梅西百貨 (M) 2011 Q1 法說會逐字稿

Good morning and welcome to the Macy's Inc.

first-quarter earnings release conference call.

Today's call is being recorded.

I would now like to turn the conference over to your host Mrs.

Karen Hoguet.

Please go ahead.

Good morning.

I am Karen Hoguet, CFO of the Company.

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

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

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

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

We feel great about our performance in the first quarter.

Our sales growth continued strong, producing a 5.4% comp store sales increase on top of last year's 5.5% increase.

As we have said repeatedly, the momentum from our restructuring and the implementation of My Macy's is building and bodes very well for our future.

And the profitability of the business increased dramatically in the quarter with earnings per share more than tripling.

We reported earnings per share on a diluted basis of $0.30 versus last year's $0.09 when we exclude the expense related to the early extinguishing debt.

And with the continued confidence in our operating results, and our balance sheet now in a stronger position, we doubled the size of our annual dividend from $0.20 a share to $0.40.

This is an important step in returning more value directly to shareholders.

Let's first talk a bit about the quarter and then I will discuss the outlook for the remainder of the year.

Sales in the first quarter were $5,889,000,000 up 5.7% over last year.

While ahead of our expectations across the country, our southern region, the Southeast, the Southwest and South Central did best given the more favorable weather in that part of the country.

And the Upper Midwest also had a strong quarter.

This should bode well for the second-quarter sales in the North as the weather warms up.

Bloomingdale's had another terrific quarter and continues to do very well versus their peer group.

Sales on the Internet were also very strong in the quarter with a 38% increase.

We are very happy with how our omnichannel strategy is evolving at both Macy's and Bloomingdale's.

We believe both the stores and the Internet sales are benefiting from these efforts and investments.

In the first quarter, sales of jewelry and watches, cosmetics, men's and home were very strong as were our private and exclusive brands led by INC.

The weaker businesses included women's traditional and casual apparel, women's suits and intimate apparel.

In the quarter, average unit retail was up approximately 1%.

Our inventory continues to be in great shape both in terms of quantity and quality.

At the end of April, comp store inventory was up 2.8%, well below our expectation for comp sales in the second quarter.

And even though we are controlling our inventory, we are making investments in new businesses like outdoor furniture, expanding successful businesses such as impulse beauty and designer fashion watches as well as funding incremental merchandise receipts to support the fast growing businesses.

Gross margin in the quarter was 39.1%.

While still 30 basis points below last year, it is better than we had expected.

As you recall, the key reason for the decline versus last year relates to the growth of search and send and overall free shipping on macys.com.

SG&A in the quarter was $1,973,000,000 or 33.5% of sales which is down 1% in dollars and 230 basis points as a rate versus last year.

This is much better than we had expected.

Part of this favorability does relate to timing and therefore will come back in future quarters, but most of the good news is permanent.

The biggest upside surprise came from credit.

The profitability of our credit business improved by $25 million versus last year in the quarter which was significantly better than we had expected.

The portfolio experienced a big improvement in bad debt and in addition, the penetration of our proprietary credit card was 46.7% which is flat with last year and better than we had expected.

Also in the quarter, stock-based compensation expense was lower than expected and was $16 million this year versus $29 million last year.

Depreciation and amortization was $19 million below last year as expected and we benefited in the quarter from a $12 million gain from the sale of our shares in The Knot.

Operating income in the quarter was $330 million, $127 million or 63% higher than last year and 200 basis points higher as a percent of sales.

Interest expense was $116 million in the quarter which is $19 million below last year excluding the costs associated with the debt repurchase.

This is obviously due to a reduction in debt over the last year.

Tax expense was $83 million, bringing net income to $131 million in the quarter compared to $23 million last year.

Average diluted share count in the quarter was 430 million shares.

And as I said earlier earnings per share was $0.30 in the quarter as compared to $0.05 per share last year or $0.09 per share excluding the expense associated with the early retirement of debt.

Cash flow was also very strong in the quarter.

Cash provided by operating activities was $67 million versus a use last year of $149 million.

Net cash used by investing activities was $64 million, $20 million higher than last year due to the increase in our capital expenditure budget this year.

So cash provided by operating activities net of investing activities was $196 million higher than last year.

During the quarter, we paid down $335 million of debt at maturity and contributed $225 million to the pension plan.

We believe this puts our balance sheet in very good shape such that we are able to begin returning cash to the shareholders while working toward our objective of becoming investment-grade at Moody's and at S&P.

Given this crossroad, we thought it would be the right time to discuss the key credit metrics that we are now tracking and our targets for these metrics.

As you know, S&P, Moody's and Fitch calculate credit ratios using different definitions and we have attempted to combine the best of all three in setting our own definitions.

The details of these calculations are all on our website under financial information, but essentially we're using reported debt, EBITDA and interest expense and making adjustments for leases and for any underfunding of our post-retirement plans.

So we are tracking two key ratios, one leverage for the adjusted debt to EBITDA; and the other coverage, adjusted EBITDA to interest.

So for 2010, our adjusted debt to EBITDA ratio was 3.0.

And on a rolling four quarters basis through the first quarter of 2011, this ratio improved to 2.8.

Our current target for this ratio is 2.4 to 2.7.

For 2010, our adjusted EBITDA to interest was 5.6 and on a rolling four quarters basis through the first quarter of 2011, this ratio improved to 6.0.

Our current target is 6.4 to 6.6.

We expect to achieve or come very close to achieving these targets by the end of 2011.

We believe that these targets are consistent with what would be necessary to achieve investment grade although as you know, there are many other quantitative as well as qualitative factors that go into the rating decision.

The first quarter was a great one and we are so pleased that the momentum continues to build.

Our organization is completely focused on keeping the sales growth trend growing.

We're all focusing on better serving our customers both in-store and online with great locally tailored assortments, terrific value and MAGIC Selling.

As you saw in the press release, we increased our guidance for comp store sales growth for the remainder of the year to approximately 4% which would translate to approximately 4.3% for the full year as compared to our original guidance of 3%.

For the second quarter, we are expecting comp store sales growth of around that 4%.

Although I should add that we expect the highest sales growth in the quarter in the month of May, the next highest in the month of June and the lowest in July given prior year's performance.

Our earnings per share we're guiding to $2.40 to $2.45 or up $0.15 from the original guidance and CapEx is still budgeted at $800 million.

We are off to another strong start this year and we have every expectation it will continue.

There has been a lot of speculation about how the consumer will react to higher gas prices, price inflation, stagnant housing prices and a myriad of other macroeconomic factors.

No one of course knows how this will all play out but we do feel great about our Company's ability to continue to outperform the competition no matter the environment.

We have a tremendous amount of ammunition in place and as I've said repeatedly, the My Macy's culture and structure combined with the omnichannel strategy are making an enormous difference.

We couldn't be happier with the progress we've made and we are all feeling very positive about the potential in front of us.

And with that, I will take your questions.

(Operator Instructions) Deborah Weinswig, Citigroup.

Well congratulations on an amazing quarter, Karen.

Thanks, Deb.

So your sales obviously significantly beat your expectations in the first quarter.

You talked about omnichannel and a lot of other factors, but what do you think were the key drivers?

I think it's all of the things we have talked about.

It's not one particular factor.

The assortments have been terrific, the MAGIC Selling is beginning to help, the localization of the assortments.

Obviously the Internet had a great quarter.

I really do think it's a combination of all of the strategies we've been working on and they're all working.

You called out the performance of exclusive and private label.

Is that growing faster than your national brands?

And can you also throw in there some discussion on the designer capsules?

Yes, the private and exclusive brands are growing faster than the national brands as they have in the last couple of years.

They're doing very well across the board and the capsules are doing well, obviously small, but what they're doing is generating a lot of excitement and energy around the stores.

Okay, and then I'll throw in one last question on Bloomingdale's which is twofold.

One, I believe at the analyst meeting last year you talked about investing in the Bloomingdale's flagship in the city.

I don't know if you could elaborate on that.

And secondly, can you just talk about the performance of the outlets to date?

Yes, on 59th St.

we have invested quite a bit of money over the last couple of years and continue to improve different parts of the store.

We just approved the project for a couple of floors, I'll let you be surprised when you see it later this year.

But that store has continued to perform well and the investments we are making are paying off quite nicely.

And then the outlets we feel good about.

It's obviously still early.

We've got four open, three more coming this year but we are feeling very good about that strategy.

Thanks so much and best of luck.

Emily Shanks, Barclays Capital.

I had just a couple of follow-ups around the investment-grade goal.

I was wondering if you could give us a little bit of an explanation around what the drivers are of that goal and what you think the operational benefits are of obtaining investment-grade.

You mean, you're asking why we want to become investment-grade?

Correct.

We believe it gives us the appropriate amount of financial flexibility that a company like ours should have.

Obviously it does save us some money in terms of financing costs, but the bigger issue is the financial flexibility.

And do you see yourself ever wanting to get to the point where you can issue CP?

Well, that's obviously the goal.

As you know prior to the economic downturn, we had a BBB rating.

That would be desired.

But at this point, we're just aiming to get back to the BBB- range.

Liz Dunn, FBR Capital Markets.

Let me add my congratulations.

I guess two questions on product and then just one on expense.

If there -- do you have any examples of sort of early price increases and customer response to that?

And then the second products question is are there opportunities to take some of your learnings with these capsules and exclusives into some of the areas of women's that are underperforming?

We would sure like to do that, in terms of your second question, we are trying to learn and see what we can expand from that in terms of the other parts of the business, the more traditional parts.

Not sure what the learning will be but we will certainly try.

And in terms of your first question, we have done some limited testing in terms of the price increases.

In most of the areas where we have tested so far, the tests have gone okay and have gone well.

I think there may be some resistance in some of the moderate home categories to price increases, but that's how we've planned the business.

So far, I'd say no surprises.

Great, and then on expense, why was stock compensation down year over year?

And do you have guidance for credit expense for the full year embedded in your SG&A guidance that you could share?

The stock compensation expense as you know is non-cash and is dependent on what the stock price does.

So last year in the first quarter, the stock performed quite well.

This year it didn't perform as well.

So it's just strictly one of those things you can't plan.

It depends on what happens with the stock price.

In terms of credit, it will do better than what we had expected for the remainder of the year.

But I at this point can't really give guidance.

We're still just watching those trends very closely.

Paul Swinand, Morningstar.

Sorry, I have got a little bit of a cold.

But my first question is on CapEx.

I know you're holding the $800 million and I know depreciation has been coming down year over year.

As things sort of normalize or are stable now, do you see that eventually ticking up on a square footage basis?

And then a second part to that question...

You mean CapEx?

Yes.

Okay.

And then obviously you are investing in technology in the Internet.

Do you see that increasing and then leveraging or how do you see that playing out?

At this point, we don't expect much of an increase to the $800 million in terms of CapEx.

Obviously we look at it every year and we're constantly evaluating new store growth opportunities.

But at this point, the $800 million is the best guidance that I can give you.

So that's a good refresh rate ongoing for your existing store base?

Correct, correct, including the investment in technology.

And so, yes, I do expect that we will forever be investing in technology.

What we're investing in will obviously change year to year, but that's a very important part of our strategy.

But that should eventually leverage?

Is that fair or (multiple speakers)

It should eventually but it is growing so rapidly, I'm not sure.

Okay, and then just a quick question on the training.

I know you and I talked about it last quarter.

As I know your ongoing training is a program you are going to invest in, but comparing to the quarter last year in the first quarter, did you have a more one-time lump of training in SG&A last year?

I don't think training should be viewed as lumps.

The truth is it takes a long time and multiple refreshers for people to be trained properly.

So I think there's a cumulative build, both the more formal training we're given and also the experience on the floor trying to take that training and make it happen which as you know, an important component of what we're doing is coaching.

So I don't think it's in your words lumpy.

I think it's just going to continue to build.

Got it, got it, thank you for that.

And then just to follow up on that, if someone were in stores in major metropolitan areas, what percentage of the employees are trained that we would be running into?

Is it pretty much everybody?

It should be 100%.

100%, okay.

All right, thank you.

You bet, take care, I hope you feel better.

Bernard Sosnick, Gilford Securities.

You said that proprietary cards held at about 47% of sales and you were encouraged by it being flat.

I'm wondering what factors are at play and particularly the loyalty incentives that might be supporting your proprietary card program.

Well, I think there's nothing new other than in three markets in terms of the loyalty program, so I don't know that that's really what's supporting it.

I think our customers feel that there's value using our card and like having that connection with us.

What we have been concerned about has been the opening of new accounts given all of the legislation coming out of Washington.

And so we remain concerned about that and that's why we are so pleased with that flat penetration.

The last call you us a little bit of a hint about the dunnhumby findings.

You said that customers love coupons.

What are some of the learnings you might be getting out of that and things that we might expect to see from Macy's?

I think what we are finding is that as we understand how individual customers shop and what is in their shopping bags, we're making better decisions about what to carry in the stores.

So for example if you find that your most loyal customers buy a brand that may in of itself not be profitable, you wouldn't want to exit that brand from the store that's driving the best customers into the store.

So we're spending a lot of time looking at that.

Similarly we're looking to see what products or brands our best customers like and in some cases adding that to more stores knowing it will drive a more loyal customer.

Well, thank you.

By the way, just to give you a hint of my TV preferences, I watched Dancing with the Stars last night and Macy's got tremendous publicity.

Keep it up.

Thank you, thank you.

Michelle Clark, Morgan Stanley.

Karen, congratulations on a great quarter, how are you?

Good, thanks, Michelle.

Good, you had mentioned in your prepared remarks that some of the SG&A performance in the first quarter was due to timing.

Can you just give us a little more color there, what amount shifts out and then how does that play out over the second through fourth quarter?

And I know that for the full year, you had guided SG&A growth at 2 to 2.5% previously.

Is that still the full-year outlook?

It's a hard question.

Some of it we know to be timing where something was supposed to be spent.

We know it was spent but will happen but the expense will actually happen in the second quarter.

Others I think many people just say it's timing internally when it may not be.

So I can't really give you a specific number to be helpful then.

Obviously a lot of that I would expect to come back in the second quarter.

And it's hard to give you exact items but I think that's probably around the range that I think it will be.

The 2 to 2.5 for the full year?

Correct.

Okay and then if you pull out the impact on gross margin from search and send, would your gross margin rate in the first quarter have been up?

It was flat.

Okay, that's very helpful.

And then any updated learnings on elasticity and ability to raise price points?

You know, I think so far, we feel as if as we have thought about how the customer is going to behave, we've mapped it out pretty well.

So in some cases, small price increases will work fine in terms of the customers.

In other cases we have been much more careful and reduced units and we think that is probably appropriate too.

Okay, and any update on your unit plans for the full year?

It's hard to give you an answer because it's so different by category.

If I added together, yes units are up, but there are some categories where that is not the case.

Okay, great, and then lastly, any updates on price optimization by market?

Still working.

We have some tests going that are going very well and we're also working on the actual system that we will eventually roll out to the company which will make it easier to do that.

But that will not be rolled out until late next year, so it's really a 2013 benefit I think that you'll see in terms of the gross margin.

Alright, terrific.

That's very helpful.

Thanks, Karen.

Dana Telsey, Telsey Advisory Group.

Good morning, Karen, and congratulations.

Thank you.

Can you talk a little bit about gross margin cadence as you move forward?

Obviously, ex search and send if it was flat, could we see improvement as we go through?

I think originally there was flat guidance on the gross margin?

Yes, you know, Dana, I don't know.

It's one of the hardest questions to answer right now.

There's so many good things happening that would lead you to believe the margin should go up, but given what's happening with cost inflation, I just don't think we can commit to it.

So I think flattish for the year is still the right answer.

Got it.

And then on expenses, are any other things on expenses besides topline driving those expenses lower and do you still expect 2 to 2.5% growth or does that adjust?

Yes, I mean that's a question Michelle just asked.

It's very hard.

I think that's probably still the right expectation for the year.

Remember as you think about it, first off, depreciation we had said would be down by about $40 million for the year.

So that increment will go down since we got so much of it in the first quarter.

By the fourth quarter, depreciation is planned about flat with a year ago.

The stock compensation expense we hope becomes not a positive, meaning we're hoping the stock price is doing well.

So that will be factored into the expense increases.

And as you think about things like credit improvement which you think in terms of dollars, as the expense base grows after the first quarter, as a percentage factor it's less significant because the base expenses are higher as you go through the year.

Got it.

And on the big initiatives, My Macy's, MAGIC Selling, are you further along in My Macy's than MAGIC Selling and is that what is leading to the trifecta of comps doing so well that the initiatives are all taking hold throughout the larger store base as we are moving forward now?

Yes, I mean I think the misunderstanding that a lot of people have is that My Macy's or MAGIC Selling is a one-time event.

It's really an improvement in how we think about the customer and how we think about the business that just keeps building in terms of the momentum.

I mentioned for example one of our best regions was the Upper Midwest which is one of the original My Macy's areas and it's their third year.

It just keeps getting better.

Thank you and congratulations.

Todd Duvick, Bank of America Merrill Lynch.

A quick question for you, Karen, and first of all, thank you for clarification on the credit metric targets that you are looking at.

Sure.

And so my only question following that is with respect to when you do resume share buybacks either this year or next year, I would assume you're going to be -- how quickly you are going to buy back shares is going to depend on managing to within those ratios.

Is that correct?

That is correct.

Okay, that was my only question.

Thank you very much.

You bet.

Adrianne Shapira, Goldman Sachs.

Karen, just as we try and kind of get our arms around the elasticity of demand, I'm just wondering on the AUR up 1%, if you could maybe dissect tickets versus units per transaction to maybe shed some light there?

The AUR is average unit retail on a unit.

Okay, but in terms of -- you know give us -- right but in terms of trying to help us understand what you're seeing so far in terms of units versus tickets (multiple speakers)

Well, 1% is what we are seeing in terms of ticket.

That's what the price has gone up on units.

Right, so that's what I'm saying in terms of what are you seeing -- that's the ticket but what are you seeing in units per transaction?

Are units down (multiple speakers)

Well, you know that the total comp was up by 4 and AUR was up 1, there's more units and transactions happening.

I can't split between the two.

Okay, and then traffic in terms of part of to get to the (multiple speakers)

Obviously it's either units or transactions, I mean, it's both.

But it would seem the traffic is good.

(multiple speakers) I mean, as I have said to investors, I think the concerns about the price inflation has been overstated and it's clearly something that is making our lives challenging and people are spending a lot of time focusing on it.

We have a whole group of pricing analysts trying to understand it.

But we don't -- I'm not as concerned as I think many of you are about that subject.

Okay, great.

And then just talking about the categories, it does seem as if there perhaps could be an opportunity in women's.

Give a sense of the traditional, the casual, the shoes, what you're seeing there in terms of the weakness.

Maybe some initiatives or what is in place to perhaps drive an improvement in those significant categories that still seem to be lagging?

It's a good question, obviously we're working very hard to try to figure out what we can do to improve the businesses.

Typically it relates to needing more newness and so we are focusing on that in those categories.

I would say that's probably the biggest area is just making sure that even though it is traditional, it doesn't mean it has to be the same as what they have seen in prior years.

Okay, and then just on the capital allocation front, we're obviously seeing you doubling the dividend and as you say, you seem on track to hit your targets to be consistent with investment grade by year-end.

Just marry what the appetite is in terms of dividends, buybacks.

As you say, the focus continues to be returning cash to shareholders.

Give us a sense of prioritization, how should we think about the opportunity and the appetites going forward?

Well, I don't think we have, you know, a set decision on how we are going to continue to give cash back to the shareholder.

Our history would say that we have tended to pay a competitive dividend and then used excess cash for buying back stock.

But we are still reviewing various options.

Great, best of luck, thank you.

Thank you.

Lorraine Hutchinson, Bank of America.

Just wanted to clarify a comment that you made on inventories.

I think you had said you are planning inventory units up.

And given some of the cost increase commentary we've heard from the vendors, that makes it seem as though inventory would be up quite a bit in the back half.

Can you just maybe talk to us a little bit about how you're thinking about plans there?

Yes, I mean I think it will be up.

But I don't think it's going to be up more than what we're planning for sales.

I mean we're still working on the details of the plan, so I don't want to give specific guidance there.

But overall we're still trying to improve our turnover.

So I don't think you're going to see a number that would frighten you.

Rob Wilson, Tiburon Research.

Karen, I guess you didn't tell us the metrics for traffic and units per transaction but would you say they were both higher?

I don't have those metrics.

So it's not that I didn't tell you, we don't track it specifically.

But obviously if AUR was up 1 and comp was up over 5, there's more units being sold and more transactions and traffic presumably.

Okay, close enough.

And the search and send functionality, that anniversaries fully at the end of Q1?

Middle of the second quarter.

Middle of the second quarter.

And finally, is there any update on the loyalty program test that you have been undertaking?

No, I would say so far they have been not -- the results have not been compelling enough that we are rolling it out.

We're still watching and seeing.

But so far while we've gotten sales lift, not enough to pay for the program, but we are still tracking along and seeing if over time it builds.

Have you expanded the test any?

We have not.

It's really in four markets now and we're testing slightly different things in each of the markets.

And finally on depreciation, are you keeping the guidance you provided for depreciation last quarter?

Yes.

And income tax rate the same?

Correct.

37%.

For the year.

Okay, thanks for taking my questions.

Mike Shrekgast, Longacre.

Karen, I was just wondering if you could talk a little bit on the cost side.

You know, if we go back historically to where Macy's was on SG&A relative to where sales were, last time sales got up to the levels you were guiding to, SG&A was about the level where you guys are guiding to now, maybe slightly less.

Just wondering, when will we -- given the 4% comp guidance, when will we see more of an inflection and a leveraging of SG&A you think so that we see it into the EBIT -- we see more fall to the EBITDA line?

I think you're seeing quite a bit of leveraging.

I'm not sure I understand.

Well, I think you're calling for 4% growth in sales and it sort of backs into an EBITDA number.

No, we're not calling for a 4% (multiple speakers)

Same-store sales.

Right (multiple speakers)

And then sort of back based on your guidance, it backs into an EBITDA number that's only up 3%.

I'm not sure, I'll have to go back and do that math.

I don't think that is the case.

But I will check the math and see.

Okay, well I guess just the main question is, is there a point where we will see more of an inflection in SG&A and perhaps it just comes in more the second half this year as a lot of the -- obviously a lot of the topline initiatives are really starting to work.

Well there was -- if you look at the first quarter which is an actual number, obviously we had lower SG&A on a 5 comp.

Yes.

So I do think that the performance is such that we will see improvement in EBITDA as we go through the year and beyond.

Ken Stumphauzer, Sterne Agee.

Just briefly, confirmation, you said you anniversary the search and send in the second quarter, correct?

That's correct.

So in the back half of the year, that would not be a drag on gross margins?

That wouldn't but the free shipping is.

Okay and when would you -- the free shipping was implemented around the holidays?

The beginning of this year.

And then as far as the debt metrics that you were indicating you might hit by year-end, does that incorporate any prepay of debt beyond that which is maturing this year?

Not prepay, just what's maturing.

Okay and then one last question.

You talked in the past about small stores outperforming the large stores.

I'm curious to know whether that has persisted and if so what you attribute that to.

It has continued.

What we're finding is that the smaller doors are performing much better than they had historically and much more similarly to bigger stores which is terrific and obviously that was the dream of My Macy's, with the greater focus on localization and the reduced span of control in the field organization and we have been able to make a difference to lots of these small stores.

Bob Drbul, Barclays Capital.

Just a couple questions.

The first one is the aspiration to get back to BBB-, will you need to get that designation before you could start resuming your share repurchase?

No, and in fact we doubled the dividend that was announced this morning before getting that rating.

Okay, and then on the sales trends overall, have you seen any change between the sales trends at Macy's versus Bloomingdale's in the outperformance?

The upper tier of retail is doing better on an absolute basis.

Bloomingdale's has done better absolute numbers than Macy's.

Wayne Hood, BMO Capital.

Yes, Karen, just coming back to a couple of topics.

One is as you move those credit metrics down to a level that you think the rating agencies would likely give you a ratings upgrade, I'm just wondering if you're setting yourself up for disappointment because it was five or six years ago that Penny also had similar kinds of metrics and was actually performing very well and the rating agencies did not take them to investment grade and it was because just kind of the dim view they have for the industry.

So for you, you do all the work to get them there and you still don't get investment grade.

Are you setting yourself up given there's a precedent that that didn't happen in the past with another company?

I'm not sure I'm setting myself of up.

I mean if they don't give us the rating, they don't give us the rating.

As I said to Bob, we're not going to act differently into rating.

So I still think it makes sense to get the balance sheet to these ratios and my hope is and my expectation is that the investment grade rating will come.

If it doesn't, I still think it's the right thing for the balance sheet.

Right, okay.

I guess a second question, can you discuss the progress that you may or may not have made with inventory turnover in the first quarter if you strip out the online business?

And what kind of progress you expect for the year now that the sales are growing fairly robustly in the churn number?

I would never , I mean I don't know why you would strip out the online business.

That's sort of the key part of what we are doing from an inventory turn perspective.

But the comp store inventory which includes the Internet inventory was up 2.8% compared to the comp of 5.4%.

That's pretty impressive.

And as I said, we are investing in the

So you are implying that you did have improvement in turn in the first quarter?

Yes.

And for the year, do you have a basis point expectation as to what you think that turn could be?

I don't.

As I said earlier, we're still working on the fall plan.

And then my last question comes back to the credit side of the business.

How much of that is just reserve unwinding versus the overall portfolio growing or some combination of both?

It's a combination of both.

The guidance you have given though would imply some improvement obviously in the reserve and the performance of the portfolio.

And I think Liz got to this is how much of the improvement in SG&A though is really driven by credit in 2011?

Well, for the first quarter I gave you the numbers, $25 million of the improvement was due to credit.

Some of that will -- we expect to continue to see it, but at this point we're still watching the trends very closely.

So I can't give you a specific number for the remainder of the year, but we do think it will benefit us.

But I was just thinking there's some implied number in the guidance you've given, right?

There is not.

Jeff Stein, Soleil Securities.

Karen, a question regarding the cost of goods.

I'm wondering if vendors are willing to lock in prices as they have in the past or are they trying to kind of shorten the lead time before they give you a commitment on price?

I'm not sure I'm an expert on this subject but I have not heard any change in how we are working with our vendors.

Got it.

And as far as your strategy for the back half of the year with respect to pricing, is the goal to kind of maintain your -- protect your merchandise margin so to speak with higher selling prices?

Our goal is to drive sales and keep our customers happy and our expectation is that we can do that and also maintain our margin.

Got it, got it.

And just final question, just looking at the store, obviously things are going extremely well.

But what are kind of some of your priorities from a merchandising standpoint where you are trying to focus and improve underperforming areas?

And also there was a comment in the release this morning that did indicate you're testing a wide range of new ideas and innovations.

Wondering if you might give us a couple of examples that you're working on.

Yes, I would say -- and it's not because it's an underperforming business, but because we see opportunity.

But we're spending a lot of time focused on the youth businesses which we started with Material Girl and BAR3, the new private brand we launched, and that will continue.

So that's a big area of focus as we go forward.

So again not an underperforming business, but one where we see a lot of opportunity for us to grow and keep the comp store growth going as fast as it has been.

In terms of some of the innovations, two that come to mind is we're beginning to use iPads in our stores in different ways and bringing more technology into the stores.

Another would be the impulse beauty area which I think probably all of you have now seen.

It's in about 75 locations with another 25 plus going in the remainder of this year.

But we started slowly and tested bringing in smaller lines really geared to that younger customer and the departments are doing extraordinarily well.

David Glick, Buckingham Research.

Congrats, Karen, on the quarter.

Thank you.

Just wondering if you could update us on the investments you are making in macys.com and bloomingdales.com in terms of infrastructure investments and hiring and how you see that ramping up the balance of this year and in 2012 and what kind of impact it's going to have on SG&A growth in the next year and a half.

We haven't actually quantified the expense investment we're making, but it's obviously material when you've got a business growing at 38% and we expect that trend to continue.

We're obviously adding quite a bit.

But I can't give you a specific dollar number, David.

And in terms of the capital investments, those continue to be made as well.

And do you see that having more of an impact on this year or next year in terms of the expense side?

My guess is if that business keeps growing as it's growing and as we expect it to, I think it's going to continue to have an impact.

And what's interesting is five years ago, we thought of it as a separate business, the Internet.

Today it's getting so intermingled with how we are operating the stores that it's frankly just an investment in the total growth of Macy's Inc.

Thanks for the color and good luck.

We have no further questions at this time.

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

Karen Hoguet for any additional or closing remarks.

Well great, and thank you all for your interest and support and if you have any additional questions, obviously feel free to call us.

Thanks.

Take care.

That does conclude today's conference, thank you for your participation.