael Exstein, Credit Suisse.

Can you give us a sense of what you're looking at for depreciation in the second half of the year?

You always ask such tough questions.

In the second half, about $590 million.

Okay.

And are you evaluating off-price stores for the core Macy's division?

At this point, we've thought about it, but are focused on Bloomingdale's.

And watch how that plays?

Correct.

And finally, any sense of what is going on in terms of the capacity issue over in Asia for producing goods?

Some people talked about excess.

Some have talked about tight supplies.

And in terms of transportation, also.

I can't answer that.

In terms of transportation, which is, I think, a slightly different issue, we have worked very closely with our long-term vendors in the transportation arena to make sure that we have plenty of capacity.

(Operator Instructions).

David Glick, Buckingham Research Group.

Just on the issue of capital expenditures, as your business continues to get traction and you've talked about increasing the level over time back toward that billion-dollar level.

I'm just curious, are you confident enough at this point to kind of move that number up for next year to that level or are you still evaluating that?

If you can give us some color on that, that would be helpful.

We have not talked about moving the capital back up to $1 billion level (multiple speakers) -- $800 million, which we have said, and we had said we would get there in 2012.

And I think, given the growth of the Internet business and the need to expand distribution facilities to keep pace with that growth, we may very well take 2011 up to a level at the $800 million, but we are not thinking about a level above the $800 million in 2011 or 2012 or beyond, at this point.

Thanks for that clarification.

In terms of the categories that you had planned on driving your business for fall, I know given now that you have spring behind you, are you still feeling as good about some of those key categories like fashion watches, jewelry, shoes, perhaps handbags, and what are your thoughts on what the drivers are for the second half from a category perspective versus in your original expectations?

I can start by saying we feel good.

In terms of the details of the plans by category of business, I don't have that in front of me, David.

But, obviously, we look at the business every day and are making these judgments, and by raising guidance for the fall, we obviously feel good about the plans and strategies in place.

Great.

Thanks, Karen.

Good luck.

Virginia Chambless, JPMorgan Chase & Co..

Thank you.

Karen, just a follow-up on your comments earlier about the decision to continue to reduce debt.

Do you see any opportunities now to accelerate that debt reduction in terms of another round of open market repurchases or any sort of a formalized tender, or do you expect to just pay down debt as it matures?

I think it depends on market conditions.

We are driven to only do transactions that are NPV positive, and we'll see if any of those kinds of transactions present themselves.

But in any event, we would conserve the cash to retire the debt of the 2011 and 2012 maturities.

Then, I guess sort of another related question to that is, can you characterize or sort of give us an update on your conversation with the rating agencies and any sort of prospects for upgrade here in the near term?

There's really nothing to update.

Bernard Sosnick, Gilford Securities.

Karen, you mentioned that furniture, mattresses did well with regard to sales.

I'm wondering if you could amplify on your performance in the hardline areas generally.

You mean all of home?

Yes.

Home has continued to do very well.

Textiles had a particularly good quarter.

Housewares is doing well.

Tabletop is a little bit slower, the fine dining category, as we might expect in today's day.

It's a little bit more challenged, although we are putting more life into that category with a terrific gift presentation.

So, home has done well.

We obviously -- luggage has done very well.

So it's been strong.

Could you amplify a little bit with respect to centralization?

Has that contributed to your success in home?

We had centralized home before the rest of the store.

(Multiple speakers).

And in fact, some of us have posited that one of the reasons they've done well is that they've been centralized for longer, which gives us more confidence in the good results that can extend far beyond this year as the centralization takes hold.

But we think that business is running quite well right now.

Ken Stumphauzer, Sterne, Agee & Leach, Inc..

Karen, I just wanted to touch on the Bloomingdale's Outlet strategy.

Over the past couple of months, we've seen what would be one of your principal competitors, the Nordstrom Rack, has struggled as there hasn't been enough inventory in the channel.

I'm just wondering if that changes the way that you're thinking about merchandising the stores, and how much you envision will be transfers from the existing Bloomingdale's stores versus special purchases?

Actually, a small percentage will be transfer from the store.

But they are feeling good about the merchandise that they've been able to buy to put into the stores.

We have no further questions at this time.

I'd like to turn the call back over to Karen Hoguet for any additional or closing remarks.

Great.

Thank you all very much, and if there's further questions, call me or call Susan, and we'll do our best to help you.

That concludes today's conference.

Thank you for your participation.