梅西百貨 (M) 2011 Q2 法說會逐字稿

Good morning and welcome to 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.

Good morning and welcome to the Macy's conference call scheduled to discuss our second-quarter earnings and our outlook for the remainder of the year.

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 completes.

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.

You haven't been hearing much positive news about the economy so far this week.

But I think we at Macy's have a very good story to tell about the last three months.

And our outlook for the remainder of the year reflects the optimism we feel about the direction of the business as well as realism about the macroeconomic environment.

As you saw, we produced a 57% increase in earnings per share in the quarter, well ahead of our expectations.

The two major factors driving this strong performance are, first and foremost, profitable sales growth, and secondarily, the improvement in our credit performance.

When we started the year, we had expected comp store sales growth of the 3% for both the first half and the full year of 2011.

Having achieved in excess of a 5% comp store increase in the first half of 2010 and with concerns about the economy, we thought 3% would represent good performance.

However, we were able to exceed the 3% expectation by a wide margin and produced a comp store sales gain in the first half of the year of 5.9%.

This result also compares very favorably to our peers.

Our strategies are clearly working and we continue to believe that our My Macy's structure and approach to localizing our offering are giving us a significant competitive advantage.

In addition, our Omnichannel Strategy and MAGIC Selling program are also helping us to accelerate our sales trends.

In the second quarter, we produced sales of $5,939,000,000 or a comp store increase of 6.4%.

All Macy's regions exceeded last year and at least achieved plan in the second quarter.

We are producing our strongest sales trends across the South and in the major tourist areas such as New York City, downtown San Francisco, Miami, Las Vegas, Orlando, Hawaii, and Chicago.

The Bloomingdale's business continues to be very strong as well and compares favorably to our upscale competition.

The Internet, with our Omnichannel Strategy, is continuing to produce terrific results with a 40% sales increase in the second quarter.

The interaction between our stores, the Internet, and mobile devices is making it harder and harder to really distinguish between store sales transactions and Internet sales transactions.

We are reporting the sales where the customers buy, but we know that customers are sometimes shopping in the stores and then going home and ordering online while other times the reverse is done.

Having multiple channels and focusing on an integrated strategy for all is really important for driving our sales growth and enhancing customer loyalty.

Our strongest merchandise categories in the second quarter were jewelry, watches, fashion accessories including handbags and hosiery, cosmetics, fragrances, men's and home.

Private brand also had a good quarter, led by INC.

We had two very successful private brand launches this spring.

BAR III for the Millennial customer, and Greg Norman for Tasso Elba, a new exclusive golf line.

We also continue to see strength in exclusive brands such as Tommy Hilfiger and Martha Stewart.

The weak categories of merchandise continue to be within the casual traditional feminine apparel and intimate apparel.

During the second quarter, the average unit retail or AUR increased by approximately 4%.

Our customers began to feel the impact of increased prices in the second quarter but it is not until the August-September period when we expect the price increases to be more widely experienced.

It is important to remember, though, that some of our AUR increases result from factors other than price inflation.

AUR increases occur with mix changes, resulting from the healthy sales in our status brands, new higher price point initiatives like Impulse, and product initiatives that are geared to fashion versus commodity goods.

Also, more regular price selling can also result in AUR increases.

Combining all of these factors, we are expecting AUR increases in the 5% to 7% range this fall.

Gross margin in the quarter was 41.8%, down 10 basis points versus last year due to the stronger Internet sales and the free shipping.

We ended the quarter with comp store inventory up approximately 3%, which we feel positions us well for the back half of the year.

SG&A in the second quarter was $1.976 billion or 33.3% of sales.

This is up in dollars 1.2% over last year but down 190 basis points as the rate to sales versus the year ago.

This is better than expected, due primarily to the continued good news on the strength of our credit portfolio.

In the quarter, credit produced approximately $57 million more income than last year.

We had expected improvement but not this much.

As in the first quarter, the portfolio experienced a big improvement in delinquencies and losses.

Proprietary penetration or use of our proprietary card was essentially flat during the quarter versus last year at 46.8%, which is also better than we expected.

Offsetting this benefit from credit, as well as the $20 million reduction in depreciation and amortization, were three main factors.

One, an investment in selling expense to drive our sales growth.

Two, investment in our Omnichannel Strategy, including the costs associated with our store to door strategy and three, stock-based compensation, which increased $18 million over last year in the second quarter.

Operating income in the quarter was $506 million, up 37% over last year.

And as a percent of sales, operating income was 8.5%, up 180 basis points over a year ago.

Interest expense was $111 million, down $19 million from last year.

Tax expense was $154 million, leaving net income of $241 million.

Average diluted share count was 434.6 million shares and earnings-per-share was $0.55 per share, up 57% over last year's $0.35 a share.

Net cash provided by operations was $587 million, up just short of $300 million over a year ago.

As you saw, net income was up $202 million, explaining much of the variance.

In addition, we made $100 million lower pension contribution this year as compared to last year.

These were offset in part by inventory, which was $172 million unfavorable to a year ago, offset though by $109 million of higher payables.

So, the net additional use of cash for inventory was $63 million.

You heard me refer to inventory net of payables.

I did this because we executed a strategy this year to have new merchandise arrive in stores across the country closer to the same day than what happened previously.

This was actually one of the changes we made in response to a My Macy's sales-getting opportunity that the new team identified.

The result of this, though is a large increase in in transit inventory at the end of a month, as our receipt flow during the course of a month becomes more concentrated in the first week.

In transit, as you know, is completely offset in payables so there's no impact on cash flow.

And at the end of the second quarter, inventory was up 6.8%, but net of merchandise payables, it was up 3.5% just slightly above the comp store inventory increase.

The key here, though, is that factoring out variations and ship dates, we will continue to maintain comp store inventory growth at a level lower than comp store sales growth.

Net cash used by investing activities was $222 million in the first half of the year, approximately $100 million more than last year, due to the planned increase in CapEx which includes purchase of property and equipment as well as capitalized software.

We utilized less cash for financing activities this year, largely due to the fact that we repaid $247 million less debt this year.

So, we've ended up generating $31 million of cash in the first half of the year as compared to the use last year of $478 million.

And because of our strong performance, we were able to achieve the target credit ratios that we laid out for you at the end of the first quarter.

The calculations are detailed on the website but, as you recall, we had set targets for debt EBITDA of 2.4 to 2.7 and for the rolling four quarters ending in July we've achieved 2.7.

And our adjusted EBITDA to interest, is 6.4 for the rolling four quarters versus our target of 6.4 to 6.6.

This is earlier than we had anticipated and now opens the door for us to consider the possibility of buying back stock this fall.

However, there will not be any significant buyback until after the holiday season which, as you know, is when we generate significant cash flow.

We remain very focused on keeping our ratios within the target range and being an investment-grade company.

As we look to the fall season, we are cognizant of the less than ideal economic backdrop as well as the price increases coming in some parts of our business.

Having said that, we have great momentum with so many merchandise categories performing well, and our initial experiences with price increases have proven to be generally consistent with our expectations in terms of unit sales.

We are assuming comp store sales for the fall season of 4% to 4.5% versus our original guidance of 3% and most recent guidance of 4%.

This, combined with the Spring actual results, would result in an annual increase of 4.8% to 5.1%.

We are expecting annual earnings-per-share of approximately $2.60 to $2.65 for the full year or for the Fall season $1.74 to $1.79.

This guidance excludes any benefit of any potential stock repurchase but as I stated earlier, we would not expect the impact to be significant this fall.

Also, as in prior years, we could close a few stores at the end of the year, and the costs associated with these which would be primarily non-cash are also not included in this guidance.

Let me make a few additional comments that I think will relate to the fall guidance to help you as you develop your expectations for us for the back half of the year.

One, comp store sales are assumed to grow by about the same percent in each of the third and fourth quarters.

In the third quarter, we are expecting to generate our biggest sales increase during the month of August with lower growth expected in September and then in October.

Two, we are expecting our gross margin rate to be down slightly in the Fall season, particularly in the third quarter.

This is due primarily to the impact of free shipping on the Internet and the growth in that business.

Because we offered free ship during so much of the fourth quarter last year the impact on gross margin this year relative to last year will be less during the fourth quarter.

Three, while the increase in the comp store inventory is expected to continue to be below that of our sales growth, at the end of October and the end of January, the reported inventory will show a bigger increase.

As discussed before, this is because of the change in how we are writing our orders regarding the ship date.

We also decided to accelerate some merchandise orders from the first week of November into the last week of October.

We did this to ensure that the stores can absorb the merchandise received.

This shift compounds the in transit increase and leads to an even larger expected increase in inventory at the end of the third quarter.

We are still working on this shift and the estimate for inventory at the end of the third quarter, but at this point we would estimate that the reported inventory could be up as much as 10% to 12% at that one point in time.

Obviously, at the end of January, where there won't be any receipts shift the impact will be much less.

Four, as to SG&A.

We are assuming a continued improvement in SG&A as a percent of sales in the third quarter and in the fourth quarter as we leverage the sales growth.

SG&A dollars are expected to increase versus last year by a higher percentage in the Fall season than experienced in the second quarter and by an even higher percentage in the fourth quarter than in the third quarter.

We're expecting the improved credit income to continue into the Fall season.

However this benefit is expected to be offset by many items most of which, though, relate to driving the comp store sales growth.

For example, the ongoing investment in the Omnichannel Strategy, including the store-to-door fulfillment strategy, is adding costs.

And, we are making an investment in our stores for the holiday period to support our MAGIC Selling effort.

We are also funding resources during that very high-traffic time of year to help our stores better recover after big days.

Five, we are expecting depreciation and amortization to be approximately $565 million this fall and interest expense to be approximately $215 million.

Six, our tax rate is still expected to be 37% for the full year even though it was approximately 39% during the first half of the year.

We are expecting some state tax settlements for audits, which will result in a much lower tax rate in the quarter when they occur which, at this point, we think most likely will be in the third quarter.

And seven and lastly, we are still expecting CapEx for the year to be approximately $800 million.

We remain cautious but optimistic about this Fall.

We can't ignore all that is going on in the world this week.

But we also can't ignore the momentum we have nor the confidence we have in our strategies.

We are staying focused on what we can control.

Our team is working hard to maximize the opportunities from our three key strategies.

One, My Macy's.

Two, Omnichannel Strategy and three, MAGIC Selling.

As we have said before, we continue to be in the early innings of the implementation of each of these strategies.

And frankly, the more we learn and the more positive results we see from each, the more additional benefits we can envision.

At a management meeting last week, for our top 60 people or so, the mood was as optimistic as I've ever seen it.

And while we are all very pleased with our results, we all know just how much more potential we have.

The good news is that our success to date has been balanced between Macy's and Bloomingdale's, between the stores and online, across all regions of the country and across families of business.

Even with the new discussion about the economy and the headwinds we all face, we have a broad range of assets to keep our business moving forward.

With that, I will take whatever questions you may have.

(Operator Instructions).

Michelle Clark, Morgan Stanley.

Congratulations on a great quarter.

The first question obviously you didn't see it yet in the second quarter, reported sales number, but obviously there's a lot of nervousness among investors about strength in the high-end consumer given the recent selloff in the market.

Just wondering if you've seen anything at Bloomingdale's in terms of a slowdown in sales trends over the past couple of weeks correlated with a selloff in the market?

I would argue A, we have not.

But B, I think gets a little bit early to be judging but at this point, business has continued strongly.

Terrific.

And then, I was wondering if you could just discuss what you're seeing in terms of the promotional environment, specifically as it relates to Macy's.

I don't think we've seen anything dramatically different than what we've experienced in prior times.

So no pickup in discounting 2Q versus 1Q?

I'm not even sure how I would answer that.

But there is no difference year over year.

Okay, great.

Then on the first-quarter call you had mentioned that May was off to a good start.

I was wondering if you had any commentary on August.

I know it's early

Well, it is obviously early but as I just said a minute ago vis a vis Bloomingdale's, we continue to be feel good about the business as you can see with our guidance for the Fall season.

Thanks, Karen.

Best of luck.

Paul Swinand, Morningstar.

Good morning and thanks for taking my question.

My first question was on the prior conference call you said that you were going to be investing in certain inventory areas.

I think one of the things mentioned was outdoor furniture.

I guess with the good comp in the quarter that implies that some areas accelerated turns.

Can you talk a little bit about what maybe you didn't invest in but that you're able to keep the sales high and turn the goods faster?

Well, our turn overall is improving as a result of the good sales and inventory control that we are exhibiting.

So really, in most parts of the store, turnover has improved.

So are you attributing all of that to the My Macy's system and just taking what you would've done in merchandising any way and a soft goods category and being able to get that out faster, get better -- more on target merchandising, turn it faster or --?

I think it's a combination of our offering meeting customer demand better and sales being stronger.

Also we have a very strong replenishment group in place that's helping in those areas.

So, it's really efforts across the board.

Okay and then in the Fall and going into the holiday, what new areas of inventory will you be investing in a similar way?

While I think we will continue to invest in the areas of the business that are doing so well throughout the center core -- cosmetics, men's, home, etc.

-- I can't think of any major new categories that are large.

But we will continue to fund the businesses that are growing.

Thank you.

Then just real quick with the talk of the inventory system that you just explained, do you see that accelerating cash flow over the long term or is it just a net neutral in the next few years?

Inventory turnover, obviously, does help cash as we can improve it.

The next big opportunity for improving inventory will be better utilizing the inventory we have between our stores and the direct to customer warehouses.

And, we haven't even begun to take advantage of the opportunities there.

So, I would expect turnover to continue to help our cash flow over the next couple of years.

Jeff Stein, Ticonderoga Securities.

Karen, question on MAGIC Selling.

It sounds to me like you're kind of stepping up the level of activity there and I'm wondering, have you in any way been able to measure the level of conversion or improvement in conversion that you're getting from MAGIC Selling?

Well, it's hard to measure but it's also obviously the sales growth that we are exhibiting certainly, I think, is in part attributable to MAGIC Selling.

The other remark or comment I would make is that we, as you know, are measuring the equivalent of a net promoter score and we are at levels now significantly higher than we were a year ago, which is when we began to measure that.

I have to believe a lot of that is attributed to MAGIC Selling as well.

Okay.

So are you investing -- relative to where you started the year, are you investing more in that initiative now than you had originally planned?

No, we aren't.

It's as expected.

And, the $57 million increase that you saw -- benefit that you saw from credit in SG&A, roughly how many basis points improvement did that produce in that ratio?

I'm not sure I understand -- as a percent of what?

As a percent of total sales?

I don't know the answer to that, Jeff.

I could calculate it but I'll do it later and call you.

And final question, quickly, which categories are you seeing the highest relative price increases or cost increases for the fall?

Well, it's really going to be any areas that have high percentage of cotton.

So it will be a lot of the apparel areas and also home textiles sheets and towels.

Got it.

Thank you very much.

Lorraine Hutchinson, Bank of America.

Karen, can you share with us some early findings on price elasticity?

Any differences you are seeing in basics versus fashion or anything else you can call out to help us understand how these trends are going?

Well, I would say in fashion obviously there's less resistance as you would expect in commodity areas but, I think the good news for us is that as we've done some tests and in commodity areas, where we reduce the number of units, we've been relatively good at predicting that elasticity.

So, there are parts of the store where we expect units to be way down versus a year ago.

But, in other fashion areas, particularly, less the case.

And then are there places particularly in private label where you are hoping to defend some of the opening price points and then perhaps raise on higher fashion items?

Absolutely.

There's not one answer to how we've dealt with the pricing increases.

In some cases where we know the customer is very value-oriented, we are not passing the cost increase completely or at all to the customer and hoping to make up the margin other places.

Adrianne Shapira, Goldman Sachs.

Thank you.

Karen, obviously a great first half it sounds like very confident of you heading into the back With your own opportunities as you kind of raise your comp outlook to 4.5.

But, give us a sense if you step back, are there places in the planning that you've tempered, whether it be some orders, inventory, even margins, how we think about it in light of the fact that the world seems to -- at least the market seems to be telling us that we are going to go into a bit more of a challenging back half?

I'm not sure we know that yet.

Clearly there is market disruption but how that affects customer spending, I don't think we know yet.

I think the only comment I would make to you is that we are constantly re-forecasting the business.

So should we start to see weaker sales we will start to react.

But at this point I think doing that right now might be an overreaction.

Okay, because I guess on your gross margin in terms of the guidance, appreciate the fact that free shipping would be an impact there.

But I guess previously for the year we had thought about flat for the year versus (Multiple Speakers).

Well, the difference -- the difference though is not merchandise margins.

The difference is the free shipping.

Had the Internet not been growing as well which, by the way, are very profitable sales, it's just from an accounting perspective the free shipping goes into margin.

But, the merchandise margins are still expected to be flat this fall.

Okay, that's helpful.

Then, talking about categories, women's like casual, traditional, women's you've been calling that out as weak for some time.

Maybe kind of help us think about what actions are being put in place to stabilize, improve there -- talk about maybe the inventory bets and is that true national as well as private label?

I think I can speak more to the private brand side where we're spending a lot of time looking at the private brands that service that customer -- particularly Charter Club and have really retooled that line and are actually excited about its prospects.

But, don't expect it to make a big impact on this Fall.

And, I guess I should add as you are all beginning to be so worried perhaps hopefully overly so about what if the Fall sales disappoint us?

I would say that the good news is, is that most of the areas that we have funded in terms of inventory and that have been growing so well are more of the center core areas where the markdown risk is a lot less.

So, that should hopefully make you feel a little more comfortable about margin risks should changes in the sales trend happen.

That's helpful.

Then beyond just in terms of the inventory, the margin, on the SG&A front, I mean obviously you talked about continuing to invest in Omni channel and -- but help us think about contingency plans on the expense side.

As I said, so much of the increase has to do with added selling and added support in the stores that, if the sales don't happen, we won't add the expense.

So, there, too, if the sales trends change significantly, we have time to react.

Bernard Sosnick, Guilford Securities.

Karen, could you amplify a little bit on the difference in sales between the tourist areas and much of the rest of the country during the second quarter?

Would you say that where it was somewhat weaker, they were all up to plan, but where it was somewhat weaker was mainly weather-related?

I'm not sure that there were any major issues with weather in the second quarter.

I'm not quite sure how to answer that.

Business was pretty good across the country.

As I said, we did well in all of our regions.

The southern part of the country did particularly well all the way across from Florida all the way through to California and Hawaii.

But in addition to that, tourist markets did particularly well.

Now, with regard to My Macy's, particularly in the Midwest and in markets -- hate to use the word -- formerly serviced by May Department Stores, are there kind of particular adjustments that are taking place to address the somewhat less affluent customer than, let's say, Macy would've been catering to and might have adjusted the inventory towards after the acquisition?

Well I'm not sure that I agree with your distinction between May and Macy's.

But, it's sort of not relevant anymore.

I think the key thing is with My Macy's, store by store, we are reacting to the customers in that store and in that trading area.

So there are a lot of places where the mix of customers is more moderate than others.

And we are responding with putting in that inventory that appeals to that customer.

But I think the short answer to your question is yes.

We are responding.

That's one of the beauties of My Macy's.

Yes, believe me, I appreciate it and I asked the question in that vein.

Anything with regard to gift strategy during the holiday season that's noteworthy?

Well there's a lot that's noteworthy but I'm not sure I would want to tell you given that the competition will find out at the same time.

But we are very excited about our gift strategy building on a lot of the things that we had done last year.

And we feel great about the marketing campaign which, in many ways is going to be Omni channel this year, as well as the assortments and in-store execution?

Should be a terrific holiday season.

Bob Drbul, Barclays Capital.

I guess asking the question a different way, when you look at the uncertainty that's out there, the unsettling markets, what categories are you watching closer today that you weren't really paying that close attention to over the last few weeks or months?

We are watching every category more closely today than we were before the last couple of weeks.

There's really not any one in particular that I would point to.

And in terms of the credit card income, can you give us a perspective on where we are within the credit card business, you know, ROA reserves or write-offs maybe relative to 2007?

Just trying to understand sort of the differences today in those levels versus where they were.

Yes, we are getting back to historic levels of profitability of that business.

So it's really quite good right now.

Okay.

And then, can you talk a little bit about the Bloomingdale's outlets, the unit economics around that and sort of any updated thoughts on the ultimate penetration for that store?

No.

We continue to feel like it's a good opportunity that, interestingly, we think is building the brand even in the full-line stores.

So we feel good about it but it is as you know a very different business in the full-line stores.

And so we are learning as we go.

But we will continue to open them and how many we ultimately get to.

I think it's too early to tell you that.

I just don't know.

Then, my last question is on the AUR's, up 4%.

Are you seeing any shopping habits changed around the different prices in terms of a flop to more on the promotional events or anything like that?

Not yet.

Ron Wilson, Tiburon Research.

You mentioned that AUR was up 4% in Q2.

Can you give us maybe the primary driver of that in Q2?

It's a combination of the factors that I talked about.

Some of it really is mix change.

Some of it is stronger regular price selling but also we were beginning to experience some of the price increases that we expect to continue into the fall season.

Okay and well, thanks, and why do you suggest that August would be your strongest month in the quarter Q3?

Well, we moved our Shop For a Cause event from October into August so, that should help.

And we did that to frankly have less events in October and spread it out better.

So that should lead to higher sales in the month of August.

Okay and finally I go back to that regular price sell-through.

Are you expecting higher regular price sell-through in the second half of the year?

You know, we don't really plan it that way.

But, it has been true this spring.

So we would expect that it would continue.

Ken Stumphauzer, Sterne, Agee.

Thank you for taking my questions.

I just have a couple of them.

As far as the carded income, you indicated there was a $57 million tailwind in the quarter.

Am I correct about that?

Yes.

It just seems exceptionally larger than the context of how much that contributed last year.

I think it was like 322 for the full year.

Is there anything structurally different that would explain that or is it just that we are in a better part of the cycle at this point?

There is nothing structurally different.

So this would suggest that you could get back to kind of like peak 2006 type income levels.

Is that correct?

Well, you've got to be careful with -- you have to look at a period after we sold the business to Citi but yes we will get back to peak profitability.

And then as far as the gross margin impact from ECOM and free shipping, can you quantify how much that was in the quarter and what you're expecting it to be in the next quarter?

No we have not broken that out.

But it is the entire reason that the margin in the second quarter was below a year ago.

Okay and just finally, as far as comps go, looking backwards obviously this quarter and the preceding quarter accelerated from the prior period and the second half of 2010.

Do you think you can attribute any of that increase to the increasing price points or better-than-expected demand elasticity?

I don't know.

I've got to stop and think about that one.

Clearly in the second quarter, the AUR was up more than it had been in the first.

So, I think that probably is true.

Best of luck.

Priya Ohri-Gupta, Barclays Capital.

Good morning.

Just wanted to confirm that you are still expecting to pay down maturity you that you have coming up in September.

And also, if you could address your plans for the other maturities you have coming due over the next 12 months.

Thank you.

Yes on the maturity in September and for the next 12 months, we are really going to manage that around our credit ratios so some of that debt that matures in 2012 will get paid down.

Others could be refinanced.

Deborah Weinswig, Citi.

Thanks so much, Karen, and congratulations on a great quarter.

Can you update us on where you are with regards to the rollout of the optimization technology and when should we expect the benefits to impact the business?

I'm assuming you're talking about the pricing optimization.

Yes.

Yes, we are just beginning to start testing it and so would not expect a rollout until probably a full rollout probably until early 2013 but certainly by this time next year it will have been rolled out to a significant part of the Company.

And we're obviously very excited about what we think that will enable us to do.

Should help gross margin rate and also should help sales.

And then, you had referred earlier to being in the early innings with some of your key strategies.

With regards to MAGIC Selling training, Omni Channel by Macy's, can you just update us with regards to what innings you actually are in?

That's obviously a major judgment call, Deb.

On MAGIC Selling, we are just scratching the surface and beginning to make an impact.

So, it's hard to give you an inning but it's very early.

In terms of the Omni Channel I would say the same thing.

So, we are obviously farthest along with My Macy's.

But even that is still early in the game.

Very helpful.

And then how many stores at this point in the game have Impulse Beauty and have you noticed any difference in the comps in those stores?

I don't know the specific number.

I'm sorry.

I'll have to get back to you on that.

But those stores with the Impulse Beauty are doing better in cosmetics.

I have not checked the total store.

Okay.

And then you had mentioned on the call about store to door.

Can you maybe just provide an update on that initiative?

Yes, let me go back a step and put that in context.

Around this time a year ago, we rolled out something that we call Search and Send which is if you are in a store and we don't have what you want in stock, the sales associate can very easily order it for the customer from the online inventory.

During the fourth quarter last year, we tested it in a couple of stores on the West Coast the ability through the same Search and Send but have inventory pulled not only from the central warehouses supporting the Internet business but also from these two store locations, i.e., store to door.

And we found that by doing that, we are more likely to be in stock when the sales associates search for an item and therefore satisfy more demand.

And so, we've now got that in 23 locations and it will be over 150 locations by this time a year from now, and we are so now throughout the Company, you are able to go to a Macy's store and have the associate search the inventory, invisible to the sales associate, but we will pull it from stores in addition to the Internet warehouse.

And this is all a part of trying to be able to better satisfy customer demand and also over time make our inventory investment far more productive.

It's really quite exciting.

Thanks so much and best of luck.

Wayne Hood, BMO Capital Markets.

I had a question and it kind of relates to the pension plan right now.

Given what's gone on with the yield curve in credit markets, you know, things could change daily I know but as you begin to think about like 2012 and 2013 with them wanting to keep rates low for a sustained period of time, and you've got an 8.75 expected long-term rate of return built into the plan, at what point do you begin to think about we need to make some adjustments to that, given where fixed income rates for the yield curve is going to be and where markets are right now?

First, it's 8%.

But, secondly, we review it every year and we'll do that again this year.

I guess given where the fixed income markets are, you would think you would have to review that as opposed to leave it loaned?

No, I don't know that.

Okay.

Second question I had would be can you give us some sense of the percent of merchandise that's tied to free shipping and kind of what your assumptions for minimum orders for free shipping because a lot of companies last year and this year are using that as a competitive edge and I just wanted to see where your thinking you're going to come out on all that.

I'm not sure I understand your first question.

Anything is eligible for the free shipping.

Yes.

So what percentage is that?

Percentage of what?

Percentage of sales is tied to free shipping?

I don't know.

Not quite sure.

But, currently if you're in a store and you take advantages of the Search and Send anything over $50 is free shipping and online it's $99 for Macy's.

Bloomingdale's is higher.

Then, my last question I guess, back to the credit thing.

Would you anticipate anyway that with the reserve unwinding that you would go deeper into the file to drive traffic or to develop more deeper credit promotions to differentiate yourself, given that reserve unwind potential?

I wouldn't relate the two that we are always looking for opportunities to profitably increase the amount of credit we can offer to our proprietary card users.

So, we are doing that on an ongoing basis.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about the complexion of -- as how you're thinking about the comp guidance?

Given the 4% increase in AUR that you got in the second quarter, do you expect it to be similar as you move forward, given the price increases that are occurring?

And then just lastly as you think about Fall and Holiday, advanced product focus -- how will it be different this year than last year?

Thank you.

Let me answer the first question which is, as we had said we are expecting the AUR to increase 5% to 7% in the fall, consistent, and our guidance is the 4% to 4.5% so, obviously you see the delta there in terms of units.

And in terms of areas that we are focusing on in terms of the Holiday business, I think I'm going to pass on that.

David Glick, Buckingham Research Group.

Congrats to you and the team on a good quarter.

Just looking at the success of your Internet business, I know there are a lot of factors underlying it.

I am wondering how much of it do you guys attribute to the shift in your advertising budget to more digital versus TV and print?

And does that give you more confidence in accelerating that shift as we go forward?

Actually, I think the digital marketing is doing more to drive the store's business.

So actually I see that as helping the store business as much as I do the Internet.

We are making so many improvements on the site week by week, month by month, better assortments, more consistent with what's happening in the stores which is helping better marketing.

More personalized offers out of the website.

But I do think we're going to continue to see outsized growth there.

Thanks a lot.

Good luck in the second half.

(Operator Instructions).

Bernard Sosnick, Gilford Securities.

Karen, could you give us any guidance as to annualized projection for online sales this year?

No.

Sorry.

No.

A., I don't have the number.

And B., we don't break it out.

It's obviously contained within the comp with the 4% to 4.5%.

Okay.

Thank you.

It appears there are no further questions at this time.

Ms.

Hoguet, I would like to turn the conference back over to you for any additional or closing remarks.

Really, just thank you all for your support and if you have more questions feel free to call us and we'll try to be helpful.

Thanks.

This concludes today's conference.

Thank you for your participation.