梅西百貨 (M) 2013 Q2 法說會逐字稿

Good morning and welcome to Macy's second-quarter earnings release conference call.

Today's call is being recorded.

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

Please go ahead.

Thanks, Lori.

Good morning and welcome to the Macy's conference call scheduled to discuss our second-quarter earnings.

Any transcription or any 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.

While we are pleased to have reported a 7.5% increase in earnings per share for the second quarter, and a 16.5% increase for the first half of the year, we were disappointed with our sales performance in the second quarter.

Remember that we had originally planned sales growth 200 to 300 basis points lower in the second quarter than in the first quarter due to the shift in the timing of the Friends & Family event at Macy's.

But the trend did end up worse than we had expected.

We believe that much of our weakness is due to the health of the consumer and the fact that consumers seem to be choosing to make purchases in non-department store categories such as cars, housing and home improvement.

Since we are the first to report sales and earnings it is frankly hard to judge how much of a role the economic conditions played.

But we think it was significant.

We also believe, however, that we could have produced a better sales performance and we are discussing what we could have done differently both so that we can improve the trend in the third quarter and also so that we can have a great second quarter next year.

I will address this more as we go through the call, but the good news is that we believe we have reacted appropriately and our fall plans now reflect increased marketing as well as greater recognition that in today's environment value matters a great deal.

So we are turning up the volume on that message for the remainder of 2013.

We believe that the changes we have made will result in improved sales performance this fall.

And while it has only been a few weeks, we are encouraged by our early August trends across the country and particularly in the back-to-school categories.

I'll now summarize some of the key aspects of our second-quarter results, as well as our guidance for the back half of the year, and then I will take your questions.

Sales in the second quarter were $6.1 billion, down 0.8% from last year on a comp basis.

Remember that comp sales do not include any amounts attributable to licensed businesses.

If sales in licensed businesses were included in both years our comp sales would have been up 0.3% or 1.1 points better.

As we have discussed, this is the most comparable measure to last year because of the conversion of our athletic footwear business to Finish Line and also the introduction of some new brands at Bloomingdale's and at Macy's Herald Square that are licensed departments.

Sales at Macy's were disappointing in the quarter across the country, although less so in the southern parts of the country and Hawaii where weather was less of a factor.

Macy's.com continued to be strong relative to last year.

Bloomingdale's had a very strong second quarter both in stores and online.

This performance was much improved in comparison to the first quarter which is very encouraging.

If we look at the performance by Family of Business, trends softened relative to the first quarter pretty much across the board with businesses that had been strong remaining so on a relative basis.

Business in center core, especially handbags, continued very strong, as did key home categories including furniture and mattresses.

We also saw strength in key back-to-school categories including kids and active, although juniors continued to be weak.

Impulse, which is geared to our older millennial female customer, is beginning to gain traction as we continue to add more new brands.

Our two most recent launches, Maison Jules, a private brand, and QMack, an exclusive brand by Jones, have both started off very strong.

What was most encouraging in the second quarter, however, was the strengthening in feminine apparel.

Sales of career and modern wear to work merchandise were strong and this bodes very well for the fall.

We also did very well in opening price points in the Women's apparel area.

Moving on to the areas with weakness...

In addition to juniors we had a tough quarter in shoes driven by a weak sandal season.

We are hoping for a strong boot season which would improve our overall shoe trend this fall.

Cosmetics, fragrances, jewelry and watches all softened in the second quarter relative to the first, but we do feel better when we look at the overall trend in the first half of the year in those categories.

Average unit retail was flat in the second quarter with transactions down approximately 1.6% and units per transaction up just short of 1%.

This is a very different picture than what we had experienced earlier this year.

The average unit retail was hurt by the promotions needed to clear through the warm weather inventory as well as mix.

For example, the opening price point of apparel being strong with jewelry being weak.

What was more concerning though was the drop in the number of transactions, which is a proxy for traffic.

This is in part why we decided to add to our marketing for the back half of the year.

Gross margin in the second quarter was 41.8%, down 10 basis points from last year.

This was partially due to additional markdowns needed to clear the seasonal merchandise, given how long it took this year for the weather to turn hot.

Also pressuring margins in the quarter were the ongoing costs associated with free shipping.

These negative factors were offset in part by higher licensed income.

Inventory at the end of the second quarter was up 6%.

This is consistent with what we had expected and reflects the acceleration of back-to-school receipts and receipts of merchandise in our key brands.

Planning the timing of receipts is very complicated this year.

Because of the 53rd week in 2012 every week on the fiscal calendar is essentially one calendar week later.

We believe that bringing these goods in fiscal July was right for driving the sales since customers shop on certain calendar days, even if it falls differently on our retail calendar.

SG&A dollars in the second quarter was just short of $2 billion, $10 million less than last year, although up 20 basis points as a rate to sales due to the lower sales.

We are very pleased with our expense performance and our ability to minimize the impact on the bottom-line of the weaker sales.

In the quarter we benefited from continued good results from our credit business which generated $31 million more income this year than last year in the quarter.

The credit profitability continues to be driven by low losses and the strength of the portfolio.

But we do continue to be challenged by credit penetration which fell versus last year by 70 basis points in the second quarter.

As we look to the fall, we are not anticipating big increases versus last year in credit income.

The benefit from credit was offset by our added investment in Omni-channel, which we are funding to support the continued growth.

Interest expense in the quarter was $96 million, $9 million lower than last year.

Our tax rate in the quarter was 35.8%.

As we have discussed, our tax rate will vary by quarter based on the timing of settlements and other discrete items.

Net income in the quarter was $281 million, up $2 million over last year.

Average share count on a diluted basis was 389 million shares, down 7% from last year.

Earnings per share on a diluted basis were $0.72, which is 7.5% over last year's $0.67.

For the first half of the year, comp sales were up 1.5% and if sales of licensed businesses were included comp sales would have been up 2.4%.

Operating income for the first six months was up 2.5% over last year and up 10 basis points as a percent of sales.

Net income was up 8% over last year and earnings per share on a diluted basis was $1.27, up 16.5%.

While we were disappointed by our second-quarter sales, we were pleased that we were still able to produce 16.5% earnings per share growth during the first half of the year.

The cash flow also continued strong during the first half of the year.

Cash flow provided by operating activities net of investing activities was $348 million, up $103 million over last year.

Some of the major variances versus last year were -- one, $38 million higher net income; two, $20 million more cash generated from inventory net of payables; and $103 million lower CapEx.

We do still expect CapEx for the full year to be approximately $925 million.

Also the combination of the current income taxes, deferred income taxes, and the long-term tax liability, which is in other liabilities, was essentially a wash.

During the quarter we utilized $446.7 million to buy back 9.2 million shares.

So for the first half of the year we have bought back $806.5 million worth of stock or 17.5 million shares.

As we move on to the fall we recognize that we are not entering this season with the sales trend that we had expected.

However, we have taken actions that we believe will result in stronger trends this fall.

We are very excited about the value and the assortments we will be offering our customers with strengthened marketing to drive customers to our stores and to our website.

Our guidance for the fall is to have comp sales in the 2.5% to 4% range.

This would translate to an annual comp increase of 2% to 2.9%.

The top end of our guidance is comparable to our expectations at the beginning of the year with the lower end more reflective of the recent trends.

We don't anticipate being able to make up the second-quarter shortfall in the back half of the year.

And with this lower sales expectation for the year we are also lowering our earnings per share guidance to $3.80 to $3.90.

Our management team is viewing the second quarter as a speed bump.

We do not see this as a change in the momentum that we have accumulated over the past three years.

Our Mom Strategies, My Macy's, Omni-channel and MAGIC Selling, are alive and well.

And just last week we saw a huge amount of excitement at a senior management meeting for the new ideas being developed and executed in the My Macy's localization, Omni-channel integration and MAGIC Selling.

As noted, we have learned from our shortfall in the second quarter in a manner that we believe will improve our trend not only in the upcoming holiday season but next spring as well.

We realize the environment in which we are operating will continue to be challenging, but we have made appropriate adjustments and have complete confidence in our M.O.M.

Strategies and in our team's ability to execute at a very high level.

And now I will take your questions.

(Operator Instructions).

Paul Trussel, Deutsche Bank.

Just a question about the cadence of the sales trends throughout the second quarter.

Was it weak right from the very start or softened more towards the end?

No, it was weak throughout the quarter.

You know, May was impacted by the shift in the Friends & Family so it was a little bit hard to judge, but it was weak throughout the quarter.

And you mentioned that you are encouraged about the August sales to date particularly in back-to-school categories.

Could you give a little bit more color?

Specifically is the quarter-to-date trend within your 2.5% to 4% range?

I can't comment on the numbers for a couple of weeks, but we are doing significantly better than we were doing in the second quarter in back-to-school, but frankly, across the country and across all the categories.

So it really does feel like we are on to a new trend.

But again, 2.5 weeks does not make a season.

Okay, and lastly for me, you spoke about the marketing approach, the change you are going to have in the second half.

Could you just give a little bit more color on what we should expect?

Are these sharper discounts across multiple categories?

I mean, what should we -- what difference should we see in the marketing and promotional cadence?

Well, obviously being sensitive to not sharing data to our competitors, you know, really what we are trying to do is communicate more broadly and be more clear and crisp in the communication in terms of how we are offering value.

And we're obviously also trying to be very sensitive to the fact that in this environment price matters.

So -- but we're trying to do things in a balanced way, both in terms of brand marketing and also what we call demand.

But it really is just stepping up, making our voice louder.

Thank you, best of luck.

Kimberly Greenberger, Morgan Stanley.

I am wondering if you can just help us think about the second half of the year.

And are there any shifts between Q3 and Q4 that we should be thinking about as we are modeling out revenue, gross margin, SG&A?

Just help us with the way to think about Q3 versus Q4 if you can.

There aren't any significant shifts between the quarters.

There are lots of shifts between months within the quarters, but not a lot across the quarters.

So are you expecting a relatively consistent trend in both Q3 and Q4 as you look out to the back half of the year?

Yes, but it is hard to forecast at this point.

We will provide more insight as we get -- at the end of the third quarter.

Sounds good.

And then just lastly, if you could just help us think about inventory levels both at the end of -- particularly at the end of Q3 just given the change in the fiscal quarter end date, that would be great.

I think I would focus sort of on year end, which is when the calendar flushes out and it is the same weeks.

Q3 could be a similar situation as Q2, given when the fiscal calendar ends versus the regular calendar.

But again, our inventory at the end of the second quarter was actually below our plan.

So we feel fine about the inventory levels.

And your outlook for year end on inventory?

You know what, I don't have that in front of me, but my guess is it is keeping in what we would expect sales to be in 2014.

Okay, thanks, Karen.

And good luck here.

Matthew Boss, JPMorgan.

As we head into the second half can you speak to any merchandising initiatives that we should watch for in stores?

And also any categories or changes that you think contributed to the upswing in Bloomingdale's that you talked about?

I think in terms of what you should see in stores, there is going to be a lot of new brands, as I said, rolled out in the Millennial World, particularly in Impulse -- Maison Jules, QMack are the latest, Bar III still looks terrific, that is something I would point to.

Looking through ready-to-wear the assortments are looking better and better.

But there is newness in every part of the store particularly as we head to fourth quarter and our gifting strategies.

I had the chance last week to see the set ups of the assortments for the fourth quarter and there is lots of newness, lots of new items, they just look terrific.

So we are actually quite excited about holiday for this year.

Great.

And then secondly, in relation to the overall aggregate comp, anything you saw as it relates to door to store?

I think you have 500, is that -- are you at 500 today?

And how do think this can help as we get into holiday having 500 stores up and running on door to store?

Well, I think what's happening is having increased ability to fulfill demand has been great for the websites, it's also great for the stores who can offer inventory that perhaps they don't either carry in that store or that they have run out of.

So I think this is a terrific sort of weapon in our arsenal to help grow business this fall.

And having 500 doors just increases the probability of satisfying the customers' demand.

As you lap some of the benefits from last year, am I right in thinking that the lower productivity doors, that is where the multi-year opportunity is and that you can basically offer more fashion without taking the inventory risk?

Am I right in thinking about that?

Yes, absolutely.

One of the good things that has happened from store fulfillment, to your point, Matt, is that we have been able to give some of the smaller doors more fashion so that if it doesn't sell at the same velocity that we would like we can use it to satisfy either Internet demand or demand from other stores.

But what this is doing, people often talk about downward spirals, this is actually the opposite and is making our offerings in our smaller stores more attractive and that is beginning to gain some momentum.

So we think this will help over time.

It is still early, but we think this could be a big benefit.

Great.

Best of luck.

Steve Kernkraut, Berman Capital.

I just wanted to get a better sense on some of the e-commerce strategy.

You're spending a lot of money in terms of putting the -- having the inventory in store, having direct ship and all that kind of stuff.

But it is the type of thing where -- where what is the return that you are really getting from all that?

You are not measuring your dollars.

You are not providing the dollars to the investment community in terms of how much your sales have done on e-commerce and there's probably double counting.

But how do you measure the return on investment of what you are spending there?

Well, we know that the sales growth we are getting is significantly greater because of what we are able to do not only on the Internet but with what we are calling these Omni-channel transactions, satisfying demand significantly greater.

So we know that that is a benefit significant to us.

And by the way, if we weren't doing it on the Internet people would be shopping elsewhere.

So --.

Right, but it's the same rationale -- you build a new store, it's cannibalizing another store, or if you rehab an existing store, if you didn't do it the sales of the store would have gone down (multiple speakers).

Correct.

But the key thing is, Steve, we are (multiple speakers).

(Multiple speakers) you are very comfortable you are getting the return on investment that you desire?

Absolutely.

Okay.

Charles Grom, Sterne, Agee.

Given the comp shortfall I was surprised that the gross profit margins held in as well as they did.

I was wondering if you could speak to some of the positive areas that you saw in the quarter.

And also what your expectations are for the back half on the gross profit line?

Well, I think the key thing is that the licensed business income is additive to the gross margin and that helped offset not only the lower merchandise margin, but also the added cost associated with the free shipping.

So those are really the key components.

As we look to the back half of the year I think we'd still expect gross margins to be flattish maybe down a touch.

Okay.

And that is consistent with the guidance we've provided all year.

Okay, great.

And then my second question -- on your call in May you spoke to the budget shopper as an area of softness.

And I was wondering if that was a factor here in the second quarter?

What area?

The budget shopper, the low end shopper being an area of softness and I was wondering if that was a factor again here in the second quarter?

You know, it probably was.

We are trying to dissect that and that information comes to us a little bit later.

But that is my suspicion.

Okay, great.

And then just to play devil's advocate, if there is a crowding out effect from housing and from auto sales, just what gives you the confidence that that really changes in the back half of the year?

Or is it just your expectations on some of the things are going to do on your own can offset that?

Well, you know, we have dealt with what I would call shifting consumer moods, many times in our past.

And I frankly think we think we can manage through this as well.

So we will see, but I think you are going to see enough newness in our assortments as we head towards holiday that I think if weather cooperates this year that could be an added plus.

But we feel confident that we will be able to manage through it.

But -- yes.

Great.

Best of luck.

Bernard Sosnick, Gilford Securities.

Could you give us a clue or two about what exactly created the exciting response at the management meeting?

Probably not.

But I think what I would tell you is that when we went through all of the offerings, particularly for the holiday season was the focal point, because at this point back-to-school is already on the floor in the third quarter inventories.

It is very exciting.

We learn and we get better and better every year with the gifting strategy.

Okay.

So gifting is part of it.

With regard to the e-commerce portion of the business, I know you are not breaking it out and I'm not asking for that.

But did you see a slowdown in e-commerce sort of parallel to your overall sales weakness?

With Macy's we did, it was still extraordinarily strong, but it also weakened from the first quarter.

Bloomingdale's was equally strong as the Bloomingdale's stores.

So it is really the brands that had the movement.

And I'm sorry -- in your comments I really didn't pick up, I wasn't listening closely enough I guess, about the weakness in budget.

And you said you -- in your answer here that you really weren't quite aware of what it might have been -- what might have been the cause.

But you did say that in women's apparel the lower price points were selling well.

So could you amplify a little bit about the budget price points?

Well, it wasn't budget price points, it was the budget conscious customers and they can be at all price points.

Okay, you are saying value conscious customers --?

Correct.

-- In a way, okay.

All right.

Thank you very much, Karen.

Jeff Stein, Northcoast Research Investments.

Question on The Finish Line in line store -- store within a stores.

I'm wondering if those are performing better than expected because it had seemed to me at the beginning of the year you were expecting those departments to have perhaps a 20 or 30 basis point headwind to comps.

And it looks like, at least in the second quarter, the impact was over 100 basis points.

So I'm wondering is it the improved performance of The Finish Line departments relative to plan or is it some of the other licensed departments that you have added at Macy's and Bloomingdale's, Harold Square you mentioned specifically?

And if so if you could just call out what those departments are?

Thank you.

Finish Line is doing extraordinarily well.

I have a feeling -- I'm not sure what that 20 basis point reference is to.

So I'll have to go back and check and see what that is.

But we feel very good about Finish Line as well as the other businesses.

And how many departments -- Finish Line departments do you have currently?

You know, I am not sure I know that number specifically.

I think at this point by next year we are expecting to have 450, but at this point I think the number is approximately 100.

Okay, terrific.

And one final question real quickly.

Can you talk about the drop in credit penetration and what might be the cause there?

And if you have any strategies in place to try to bump that up in the back half of the year?

Well, I think part of it has been related to some of the new regulations limiting credit lines and limiting our ability to offer credit to customers.

And I think part of it is just related to the overall weakness in the business in the second quarter.

So our hope is that we will begin to also improve penetration as the overall marketing increases and the business strengthens.

Great, thank you very much.

Michael Binetti, UBS.

So, just really quickly as we think about the back half, and last year we were talking about how favorable the calendar was between Black Friday and holiday with the extended -- I guess the extended holiday shopping days.

And this year I think it is a much shorter calendar.

Could you help us just think about what the impact that may have on the holiday outlook as we look to our fourth-quarter modeling?

Yes.

You know, the truth is I have heard people argue that it will hurt us this fourth quarter and I've heard people say that it doesn't hurt us.

I think I fall more to that it won't hurt us because people are going to spend a certain amount of gifts and they'll just have fewer days to do it.

Last year the Christmas season felt like it went forever.

And I think the compression may add to more excitement and frenzy, which could help business.

But we will have to see as we get through the fourth quarter.

Okay.

And I think you called out weather as a potential plus, we've obviously had two bad winters in a row here.

Two in a row, I'm not sure, but yes.

And so, can I assume that you are planning outerwear categories fairly conservatively?

And if so if weather plays ball, maybe some comments on what your big outdoor vendors are telling you as far as being able to help you guys chase.

I mean they have also obviously had inventory pressures the past few years as well and will probably want to be conservative.

Yes.

No, I can't comment on the vendors because I haven't had those conversations.

We are planning it conservatively and we're also talking about what if it goes back to the old days of the typical cold weather and making plans accordingly with the vendors.

But I can't comment on any of the specifics.

Okay.

And then maybe finally just on -- you are saying that your guess is that you're going to find that the budget conscious consumer has been your hunch as to what has been sluggish.

As you are adjusting the plan -- just so we think about it, is the plan to flow in maybe a higher mix of lower opening price points?

Or is it maybe more to keep the merchandise more consistent and maybe hit the coupons a little heavier which would line up with your step up in marketing comment?

Honestly it is a little bit of both.

And part of it is just that we may have moved away too far from some of the opening price point in women's apparel.

And so part of it just may be refining our strategy in terms of key items.

Thanks.

And best of luck, Karen.

Bob Drbul, Barclays.

I guess with the second-quarter results and the uncertainty that persists into the back half of the year at this point, what is your appetite for share repurchase and how has it changed over the first half of the year?

It hasn't changed at all.

We don't see anything changing in terms of the underlying value of the Company.

And our cash flow continues to be very strong.

And when you look I guess in dissecting the business, would you attribute competitive pressures to any of the shortfall?

I am not sure how to answer that.

As we moved into the second quarter we may have waited a bit too long to start marking down the warm weather goods.

And I think some of the competition started doing so sooner than we did.

That may have caused us to lose some sales in the quarter, I am not sure.

But frankly as we look back on the quarter we were more concerned with things we did or didn't do ourselves as opposed to what competitors were doing.

And then the last question is, and I think you said it broadly speaking the sales results at Macy's were disappointing.

But geographically either in the second quarter or I guess for the last few weeks in early back-to-school, are there any geographic call outs that you would make for us?

Well, I had said that in the second quarter the South continued to be stronger than the North.

So that's been a continuation.

But the South weakened as well in the second-quarter.

And as we moved into August everything has gotten significantly better.

And it is hard to judge by geography given some shifts in the tax-free weeks.

But my sense is that everything has risen in terms of the level of performance.

Thank you very much.

Paul Swinand, MorningStar Investment Research.

Just a quick question on the -- kind of all the Internet and analytical tools that you are using.

I noticed for example on your website you have got things that are trending and then there's also some talk in the industry about using weather analytics.

Are there any call outs or is it just still too early to tell?

Are you getting any -- can you give us any color on the effectiveness of some of the Internet and online analytics that you are using and how that might affect sales and markdowns?

Well, we think that having the online analytics helps us to better understand our customer in what we call a 360 degree view, which is very helpful in trying to fine-tune our marketing and how we are sending emails and we are trying to get better and better at personalization.

So we do think it is helping, but we are really at the very early stages of utilizing that data.

So it is [early] first inning?

Oh, absolutely.

Okay, great.

Thanks for that.

And then real quick, I know you've talked a little bit about of the outlets and you said transactions are a proxy for traffic.

You thought the outlet -- outlets were a little stronger, but I know in one of the conferences you said you were opening sort of a hybrid in Gurnee here in Illinois.

Can you kind of any more broadly on the long-term trends, do you think that the outlet areas are going to continue to drive traffic?

Is off-mall still getting more general traffic and do you think that is going to continue, or is it just a blip in the second quarter?

I didn't comment at all about the outlet business.

So let me take a step back.

Macy's, we don't have an outlet business.

We did open a new store during the quarter in Gurnee Mills, which is an outlet mall, but also has some regular retail as well.

So it is a regular Macy's store that is opened in Gurnee, and has opened incredibly strongly.

And if it does well, it is possible that we would open regular Macy's stores in other outlet malls across the country.

Bloomingdale's does have outlets and as I've said on prior calls, we are still refining that strategy.

We did open one in the quarter in Rosemont in Chicago, which I've not seen yet but people who have seen said it is absolutely spectacular, and hopefully bodes well for the strategy and going forward.

I thought in your -- maybe one of the responses to the questions you said that the traffic to outlet malls was better, or you were losing share more to outlets.

I didn't say that.

I'm sorry.

No, I'm not even sure what I said there.

I did not say that.

Okay, I'm sorry; I'm confused with something else.

Thank you.

Deborah Weinswig, Citigroup.

Deborah, your line is open.

If you could check your mute function for us.

Lorraine Hutchinson, Bank of America.

Thanks.

Good morning, Karen.

You had talked about some things that you could have done differently in the second quarter.

Was that around product specifically, timing, marketing?

What would you attribute that to?

Honestly, yes, yes and yes.

You know, we are very self-critical and we are all perfectionists.

And so even though we can point to lots of things in the economy and the environment that hurt the business, we are all determined to do whatever we can to improve it.

So we looked at things that did we have too much reliance in the quarter on regular price promotion?

Should it have been more what we call demand promotion?

Did we have too much fashion and not a lot of core seasonal merchandise?

Did we have enough opening price product to fuel the second quarter?

I mean, we went on and on and on at looking at all the things we thought we could do better, and we have made notes for next year in the second quarter, and we immediately began fine-tuning our plans for the third and fourth quarter for this year.

And then as you look at your inventory balances coming into the third quarter, have you cleared through all of the summer goods that were liable?

We have not cleared through it all because, as you know, the weather is still quite hot.

But we are where we had expected to be in terms of the clearance.

So we are working through that inventory as we had expected.

Okay, but we shouldn't expect any carryover gross margin impact into the third quarter?

No, not any different then we what we had planned.

Okay.

And then just looking at the marketing plans for the back half, are you elevating your spending levels or are you just changing the marketing message?

No, we are spending more and we, again, started working on this a while ago and so we were able to offset the added marketing costs in other parts of the business.

So it shouldn't be an SG&A issue.

But, yes, we are accelerating the spend.

Great, thank you.

Liz Dunn, Macquarie Capital.

I guess I will start with just the improvement that you've seen in the last few weeks.

Is that improvement in fall goods or is that selling through some of the spring/summer carryover?

Both.

But the encouraging part is the new goods.

Okay, great.

You would expect us to keep selling summer goods at great values.

But the new product has been selling well also.

Okay.

In terms of looking at some of these kind of inflection points in the quarter or maybe they are not inflection points, maybe just anomalies.

But as I think about the flattening out of AUR and sort of the slowing in performance of shoes, cosmetics, fragrance, jewelry, watches, can you see sales accelerate in the back half without a change in that trend from the second quarter?

We can, but we also expect a change in that trend.

Okay.

How much is the center core as a percentage of your business?

I don't have that in front of me, but you can find it on the website.

Okay, and then finally, in terms of those categories that were a little bit softer in the quarter, was that still -- was that a factor at Bloomingdale's as well or did those categories perform strongly and consistent with where they had been at Bloomingdale's or even accelerate?

I think Bloomingdale's was similar in terms of the change in trend in some of these businesses.

But again, other than juniors, which has continued to be weak, we are not overly concerned about the trend change in the second quarter in those businesses as we look at whole spring season.

Okay.

Great.

Thank you so much, good luck.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit more about the licensed business opportunities?

It seems like it is becoming more important and seems like it is doing well and adding.

How do you see that progressing?

And then just lastly, the timing shift of the event into the first quarter from the second quarter, are there any other timing shifts of events that we should be watching?

Thank you.

I will answer the second question which is no as we go through the fall season.

So there is nothing -- no major shifts between the third and fourth quarter.

In terms of the licensed businesses, I think they provide a great opportunity for us to offer really compelling assortments in categories where either we can't get the product or we don't have the right selling model and they have been very successful, whether it be Sunglass Hut or now Finish Line.

In the case of Bloomingdale's and also Herald Square, it enables us to bring in some designers and brands that we couldn't get on an owned basis and they're working very well.

So we do feel good about it.

Will we continue to find opportunities?

I think so, and I hope so.

Because again, our mission is to provide great assortments of wanted product to our customers any way we can.

And if we can't do it ourselves we love finding partners like Sunglass Hut or Finish Line to work with to bring the best that we can to Macy's and to Bloomingdale's.

Thank you.

Richard Jaffe, Stifel.

A couple of quick questions on the credit opportunity.

With more advertising or more marketing being front loaded in the second half, will some of that be directed to signing up more credit customers to try and build the credit card portfolio and the credit card income in the second half?

We always invest a lot in doing so, but there is not an increase versus what we had planned originally.

And so, your outlook for the credit contribution in the second half is (multiple speakers)?

We think it will be up over last year but not by a lot.

So at a rate less robust than we saw in the first half?

By significantly less.

Great.

Thank you very much.

Stacie Rabinovitz, Consumer Edge Research.

You had talked a little bit about maybe wishing you hadn't bought quite some any fashion items, or maybe I'm misinterpreting you.

Could you talk a little bit about how your fashion versus basics performed during the quarter?

And also maybe owned brands versus some of the labels?

Private brands had a terrific quarter.

Obviously always we have some that perform better than others.

But we've had terrific success with our private brands in the second quarter as well as for the spring season in total.

And I don't have the data on true fashion versus basics.

But we are always fine-tuning that balance.

But fashion is obviously very important to the Macy's customer.

But also obviously he or she also needs basic items, so you've got to get it balanced right.

Priya Ohri-Gupta, Barclays.

Just wondering if you could update us on your thoughts around adding more debt to your balance sheet over the remainder of this year?

And then whether there is any change in your thought process around where you want to maintain the leverage target within your range and whether it is more prudent to keep a little bit more cushion just given the uncertainty around the remainder of the year?

Yes, I mean, as you know, we are currently at the very low end of our range in terms of leverage.

And as I have said in the past, there is a good chance that we could issue some more debt this year.

And again it will depend on market conditions.

Okay, that's very helpful.

Thank you.

Michael Exstein, Credit Suisse.

Two quick questions for you.

Number one, Bloomingdale's was very early to see a slowdown in the organization and now you are saying that it's probably seeing an improvement in its business.

Do you think it is acting as an early warning to the organization?

And secondly, what are your plans or how are you positioning Macy's to sort of ride improving home-related goods sales and hopefully offset some of the slowdown elsewhere in their mix?

Well, home has been a strong category for Macy's for the last couple of years.

And we continue to build on that success both in terms of the assortments, adding millennial product throughout, for example, textiles even some in housewares and furniture and mattresses -- less mattresses but more furniture.

And we continue to build on that strength and expect it to continue.

So that has been a strong category all year.

And we think that will continue throughout the fall season.

In terms of Bloomingdale's, as you know they had had a weaker first quarter, strong second quarter, the opposite of Macy's.

But we do hope it bodes well for Macy's as we go through the fall.

Is there any history of it sort of being an early warning or a canary in the coal mine in terms of business?

Not really.

Okay, thank you.

I would like to believe so today, but we will see it (laughter) the third quarter.

Well, we are all looking for something.

Yes.

No, you know, I think what is interesting though, Michael, as we look at -- again, it is only been two and a half weeks, but the whole back-to-school area has been doing well and that makes us feel good.

And the fact that new merchandise is selling has to be a positive versus what we've seen during the second quarter.

How influenced has the selling been by any changes in the sales tax holidays?

I don't think it has been.

Okay.

I mean we have been tracking where there haven't been those.

It is harder because, as you know, every state seems to change them.

(Multiple speakers) so we have been focused on versus plan versus looking at it versus last year because of all of those shifts.

But I don't think that is the reason.

Great.

Thanks so much.

Filippe Goossens, Mitsubishi Securities.

Another follow-up on the credit card performance.

You made reference to changed regulations.

Can you just clarify a little bit more what you meant?

And then the second part of my question is, if you look at your terms are they at all any more restrictive than any of your competitors even including the banks that may perhaps limit somewhat the upside in the amount being charged on your card?

Yes, it's a good question.

I don't know the answer relative to the granting of credit.

As you know, Citibank owns our credit business.

So they are really the ones who make all the risk decisions.

And I can't speak to how Citi makes those determinations versus others.

As to whether it is tougher or not.

I am not sure about that.

Okay.

And then my second question, Karen, you made reference a couple of times to competition.

Can you at all comment on whether the return of promotions at JCPenney had an impact on the performance in the quarter?

I really can't comment on that.

Okay, fair enough.

Thank you so much, Karen.

David Glick, Buckingham Research.

Most of my questions have been answered.

I just wanted to get an update on what you are seeing at Herald Square.

Did that -- is that progressing as you would expect it?

Obviously it is a major capital investment for the Company.

And did the disruption there have any impact on your overall business?

In tourist cities in general did you see any changes in your trend in Q2 versus prior quarters?

I don't think there was a particular trend in tourist cities.

As I said, everyplace sort of got worse except the southern parts of the country.

But I don't think there was a big difference tourist versus not.

Herald Square is doing very well in terms of our own sales relative to plan.

And if we include the licensed sales we are doing better versus last year.

Once we get through this fall season we will be through I believe the worst of the disruption meaning the main floor.

And for those of you in New York I would urge you to come and what the changes.

By November we should be reopened on the first floor and it is looking terrific.

And we feel very good about how the business has responded.

The shoe business, while overall shoes had a tough quarter Herald Square did very well.

And we feel really good about the areas as we reopen them.

Great.

And just a -- thank you, a follow-up on marketing.

At what point in this past quarter did you decide to strengthen marketing in the second half and did it have any impact on the back to school business that you are seeing now or should it impact just kind of given marketing lead-times being more focused on later in the fall season?

No, I think we started making the changes earlier in the quarter, so it is helping in terms of the August business.

And we will keep going as we go through the fall season.

And also, just a clarification.

I'm assuming your comments about the last two and a half weeks are on a kind of apples-to-apples calendar basis, shift adjusted for the 53rd week.

Yes, I mean it is relative to what we had expected.

Okay, great.

Thank you very much.

Good luck.

[Gregory Swatco], Goldman Sachs.

Just wanted to follow up on the flexibility with regards to issuing a bit more debt.

Could we consider uses of capital there?

Could you give us an idea of what the uses would be?

And then as part of that, would you consider potentially paying down some more of the higher coupon debt as you've done in the past or do you feel comfortable with levels where they -- those maturities are as far as size and such?

Well, where we have issued debt it would be to either pre-fund maturities next year and also fund the buyback program that we have talked about.

In terms of refinancing higher coupon debt, we are always doing the analysis to see if it makes sense.

But obviously we have done those issues that made the most sense.

And it just depends on the economics at any given point.

Great, thank you very much.

Rick Snyder, Maxim Group.

Could you give us some sort of an idea how much the licensing is benefiting gross margin?

And sales during the second quarter, was it a steady decline or did we see choppy sales like we've seen in the past?

No, we had seen choppy sales throughout the quarter, I mean we -- all the way through.

And we don't comment on the specific components of gross margin.

Okay, thank you.

(Operator Instructions).

Harry Ikenson, Ikenson Research & Consulting.

Karen, you mentioned that you are excited about the new trend and you said in women's sales going forward.

I was wondering if you could comment at all on some of the excitement.

If you can't be specific on anything on colors or is it a new silhouette.

Just give us some something that you can comment on that you feel comfortable.

Well, we talked about the modern wear to work, suit separates has been very strong, as well as some of the opening price point more key items have done well also.

Active has been very strong, which is pretty much a new category for us over the last year or so.

And we are beginning to see traction for that younger feminine customer or the older millennial customer in the Impulse area.

Some of the new brand launches are doing extraordinarily well.

And we are building business there also.

Thank you very much, that is very helpful.

Thank you.

Wayne Hood, BMO Capital.

A couple of questions.

One, I just wanted to deep dive a little bit more into how you express in the market you mentioned in your value proposition, because just looking at this past weekend's back-to-school flyer, I mean you are in there with Levi at $39.99 and JCPenney is at $40.

So you look at that, there's really not much difference in the value proposition other than you're emphasizing more styles, sizes and colors.

So, as you think about how your message evolves, is it going to be more about price or you leave that alone and you just emphasize the size, style and color differences between you and others on key brands?

I don't think I'm going to comment on this, Wayne.

You will have to wait and see.

Okay.

The other thing kind of related to this, if we were to enter a period where the consumer was beginning to buy the opening price point goods at a more sustained basis, what does that do as you think about your comp?

Rather than being 3 it might be 2, or 1 to 2 rather than 3. And what does that do for your leverage metrics if we do get into a period like that from an expense standpoint?

Well, remember, I don't mean to imply that opening price point is taking over the store.

It is still going to be very balanced and it is just been slightly stronger in the second quarter, but it is not the pendulum going completely to the other direction.

And all of these factors were taken into consideration when we gave the guidance of the 2.5 to 4 for the fall season.

Okay (multiple speakers).

And my final question is back to credit again (multiple speakers).

Don't over-react.

You're sounding like you're over-reacting.

I guess if you were to push Citi to go deeper into the file to try to drive traffic, would you be willing to incur less credit income for that increased traffic and anticipating that losses might grow into 2014?

So therefore that we might begin to think about 2014 where credit income could actually be down year over year?

Well, first off, Citi makes those decisions in terms of that risk.

But having said that, if it were -- if I were making those decisions I probably would push farther.

But again, that is not within my control.

Okay, thank you very much.

Deborah Weinswig, Citi.

So three hopefully quick questions.

So as we look and dive into the millennial strategy, which I think you have been incredibly affected.

If you look at the Impulse trend versus juniors, and I know you still have a lot of brands rolling out this year and next, can you maybe talk about some of your early wins at this point in the game?

Well, I think the early wins have been both in active, which has done extremely well both some of the market brands as well as our own private brand ideology, which is terrific product at a great value.

On the Impulse side the new brands, Bar III, which was the first big private brand in Impulse, has done very well, some of the market brands and again the launch of Maison Jules last week went extraordinarily well.

So we think that it is -- product and assortment is first and foremost for that millennial customer.

Juniors has taken us a little bit longer and not as optimistic that we are going to have it turned around this fall.

But hopefully for spring of 2014 that will begin to strengthen.

Okay.

And then I had an unusual amount of time to spend on your website.

But I went and revisited everyday value and just wanted to know some additional insights in terms of how you are utilizing that as an opening price point, especially as you look at your strategy in the back half of the year?

I don't think there is any change with that, Deb, in terms of what we've done in the past.

All right.

And then in terms of the improvement at Bloomingdale's, just wanted to know how the Loyallist program fit into that as well.

I think the Loyallist program, as it continues to get refined, is becoming more important to driving the Bloomingdale's business.

So I don't know the specifics, but I have to believe that has been a factor.

All right.

And then lastly as we think about M.O.M., with MAGIC Selling training going into the back half of the year, as we think about maybe more of a value message, will the associates on the selling floor also have that as part of their training?

Absolutely.

And again, our sales associates are taught to engage with the customers and one of the things that Peter Sachse, who is running the stores now, says to them, sell from the heart.

All of that training I think really is paying off and they are very sensitive to the messages of the Company in terms of the importance of communicating value.

So I believe that will be done very effectively on the selling floor.

Great, thanks so much and best of luck.

That concludes our question-and-answer session.

I will turn the conference back over to Karen Hoguet for any additional or closing comments.

Great, well, thank you all for your interest in the Company and your support.

And as always, if you have other questions feel free to call me, Matt, Sarah and we will do our best to get them answered.

Thanks.

That does conclude today's conference.

Thank you all for your participation today.