梅西百貨 (M) 2013 Q4 法說會逐字稿

Good morning and welcome to Macy's, Inc., fourth-quarter earnings release conference call.

Today's call is being recorded, and I would now like to turn the call over to your host, Karen Hoguet.

Please go ahead.

Thanks, Vickie.

Good morning and welcome to the Macy's call.

I am Karen Hoguet, CFO of the Company.

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

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

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

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

As you saw in our press release, our sales in January were very disappointing, but in spite of that, we ended the quarter and the year very strong in terms of our operating income, earnings per share, and cash flow.

Our adjusted earnings per share grew by 16% in 2013, which is our fifth year of double-digit EPS growth, starting in 2009 when we restructured the Company and began implementing our M.O.M.

Strategies -- My Macy's, Omnichannel, and Magic Selling.

This morning, I will talk first about the quarter and then the full year.

After that, I will discuss our key assumptions in planning 2014.

Sales in the fourth quarter were $9.202 billion, up 1.4% on a comp basis and up 2.3% on a comp basis together with sales in licensed department.

The 2.3% is really the best metric for gauging customer demand.

Given the conversion of some of our businesses from owned to leased, such as athletic shoes, during the year, this is really the only way to track customer purchases on a comparable basis to last year.

And on an ongoing basis, even after a conversion, customers may choose a licensed item versus owned in a similar category, so we will continue to focus on this metric.

Also, you will note that total sales were down 1.6% in the quarter, because we are comparing this year's 13-week quarter to last year's 14 weeks.

We were pleased with our November/December sales, but in January, our sales fell well short of what we had planned.

As a result, we missed the sales guidance that we have provided at the start of the month.

Clearly, much of this weakness resulted from the bitter cold temperatures and the frequent snow events in January, but we would not attribute all of the weakness to the weather.

Back in August, we were assuming a 2.5% to 4% comp sales increase for the second half of the year, which we then updated to 2.8% to 2.9% after December.

However, the weak January brought our comp sales for the second half of the year down to 2.3%, or 3.2% including sales in licensed departments, and while below what we had hoped, 3% is feeling like a good performance compared to our competitors.

The strongest businesses in the quarter were handbags, cold weather apparel and accessories, our older millennial apparel or impulse area, men's dress apparel and shoes, luggage, and furniture and mattresses.

I should also add that we continue to see strengthening in the women's apparel categories overall, which is a very good sign.

Private brands were part of the reason for the strengthening in the women's apparel category.

The weaker businesses in the quarter relative to their prior trend included watches, fragrances, housewares, and tabletop.

Juniors continued to be weak, but we did see some improvement in trend, especially the dressier parts of the business.

Geographically, as you may suspect, our strongest sales performances were across the South, where weather was not as much of a factor.

We also continued to see strength in all of our Omnichannel transactions, whether it be online purchasing, including transactions on mobile devices, shipping from stores to satisfy online demand, and shipping from warehouses to satisfy store demand.

We also tested buy online, pick up in store this fall.

And based on the positive results, we are now rolling this out to all of our stores during the spring season.

We continue to find our stores to be important even to our online-only buyers, whether it be to check out a color, try something on, browse to get ideas, or make a return.

Bloomingdale's had a better fourth quarter than Macy's, in part because we experienced less weakness in January in these stores.

As with Macy's, the Omnichannel transactions helped fuel Bloomingdale's growth.

Average unit retail in the fourth quarter was up approximately 1%, with transactions down just under 1% and units per transactions up a little more than 1%.

The gross margin rate in the fourth quarter was 40.6%, flat with last year.

We are very pleased with that result, which was better than expected.

Inventory at the end of the quarter was up 4.7%, or 4% on a comp basis.

This is higher than we had planned, as a result of the weak January sales.

But this inventory is in the right categories, so it doesn't pose a significant markdown risk.

We will move this inventory out during the first quarter, and hopefully without a noticeable margin impact.

SG&A in the quarter was $2.3 billion, down $99 million, or 4.1%, versus last year.

This reduction is in part due to last year's extra week in the quarter, but as a percent of sales, SG&A was 25%, 70 basis points below last year.

We did benefit in the quarter from $58 million in asset sale gains, a little more than half of which had been planned and included in our prior guidance.

We did not include the other transactions in our guidance even in early January, because we were not sure that they were going to close in 2013.

This was one of the reasons we were able to beat the upper end of our previous guidance, in spite of the weaker sales.

We were also pleased with our credit results in the quarter.

Credit income was $6 million above last year, consistent with expectations.

The usage of our card, as measured by penetration, was 47.2%, up 20 basis points over last year.

This is a positive trend that we hope will continue into 2014.

Operating income, excluding impairments, store closings, and other costs, in the fourth quarter was $1.437 billion, or 2.9% above last year's $1.396 billion.

And as a percent of sales, operating income in the quarter on this basis was 15.6%, 70 basis points over last year.

We booked in the quarter $88 million of impairments, store closings, and other costs, of which approximately $45 million are non-cash charges.

This is significantly less than the original estimate of $120 million to $135 million.

This is largely because we were able to place many more associates than we had expected into open jobs after their positions were eliminated.

In the end, we laid off approximately 1,800 employees, instead of the original estimate of 2,500, and this will not impact the expectation of the $100 million in annual cost savings.

Interest expense in the quarter was $99 million, $7 million lower than last year.

Tax expense was $439 million, $17 million higher than last year.

As a rate, though, it was 35.1%, compared to last year's 36.6%.

Our tax expense in the quarter included a $13 million adjustment to a valuation allowance, because we now anticipate being able to utilize more state loss carry forwards than previously expected.

This added $0.03 to our earnings per share and had not been anticipated in our guidance.

Diluted EPS, excluding the impairments, store closing costs, and other costs, was $2.31 in the fourth quarter, 12.7% above last year's $2.05 on the same basis.

And for the full-year 2013, our sales were $27.931 billion, up 1.9% on a comp basis or 2.8% together with sales from licensed businesses.

This fell below our expected 3.5% comp guidance at this time a year ago, but our earnings per share, excluding the impairment, store closing, and other costs, was $4.00 for 2013, which beat the guidance that we had provided at this time last year of $3.90 to $3.95.

As you will remember, we had lowered the guidance to $3.80 to $3.90 in August after a weak second quarter.

We are very happy that we were able to make up that quarter's shortfall during the fall season, even without above expectation sales, and were able to beat our original guidance.

And while our sales were below our own expectations, we hope that our performance relative to competitors looks strong when we see what everyone reports, as it did through the first nine months of the year.

Our gross margin rate for the full year fell 20 basis points below last year, due largely to the impact of shipping charges associated with our Omnichannel transactions.

Merchandise margins were just slightly down, as a result of increased promotional activities needed to fuel the business, especially in the third quarter.

SG&A ended up below last year in dollars and 50 basis points below last year as a percent of sales.

This was good -- to good expense management throughout the Company, together with asset sale gains, $68 million of higher credit income, and $29 million lower depreciation and amortization.

In part, these benefits were offset by our continued investments related to our Omnichannel strategy.

Operating income, excluding impairments, store closing, and other costs, for the full year was $2.766 billion, up 3.8% over last year, and as a percent of sales, up 30 basis points.

Adjusted EBITDA as a percent of sales was 13.6% for 2013, up 20 basis points over 2012.

We continue to march towards our 14% target for EBITDA as a percent of sales.

Average share count for the year was 385 million shares, which is 7% below last year as a result of our buyback during the year of 33.6 million shares for approximately $1.6 billion.

And EPS on a diluted basis, excluding the charges previously mentioned, was $4.00, or 15.6% above last year on this basis.

Return on invested capital was 21.4%, 20 basis points over last year.

We are very pleased with our performance over the past four years on this metric.

Cash provided by operating activities, net of investments, was $1.761 billion, or $363 million higher than last year.

This was due to higher EBITDA, lower capital spending, as well as higher asset sales.

The capital spending did fall below our expectations by $62 million, due to timing, and much of this will carry over to 2014, as I will discuss in a few minutes.

The cash flow generated by the Company is very strong, enabling us to invest in profitable growth, while still returning significant cash to our shareholders.

In spring of 2013, we increased our dividend by 25% to $1.00 a year, and we also bought back $1.6 billion of stock during the year, which is approximately $200 million more than the prior year.

We are proud of our performance this year and are confident in our strategies.

We are focused on identifying growth opportunities, whether it be in a specific store or an entire market; with a third-party vendor or a private brand; an owned business or a licensed business; in store, online, or a combination of both; and I can go on and on.

Our M.O.M.

Strategies -- My Macy's localization, Omnichannel, and Magic Selling -- continue to gain traction.

The retail environment is evolving rapidly, and I believe that our 2013 performance demonstrates that we are making the necessary changes to our business model so that we can continue to compete effectively and profitably.

But let's now look to 2014, so you can hear some of what we are doing to accelerate our progress.

Let's start with My Macy's.

We continue to find ways to leverage technology to help us better localize assortments.

We also continue to refine our ethnicity strategies for localized growth.

There are so many opportunities to accelerate our growth by applying a My Macy's lens to all of our merchandise strategy.

Importantly, we remain committed to stores, which we believe are important for us to connect with customers in local communities.

We're also very focused on developing Omnichannel strategies that will enable us to better serve our customers and attract new customers, as well.

Increased collaboration between our stores and dotcom teams is enabling us to identify new growth opportunities and ways to be more productive.

The key to Omnichannel success will be the combination of the digital world with our stores, to make both better shopping experiences for our customers.

Magic Selling also continues to be important to us, and we have expanded the mindset beyond stores to include all customer-facing environments, such as phone, live chat, and big-ticket delivery.

We need to make magic in all of our customer interactions, not just on the selling floor.

We are confident that our M.O.M.

Strategies and our focus on our major powerhouse brands, many of which are exclusive to us, will continue to help us perform well.

There is lots to feel good about for 2014, and fortunately, starting around Valentine's Day, our sales trend began to recover.

Our guidance for 2014 sales and EPS is unchanged.

For comp-sales growth, we are assuming 2.5% to 3%, and we are guiding for earnings per share on a diluted basis of $4.40 to $4.50.

Let me now list off -- I think it's 11 other key planning assumptions.

First, for the year we are expecting comp sales, including sales from licensed departments, to grow only slightly faster than comp sales, as we year-round on the finish-line conversion midway through the first quarter.

Two, we expect total sales growth to be approximately the same as comp sales through this year.

Three, our sales plan for the first half of the year assumes a higher comp gain in the second quarter than in the first quarter.

This is due to the fact that we are year-rounding a stronger first quarter and a weaker second quarter, as well as a promotional shift at the end of the first quarter.

The same is likely to be true between the third and fourth quarters.

Four, for gross margin rate we are assuming a flattish to down slightly gross margin rate for the year.

Five, credit is expected to produce more EBIT than last year, but with significantly less of an increase than we have experienced in prior years.

Six, depreciation and amortization is assumed to be approximately $1.040 billion, which is slightly above 2013.

Seven, interest expense is assumed to be approximately $390 million for the year.

As to tax rate for 2014, we are assuming a lower effective tax rate of 36.4%.

This is lower than our normal assumption, due to tax credits we are now receiving relating to our remodel of our Herald Square store.

Nine, with the pension plan now frozen, our retirement expense will change dramatically.

Pension expense is assumed to turn into income in 2014, and the 401(k) match will go up significantly as we are shifting our retirement benefits more to our defined contribution plan.

Net net, we are assuming approximately $150 million of lower expense in retirement expense in total, much of which is being used to offset higher healthcare costs.

Ten, we have $453 million of debt maturing in July, which we expect to refinance during the year.

Our target leverage ratio remains 2.4 to 2.7 times.

And the 11th assumption is that CapEx is assumed to be $1.050 billion, with that $50 million being pushed out from 2013.

So that's a quick overview of our key planning assumptions for 2014.

I always find the year-end to be a good time to just stop and reflect.

To fully appreciate where our Company stands going into 2014, consider the contrast to where we were just five years ago when we started our journey as a restructured Company with our M.O.M.

Strategies.

Concurrently, we were continuing to invest aggressively in online infrastructure, talent, and fulfillment.

Since that time, we have become a fundamentally different Company that is able to serve customer needs no matter how that customer prefers to shop.

We can strategically access and manage inventories across channels.

We have balanced our ability to offer localized fashion, differentiation, and newness, while also delivering the value and service that our customers expect and demand.

We have built a strong and talented organization at all levels.

We have returned value to our shareholders through stock buybacks and dividends, while also achieving investment-grade ratings.

We are today a strong and stable Company with a consistent track record in growing sales, earnings, and cash flow.

We have been able to reliably increase our ROIC and EBITDA as a percentage of sales.

It goes without saying that we are very proud of our people and our accomplishments.

And we appreciate your strong interest in and support for Macy's and Bloomingdale's as we embark on what we expect will be another successful year in 2014.

I will stop here and take your questions.

(Operator Instructions).

Matthew Boss, JPMorgan.

Something that seems like it's definitely set Macy's apart is the brands and the partnerships that you have established.

Can you talk about some of the notable collaborations in the fourth quarter, as well as some of the learnings from the marketing changes that you made out of 2Q so far?

We have got spectacular vendor partnerships with all of the major brands, and again, if I start listing, I'm afraid I'll drop somebody accidentally.

Also, by the way, our private brands, but one of the major changes that happened in 2009 when we centralized all of the merchandise functions was the ability to collaborate much more closely, and we believe passionately in what we call these power brands, and we are working very hard with them so that they can grow our business aggressively both in our stores and online.

Great, and then I think we all understand weather and the impact that it has had on retail.

Can you talk, though, about what you saw in less weather impacted areas during the quarter, and obviously, you commented on some of the business post Valentine's Day, but was this broad based and clearly a better sign, it sounds like?

In January -- in November/December, our business was strong really across the country with continued strength in the South.

In January, there was much more of a difference between the North and the South.

There was some weaker business in the non-weather impacted areas.

That's why I said during the call that I don't think it's all weather in January, but the good news is starting on Valentine's Day, all boats are rising, and so we're feeling very good about the trend.

Great, best of luck, and hopefully those boats continue to rise.

I agree with you.

Thanks, Matt.

Charles Grom, Sterne, Agee.

Fantastic performance, obviously, on the gross margin.

I think that's the big surprise this morning.

Just when you look out over the next couple of years, what do you think the puts and takes are for the Company?

I think the key thing is the hope is that we will accelerate sales growth and continue to increase the EBITDA rate up to the 14%, and I think it will be terrific performance, continued strong profits, as well as the cash flow that we generate.

Okay, and any longer-term structural changes with e-commerce as it continues to grow and what the implications could be for gross margins?

I am not sure about the gross margin piece.

One of the things we continue to work on is how to make our inventory more productive across channels.

That may, in fact, lead to helping us get that EBITDA rate up.

I'm not sure that it would be gross margin or expense, but that is going to be an important strategy.

Okay, and just a couple clarifications.

I appreciate the 11 points on guidance, but the buyback, how much do we assume or what are you guys assuming in the $4.40 to $4.50?

We don't disclose that, but it is included in the $4.40 to $4.50.

Okay, that's what I thought.

And by the way, just on the fourth quarter, that $58 million, geographically that goes in as a contra SG&A, is that where it placed?

Yes.

Yes, that's all (multiple speakers) and it was a little bit more than half?

(multiple speakers).

And it was multiple.

It was multiple asset sales, and as I said, a little bit -- more than half of that had been planned, and then we were happy that a few transactions did close right at the end of the year.

Okay, great.

Good luck, thanks.

Heather Balsky, Bank of America Merrill Lynch.

I guess first on the gross margin, you guys had gotten a little bit more promotional in the third quarter and you had expected that to continue into the fourth.

And then also, given the growth of e-commerce, how were you able to keep gross margin steady in 4Q?

I think we have a spectacular merchant organization that works very closely with our vendors, as well as our marketing team, to plan out profitable promotions, and I think they just did a spectacular job in the fourth quarter.

Great, and then just as a follow-up, you had spoken about also that you're getting smarter about using data to plan your promotions.

Any learnings during 4Q using that strategy, and how do you think about it in the first half of next year -- or of this year, I guess?

I think every major event is benefiting from that, because we learn from the prior ones what items are generating what we call radiating sales and things like that, what kinds of promotions are impacting which customers, so that's just constantly helping us do a better job at growing the business profitably.

Great, thank you.

Oliver Chen, Citigroup.

Karen, congratulations on a great year.

Regarding your comments and your details as you think about your inventory positions, could you just elaborate on some of your strategies to move the inventory out?

And also on your comments on a look forward to a more normalized pattern of shopping and your confidence there, what are the things that we should fixate in terms of that happening in the marketplace to then a relatively kind of confusing consumer spending environment we're undergoing right now?

It seems like -- I don't know that I would use the word confusing.

Yes.

I think the key thing is we will just see what sales look like at the end of the first quarter.

We will take note and keep moving from there.

Okay, and as you move inventory out, what's the main tactical levers that you're pulling in order to --

We have major events planned throughout the first quarter, and so we will obviously use those events to clear inventory.

Okay, thank you, and regarding the later Easter, could you give us any comments there on things we should think about as we look at our models and regarding expectations?

I do think the later Easter is good for retail, so that could be helpful.

And as I had said earlier, we do expect the second-quarter comp to be higher than the first quarter.

Beyond that, I think that really is all I can say.

Thank you.

Best regards.

Kimberly Greenberger, Morgan Stanley.

Nice cap to a really terrific year, Karen.

Thanks, Kimberly.

I am wondering if you can talk a little bit more about your Omnichannel initiatives.

I know you are testing any number of different ideas or strategies at any time.

Are there any of those tests that are going on here in the first half of 2014 that you can share with us?

And then, reflecting back on 2013, e-commerce continued to be a really nice contributor to your sales growth.

Is there evidence that you have that you are able to capture a new customer through some of these Omnichannel initiatives, and what were the strategies that you think helped drive growth in that channel last year?

Wow, that's a lot of questions.

Let me try to summarize some of it.

I think the key thing is we are testing lots of things as we go through the first quarter, whether it be relating to our assortments or how to be more efficient in terms of the store fulfillment.

We talked about the buy online, pick up in store.

We are also testing strategies for intensifying our service levels within stores, so sometimes it's not all Omnichannel, but related to that.

And again, we are trying to scientifically measure all of these results as we go.

So that's going to be very important.

If I think about things that are making us successful online, frankly, it's very similar to what is making us successful in store, which is merchandising strategies, and without the right assortments and the right service levels, it almost doesn't matter if you have sexy technology.

And I think that's what's driving our Omnichannel business today.

You mentioned that your e-commerce, your dotcom merchants and organization are working very, very closely with the store teams.

I think that's a little bit of a change over the last three to five years.

Is there still more opportunity in that partnership to either yield better in-store benefits, better online benefits, or, just broadly speaking, other sales or margin benefits?

Absolutely.

We're really at the beginning stages there.

We have tested it in some areas.

We have got a major test going on right now in the dress area where we actually have one combined inventory between channels.

We think that's going to be very important as we go forward.

The other thing that we are doing which I think is important is that we are moving people around so they get different experiences, whether it be store merchandising or dotcom, and that's helping also to enhance, really, this collaboration.

So I would say we're at the very early stages of that, and that's why I am so excited about the growth going forward, because I think the combination of these teams working together is going to be very powerful.

Terrific.

Thanks, Karen.

Paul Swinand, Morningstar Investment Research.

Good morning and thanks for taking all the questions.

Wanted to ask about some of the -- in your prepared remarks, I think you said watches, fragrances, home, and juniors were tough.

Do you think that had something to do with the weather or do you think those are delayed purchases, because maybe people need to browse the stores for them?

And have they picked up with the Valentine's Day lift that you were talking about?

That could be the case.

Fragrances has certainly picked up, so that's one example where there has been a change in trend.

Watches, as we know, we have gotten spoiled with.

It's been unbelievably strong, and I would say it's still good relative to much of the store, but not nearly as good as it had been.

So again, there are different -- juniors, I talked about.

We are making improvements there, so it's still weaker relative to last year, but making a lot of progress.

And housewares and tabletop, we hope will get better this year.

Any comments or any color about the price points or the geographies on watches or home?

No.

I don't think either of those are really the issues (multiple speakers)

By the way, it's not all of home.

We had great business in furniture and mattresses.

We had very good business in home textile, sheets and towels, so it's not all of home that's weak.

Much of home is in the very strong category.

Okay, interesting, thank you.

And quickly about the online business, when you have got these extreme weather events, does online actually pick up a little?

In other words, did your strength online actually offset what was maybe even a weaker actual traffic environment than we realize?

I wish.

No.

It did pick up, but I think people were watching the weather and not focusing on shopping.

People are (multiple speakers)

Yes, it did pick up, but not anywhere close (multiple speakers).

No, if you think about how much of our business is done in stores, that just isn't going to happen, at least not yet.

Right.

Okay, great.

All right, thank you and best of luck.

Paul Lejuez, Wells Fargo.

When you think about your 2014 guidance, what are your assumptions as far as the competitive landscape, just overall promotional environment, particularly as you think about how the next holiday will look relative to this past year, since it was such a promotional one?

And I guess just specifically on the comp drivers, how do you think about transactions versus average ticket size in terms of what will drive your comp assumption?

Thanks.

Yes, honestly, I think every year is promotional in this business.

So I don't expect it to get better or worse in terms of our guidance.

And in terms of AUR for 2014, we have got lots of different assumptions that could get us there.

We are not expecting a huge increase in AUR for the year, but hopefully not a decline.

Got you.

And then just last on inventory, how should we think about your plans throughout the year, inventory versus sales?

You tend to want your inventory increase to be comparable to your comp growth expectations.

And obviously, we are high right now at 4%, so that's why the expectation is that will come down by the end of the first quarter.

Okay, great, thanks and good luck.

Jeff Stein, Northcoast Research.

Just a follow-up on the last question.

If you look at weakness in mall traffic, and you are thinking perhaps about a flattish, maybe up slightly AUR, it would seem that creates quite a gap to getting to that 2.5% to 3% comp increase, even with the benefit of stronger online growth.

So, I am wondering how you are thinking about that, how you get to the 2.5% to 3%?

I think it's a combination of things.

I do think that transactions should go up this year, and units per transaction, we're always trying to increase.

So again, there's lots of different formulas that can get us there mathematically.

Also, mix is a big part of that, also.

Right.

So, we are feeling pretty confident, Jeff.

Okay, and as far as the millennial collections that you launched last year, can you talk about which ones did well, which ones did not, and plans to roll the successful ones out to additional doors this year?

We feel very good about many of them, and I probably won't hit all the ones that we're feeling good about, but certainly Bar III and Maison Jules, our private brands, we do feel great about, and we will continue to roll them out.

As I said a few minutes ago, the impulse part of our business was very strong in 2013, including active, which was also very strong, which again we consider as part of that business.

So we're feeling good about that, and the younger millennial, as I said, we are making some progress, albeit fourth quarter wasn't quite where we would like to be yet, but we think that a year from now, we will be feeling much better about that.

Great, and one final question, Karen.

Can you just bring us up to date on how many Finish Line leased departments you have now and what the plan is for the rollout for the remainder of the year?

I don't know the specific number.

I will have Matt call you with it, Jeff.

Sorry.

Great, thank you very much.

Robert Drbul, Nomura Securities.

Just have a couple questions.

On the overall business, can you talk a little bit about how the collection businesses are performing and some of the denim businesses?

And then, Bloomingdale's and the Bloomingdale's Outlet, Karen, you said Bloomingdale's actually did well, I think, in specifically January when things got a little choppy.

Just maybe a little bit more insight into that business for us?

Yes, the outlet business had a good fourth quarter, got hurt by weather in January, but November/December was feeling stronger, which was very encouraging.

And then on collections and denim, not as strong as we would have liked in the fourth quarter, but I wouldn't put it in the weakness category.

Got it, okay.

Thank you very much.

Paul Trussell, Deutsche Bank.

In the guidance you provided, I believe you mentioned that interest expense would be roughly in line with the 2013 totals.

And so, just wanted to inquire about your thoughts on adding debt to the balance sheet.

Given such a strong operating performance this past year, it does seem like you are on track to be at the very low end of your targeted leverage ratio, if not below, as we look forward over the next 12 months.

I think what you say is correct.

We are at the low end of the range, and our plans for debt, we haven't decided exactly yet.

Obviously, a lot of that will depend on market conditions, and we will see as we go through the year.

Got it, got it, but not included in the guidance at this point in time?

Refinancing the $453 million is, and should we do more, that could go up a little bit.

Understood.

And then just for clarification with SG&A, the $58 million of asset sale gains, that was about $0.10 or so, in my quick math.

You said that was, though, included (multiple speakers)

No, a little more than half of it had been included in our original guidance.

Okay.

And a little bit less than half had not been.

Okay, okay, that's helpful.

So, yes.

And then, just going forward, though, obviously you have the reorganization providing some expense savings throughout 2014.

But if you can just walk through some of the headwinds and tailwinds on some of the other line items that is going to impact expenses, whether it's healthcare or just overall (multiple speakers)

I think as we said credit should be helpful, the savings from retirement expense, the savings from the cost-savings program all are helpful.

On the other side, we have got healthcare going up, and also we have got the continued investment in the Omnichannel work.

Those are probably the big factors.

Got it.

All right, thanks a lot, Karen.

Michael Exstein, Credit Suisse.

This is [Lauren Thomas] on Michael's behalf.

We did have one question.

You said your licensed department commissions are included in net sales.

Is there any other line items in your P&L we should be thinking about that are impacted by the licensed category?

It doesn't -- it goes into gross margin as well.

Okay, okay.

Thank you very much.

Stephen Grambling, Goldman Sachs.

Good morning, Karen; thanks for taking my question.

Just a follow-up on, I think, Paul's comments about SG&A, are there any additional opportunities to streamline the organization longer term?

And then, can you also discuss how we should be thinking about flowthrough next year, should the environment maybe exceed plan?

I'm not sure -- well, in terms of the first question, we are always looking for opportunities to more cost-effectively operate our business.

I don't see any major changes.

Obviously, we just announced a major restructuring, but we are constantly looking to improve incrementally as we go.

And again, as we march to the 14% EBITDA rate, that's always a piece of it.

But I don't see any major changes happening in the near future.

And then on the second question, which is just how we should be thinking about flowthrough depending on the topline?

Hopefully, if the sales are higher, it will help achieve a higher EBITDA rate, because it should be at a higher rate, and obviously help accelerate earnings growth beyond what we have said.

Okay, and then one other clarification, just on Omnichannel.

How has the assortment changed online?

Is there any way you can quantify that in terms of the SKUs?

And are there additional opportunities, other than the ones you have already outlined with private label?

I don't know how to quantify the -- I am not sure exactly what your question is, but what we are trying to do is have our assortments online be representative of what we have got in store and have them -- have more available online than what's available in store, but to be congruent.

Okay, that's helpful.

Good luck.

Richard Jaffe, Stifel.

Just a follow-on question to Omnichannel.

A lot of initiatives in place and a lot of success.

I'm wondering how far along, perhaps on a percentage basis, you are in terms of putting Omnichannel where you think it should be, and also how much it might cost to get there?

I think -- I mean, the costs we're absorbing as we go, and fortunately have been able to do that and still generate profitable growth.

I would say we are just really in the early stages of accomplishing all that we think we can do.

As I said during the call, the key will be taking the best of the digital world and putting it into our stores, and at the same time taking the best of our stores and putting that into the digital world.

And it's complicated and will take time, but we are very much committed to making that happen.

And have you been able to broaden the assortments online compared to what's in stores, and how much broader are they now?

Somewhat so, but within the categories primarily that we offer.

So, often we can use online for extended sizes.

Often we use online to test, and if a test is successful, we will put it into the stores.

Or if we find the online sales of, let's say, extended sizes does very well, we will bring that assortment into stores, so it's really very interesting to see how the two can interrelate.

And we should interpret early stages as not even halfway there?

Is that fair to say?

Yes.

I don't even know what there will be, because I think the world is going to continue to evolve.

But I think the key thing to remember is the keys to success in Omnichannel are going to be the keys to success in retailing in general, and again, the strong merchant, store organization, technology group that we have is really going to -- what will pay off here for us as we go forward.

Great, thank you very much.

Michael Binetti, UBS.

Morning, Karen, congrats on a great quarter and a great year.

Thank you.

I hate to bore you with a quick accounting question, but could you explain to me how pension becomes an income line, and is that just related to funding levels last year versus change in interest rates?

That has to do with the benefits going forward being frozen, but if you want, we can talk to you later and take you through the detail.

Okay, well, is it an income line beyond 2014 is the quick question, I suppose?

You know what, I don't have that in front of me, but I suspect it is.

Okay, and then maybe more interestingly on the women's business since obviously an area I think (multiple speakers)

That is much more interesting.

I think you waited a long time to tell us that was (multiple speakers)

You bet.

Can you tell us what you think is helping drive that category?

Is it just a good old-fashioned wardrobe refresh or has there been an adjustment on brands and promotional strategy or perhaps (multiple speakers)

Yes, yes, and yes.

I don't think it's just -- it happened accidentally.

I think our team put together a great strategy.

A lot of it was relating to items and also, I would say, more focused on opening price points.

But we have done very well at the better price points, too.

Our INC brand had a spectacular year last year, but so did Style & Co.

and Jennifer Moore, so again, I think the team just is working very well on the assortment strategy, as well as the marketing.

Okay, and if I could have one last question, since you mentioned you were (multiple speakers)

As long as it's not accounting.

Since you mentioned how reflective you are at year-end, as you look back on the year, can you talk about any of the categories you think that you could've seen better results in 2013 that could be an opportunity as we look ahead to 2014 to say this is where we can improve?

That's a good question.

My hope always is that the categories we did well and will continue, and we will fix everything else, but after 30 years in the business, I think that may be too optimistic.

So I think, again, wherever you see weakness -- for example, juniors, I do think we're going to see improved business this year.

I like what the merchants are thinking about.

That should be helpful.

I think we're going to continue to see great results in impulse, particularly some of the new brands, and also active.

The coat, cold weather business will be interesting next year, now that we finally had a great year after two horrible years, and I think women's apparel is just poised to take off, so I feel really good about that.

I think center court will continue strong, so I guess I'm fairly optimistic throughout the store.

All right, thanks a lot, congrats (multiple speakers)

Sorry, I --

Liz Dunn, Macquarie.

Let me add my congratulations on a great finish to the year.

Thanks, Liz.

I guess I'm interested in your comment that you see multiple opportunities for an acceleration of sales growth.

Obviously, the millennial strategy is a big piece of this.

Am I right that this ethnicity strategy that you referenced is something you haven't talked a lot about in the past, and are there others that you're comfortable -- other strategies that you're comfortable naming at this point?

I think we had started with My Macy's beginning to think about that.

We started with the tourist strategy, which is very different in different parts of the country, and obviously as you look at the population base, there are stores in local areas where you need to think through the Latino strategy or an African-American strategy, or Asian.

But interestingly, there isn't one Latino strategy, because in different parts of the country, in different countries of origin, it can be very different.

Same for the Asian.

This is where My Macy's is just helping us so much with that local input coming from the field is terrific.

So we have been working on this, but it just gets better and better and better.

And we incorporate not only the merchandising, but the marketing, which is a big part of it, store events, and also visual in the stores.

So we just get better and better at it every year.

Okay, great.

And then, relative to the restructuring and cost savings that you have outlined, in the past when you've done any sort of restructuring or merging of divisions, the cost savings have actually turned out to be better than expected because there are best practices and that sort of thing that you don't necessarily model in.

Is it fair to assume that you have taken the same conservative approach to how you have planned out the cost savings this time?

I hope so, but I don't think so.

Because this is different than a division consolidation, but hopefully I'm wrong.

But at this point, I would not count on that.

Okay, and then finally, we haven't talked about Bloomingdale's Outlet for a while.

Could you just update us on where that stands?

Sorry, we just talked about it.

I think they had -- the outlets had a good fourth quarter.

January was tough with the weather, but we're feeling better and better about the business there.

I am sorry, I meant in terms of growth expectations or -- I apologize if I missed it.

I got pulled off the line for a second.

No, no, no, that's fine.

Sorry.

I think that we are beginning to think about where else to put the Bloomingdale's Outlet stores.

Where have they done the best?

Where would that work -- do?

My guess is it is probably not 2014, but in 2015, we will start to see acceleration of that growth.

Great, thanks.

Dana Telsey, Telsey Advisory Group.

Good morning, Karen, and congratulations.

Thanks, Dana.

As you think about Omnichannel and the learnings from it, what is the marketing impact from it?

Is there any qualitative implications that make sense for marketing and expanding the customer base, whether it's from your credit card holders or from non-credit card holders?

Yes, absolutely.

And in the way the marketing team is thinking about how to best market to our customers is changing dramatically with Omnichannel and all the digital technologies available to them.

So we are thinking about how can we market better across channels, and really trying to get -- the word we're using now is Omnichannel engagement because very often we will find people, as I said earlier, who only purchase online, and yet we know they are spending a lot of time in our stores.

And so, as the marketers are thinking about that in driving Omnichannel behavior, it's becoming very interesting changes in the strategy.

Does it change your marketing spend at all?

Has not yet.

Perfect.

Thank you.

Stacie Rabinowitz, Consumer Edge Research.

I was just wondering as you add licensed departments very slowly, but I was in the store the other day and it felt like almost the whole first floor was starting to become licensed.

Do you see additional (multiple speakers) there?

First floor of Macy's?

Of Macy's, yes.

I was trying to return something, and especially with the -- there was the cosmetics.

There was the sunglasses.

Cosmetics is all an owned business, so -- but anyway, keep going with your question.

Just as you start thinking about other business models, I guess, and more -- different structures in terms of how the vendors operate your space and how much leeway you give the vendors in there.

I know Michael Kors has been talking about how they have been, in the retail department space, having some great successes with being more involved in the operations there.

As part of our vendor collaborations, we're always trying to work more closely with vendors to help, obviously, make our stores more successful, and obviously Michael Kors would be an example of that.

But we are still operating with the owned model, so actually if you think about the first floor of Herald Square, we do have the luxury shops around the floor that are leased, but most of the first floor is not a licensed business model; it is still owned.

Okay.

And again, from our perspective with licensed businesses, what we do is identify what we call white space and where is there a business that we think we either need to add to the store or we believe someone outside could do better.

So if you think about Sunglass Hut, when we decided to license that business, part of it was because they had access to brands that Macy's couldn't get without the licensed model, and we think they have done a fabulous job.

Similarly with Finish Line.

So again, we start with what does the customer want and where is there an opportunity, and if we don't think we are the best at delivering that to the customer, we're more than willing to partner with somebody, as we have done in athletic shoes, sunglasses, et cetera.

Okay, and do you see those opportunities up ahead, or so far, nothing (multiple speakers)

We are always looking at new ideas, so I certainly don't want to say nothing.

We have a whole team of people that is focused on where are the white spaces and what businesses can we add to our stores to either satisfy customer demand, make them more interesting, bring in a new customer, so that's an important focus of what we are working on.

Great, thank you.

Valerie Brown, AllianceBernstein.

Hi, Karen, it's Valerie.

Just a question on the working capital efficiency.

You have talked a bit about your inventory levels, and obviously they are a bit elevated now relative to your increase in sales.

Do you have any specific initiatives that we should look out for that would really drive those inventory turns, particularly given the Omnichannel strategy?

There just seems to be some room for improvement there that would also help drive your cash flow?

I believe that there is, Valerie.

I don't think it is going to be 2014.

As I said earlier, we are testing having one inventory across channels, which I think will be an important part of bringing the inventory levels down over time.

But we are just beginning to test, so it will not happen in 2014.

Okay, thank you.

David Glick, Buckingham Research.

Just a quick follow-up on the licensed model.

I am curious, and footwear, obviously, is a big, important business, and you had to make some tough decisions in terms of space allocations to put their shops in.

Have you looked at the performance of your footwear business and locations that have put the shops in versus not, and how do you evaluate the trade-offs in terms of sales productivity and whether you look at profit dollars per square foot, and how do you think this investment has paid off?

We are very happy with the investment, and I would also say it has brought new customers into the store, which is also helpful.

So, we feel very good about that decision.

And we're also starting to see some new shops we really haven't seen, in addition to Finish Line, some vendor shops, show up in footwear.

I'm just wondering if that is helping drive productivity as well, and maybe that could be one of the leading categories for you guys that could replace one or two of the other center court categories that are still good, but maybe not quite as productive.

I hope shoes does well and so do those other categories.

Okay, and then just finally, just a quick clarification.

I believe, I just want to double check, you said similar to -- you said Q2 comps would be greater than Q1, and I think you said Q4 greater than Q3.

Is that what (multiple speakers)

That is what I said.

And first half roughly equal to second half?

Didn't say that.

Didn't answer that one.

Is the first half comparable to the second (multiple speakers)

We are not commenting.

Okay, thank you, Karen.

Good luck.

Rob Wilson, Tiburon Research.

Thanks for taking my call, Karen.

Can we go back to the gross profit margin in Q4 and drill to that a little bit deeper?

Was there any impact from the licensed business on gross profit margin in Q4?

There was, and there was also impact of the increase in delivery fees, so both of those factors are offsetting.

Was the core merchandise margin higher or lower?

It was about flat.

Okay.

And then, did you have any asset gain sales last year -- asset sale gains last year?

In the fourth quarter, that's a good question.

I don't know the answer, but if so, it was small.

Okay, and then (multiple speakers)

We will check that and get back to you.

One final question, the pension expense, $150 million, will that flow through evenly throughout the year or is it lumpy?

I don't know the answer to that.

We can check that.

Okay, I will follow up.

Thanks for taking my questions.

Richard Church, DISCERN Investment Analytics.

I just wanted to -- with respect to Omnichannel, I was wondering if you could comment a little bit about the last-mile challenges that I think you and everybody faces with getting that product into the consumer's hands.

How you are thinking about that, how that is reflected in your guidance, of course, and then, were there any unusual expense pressures associated with that in December?

One of the things that has us excited about the buy online, pick up in store test is that is going to help us really lay the foundation for same-day delivery, because we have the capability now of knowing exactly if that inventory that a customer's ordering is in a specific store, and if that inventory is in a market, obviously, it is easier to get to the customer on the same day.

So that is laying the foundation.

We will probably test same-day delivery in a few other places this year, and I don't know where that will lead.

Are you working with any smaller transportation or shipping companies that are even going a step further and trying to deliver in certain categories within an hour?

Yes, I don't know about within an hour, but we are working with a few in different markets, trying to test different ways of doing this.

Okay, thank you very much.

(Operator Instructions).

Paul Trussell, Deutsche Bank.

Sorry, just one quick follow-up.

You mentioned at this time a year ago that the promotional shift between 1Q and 2Q was material and that should lead to 200 to 300 basis points type of gap between the performance of those two quarters last year.

Should we think about the gap between 1Q and 2Q this year to be similar?

We are not commenting on the specific difference.

Okay, just wanted to ask.

Laura Starr, Nuveen Asset Management.

Several people have asked this question on the online versus in store.

I noticed when I go online to Macy's and I look at the SKUs available, there is so much more than what is in the store, which is obviously what you want to do, but how are you conveying that to customers?

How do they know that there is so much more there to pick from?

Is that something that you feel that you are at the right place at or is there more to do there?

And then, my second question is on your credit card.

I got a mailing from you.

It is a new card with a reward program where I can get points back or money back or something buying groceries and all these other things.

Is that something new that you are starting?

Let me answer that question first, and then I will go back.

We have reissued the Macy's Star Rewards program, and I would say we have, I guess the right word is, tweaked the program that we had before and, frankly, communicating with customers better about what benefits she is already getting.

We do think it is an enhanced program, but I wouldn't call it a major launch of a new loyalty program there.

The cards are red, which I think is pretty cool with the Macy's red, but it is an improvement over what we had before, but I would not call it a major launch of a significantly different program.

Okay.

And on the (multiple speakers)

On the online, it's interesting.

In some categories, what you are saying is right.

In other categories, that is actually not the case.

It just feels that way when you're shopping.

But what we're trying to do is help customers, whether it be, frankly, in store or online, find what they want easier and more quickly, and that's always a challenge.

So I would say we continue to try to showcase our inventory in a way that the customer finds what she wants, but isn't so overwhelmed that it's hard to do so.

Okay.

Thank you.

And Karen, there are no other questions, so I will turn the call back to you for any additional or closing remarks.

Okay, well, thank you all for your interest, your support.

If you have follow-up questions, you can call me, Matt, Sarah, and we will do our best to try to answer them.

And again, thank you very much.

Thank you.

That does conclude our conference for today.

I would like to thank everyone for your participation and have a great day.