梅西百貨 (M) 2010 Q3 法說會逐字稿

Good day and welcome to the Macy's Incorporated third-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.

Thank you.

Good morning.

I'm 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 a 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 10-Q.

We were very pleased with our results during the third quarter.

While sales were a little bit softer than we had hoped in early October with the unexpectedly warm weather, especially relative to last year, we exceeded our sales and profit plan for the quarter.

Given our confidence in our business trend, we utilized $500 million of excess cash to buy back debt with maturities between 2011 and 2016 during the quarter in the open market.

That brings our total debt reduction this year to over $1.2 billion, including the $150 million we paid at maturity on November 1.

In the third quarter, our sales were $5.623 billion.

On a comp store basis, sales grew 3.9%.

It was a good quarter overall for sales.

We opened two Macy's stores in California that had been Gottschalk stores, bringing our total Gottschalk conversions up to four.

These converted stores are performing very well.

As we look by family of business, the standout performances on the positive side in the quarter came from fashion watches, our INC brand, cosmetics and fragrances, men's, and luggage.

Other private brands and exclusives also had a very good quarter.

The weakest performances were in cold weather goods, traditional women's sportswear, and tabletop.

Geographically, we performed best across the South, all the way from Florida to Southern California, where weather was less of an issue.

Business, as you might imagine, was weaker in the northern climate zones, due in large part to the warm weather.

The exception to this was the upper Midwest, the Chicago, Minneapolis, and Detroit areas, which had a very strong performance for the third year in a row.

Macys.com also continued to grow rapidly in the third quarter.

The growth in online sales can be attributed to a combination of better merchandising, new technologies like faceted navigation and Quick View, and a constant focus on omni channel tactics.

Our digital marketing included the more aggressive use of social media, which is -- and it's very closely linked with the stores providing a seamless experience for our customers.

Also, a recent rollout of what we call Search and Send, where we can satisfy customer demand for items that are either not carried in a particular store or that are out of stock, we can satisfy them using the .com inventory.

This has been very successful, although these sales are not counted in our online sales.

As of the third quarter, the Search and Send technology was available to customers in all of our Macy's stores.

Bloomingdale's performed well in the quarter with strong sales both in the stores and also online.

In fact, Bloomingdale's sales trend has been comparing favorably to other upscale fashion retailers.

The Santa Monica store opened in the quarter and opened very strong, as did our first three outlet stores.

The fourth outlet store is expected to open next week.

Gross margin in the third quarter was 40%, which is up 20 basis points from last year had the current accounting treatment been in effect, but down 20 basis points from last year on a reported basis.

This is as anticipated and consistent with our prior guidance of a flattish gross margin rate for the fall season, meaning the third and fourth quarters combined.

We ended the third quarter with inventory up 1.9%.

While higher than it has been, the inventory level is still well below our comp store sales trend.

We have focused on building fresh inventories in opportunity areas to help drive our fourth-quarter sales.

SG&A in the quarter was $2.069 billion, only up 0.6% had the accounting treatment been in effect last year, and up 1.8% as reported.

As a percent of sales, SG&A was 36.9%, down 120 basis points from last year, compared to the adjusted number, or down 160 basis points on a reported basis.

This is also consistent with our guidance for the fall season.

Operating income in the third quarter was $177 million, more than double last year's $88 million before division consolidation costs.

As a percent of sales, operating income in the quarter was 3.1% versus 1.7% last year before division consolidation costs.

Interest expense in the quarter was $164 million, including $39 million of the non-recurring premium and fees associated with our open market debt repurchase.

Excluding this, interest expense would have been $125 million, down from last year's $137 million and slightly lower than expectations.

Net income in the quarter was $10 million, or $0.02 per share.

Excluding the nonrecurring expenses associated with the debt buyback, EPS was $0.08 per share, compared to last year's loss of $0.03, excluding division consolidation costs.

Cash flow from operating activities was $346 million for the 39 weeks of 2010, down $60 million from last year.

But remember that we contributed $325 million to the pension plan as of this point in the year, versus approximately $146 million last year, which reduced our cash flow from operating activities year-over-year by $179 million.

Cash flow from investing activities was roughly the same as last year.

We used $1.032 billion for financing activities this year versus $926 million last year.

At the end of the third quarter, we had $715 million of cash and cash equivalents on the balance sheet versus $581 million last year.

This demonstrates the cash flow potential of this business, given how much debt we have eliminated this year while at the same time supporting the capital needs of the Company.

It was a good quarter, and we are now ready for the fourth quarter.

So let's move on and talk about our guidance.

As we look at sales for the fourth quarter, our guidance is for a comp store increase of 3% to 4%.

We are anticipating approximately a 130 basis point spread between total sales growth and comp store sales growth for the fourth quarter.

We are expecting a lower gross margin rate in the fourth quarter than both the reported and adjusted rates last year.

You will recall that last year's gross margin rate in the fourth quarter was unusually high, even beating that of 2007.

As we guided at the end of the second quarter, the gross margin rate for the fall season would be flattish compared to last year's adjusted number, and we would give that same guidance today.

We are expecting a larger increase in SG&A dollars in the fourth quarter than that we experienced in the third quarter due to a shift in marketing dollars from earlier in the year and also last year's Visa and MasterCard settlement.

SG&A dollars for the two quarters combined is consistent, though, with prior guidance.

We continue to expect the SG&A as a percent of sales to decline compared to last year's adjusted number for both the fourth quarter and for the fall season.

Interest expense is now expected to be approximately $118 million in the fourth quarter, reflecting the reduction in debt.

This is about $20 million below last year.

EPS is expected to be $1.42 to $1.47 in the fourth quarter, or $1.50 to $1.55 for the fall season, excluding the debt premium.

This is consistent with the increased guidance that we provided last week.

So, for the full year, assuming we achieve the fourth quarter as guided, EPS, excluding the non-recurring premiums associated with both the first- and third-quarter debt buybacks, would be $1.94 to $1.99.

This compares to $1.41 last year, excluding asset impairment charges and division consolidation costs, or an increase of 38% to 41%.

This would represent terrific performance.

We have momentum as we enter the fourth quarter.

The My Macy's localization and field empowerment is making an enormous difference.

We have new initiatives this fall that are also helping to accelerate our comp store sales growth.

The two biggest initiatives I'd like to highlight this morning are our Magic Selling program and our gift strategy.

For Magic Selling, as you know, this summer, we trained approximately 130,000 sales associates and sales managers on selling skills, and we are giving seasonal hires a shortened form of this training.

Many of you have asked us what Magic Steps stands for.

The M is for meet and make a connection; the A, ask questions and listen; G, give options and give advice; I inspired by; and C, celebrate the purchase.

We also are working with our selling managers to improve their coaching skills as an ongoing follow-up to this training.

In our gift strategy, we actually started developing our gift strategy for this holiday season in May of 2009, as soon as the new organization was put together, with the focus being on developing unique and fabulous product.

As I look at this year's gift strategy, there's really three new components I'd like to highlight.

The first is we have new gift shops in 400 doors which feature limited-edition exclusive, fun gifts that are mostly under $50.

These shops, the G shops, will be year round, not just for Christmas.

The second would be our creative "be" themed shops, like be warm, be pampered, be glamorous, etc., that are across all families of business.

The third is our celebrity designer gifts.

These are terrific, exclusive selections from our celebrity designers like Jessica Simpson, Tommy Hilfiger, Ralph Lauren, Martha Stewart, Calvin Klein, Michael Kors, Rachel Roy, Kenneth Cole; I could keep going.

As you walk through our stores today, you will see these throughout the store.

All of these great new product offerings are being presented in new and very interesting ways, both in our stores and also online.

The products are supported by a terrific marketing campaign.

Our organization is ready and prepared to execute the fourth quarter to a whole new level.

We believe we have generated significant momentum in the business, and we expect customers to react well to the newness in our assortments, our engaged selling efforts, and our marketing.

We hope you will all get out and check out our stores, and hopefully do some holiday shopping.

With that, I'll take your questions.

(Operator Instructions).

Deborah Weinswig, Citi.

Thanks Karen.

Congratulations on a great quarter.

So the upper Midwest you mentioned continues to be strong.

If memory serves me correct, that was one of the first regions that took on My Macy's.

Can you elaborate on what you think continues to make that region so successful?

I think, when you implement My Macy's in the localization, it is not a one-shot deal.

Many of you think you come in, you understand the customer, and you are done.

We're finding year after year we are refining it, we are taking bigger bets as we get more confident in our localization.

We think these benefits are going to be sustainable for many, many years and we will just continue to build as we go forward.

Then if I go back to your analyst meeting, I believe that you were doing a test with Kronos in terms of workforce management in the back half of this year.

I don't know you could update us on that in terms of any expense benefit you had in this quarter, and if you're still on plan for the rollout in 2011.

We are testing that as we move into the fourth quarter, and really no update in terms of the benefits that we expect.

The hope, frankly, is that we provide better service, more importantly than the expense savings.

Then lastly, on the Magic Selling training, have you seen benefits to date, and any early wins there?

The third-quarter sales were strong, so I have to believe that the Magic Selling was a piece of those results anecdotally.

Even many of you have called recognizing a difference as they've been in our stores but, again, it's hard to know what's what.

But clearly I think that is part of the strong results we've been seeing.

Best of luck this holiday season.

Thanks so much.

Charles Grom, JPMorgan.

Thanks.

Good morning Karen.

As you guys continue to delever, I was wondering if you would give us an estimate of what you think the optimal capital structure for you guys is going to be going forward.

Then separately, do you expect to make any more cash pension contributions in 2011?

It's hard to give you that answer.

I think we're going to wait until we get through Christmas, and then think through debt reduction strategies from there in terms of your first question.

On the pension contributions, you had asked about 2011.

Clearly, we will be making an additional pension contribution in 2011.

Again, we also could potentially make one at the end of this year.

So as we think about debt, the pension underfunding is another form of debt that we are also addressing as part of the debt reduction strategy.

Great.

I know you guys are doing a lot more collaboration with your vendors.

I'm curious what they are saying with regards to higher sourcing costs, particularly in the second half of next year.

Yes, this is obviously a question that many of you have been calling about.

Clearly, there are pressures with the sourcing costs, particularly, as you said, for the back half of 2011.

One of the things you need to keep in mind is we, both at Macy's and Bloomingdale's, have the benefit of being more of a fashion retailer and having a higher fashion content in our merchandise, which means that the input cost represents a lower percent of cost of sales.

Also, it gives us more flexibility in terms of the production, locale and also the materials we are using.

So, frankly, we are in a relatively better position than many of our competitors.

But as you said, this is where our increased collaboration with our vendors is going to pay off, both in addressing the sourcing challenges and working together to minimize those.

Also, the collaborations are giving us opportunity to reduce other costs of doing business together, which will help us to offset some or all of the increases in the cost of goods.

I should also add that, as you think about our private brands, while we're on this subject, we have a terrific sourcing organization with very strong relationships with our manufacturing partners.

This too will help us minimize any impact we're seeing.

Can you remind us what the mix is of private and exclusive brands at the end of the third quarter?

Private is about 20%, and when we include exclusives and limited distribution, it's north of 40%.

North of 40%?

Okay, great.

Then my last question -- if I look at 2010 SG&A growth, it looks like it is maybe 1% to 1.5%, roughly speaking.

When we think about '11, is that a pretty good ballpark for us to think about, or is there any catch-up costs that could come into the pipeline next year?

Remember, this year we were still recognizing savings from the My Macy's consolidation.

While it seems like ancient history, we were still getting some of the benefits this year.

So we will -- expense I would expect to grow probably faster than that, but still a lot of leverage in the business.

Great.

Thanks a lot.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you.

Good morning.

Just one more question on the sourcing impact from China -- I guess I was just curious to hear what you are planning on pricing, either what you're hearing from vendors about pricing programs, and then also on the private label side.

Do you intend to start to raise prices to try to offset some of these costs?

I think it's early to be able to really give you that answer.

We are going to be very thoughtful about our pricing decisions.

We are going to review our strategies at retail and really think through.

The key is we want to maintain a very high level of value for our customers, but at the same time obviously we also want to maximize sales and margin.

So I think it's too early to say.

Then any early learnings from the Santa Monica store that could potentially get you to increase the number of Bloomingdale's store openings in the coming years?

On one hand, I should say it's way too early to judge.

On the other hand, it's hard to not be very excited about Santa Monica.

It's really a smaller Bloomingdale's format, so again, too early to say.

But my suspicion is we will conclude that we can open other smaller Bloomingdale's in similar areas.

Great.

Thank you.

Michelle Clark, Morgan Stanley.

Thanks.

Good morning Karen.

Congratulations on a great quarter.

The first question [for you] gross margin outlook to be down in the fourth quarter, both on an adjusted as well as a reported basis.

If you could walk through some of the assumptions behind that, what are you expecting for the promotional environment in the fourth quarter?

Are you accounting for the fact that December of last year was one of the coldest on record, and this December forecasted to be a bit warmer?

Maybe walk through some of the expectations there.

Then the second question -- any updates from discussions with the rating agencies?

Any sense of when we could see a return in Macy's to investment grade here?

Thank you.

In terms of your first question on the gross margin rate, as I said, this is consistent with what we have been planning all fall season.

So there's really no news.

As you recall, last year in the fourth quarter, it was record high, and we just think it's going to be hard to beat that this year.

So again, we aren't expecting it to be any more promotional than last year.

It's just that, when we look at the timing of markdowns and how the quarter should end up, our merchants believe it's unrealistic to expect to increase that margin yet again.

But again, that's not new news, and we aren't expecting it to be any more promotional.

Okay.

In terms of the rating agencies, we've not had any meaningful conversations through the year.

Frankly, until we get through the fourth quarter, I'll be superstitious and let's just wait and talk to them then.

But clearly reducing debt and reducing the pension underfunding this year clearly makes our balance sheet significantly stronger, in combination with a significant increase in EBITDA this year.

I think, as you have read the reports this year, they are taking note.

What that means in terms of investment grade timing, I can't speak for them.

Okay, thanks and best of luck.

Bob Drbul, Barclays Capital.

Good morning Karen.

I guess two questions that I have.

The first one is can you maybe talk a little bit about small-market stores and how they have been trending versus the rest of the stores?

The second question is, in the Bloomingdale's Outlet strategy, just maybe you could elaborate with some of the early learnings on what we've seen so far.

Let me start with the second question, which is far too early to really be speculating.

They are doing well versus what we had expected.

But again, that doesn't -- it is early, but we are very optimistic.

We think we have a good strategy there, great team, and we're watching these four very closely.

In terms of the small-market stores, I can't answer small market, but I can answer small stores.

Some of those would be in larger markets but fill-in stores.

Interestingly, the spread between our largest and smallest is more narrow than it's ever been.

In fact, some of our smaller stores in the third quarter were the strongest.

So one of the thoughts, as you know, behind My Macy's was to help the smaller doors do better, and that does appear to be working.

Thank you very much.

Liz Dunn, FBR.

Good morning.

Let me add my congratulations.

I guess my first question relates to the Bloomingdale's outlets.

It just looks like they were much, much -- their performance was much better than you anticipated originally, or the productivity is coming on much stronger than your existing stores.

Could you just flush that out a little bit?

I'm not sure why you would say that.

Well, I'm looking at 6%, 6.6% total sales growth versus a 4%-ish (multiple speakers)

I was afraid that's what you were doing.

No, no, no.

Remember that, had the accounting been in effect that is in effect this year, the total sales last year are higher on a restated basis.

Okay.

(multiple speakers)

It's all on the website.

So the spreads between total and comp is not just the new stores.

Okay.

I guess I had, in my guidance or in my notes, that you expected a 1.6% spread between them.

So if you look at the third quarter and the fourth quarter together, it will be close to that.

Remember, I said the fourth quarter about 130 basis points and the reason it goes down in the fourth quarter.

Most of that restatement had to do with the sale of private brands to other retailers.

That volume will be a lot lower in the fourth quarter, as you might imagine, because we will have shipped the goods for them in the third quarter.

So there's really no change in the seasonal guidance there.

So would you characterize them as better (multiple speakers)?

Yes, we said they were better than we expected, but it's obviously the four outlet (multiple speakers) are very small relative to total Macy's Inc.

But yes, I would still say they opened strong but I was afraid that's where you were judging it from.

How are those -- how much of the goods in those stores is coming directly from stores versus bought specifically for that channel?

How do you see that shifting over time?

I believe it's less than a quarter.

I don't know how we will see it shifting over time.

Obviously, we are learning a lot this season, and we will know more as we get through the holidays.

Great.

Thanks.

Good luck.

Wayne Hood, BMO Capital.

A couple of questions on expenses and gross margin rate -- when you look at the third quarter, was there a big delta in the credit incentive income that comes off the portfolio that would have an impact on the SG&A rate?

Even looking forward with delinquencies that way they are and [roll] rates the way they are, would you expect that credit income becomes a tailwind in a material way as we go into next year?

No.

In fact, the opposite as we look to the fourth quarter.

The reason for that is, you're right, the losses are coming down, and that's obviously a benefit.

But with the Card Act and the changes associated with that, there's actually pressure in the fourth quarter on the credit line, versus a year ago.

It's actually expected to be worse.

Okay.

Do you care to quantify that, and (inaudible) '11 because if you [now] cycle against that?

We won't cycle around until we get to the fall season next year completely.

The same kind of question I guess on the pension expense.

Was there any delta in that in the fourth -- or the third quarter?

Any change expected in the fourth quarter?

No.

It's consistent with what we had talked about.

Yes, no real change there.

Then could you deeper dive into the reason behind the increase in gross margin mark up, mark down, just a little bit more color around that?

Thank you.

The mark downs were lower than what we had expected, which is typically the delta.

So mark up -- was mark up lower year-over-year, or was that flattish or --?

You know what?

I don't have that in front of me, but I know the good news versus last year was primarily mark downs.

Thanks Karen.

Jeff Stein, Soleil Securities.

Karen, good morning.

Think about the month of November in the context of kind of looking at the two-year stack.

In November of 2008, you saw huge drop due to the calendar shift.

How should we adjust that out and factor that into our thinking as we look at November?

Yes, I mean, obviously, that's an issue.

We aren't giving guidance month-to-month, so I'm not really sure how to help you there.

Okay.

Can you give us some guidance in terms of how it affected November of 2008?

I don't know if you would have --?

Well, I think maybe a better way of looking at it might be a three-year.

It's complicated; it's hard.

I don't really know how to help you there.

How about the loyalty program?

Can you give us an update there in terms of the several regions where you're currently testing it and how that is working out?

I would say we are learning a lot, and there's some aspects of it that have been very positive.

It's too early to really judge the program as a whole, but learning a lot, very encouraged.

Finally, Material Girl -- that seems to have been a real win for you this fall.

Is it going to be rolled to more stores for spring?

If so, can you give us an indication of how many?

I don't know that number.

Let me get it, and we'll get back to you.

Thank you.

Ken Stumphauzer, Sterne Agee.

Hey Karen.

Good morning.

A quick question for you on SG&A -- this year, at the end of the day, what do you think the net benefit that you will have received from the My Macy's restructuring -- how big of a number will it up being in 2010?

Well, we had said -- oh, in 2010?

Yes.

I don't know that.

I'd have to go back and calculate.

We are on track to deliver more than what we had expected over the two years combined.

Okay.

Then just a clarification on the cash flow statement, the $25 million asset sale.

That did not roll through the P&L, correct?

I'm not sure I understand.

On the cash flow statement, there was a $25 million asset sale.

Correct.

I was curious to know if there was an associated gain or loss which rolled through the income statement.

Oh, no, not significant at all.

Then finally, if you could maybe give us some of the underlying analytics for the comp, ASP versus [averaging] retail transaction value.

In the third quarter, frankly, the average unit retail was, frankly, flattish as we looked at the quarter, down a little bit but basically flat.

Thanks for your help.

Adrianne Shapira, Goldman Sachs.

Thank you.

Can you talk about the inventory up 1.9%?

As you mentioned, it's been higher than it's been trending but obviously below the comp growth.

Is that the way we should be thinking about -- is this sort of the more normalized run rate going forward, up low singles?

Yes.

I think you will find us continuing to improve turnover but investing in inventory to drive the trend that we've been delivering.

Maybe specifically as you talk about you're looking to invest in some of the fresh -- build some fresh areas where the inventory is, where you're focused for the holiday season.

It's the parts of the business that have been doing well and that we think will do well.

Obviously, the gift categories, men's, many of the home areas, luggage, fashion watches, cosmetics, you can go through them, and places like INC and the more neo or fashion right parts of the women's apparel business.

Okay, great.

Then a follow-up to an earlier question as it relates to SG&A.

It sounded as if we should be expecting SG&A growth north of the 1.5%, 2% we saw this year but then you were quick to say but still expect leverage.

So should we be thinking about comps in the 3%-plus range for next year?

It's too early to be talking about comps.

Let's get through Christmas and then we'll talk about next year.

Fair enough.

Thanks.

Robert Wilson, Tiburon Research Group.

Could you comment on your credit penetration trends of late.

Also, I think, last quarter, you mentioned some new distribution facilities needed to be built to accommodate your e-commerce growth.

Can you maybe comment on how much capital you're going to invest next year on those facilities?

Yes.

In terms of credit penetration in the third quarter, it was actually down about 100 basis points but still above 2008.

So, we are seeing pressure on the penetration, which we think is, in large part, a function of new acquisitions being more challenging relating to the Card Act.

So that has been a challenge and, again, better than a year ago -- I'm sorry, better than two years ago.

You may recall that, last year, as the economy was so weak, credit penetration spiked.

Now, we're seeing it come back to what I would call more normal levels.

On investment in warehouses for the direct-to-customer business, we have announced an expansion of our Portland, Tennessee facility, which we will be doing, and most likely we will be building or taking over a new distribution center in 2011, 2012.

So, we're still working on the details for that.

So we anticipate it will require significant capital, but at this point can't give you a more specific number.

Can you give us a ballpark on that $800 million number, how much of that might be related to the distribution facilities?

I can't do that, but I can tell you that the whole direct-to-customer business could be as much as 20%, or maybe a little more.

Okay.

That includes the technology spend also.

Remember that business is growing over 20%, so we really do want to fuel that growth.

Certainly.

Thank you.

Mike Shrekgast, Longacre.

Just a quick question, and it's minor.

I'm just wondering what your position is with regards to The Knot-.com.

You have had your online business developing very nicely.

I'm not sure if there's any plans to grow your investment in not or monetize it or maybe you guys just keep it on the balance sheet.

Could you comment on that?

Yes, I can't make a comment on that, sorry.

Thanks.

(Operator Instructions).

David Glick, Buckingham Research.

Just some follow-up questions on some of the category trends you're seeing.

There are many months where you've talked about women's footwear, fashion jewelry, soft home.

Are those -- are you still seeing the same trends there heading into holiday or just maybe strong but not as strong as some of the stand-outs?

They are still strong, just not as strong as the stand-outs.

Our business has been so strong this year with the exception of cold weather in the third quarter and the women's traditional sportswear and tabletop.

Everything else is doing quite well.

On that subject of traditional women's, is that do you think more of a weather issue or a fashion issue, and how much of a markdown headwind is that for you guys?

I think we will know more as we get through the fourth quarter.

I suspect a lot of it is fashion -- I'm sorry, is weather-driven, not fashion.

But we'll see as we get through the fourth quarter.

Just a couple more quick ones -- in terms of capital expenditures for next year, any thoughts on that?

Then on the SG&A, your SG&A leverage comment, would you anticipate leveraging SG&A, excluding D&A, which obviously has been trending down?

Clearly, that's the challenge, so yes, I hope to, but still to be seen how much, and if that's possible.

And then on the CapEx?

$800 million is what we've budgeted for next year.

Thanks a lot, great.

Good luck for the fourth quarter.

There are no other questions at this time.

I'd like to turn the conference back over to Ms.

Hoguet for any closing remarks.

Thank you all for your interest.

If you have further questions, feel free to call Susan or me.

Take care.

That does conclude today's conference.

We thank you for your participation.