梅西百貨 (M) 2014 Q2 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead.

Thank you, and good morning and welcome to the Macy's conference call scheduled to discuss our second-quarter performance.

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 2 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.

The key metrics for the second-quarter performance include a 4% comp sales increase on an owned-plus-licensed basis; a 30 basis point increase in EBIT as a percent of sales; and an 11% increase in earnings per share on a diluted basis.

Those together make for a good quarter and were in line with what we expected.

While our stronger sales performance in the quarter was in part due to the shift in the timing of the Friends and Family Event at the beginning of the quarter, we were pleased that the tone of our business in the second quarter improved relative to the first quarter.

However, we weren't able to make up the sales shortfall from the first quarter.

However, given the improved trend in the second quarter and our fall holiday strategies, we feel good about the back half of the year and did not change our sales expectation for the fall.

We did lower our guidance for the full year to a comp increase of approximately 1.5% to 2% for the full year, which incorporates the spring season actual results.

On an owned-plus-licensed basis, the annual comp is expected to be 2% to 2.5%.

The good news is that in spite of the lower sales guidance, we are comfortable maintaining our annual EPS guidance of $4.40 to $4.50.

So let's talk about the second quarter, and then we will move on to our key planning assumptions for the fall season.

Sales in the second quarter were $6.267 billion or up 3.3% over last year.

Comp sales increased 3.4% in the quarter; and on an owned-plus-licensed basis, comp sales were up 4%.

As I said, we are pleased with our results overall, and we were particularly pleased with the continued strength in the center core categories, especially handbags; the good performance of our back-to-school businesses, including juniors, impulse, active, and kids; and the rebound in our furniture and mattress business after a tough first quarter.

The weaker categories in the second quarter included both women's and men's sportswear as well as non-athletic shoes.

Geographically, sales continued to be strongest in the South, particularly in Southern California and Texas.

There are also individual stores in the North that also performed well; most notably, Herald Square.

We continue to be very pleased with the customer reaction to the remodeled areas of our flagship store.

Average unit retail was up 1.5% in the second quarter, and the number of transactions was up 2.7%, with the units per transaction down 0.3%, or essentially flat.

However, given the shift in the Friends and Family Event, it is more representative to look at these metrics with the two quarters combined.

For those 6 months, the average unit retail was up 0.7%, the number of transactions was up 0.5%, and units per transaction up 0.4%.

While we had hoped that the number of transactions would have increased more, we were pleased with the balanced performance.

Bloomingdale's had a stronger second quarter, as well as Macy's.

And the Internet-generated demand continues to grow rapidly, and we believe that will continue, particularly now that we have rolled out Buy Online Pickup in Store, or what some people refer to as click and collect, to all the Macy's and Bloomingdale's stores.

We haven't even marketed this capability yet, and we are already finding that many customers like this option.

And once in the store, these customers are often buying other items as well.

It is really premature to provide color on how it is being used by customers or how big it could become, but hopefully as the fall season moves on we will understand better how it is being used and its potential.

We are excited, though, by what we have seen so far, and expect it to be a help in the holiday selling season.

Omnichannel strategies are clearly enabling us to accelerate growth, and we are just at the early stages of exploring all the opportunities.

The gross margin rate for the second quarter was 41.4%, down 40 basis points from last year.

The merchandise margin rate was down approximately 30 basis points in the quarter, and the impact of delivery expense lowered the margin rate further.

For the spring season as a whole the gross margin rate was flat, which is in line with our annual guidance at the beginning of the year of a flat to down slightly gross margin rate.

We feel good with where we ended the quarter, with inventory being 1% over last year, or 2% higher than last year on a comp basis.

SG&A in the quarter was $2.024 billion, up 1.3% over last year.

And as a percent of sales, expense was 70 basis points below last year.

Relative to last year, we benefited from approximately $40 million lower retirement-related expense and savings from the restructure that we completed at year-end.

These both helped to offset our ongoing investment in Omnichannel strategies and technology.

Credit income was also favorable in the quarter to last year by $6 million, reflecting continued strength in our portfolio.

Operating income was $571 million in the quarter or 7% above last year; and as a rate to sales, operating income was 9.1%, up 30 basis points over a year ago.

Interest expense in the quarter was $100 million, and tax expense $179 million.

The effective tax rate in the quarter was 37.9%, which is up 200 basis points over the rate last year due to the timing of some settlements.

This higher rate cost us approximately $0.025 per share relative to last year in the quarter.

We still expect, though, that the annual effective tax rate will be 36.4%; but as you know, this tax rate is very hard to predict by quarter.

Net income in the second quarter was $292 million, and diluted share count was 365.4 million shares.

Therefore, earnings per share on a diluted basis was $0.80, which is up 11% over last year.

Cash provided by operating activities, net of investing activities, in the first half of the year was $358 million, which is $10 million higher than last year.

We issued $500 million of debt earlier this year and repaid $454 million of debt in the second quarter.

We also bought back 8.9 million shares of common stock for approximately $517 million in the quarter.

We have repurchased 16.3 million shares for approximately $949 million year to date.

The earnings and cash flow were strong in the first half of the year in spite of the lower than expected sales.

We are confident in our strategies for the fall season; and as a result, we did not reduce our original sales expectations.

We are expecting comp sales of 2% to 3% for the fall, and the licensed businesses should add 20 to 30 basis points to that comp growth in the back half of the year.

Earnings per share on a diluted basis for the fall season, the combination of Q3 and Q4, is expected to be $3.04 to $3.14, which would then result in the annual guidance of $4.40 to $4.50 for the full year.

Here are a few additional planning assumptions to help you with your models.

One, we expect the third-quarter comp sales to be lower than the comp sales in the fourth quarter, given the last year's strengthened third quarter and the tougher fourth quarter.

Two, our total sales growth in the back half of the year is expected to be approximately 30 basis points lower than the comp growth, due to lower outside revenue from our private-brand merchandise.

Three, we expect gross margin rate to be flat to down slightly for the season, as well as for the year.

Four, we are still expecting depreciation and amortization of $1.040 billion for the full year.

Five, the effective tax rate is still projected at 36.4%.

Six, interest expense is also still projected at approximately $390 million.

And seven, as in prior years, we are not including in our guidance any store closing-related costs or asset impairment charges that could be incurred at year-end.

As Terry said in today's news release, our outlook for the fall season reflects our confident optimism tempered with the reality that many customers still are feeling the impact of an economic environment that, at best, is improving very gradually.

Macy's and Bloomingdale's are doing what it takes to win with the customer, and that includes delivering newness in our merchandise assortment, creating excitement with terrific marketing, deploying new dimensions in technology, and helping our customers stretch their dollars with great value.

These elements and many others are wrapped up in our M.O.M.

strategies: My Macy's, Omnichannel, and Magic Selling.

We have learned that our success is greatest when we do things big and when we emphasize great brands that draw customers to Macy's and Bloomingdale's.

Examples include: making Macy's America's destination for handbags; the development of our powerful active strategy; and all we are doing to grow our business with Millennial customers.

We continue to grow our business with major, most-wanted brands through increased collaboration and innovation.

I am talking about brands like Ralph Lauren, Tommy Hilfiger, Michael Kors, Calvin Klein, Estee Lauder, and INC.

It is brands like these that truly differentiate our assortments.

Behind the scenes we are also managing expense prudently so we can continue to invest to advance the progress in our core strategies.

We are taking a more holistic view of inventory, so we can effectively and efficiently fulfill customer demand from all directions.

We are applying our billion-dollar-plus annual CapEx budget to projects that will continue to build our infrastructure for growth.

We have made a lot of progress.

Take a look back at our financial report for the first half of 2007, the period before the recession hit.

First-half 2014 sales are well above the level of 2007.

Our operating income is nearly doubled, even when you factor out the last of the May Company integration costs.

We have actually lowered our SG&A, even on a dollar basis.

We have maintained our gross margin level, even though factors like free shipping hadn't yet entered the equation back in 2007.

And our earnings per share have more than quadrupled.

This demonstrates the resilience of our business, and it underscores the ability of the Macy's, Inc., team to manage change effectively so that we grow sales profitably.

Best of all, our team continues to approach each fall season with a level of anticipation and genuine excitement that is greater than the year before.

Our level of adrenaline has not let up.

The holiday season is when we shine.

I hope you will be watching us closely this fall: in-store, online, on mobile, and across these channels.

We believe in you will continue to be impressed by what we are able to accomplish.

I will stop now and take your questions.

(Operator Instructions) Paul Swinand, Morningstar.

Good morning and thanks for taking the questions.

Just real quick, so I understand on the SG&A.

Just the dollar increase, was that all the marketing shift?

And I'm just trying to think longer term.

You just said that you got lower SG&A on a dollar basis than when you were with May.

Can that continue to leverage or hold steady for the long term without increasing the store base?

I am not sure I understand the question, but we feel very good about the fact that in the quarter we were able to reduce our SG&A as a percent of sales by 70 basis points, even while investing in growth.

So we will continue to do what we can to control expense; but we are investing in the future at the same time.

So is that investment more in the marketing and the online initiatives?

Well, it is marketing -- it's is really more technology and building the Omnichannel strategies, delivery expense, things like that.

Buy Online Pickup in Store, all of the new initiatives that we are doing to help the customer find new ways of shopping and engaging with Macy's.

Okay, thank you.

Quickly on the handbags, is that still a very promotional area?

Obviously, a lot of other stores do well in that area.

Why do you think you'll be better with this new initiative?

No, no.

We have been doing spectacularly in handbags for a long time, and I do think we are the market leader.

I think it is a combination of terrific brands, the online/in-store presence, the display we have in-store, the sales associates in-store.

We are just very strong in that area.

Okay, great.

But that is not new, that has been the case.

Great.

Thanks again and best of luck.

Thank you very much.

Charles Grom, Sterne Agee.

Hey, thanks.

Good morning, Karen.

Just again on the SG&A, a lot of the components -- the retirement expense, the savings from the store closings, and the credit -- was basically the same as the first quarter.

Yet to Paul's question, you were up $25 million in this quarter; you were down $41 million in the first quarter.

Can you just help us a little bit on the technology spend?

How much was it in the second quarter relative to the first quarter?

And then (multiple speakers)

The difference, Chuck, is the fact that the sales grew more.

So the sales variable expense are going to be higher in a quarter, in terms of dollars, when you have a 4% sales growth.

Okay.

So there is no major change 2Q versus 1Q on the tax benefit?

Correct.

Correct.

Okay, thanks for clarifying.

Then just merchandise margins, down like you said about 30 basis points in the quarter.

They were up 15 I think in the first quarter; yet you had a better comp.

Could you just flesh out the delta?

It is great to see inventory levels clean.

Yes.

I mean, the truth is we were flat for the season, which is consistent with what we had told people.

So I think, stick with our guidance; and again, a flat gross margin rate for the quarter is what we had expected.

Okay, great.

Then any early thoughts on back-to-school so far?

Well, the end of the second quarter, back-to-school was extremely strong at the start.

We will see as it goes through the season, but we feel very good about it.

Our juniors business, we really think now has turned around and has been terrific.

Kids did well.

Active is on fire; Finish Line doing very well.

Men's -- I mean, we are -- so hopefully that will continue through the third quarter.

All right, great.

Thanks a lot.

Paul Lejuez, Wells Fargo.

Hey, thanks.

Hey, Karen; morning.

Just wondering if there were any particular categories that you actually saw more gross margin pressure this quarter versus those that might have been stronger.

And also wondering just about your performance from a top-line and gross margin perspective, when you were running Friends and Family versus the periods that you weren't.

Thanks.

You know something?

I don't look at it that way.

Because again, we look at the promotional strategy in total, and what does that do for the quarter.

So I am not sure I can help you with that question.

Got you.

How should we think about gross margin third quarter versus fourth quarter?

We heard your guidance for the second half as a whole.

You gave us some color on what to expect on the sales line third quarter versus fourth quarter; but how about the gross margin?

Well, it is hard to forecast by quarter.

So I don't anticipate any major swings, but that doesn't mean there won't be any.

I would just urge you to think about the season as a whole and the year as a whole.

Okay, thank you and good luck.

Michael Binetti, UBS.

Morning, Karen.

So, just with everything we have seen, and we have heard a number of people say, at a minimum, the level of promotions in the quarter was definitely high still to get the consumer in the door.

Can you talk to us if you guys have changed your view at all on how promotions -- you need to approach the market in the second half of the year based on just updating your thinking through the second quarter?

I can't remember a time when it wasn't promotional.

So I don't see anything different in the second quarter or the fall season.

This is a very promotional business.

Our customer very much wants value and very much responds to promotions.

So I don't see a change happening there.

But it is very promotional.

Right.

Maybe could you help us think about what might have driven the acceleration in the AUR in the quarter versus what we saw in the first quarter.

I think that is why I said focus on the two quarters together.

Because it just -- I think that is a more representative time period.

Okay.

Then just lastly, could you help us think about where we are as far as a run rate on the cost savings that you announced earlier in the year?

How much of that is running through the P&L right now?

Is that (multiple speakers)?

That is going to run through all year.

Is that up to -- it is up to the full amount of the cost savings at this point?

There is nothing incremental to come in the back half from that?

That's correct.

But it still benefits the back half.

Right, got you.

Okay, thank you.

Bob Drbul, Nomura Securities.

Hi, Karen.

Good morning.

I guess the first question is, when you think about the Omnichannel initiative, are radiated sales from the Buy Online Pickup in Store, are they impacting certain categories more than other categories?

I think they are.

But I think it is happening -- it is just too early to say, Bob.

Give us a little more time with it.

We have only had it rolled out to all stores for a couple weeks now.

And as I said, we really haven't even marketed it.

So I think we need to wait and see.

Okay.

Okay.

Then as you look at -- like, you didn't change the sales expectations for the back half of the year.

Are there some product launches or categories that you are excited about, or new products or new brands that you are excited about, that you are looking forward for Macy's -- and Macy's to have overall?

I think there are, but I don't know that I want our competitors to hear what they are.

So I think I will just leave it there.

If you look at the second quarter, the run rate in the second quarter is consistent with what we are expecting for the fall.

There is this misperception that we are expecting this huge increase in sales in the fall, and that is not the case.

Okay, okay.

Then last question maybe was just the Bloomingdale's Outlet business.

Can you just talk a little bit about the learnings there, the updated thoughts around the opportunity, and how that business is performing for you?

Yes.

I mean, I think we are feeling better about it.

The performance is good and we are beginning to develop real estate plans to expand it further.

Great.

Thank you very much, Karen.

Jeff Stein, Northcoast Research.

Hey, good morning, Karen.

Just a couple ones real quick.

First of all, Bloomingdale's versus Macy's, which segment of the business was stronger in the quarter?

We don't -- I mean Bloomingdale's had a strong quarter, just like Macy's.

Okay.

As far as the pattern of sales during the quarter, what we have been hearing now for about a year is that during special events, Fourth of July and Mother's Day and so forth, that that is when the customer comes in; and then there is a lull in between special events.

Are you seeing that in your business?

Did you see that in the second quarter?

Well, you always get more traffic when you are promoting.

But relative to our plan, I would say no, Jeff.

But you are always going to have less traffic when you're not doing a major promotion; but it is as we would have expected.

Sure.

What I meant was: do you have more challenges getting customers to come in and shop during the lull periods?

No more so than usual.

Okay, okay.

Final question is just a clarification.

On the SG&A, you mentioned $40 million of savings from retirement and -- was it retirement and store closings?

No.

No, the $40 million is the retirement.

Okay.

How about store closings, store restructurings?

Well, it is the amount that we had said we would save at the end of the year.

We didn't break it out by quarter.

So it was $100 million for the year.

For the year.

So.

Yes.

Okay, thank you.

Kimberly Greenberger, Morgan Stanley.

Great.

Thanks so much, Karen.

Just so I understand the SG&A savings that will benefit the second half of the year, the $40 million savings on the pension and the $100 million on the store closings, those were both annual figures, correct?

The $40 million -- no, that is in the quarter.

So we had said we would save approximately $150 million for the full year on the retirement side.

Okay, great.

Thank you for that clarification.

And that you are expecting to flow fairly evenly quarter by quarter in the back half?

Yes.

Okay, great.

We are wondering about the shift in merchandise margin.

Obviously Q1 was up; Q2 was down; and the net of which was basically flat, in line with your expectations.

Was that shift simply the Friends and Family shift?

Or did you feel like the business was a little bit more promotional outside of the shifting around of those Friends and Family Events?

No, I don't think it is the impact of Friends and Family at all.

I think it is partially, as you will recall, at the end of the first quarter we did not clear the inventory as rapidly because we were waiting for the warm weather to hit.

So some of those markdowns were shifted into the second quarter.

But again, the spring season was consistent with what we had expected.

The timing just changed a little bit.

Great.

The inventory here coming out of Q2 is looking fairly lean and running below your second-half build targets.

Do you feel comfortable that you have got enough inventory to drive that 2% to 3% growth you are looking for in the back half of the year?

Yes, we do.

Okay, great.

Thanks, Karen.

Oliver Chen, Citi.

Thanks, Karen.

Regarding the gross margin guidance for flat to down slightly, is the main driver there merchandise margin, as you look forward?

Also, if you could just comment a little bit on the Millennial strategies and which ones, which efforts, would you prioritize in terms of driving ongoing progress there.

That would be great.

Yes, the merchandise margins I think should be flattish, maybe down slightly.

And then you've got the delivery expenses, being the two factors that are impacting the year-to-year comparisons.

In total, we expect the gross margin, as I have said, to be flat to down slightly.

In terms of the Millennial, at this point all strategies are working well.

Thrilled with the progress in the junior arena; the continued very high growth in impulse, which is the older Millennial.

That's an apparel component, cosmetics, shoes, handbags, etc.

Also in fact has a component in home now, so we are feeling very good about our efforts to attract that sort of older Millennial customer.

And kids has done well, as well as on the men's side.

So at least in the second quarter and hopefully ongoing, we feel good about all components.

Thank you.

Just as a follow-up, in your comments in your press release and in the call about the customer is still not feeling comfortable about spending more: does that change the way in which you work with vendors as you develop an exclusive proprietary product, and how you think about planning product with the vendors, given this environment?

No, I don't think it really changes it.

The customers today are looking for great new fashion and products at a great value.

But that really hasn't changed all that dramatically.

But obviously we are constantly looking to work with our vendors in new ways, looking for innovative ideas.

And again, the good news is I think we and the major brands are working very effectively together on these strategies.

Thank you.

Best regards.

Thank you.

Lorraine Hutchinson, Bank of America.

Thank you.

Good morning, Karen.

You were able to maintain your full-year EPS guidance even though you lowered the comp.

Can you talk about if it was cost issues, or what changed to the back-half view that allowed you to keep the range where it was?

I think it is the expense performance in the first half as well as our plans for the second.

The sales came -- was lower; the margins stayed the same.

And so it is the expense that is enabling us to do that.

Great, thank you.

Paul Trussell, Deutsche Bank.

Hi, good morning, Karen.

Can you help us understand the underlying second-quarter comp trend?

What was the impact from the calendar shift that started off the quarter?

Also, just to clarify your back-to-school comments, which I believe you said were strong, was there a recent acceleration in the comp trend over the last few weeks?

Well, I was commenting only on the quarter.

We will talk about the third quarter when we finish the third quarter.

But we feel good about the back-to-school business.

As I said, all the components were doing well -- are doing well.

Okay.

What was the impact from the calendar shift (multiple speakers)?

You know, it's hard -- well, the only shift is the change in timing on the Friends and Family, and we are not quantifying it.

But it is obviously significant enough that we had called it out at the beginning of the year.

Okay.

I know you mentioned that Macy's and Bloomingdale's both had solid quarters.

Just when you look at your Macy's business, however, are there any callouts?

Or can you compare/contrast how your higher-end brands are performing versus opening price points?

Do you see any differences there?

Not really.

Not really.

Okay, thank you.

Matthew Boss, JPMorgan.

Hey, good morning, Karen.

As we think about the bottom-line opportunity here, are you still comfortable with 14% EBITDA as a goal?

Would we need some macro improvement to see -- to start to move towards 15% over time?

We are still comfortable with 14%, and we have taken 15% out of our discussion.

So, I don't think 15% is going to be possible at this point, given the investments we're making to grow the business.

So if I were you all, I would think the 14%; and yes, we will get there; and we are making progress.

But I don't think we will get to 15%.

Okay.

Then as we think about the competitive backdrop --

And by the way, you wouldn't want us to get to 15%, because it would require not investing in the business the way I think we should to get the growth.

Got it.

Then as we think about the competitive backdrop, any changes you have seen -- as you think about online, any changes that you have seen with Amazon or others?

And then anything with the off-price channel?

Is there anything you can do from a pricing perspective or that you think you need to do to maintain the value proposition?

Yes, I mean it -- we really have not seen much change in the competition.

But we are constantly looking at value and, obviously, value relative to the off-price channel becomes relevant.

So yes, we are looking at that, Matt, but don't really have anything to update you on.

Okay, great.

Best of luck.

Dana Telsey, Telsey Advisory Group.

Good morning, Karen.

You talked a little bit about you are in the early stages of exploring the Omni opportunity.

How do you see that going forward in the investment spend that you're making?

And what benefits should we see, given it seems like it is helping in terms of top line, helping in terms of driving sales?

And lastly, as you think about the core categories that performed well and the rebound in furniture and mattresses, was that rebound in furniture and mattresses big-ticket?

Was it the weather improved and it got them out there?

How did you see it?

Thank you.

That's a lot of questions there.

I think the Omni opportunity is, first and foremost, sales growth.

But what we are also finding is that there is gross margin opportunity as well as turnover opportunity from, again, better coordinating across the Company and looking at inventory across channels as well as marketing across channels.

So I actually see it as a huge opportunity across the whole P&L and balance sheet -- and very exciting.

In terms of the businesses that improved, I don't think it is weather-related.

I just think that -- and again, I can't tell you what happened to big-ticket in the first quarter, but it certainly rebounded in the second.

And we feel better about that going forward.

Thank you.

Liz Dunn, Macquarie Capital.

Hi, good morning.

I am interested in the Herald Square renovation.

Obviously, it is still ongoing and will take a few years; but so far it looks like the parts of the store that you have renovated look terrific.

I was just wondering.

Is the outperformance that you saw in the quarter from Herald Square that you called out, was that specific to those departments that have been renovated?

Or can you just give us any more color there?

Yes, I mean the good news is the areas that are renovated are obviously seeing the biggest pickup; but we are seeing --- in the areas that were completed earlier, we continue to see outsized growth.

So they continue to -- after they year-round -- continue to do better.

And obviously, once people are in the stores they are buying in other areas as well.

So we are seeing strength across, which is really exciting.

Great.

I am also interested in your efforts to specifically market to consumers via digital methods.

Like, how sophisticated are your digital marketing efforts in customizing a message for consumers, based on purchase history or even when they log on, to give them a specific homepage?

And what are you doing to improve those areas?

I would say that today we are very sophisticated relative to our peers.

However, we are constantly investing and looking to hire talent to even accelerate those efforts, because we do believe that's very important for competing effectively going forward.

But I would say today we are very good at that, but are investing to get even better.

Okay, great.

Then just one final one.

The continued improvement that you saw in juniors and impulse, is that driven primarily by some of your investments in private and exclusive brands?

Or is it shared with national brands?

It is shared across the board.

Okay, great.

Thank you so much.

Bernard Sosnick, Gilford Securities.

Good morning.

I don't think I have ever heard a lineup of good news that included all that you said today about juniors, kids, impulse, activewear.

You have put in a lot of effort to develop the Millennial strategy and to make the department store younger in feel.

I am wondering if you can give us a broadbrush view of how your thinking might be changing along these positive lines going forward.

I am not sure I understand what would be changing.

Well, I mean, you are doing so well, I am wondering whether or not you are feeling that there is a success in making the store younger in feel.

Could you share with us any forward-looking thoughts?

Well, I think we have said all along that investing in this Millennial customer was important for going forward.

And that is part of the reason we feel so good about the future for Macy's.

And by the way, the same is true for Bloomingdale's in their own way.

Again, I think it is important for us going forward.

I am thrilled to be seeing the success.

You called out Finish Line as doing very well.

I know it should be up to around 400 stores with shops by October.

What does it mean to have brands like Nike in the store, where you didn't have it before?

I am sure it is mainly for women; but what are the prospects for men's and kids athletic footwear?

It is actually not primarily for women.

It is doing extremely well across men's, women's, and -- where we have it -- in kids.

We are beginning to grow that more aggressively now.

But in most cases we had the brands, we just didn't have the right shoes.

And it is making an enormous difference and really giving us credibility that is helping us with our overall active strategy also.

Great.

Thank you very much.

Richard Jaffe, Stifel.

Thanks very much.

Hi, Karen.

Good morning.

Just a follow-on on the Internet business.

As you guys have led the charge, if you will, to an Omnichannel position, clearly you are learning a lot of things that work and don't work.

Obviously, I would love you to share that with us; and I suspect you won't.

But wondering just from a dollars and cents standpoint, you've been investing a lot.

Has it been well invested?

Is there more investment ahead that you have learned that you need to do?

Or is the investment that has been done now going to be harvested or beneficial without additional investment the next couple of years?

No.

It is a complicated question, but we will continue to invest.

And there's different parts of the investment.

The first would be how to make our strategies between dot-com and stores and the systems work well together.

That is one piece of investment.

You've got the warehouses that we have been investing in.

As you know, we just started building a new one in Tulsa.

So those will continue.

You will have store technology, which we are testing like crazy.

And we will continue to test and roll out things that work.

So I think you should assume that Omnichannel and technology investments are going to be an ongoing part of both our capital budget and also our expense.

Got it.

Thank you.

Stacie Rabinowitz, Consumer Edge Research.

Hi, you had mentioned that the back-to-school categories in some of the younger age demographics were doing very well.

I was just wondering.

As we moved through the end of the summer, was there any change in the cadence of back-to-school versus last year, or do you think the momentum could continue until school starts?

I don't know; we will have to wait and see.

The momentum didn't change; it was strong throughout the quarter.

And obviously the back-to-school business really started towards the end of July, so still a lot to come.

Okay, great.

Thanks.

David Glick, Buckingham Research Group.

Morning.

Most of my questions have been answered, Karen.

Just a couple of category follow-ups.

You mentioned -- I believe it was men's sportswear, women sportswear on the weaker categories as well as fashion footwear.

Women's sportswear, not a new mention.

I was just wondering, in your men's sportswear commentary, are you including some of the better brands or what you consider more classification sportswear?

It is just overall.

The overall apparel business did not do as well, both men's and women's.

On the footwear side, obviously the composition of the assortments changes pretty dramatically from fall to spring.

Are you feeling any more optimistic about footwear as a category, based on some of the ideas that you are seeing?

Yes, we are.

Okay.

Then finally, at the risk of beating a dead horse, I know that you said the significance -- that there was a significant impact in the Q2 comp from those 2 days of Friends and Family.

But is it fair to say that you guys look at the underlying run rate in Q2, ex-that event, still within the guidelines of what you are forecasting in the second half of 2% to 3%?

I think the horse is dead, but yes.

But yes?

(laughter) Okay, thank you.

(Operator Instructions) Craig Hutson, Loop Capital Markets.

Yes, just a balance sheet question.

We've seen a number of tender offers in the last months, including from some big retailers like Target and CVS.

CVS announced a tender last week where the highest coupon in the tender offer was 6.25%.

You guys have 21 issues in your capital structure greater than 6.25%.

What is the rationale for why specifically you have not gone down this path, to pursue tender offers for your high-cost debt?

We are always looking at the net present value of those kinds of transactions.

And if positive, we would entertain one.

If not, we wouldn't.

By net present value, we estimate you could save $100 million of annual interest expense.

Can you just walk me through this calculation?

No.

I mean, you're obviously looking at what -- you're going to have to look at the premium you're going to have to pay, etc.

So it is a cash flow question for us.

Okay.

And more a cash flow question than just the overall improvement in interest savings and earnings and --?

Correct.

We are driven by cash flow, not earnings per share.

Okay.

All right, thank you.

It appears there are no further questions at this time.

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

Great.

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

And have a good day.

Thanks.

This concludes today's call.

Thank you for your participation.