梅西百貨 (M) 2015 Q3 法說會逐字稿

Good morning and welcome to the Macy's, Inc. third-quarter earnings release conference call. This conference is being recorded. I would now like to turn the conference over to your host, Karen Hoguet. Please go ahead.

Thank you. Good morning and welcome to the Macy's conference call. I'm Karen Hoguet, CFO of the Company. I'm joined this morning by Terry Lundgren, Macy's Chairman and CEO.

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 our most recently filed Form 10-K and other SEC filings.

Terry Lundgren will start us off this morning to discuss the Company's results and strategic imperatives. I will then discuss three subjects in more detail -- the third-quarter earnings, our work on real estate, and the outlook for the fourth quarter. And then we will open the call up for your questions. So, let's get started. It's a lot to cover. Terry?

Good morning. I wanted to join the call today to help give my perspective to you directly on the third-quarter earnings and talk about the outlook to discuss our analysis on real estate and other strategic decisions that we have made. These decisions are all being made to enhance shareholder value by strengthening our core business and accelerating changes in this new retailing climate.

As you see from our press release, we had a very tough quarter. We are clearly disappointed with the 3.6% decline in comp store sales of owned and licensed businesses, and the 8% drop in earnings per share. We believe that the retail industry is going through a tough period, that we seem to experience something like this every five to seven years or so, and this one feels familiar in that regard.

As many of you know, this is a management team that has navigated through difficult times in the past and we have done so successfully. As we have demonstrated in the past, we use these challenging times to move decisively forward. We use these times to reset our ambitions and determine how we're going to win and where we are going to play, while maintaining financial objectives that we have set for our shareholders, which is to grow sales profitably, maintain an industry-leading profitability rate, and improve return on invested capital.

We know this is what will enable us to maximize total shareholder returns. We have done this in the past and we will do this again.

You will recall our decisions in 2008 and 2009 that made us a much stronger and much more successful company. We have a track record of strong financial performance and return on capital. We are taking significant steps on these important fronts, all designed to improve our operating results and enhance shareholder value.

We are taking a series of actions specifically aimed at strengthening our core business. These are designed to restore our owned-plus-licensed comp sales growth to the 2% to 3% range that we have had in the past, and an EBITDA rate of 14% over the next few years.

We continue to believe that the MOM strategies are right but they need to evolve over time. The first M in our MOM strategy is for My Macy's. We continue to focus on localization and getting the right mix of merchandise in our stores for our customers at a local level.

We are now taking this to an even more granular level with more focus on personalization. This will happen both in-store and online. Our aspiration is to help personalize shopping experiences and offers to our customers as they walk into our stores or enter our websites. We also need to help attract new customers in ways that will make them feel like it is My Macy's for each and every one of them.

The second letter, the O for omnichannel, now embraces our mobile strategy, as well as some new services and models that we have begun testing, such as subscription services. We intend to fully push the digital frontier, utilizing our innovative culture with more and more testing and faster learning. We also are helping customers get merchandise, however they wish, whether it be same-day delivery, buy online and pickup in store, whatever is their preference.

The last M, Magic Selling, has been expanded to encompass magic experiences beyond just the selling floor. We need to keep making progress with our service, particularly in store.

Although operating over 750 locations with approximately 150,000 associates, and providing good service in every transaction does present its challenges, it is an essential part of our mission. As part of this strategy, we are pushing to improve shopping experiences through our people as well as through technology. We have piloted an approach in jewelry and watches in 40 locations this fall, and based on its early success, we are rolling it out company-wide in mid 2016.

We have had great success with licensed businesses which help us acquire new customers and make our stores more productive. As you saw this morning, we announced another new partnership, this time with LensCrafters, to open optical departments in as many as 500 Macy's locations.

In addition to the evolution of our MOM strategies, I want to discuss two other subjects which are important to our core business and will help us achieve our goals. First, as we discussed last quarter, we are concentrating our resources on strengthening our top doors in our best locations. These locations have tremendous growth potential and we believe, with greater focus, we could improve their already strong results.

We also recognize that we have the opportunity to condense our network of stores. We expect to close roughly 35 to 40 stores in early 2016, as previously announced, and we expect to continue to close more stores in the future.

We will reduce expense and tighten capital spending, additionally, to operate more efficiently, while funding the highest potential growth initiatives. Our target is to reduce as SG&A by $500 million on an annual basis by 2018. But to be clear, we are going to make significant incremental progress in 2016 and 2017, as well. We expect part of this reduction to result from a greater use of technology.

We will also reduce capital spending for the next year to be somewhere around $1 billion, and that compares to $1.2 billion, which we expect to spend this year. This is just the right decision for us to make after the challenging year that we're having.

In addition to strengthening the core business, we are also testing new directions for future growth. We look for places where the growth is complementary to our core business. We want to invest in attractive businesses that meet three criteria. One would be the business is attractive on its own; two, where we can bring something new to the table; and, three, where, assuming we win, will strengthen our core capabilities.

The three areas which we are focused currently on are, one is Backstage, which you know about. But over the next two years we intend to open approximately 50 freestanding Backstage doors. In addition, in spring 2016, we are going to pilot Backstage stores within up to 10 existing Macy's store locations, creating a new hybrid model.

We believe that these stores within our stores can help bring new vendors and new categories, which will appeal to existing customers but also attract new customers to the full-line stores. We're finding that Backstage is definitely attracting a younger consumer. Assuming these pilots work, we will be ready to roll this concept of the hybrid model out quickly.

The second idea is Bluemercury where we have opened 16 freestanding Bluemercury stores this year, taking that total to 76. Over the next two years we expect to open another 40 or more locations. In addition, we are rolling out Bluemercury shops in Macy's stores and we will utilize the Macy's capability to greatly enhance the experience and grow our online business at Bluemercury.com.

Also, we will appropriately expand Macy's in China. I was just there last week as we launched on Alibaba's Tmall Global site. And we are also opening Macy's and Bloomingdale stores in Abu Dhabi in 2018. These tests may also lead to further international opportunities.

Before I turn the call over to Karen I want to make a few comments about real estate. I am particularly pleased that Tishman Speyer has become our partner and they're going to help us to capture more value from our real estate.

This is something we believe in and Tishman Speyer is a company that has an outstanding track record of creativity and developing world-class real estate assets. They are as excited as I am about the possibilities to unlock potential value in many of our real estate locations, including our mall locations.

We are going to begin by focusing our efforts on potential partners or joint ventures for the four major flagship properties. But don't misunderstand me, this is just the beginning. We're going to start with Herald Square, Union Square, State Street and downtown Minneapolis. From our work so far, we believe there is material shareholder value that could potentially be created from these efforts. And these partnerships could extend, as I said, into the mall store locations, as well.

We will also intensify our current efforts with selected real estate monetizations and redevelopments in instances where the retail business could be enhanced or where the value of the real estate simply exceeds the value to operate as a retail business. We have demonstrated this in the past and we think there are more of these opportunities.

As Karen will discuss in a few minutes, we and our Board concluded there was not enough value to be created from the establishment of a REIT at this time, even before factoring in the operational and tax risks associated with doing so. But we did put these unconcluded risks aside for our valuation process and still came to the conclusion that a REIT just does not create significant value, or enough significant value, at this time. So, we have studied it, we have used great outside advisors to help us think this through. I just want you to know that we have given this a very thorough look.

Also know that I am just not happy with our current overall results and I'm committed to fixing it. Our team is among the deepest, most experienced and most determined team in retail. That has been clearly recognized for the last several years as we have proven to have strong success.

While we are quite dissatisfied with our current results, we are quite confident that we will be able to return to delivering profitable growth. We know this is what you expect of us, and I guarantee you that is what I expect of ourselves. Our expectations are based on our demonstrated ability to respond to market challenges and emerge stronger.

No other retailer has a track record of mastering change. Remember that some of our boldest and best ideas are developed during these down cycles. Our success since the beginning of FY09, which includes a 540% total shareholder return versus the Dow of 121% over the same period means that we have demonstrated our ability to do this and we're operating from a position of financial strength.

Let me turn this over to Karen now who is going to fill you in on some more of the details.

Thanks, Terry. As Terry said, the third quarter was disappointing. The sales trend unexpectedly weakened versus that experienced during the first half of the year. Comp sales on an owned-plus-licensed basis were down 3.6%, and our total sales of $5.9 billion were down 5.2% below last year.

As discussed last quarter, the total sales declined more than comp due primarily to the reduction in sales of our private brand merchandise to a third party. Traffic was clearly a problem for us in the quarter, as I will discuss in a minute. I have to say, we are anxious to see how other retailers fared in the quarter, but in the absence of that perspective I'll describe the factors that we believe led to the weakness.

First, sales performance in our tourist stores weakened versus the second quarter, with a significant decline in international tourist sales. Using international credit card sales as a proxy, we estimate the impact of the lower international tourist sales to be approximately 1.5 points in the third quarter, which compares to the 1 point that we talked about for the first and the second quarters. As you might imagine, these are also our most profitable doors. And, remember, that we are significantly more weighted to tourist markets than our major competitors.

Second, the weather has not helped with the warm temperatures experienced across the country. Our sales of cold weather merchandise such as coats, sweaters, boots, et cetera, were significantly below last year in the quarter.

Third, the center core businesses are still growing but experiencing slower growth than in recent years. This is a part related to the slowdown in tourist sales. Fourth, some of our major brands experienced weakness during the quarter, as you have heard mentioned on the various calls recently.

In spite of disappointing overall sales, there were some bright spots. First, digital growth continued to be very strong. Our furniture and mattress business also continued very strong. And soft home -- categories like textiles, tabletop, et cetera -- strengthened in the third quarter.

Active continues to be a very strong category for us across the store, whether it be in men's, women's or kids. In fact, our kids and younger millennial businesses also did relatively well in the quarter. Geographically we did the best in the West, particularly the Northwest.

As I referenced a few minutes ago, the total number of transactions was down 3.6% versus last year in the third quarter, which compares to a flattish trend in the first half of the year. Transactions are a proxy for traffic and clearly something changed in the third quarter. Average unit retail was down 1% and units per transaction were up 1% versus last year. Both of these trends were similar to those in the first half of the year.

Gross margin rate in the quarter was 39.8%, up 60 basis points versus last year. Merchandise margin was up slightly in the quarter. But the gross margin rate also benefited from the reduction in the low-margin third-party sales versus last year.

Inventory at the end of the third quarter was up 4.6%, and on a comp basis inventory was up 3.1%. This is higher than anticipated and higher than we would like it to be but it is a result of the disappointing sales performance. We will need to liquidate this inventory in the fourth quarter so that we can maintain the flow of fresh new merchandise.

SG&A in the quarter was $1.968 billion, down $39 million or 1.9% versus last year. During the third quarter we booked a $57 million gain on the sale of the upper floors of our Seattle store, which occurred a quarter earlier than we had planned. In total, in the third quarter we booked $78 million of asset sales which compares to $48 million last year.

Marketing expense was less than last year in the quarter, due primarily to a timing shift into the fourth quarter. We also benefited in the quarter from the savings associated with the restructuring implemented earlier this year, and also a reduction in the bonus accrual due to our weak performance. The reductions were offset, in part, by our investment in growth initiatives, investments in digital, Bluemercury, Backstage and China.

Credit income in the quarter was $177 million, which is $5 million lower than last year, as anticipated, due to the costs associated with reissuing our co-brand credit cards with chips. Credit usage or penetration was 49.3% in the quarter, above last year by 60 basis points. Remember, also, that we are consolidating the results from the China joint venture, which at this point is only a small amount of expense.

Operating income before the asset impairment charge was $369 million or 13% below last year. We also booked non-cash asset impairment charges of $111 million in the quarter. These are primarily related to the potential 35 to 40 store closings which we announced in September. The estimate will be fine-tuned, if necessary, when the decisions on specific locations to be closed is finalized later in the year.

Interest expense in the quarter was $80 million, tax expense was $61 million, an effective rate up 34.6%. Also, as I just mentioned, we're consolidating the results for China to flow into our operating income. We then will break out the portion of, in this case, the loss attributable to our joint venture partner which was $1 million in the quarter.

Net income attributable to Macy's shareholders is $118 million or $186 million excluding the asset impairment charges, which is 14% below last year. Average share count on a diluted basis was 329.7 million shares, down 8% from last year. Therefore, earnings per share, excluding the asset impairment charge, was $0.56 per share, which is down 8% from last year's $0.61 on this basis.

Moving on to cash flow, year-to-date cash flow from operating activities was $278 million, $563 million below last year. This is due to less net income, more inventory and lower payables. Cash flow from investing activities is about the same as last year, excluding our acquisition of Bluemercury earlier in the year.

In the financing section you will note that we showed $791 million of debt issued, which is all commercial paper. These borrowings are expected to be gone long before the end of the fourth quarter. You will also note that we bought back $1.8 billion of stock this year or 30.6 million shares.

Let's move on now to real estate. As Terry said, we and our Board have been studying numerous alternatives for utilizing our real estate to create value. We engaged multiple advisors and have spent countless hours examining alternatives.

Our primary focus in recent months has been related to the potential for spinning off some of our properties into a REIT. The premise of a REIT, as you know, is we would create a separate real estate business that would presumably trade at a higher multiple than we do as a retailer, and that this new entity would be able to then grow into a separate business on its own.

That opportunity for evaluation arbitrage and creating a new business sounds promising, but as we analyzed it further we realized that its creation would not create nearly as much value for our shareholders as we had hoped. We reached this conclusion before taking into consideration the operational and tax risks associated with the creation of a REIT, which also would be relevant.

Our analysis addressed several key factors. First, the size of the REIT. This is a function of the rent that the retailer can pay, and therefore the amount of earnings for the REIT that could be then capitalized at a potentially more attractive valuation multiple.

Second is how the REIT would be valued. Honestly, there aren't any true comparables to look at for a Macy's REIT, which would, at least at the outset, be a single tenant department store REIT. Some of the factors influencing valuation include the quality of the properties, the diversification of geography and brand, as well as the lease terms themselves.

The third key factor would be how would the pro forma retailer trades. In other words, would the separation of real estate impact the valuation attributed to Macy's by the public markets, given the leveraging effect of incremental rent and the loss of control of properties. Even assuming no change in the retailer's multiple, a conservative assumption, on a pro forma basis, any resulting value creation is not significant.

So, each of these three factors played a part in driving the conclusion. The most significant was the amount of incremental leverage in the form of rent that the retailer could support. This in turn is driven by the financial flexibility needed at the retailer to manage through ongoing secular changes in the sector.

Our industry can be cyclical and you don't have to look far back for evidence that swings in leverage can be material through this cycle. We have lived through enough downturns and bankruptcies to know that there is a real benefit to the retailer of maintaining the flexibility of an investment grade rating and having access to capital in all markets, particularly when the industry is in flux. In addition, our real estate advisors indicated that the REIT would trade better if the retailer was investment grade since, at least initially, it would be a single tenant REIT.

As I said a few minutes ago, the leveraging impact is highly material when we capitalize the potential rent that the retailer with pay the REIT at the 9.3 times factor for Macy's that Moody's is using for us for 2014, or potentially higher given that these leases would be long-term in nature. Cash generated through leverage at the REIT can offset that somewhat by paying down existing debt, but leverage is still a limiting factor on the size of the REIT transaction that we could pursue.

There would also be material transaction leakage in any REIT formation. These friction costs would include items such as debt prepayment costs, transaction fees, incremental property taxes and transfer taxes. We would also be required under the relevant tax rules to effect what is known as an earnings and profits purge, whereby we would distribute a portion of pre-transaction accumulated earnings and profits. While our shareholders would ultimately benefit from this distribution, it would limit proceeds available for debt pay down at the retailer, and, consequently, the size of the REIT transaction that we could prudently pursue.

In the end, the value creation was not significant and, as such, our Board decided not to proceed. This is something we will continue to monitor as circumstances and markets could change.

As Terry mentioned, we are encouraged by the possible value creation from partnership or joint venture opportunities for our flagship properties at Herald Square, Union Square in San Francisco, State Street in Chicago, and downtown Minneapolis. These transactions could be for individual properties or could be more broad-based. We are open to all possibilities that will create sustainable value.

The Board agrees that we should immediately begin a process to explore these opportunities. The ultimate structures will be determined by our process. Our expectation, though, is that we will be able to create significant value.

It is possible that these partnerships and joint ventures, as I mentioned a minute ago, would extend to our mall-based stores and be significantly more broad-based than these four properties. We are seeking creative ways to strengthen our retail presence while monetizing or highlighting value of the less productive space. These will take some time to execute. In the case of these four buildings, they are very complex and the best answers are likely to be very site-specific. As examples, both Brooklyn and Seattle took over a year from inception to completion.

We have also recognized through all of this work that we could benefit by adding resources to help us create more value with our real estate. As Terry mentioned earlier, we've engaged Tishman Speyer in an expanded relationship to advise and support our management team in identifying and advancing potential store redevelopment projects nationwide. We are very excited to have their help with these efforts. And, as always, we will give you progress reports as we proceed.

Let's move on now to our outlook for the fourth quarter. As you saw in our press release, we are forecasting our comp sales on an owned-plus-licensed basis to be down 2% to 3%, which would lead to the year being down 1.8% to 2.2% on this basis. Total sales for the year are now assumed to be down 2.7% to 3.1%.

The fourth-quarter sales assumption incorporates an improvement in trend from the third quarter. I would point to three factors that should contribute to this improvement in trend. The first is that Macy's and Bloomingdales.com both penetrate higher as a percent of sales in the fourth quarter than in earlier quarters. Therefore, the higher growth rate of the online business is mathematically more of a help to the sales increase in the fourth quarter than it is in the third quarter.

Second, weakening international tourist business reaches the one-year point in mid December, and that will help the comparison be a bit more favorable in the back half of the quarter. And, three, we feel very good about our gift assortment given early reads in our prototype store. The trend in that store has improved significantly since we set it up for the holidays. The newness in some of our gifts is great -- items like faux fur, tech watches and novelty gifts.

The gross margin is expected to be well below last year in the fourth quarter, due primarily to the higher than desired inventory position going into the quarter. For the fall season as a whole we are expecting a lower gross margin rate than last year.

SG&A in the fourth quarter is expected to benefit from the $250 million gain on the Brooklyn transaction. Excluding this gain, SG&A dollars are expected to increase versus last year. While we will continue to benefit from the restructuring completed earlier this year, the benefits are offset by the investment in growth initiatives, the shift in the timing of marketing expense from the third quarter, as well as lower asset sales gained this year outside of the Brooklyn transaction.

Interest expense is assumed to be $96 million in the fourth quarter. As you saw in the release, we are now assuming annual earnings per share on a diluted basis, excluding asset impairment and other store closing costs, of $4.20 to $4.30. This equates to fourth-quarter earnings per share of $2.54 to $2.64 on this basis.

Now let me turn it over to Terry to recap and wrap up.

As you can see, we have a lot going on in our Company, both in terms of delivering improved results in the fourth quarter and looking ahead to the future. It is not unusual for us to focus on a combination of strategy and execution at this time of year. Ours is a company that has always embraced change and continuous improvement. But what is different this year is the breadth and intensity of activity, given disappointing results, together with the exceptional opportunities we see emerging from the rapid evolution of shopping patterns and preferences in the future, as well as in the real estate marketplace category.

We also know that our Company must continue to change and we have done so year after year. We have clear vision of where we need to go. We have a strong sense of urgency. And we have the talent and resources to move ahead in a manner that is intelligent and is in the best interest of all shareholders, as well as with our customers and our associates.

I know today's announcements are a lot to digest but you can be sure that we are well coordinated, and managing each element with a holistic view for creating long-term shareholder value.

Thanks for your interest and for taking the time to understand all that we have talked about today. Now Karen and I are prepared to take your questions.

(Operator Instructions)

Matthew Boss, JPMorgan.

Terry, you spoke to restoring same-store sales back to positive 2% to 3% over time. Underlying all the noise this year what base do you think we are at today? And is it fair to think about next year as the steppingstone as you roll out some of these initiatives across the base? Any help on a potential bridge back to the 2% to 3% would be really helpful.

We will come out with our forecast for 2016, as you know, as we typically do at the beginning of the fiscal year. It is what you have described, Matt, and that is, we don't expect to go from our current trend and forecast for the fourth quarter into a plus 2% to 3% immediately. All of these steps that we have described are aimed towards restoring that growth that we have seen in the past.

But they're going to take time. All of these are going to take some time. So, this is going to be an adjustment period. We are going to be aggressively moving forward with the ideas that we think are working, investing in our top locations. That work has already begun, beginning to roll out the Backstage initiative, beginning to roll out the Bluemercury initiative.

All of these things we have talked about, many are underway, either planned, in the planning stages, or even begun to execute, in some cases. But they are going to take time to get traction. I think you have described it well in your question.

Great. And then just a follow-up, Terry, I'm curious your thoughts on the upcoming holiday. Could you help break down the negative 2% to 3% comp forecast as we think about tourism, AUR, as you are reducing some of the inventory? And just how you're thinking about trafficking and spending behavior from the consumer this holiday.

Firs t of all, as difficult as the 2% to 3% is, it is a slight improvement versus how we have been in the third quarter. And, frankly, I think part of that is the fact that we will anniversary the weakness of the international tourist business, which we felt in the middle of December last year and throughout January. But we're not expecting any major trends in change, as you can tell, other than that.

I wish I could say it's going to get ice cold across the country. I wish I could say tourists are going to begin to show up and start spending. But you can see in our forecast for fourth quarter we are not expecting that. And, therefore, of course all retailers who are in the fashion business like us, we're not selling lumber so I can't carry the lumber over to 2016 and sell it at the same price next year. We're selling fashion apparel, so we're going to mark that inventory down. That will be good for consumers but it will, obviously, put pressure on our own margins in the fourth quarter.

Our goal is to be clear about making sure that we are prepared with fresh inventory receipts coming into spring 2016. And the only way to do that is to address the markdown needs to the sales plan we are experiencing in the third quarter and will in the fourth quarter, as we have forecasted. So, that is why the numbers look the way that they do in our fourth-quarter forecast.

Great. Thanks. Best of luck and thank you for all of the color.

Jeff Stein, Northcoast Research.

You guys have done a great job of keeping your inventories in line. I'm a little bit surprised that your comp inventories ended on such a high note. Maybe you can just talk a little bit about why you decided -- it sounds like you held the line on your pricing. I'm wondering why perhaps you didn't accelerate markdowns and then enter the fourth quarter a little bit cleaner. And then I have a follow-up question.

I'll just start with saying that you have to shoot when the ducks are flying, and they are flying in November and December. That is when the traffic is there. Clearly, we have talked about, with the warmer weather, we have buildup in inventory in all of those cold-weather categories of outerwear and boots and even the down comforter throughout the home. Throughout the entire Company we have got that issue.

You want to believe that eventually it is going to get cold, so when it does consumers will -- and traditionally they have reacted to that. So, you don't necessarily need to mark all of that inventory down. At some point we will, but you would like to be able to get some of that business in the higher margin and at the higher average retail early when the weather does break before you have to mark down.

You will have to mark it down eventually because there is just too much of the inventory, we predict, because of what hasn't been sold in October and what we expect going forward. That is basically why you would wait on something. You wouldn't take unnecessary markdowns.

On the fashion stuff you would definitely take the markdowns and we think we have done that. But our lumps are clearly in the cold-weather categories. We will have to address that.

I understand. With regard to Backstage, I'm wondering if you could talk about the learnings that you have had so far and how the initial locations are performing. It seems like taking a leap forward and planning to open 50 over the next two years would suggest that you are pretty pleased with what you have seen so far. And then with regard to the hybrid model, how much selling space would you anticipate carving out from your existing mall-based store to accommodate the off-price portion of that model?

First of all, I will tell you it is still early days in the evaluation process for Backstage. But our belief is that the model has certainly been proven by others. I think in particular the last two or three years there has been a consumer migration to these lower price point options, so that is how we know that there is a consumer interest there. Our belief is that there is a consumer interest there, we just need to get our share of that.

We are also seeing that younger consumer migrating to that space. With our intense focus on the millennial consumer, which we are getting inside of our Macy's stores, we think this is another way to attract that younger consumer. So, it is more of a bet on the fact that the category has been proven, mostly by others. It is early days for us in our testing. But we like the model, we like what we offer. We think we offer something different than a lot of the other guys in the off-price space have done.

As far as the hybrid idea, we haven't done it yet. We're just getting ready to do so. But, honestly, I think we have space in the apparel floors. We could take somewhere between 20,000 and 30,000 square feet to create a significant space for the Backstage within the store.

I believe there's lots of these stores, particularly in that mid-tier performance group, that are not as productive as they need to be, and the way they're going to get more productive is bringing new ideas in, like a LensCrafters or a Finish Line or Sunglass Hut, as we have done. But now, perhaps, with this hybrid model, which will also allow us to bring in new categories like home decor, which has been -- we have tried this in the stores in the past at the Macy's stores, and it is very complicated to do on a regular basis. But it is easier to do on a one-off basis of buying coat hangers and buying mirror sets and buying these other home decor items that have been successful in Backstage.

So, we think that we can create some new interest in product categories but also attract more of these younger consumers in the hybrid model. I am excited about this business test and what this could bring, mostly to make those mid-performing stores more productive.

Thank you.

Joan Payson, Barclays.

You mentioned some of the real estate optionality around the flagships. I was just wondering if you could talk about how much value those could ultimately unlock, and how we should think about the real estate gains per year going forward.

Honestly, I don't know the answer to that question. We do think it's going to be a significant value creation. But it is hard to predict. So, I'm sorry, I can't be really helpful with that.

Okay. And then just in terms of the environment in some of the partnerships that you have been launching over time, have the views or priorities around M&A changed at all?

I don't think so.

I don't think so either. We have said this in the past -- we look at everything that we think is reasonable in terms of its potential to add value to our overall portfolio. But we have not made any investments since the period of 2005, which was when we bought the May company, which was a massive investment that we all feel very good about, until we just bought Bluemercury which is a relatively small investment. We look at all of these ideas and our belief is that there are still other ideas out there. But we are going to continue to be very selective about M&A opportunities.

Great. Thank you.

Oliver Chen, Cowen and Company.

Terry, regarding your comment on the cycle and thinking about the five years to seven years, how do we think about the evolution of how you may pursue promotional strategies in this new context? Also, as we look at retail and we try to reconcile the low unemployment and certain gas benefits, what do you think is happening with the nature of the consumer?

And, Karen, I just had a question on vendors. I was just curious on the vendor side in terms of the near term what relationship you will have with the inventory positions and the gross margins. And on a longer-term basis with the vendors, I think your store experience is quite different and unique in your bargaining positions, so I was curious about pure play Internet and Macy's.

Okay. So, a series of questions. First of all, one of the things that you mentioned about the consumer, the nature of the consumer, is that, at least in the second quarter and first quarter, they were spending in categories such as automobiles, home improvements, certainly in technology and healthcare. You can find the specific categories where the consumer was spending, and that did demonstrate that there is reason to believe in the GDP forecast.

However, that drops off. We all saw how that dropped off in the third quarter. And, yes, some of those categories continued to perform. And their savings accounts still indicate, while they were a little less than they were in second quarter, they still indicate that there is money to spend if the consumer chooses to do so in the fourth quarter. We are just waiting now to see if, in fact, they will.

So, I think the state of the consumer is actually reasonably okay. One of the things I have said on a macro basis that does concern me is that we have not seen productivity in the United States improve. In fact, it has deteriorated somewhat while the unemployment rate continues to be very low. And it just seems that those two numbers are in a bit of conflict with one another. You'd think that productivity would have to increase to continue to see unemployment go down, and that hasn't necessarily happened.

That piece of macroeconomic news does concern me about the nature of the consumer longer term. But we will have to see how that plays out in 2016 with job growth with other companies.

As far as the vendor relationships go, we have very strong relationships with our vendors, as you indicated. We are generally the largest or one of the largest customers for most of the major vendors that we do business with. So, we obviously have a close working relationship. It is extremely important for them and for us. Karen mentioned this in her comments, when you see some of these big designers, these big vendors releasing their performance, you can be sure that an important part of their overall results is directly related to their results with Macy's just because of the size of our business relationship.

Having said that, our vendors have been highly supportive of us in difficult times. I know they will be in this particular time and we are counting on that. But, look, there is only limit to what everybody can do in terms of assisting us through this difficult period, and that is what we have baked into our fourth-quarter forecast.

Thanks, Terry. Just a quick follow-up. From a bigger picture perspective how to we think about promotions in a brand appropriate way and the next generation of how you think about promoting in the context of your store experience and what consumers are really looking for?

We are a promotional department store and always have been at Macy's. So, that will continue. But I do think that there has got to be new and different and creative ways to attract customers to our business in the forms of loyalty, in the forms of our Plenti program, which is an alliance among many retailers that we now have 9 million people signed up who are participating. They can buy their gasoline at Exxon and they can buy something at AT&T, and they can use those accumulated points and purchase something at Macy's. It is more of a points program as opposed to an outright discount or coupon.

I do think there will be different forms of creating the value for the consumers. But in the end it has to still be obvious, so we're working through that. Interestingly, as we have done the Backstage work there are no coupons with Backstage. The price you see is the price that you get. It is more of an obvious value approach.

We have tried everyday low price inside the Macy's store in the past with minimum success. It is not as if you can just change over to an everyday low price at Macy's and assume that the customer will get that, understand that value. In fact, I think other retailers have tried that and gone away from that -- other department stores have tried that and gone away from that in the last few years. So, it is not that simple. But I do think that there are opportunities for us to find new handles and new ways to create value for customers without the typical discount that you are used to seeing.

Thanks, Terry, for the vision. And thanks, Karen, for the real estate details. They're really helpful.

Paul Trussell, Deutsche Bank.

I just wanted to, again, touch on sales. The comments you have provided have been very helpful, Karen and Terry. I just wanted to dig into the weather perhaps a little bit more. You did speak to certain seasonal categories down significantly. Is there any color that you could help us with in terms of how coats and scarves were during the quarter? Any cadence of the comp throughout the quarter, particularly perhaps in the warmer weeks of early October? And just any breakthroughs or silver linings, perhaps, as the weather's have gotten slightly cooler over these past few weeks?

When the weather gets cooler we do see more traffic and we have seen more sales. So, yes, there is some reason to be optimistic. As Terry said, the weather will get cold. But those businesses have been tough. Obviously, often you go to the store to buy the coat when it gets cold so it is impacting other categories as well because it is less traffic.

The 3.6% drop in transactions was pretty significant, and was particularly tough in October. That is when the weather had gotten colder last year. I hate complaining about the weather but in a quarter like this it is really hard not to talk about it.

Got it. From an expense standpoint, you mentioned that the fourth quarter, despite the sales drop, will have dollars going higher ex the real estate asset sale. If you could just remind us of what some of those headwinds are that you are facing this year. Obviously, historically you have been able to offset sales declines with benefits in SG&A. And to that point, you did mention in the release that you do target to reduce SG&A by another $500 million over the next few years. What are some of the areas that you think those opportunities lie in?

In terms of the fourth quarter, the headwinds would be the investment in the growth initiatives that we have talked about -- digital, Bluemercury, Backstage, as well as China. So, we are investing in growth and we are, obviously, looking for offsets to that. The other issue that will cause an increase in the fourth quarter is that we have shifted marketing dollars from the third quarter into the fourth quarter.

Lastly, we are anticipating lower asset sale gains outside of Brooklyn. Last year in the fourth quarter we had $36.8 million of asset sale gains and this year we are expecting that to be less -- again, excluding Brooklyn. Those would be the big factors in the fourth quarter.

And, as you know, we are constantly looking to do better in with the sales trend. We are all focused on that. And as we go to look for the $500 million maybe we'll get some good news in the fourth quarter, but it would be wrong for us to predict that at this point.

In terms of the $500 million, obviously it is a large number. As you know, each and every year, if you go back over our releases in the early part of the year, we have constantly been evolving the expense structure and announcing restructurings and different ways of doing the business that have saved money. This year was $140 million that we decided to reinvest in growth. The year before was $100 million. We have stepped up the pace at which we are making changes but it is not like we don't do this on a regular basis.

When you get to a number that is as big as $500 million, obviously there will be no stones unturned. We are looking across the Company for opportunities, to use technology, perhaps, to be able to do some things more efficiently. That is a big area. And we're looking everywhere. And obviously, we will update you as we go.

Thank you. Good luck.

Kimberly Greenberger, Morgan Stanley.

Thank you, Terry and Karen, for all of the great detail. I'm wondering if you can talk about traffic? It seems that what the piece that really did step down in the third quarter. Are there some strategies or initiatives that you can put in place near term, for example, in the holiday season, to improve that traffic trend?

And, secondarily, as you step back and look at the next one, two, three years, do you have any initial thoughts on a way to evolve or update your strategies that would help to fortify that traffic number and perhaps at least stabilize it and maybe potentially start driving a positive traffic trend in your stores? Thanks.

As we saw that traffic softened earlier in the quarter we did begin to focus on what could we do in the fourth quarter to help the traffic. Part of it, again, I hate to keep saying it, relates to the weather. But to the extent we can control we have been developing strategies, both in terms of our marketing for the store business and also some online specific strategies to help drive traffic. We are hoping to be able to impact this. And also with weather, we hope it will do better. Obviously, we are on that issue, Kimberly, since we saw it developing early in the quarter.

Longer term, I think in addition to always starting with product and trying to have the best, most curated, most wanted assortments. We are also working categories that we think will be particularly relevant as we go forward, areas like health and wellness, for example. And other product categories that we already do today, how can we do those better. For example, the jewelry and watch test that Terry had alluded to earlier.

The other thing I would say is there is a renewed focus on finding new customers and attracting new customers to our stores. We will continually try to get more trips and more business from our already loyal customers, but we do recognize the need to keep building a new customer base. Again, that relates to our millennial customer. I would say that would be a big part of our traffic driving going forward.

Great. Thank you so much.

Paul Lejuez, Citigroup.

Two questions. One on the backstage stores. Just wondering if you saw any negative impact on the nearby Macy's stores? And then, second, Terry, when you talk about a return to 2% to 3% comps, and looking out in a couple of years, where do you think that share comes from? And just to be clear, are you talking 2% to 3% in the core Macy's concept or do you anticipate Backstage becoming a driver to help get to that 2% or 3%? Thanks.

I will answer your second question first. And that is that we're looking at the 2% to 3% to be all in -- on a comp store basis but all in. That includes the new initiatives with Backstage and Bluemercury. We are clearly seeing the shift there.

The other answer to your first question is, we haven't seen a deterioration in the nearby Macy's store. As an example, we have a Macy's store in Queens and literally right next door we have a Backstage store there, as well. We haven't seen a negative transfer of business from the main store to the Backstage store. That gives us more encouragement about the possibility of putting the Backstage stores within Macy's stores when we do that test.

But I will also say, on the 2% to 3%, there is going to be a growing percent of the business on our digital platform, certainly related to omnichannel. One of the complicated things about our business is that we are going to continue to aggressively support omnichannel shopping, but in many cases the customer is actually looking at her phone first, deciding where to go, coming into the store, spending time inside the store talking with our associates, maybe even trying the product on, and then buying the product from us later, either that day or putting it in her basket and buying it a day or two later.

We don't necessarily believe that that sale would take place if they didn't have the store experience. But when you look at the store impact, that is a negative for the store in terms of time invested, expense invested, and a positive for the online business who is getting the credit for the sale. That is why we have to continue to look at these as overall omnichannel transactions as opposed to one versus the other.

But it does create a complication for us in making sure that we understand just how many stores we need, how far will the customer drive to try on this product once they have discovered it on their mobile device or their tablet device. Those are the kinds of things we're thinking through. We think over time that nets to more and more of the business that will continue to come from digital. As I said, we are growing at a double-digit rate and we are already the seventh Internet retailer in America today. More of the mix will come from purely how we calculate the way I just described it in the online category portion of the business.

Great. Thanks and good luck.

Michael Binetti, UBS.

Karen, I know you gave a little bit of detail on the SG&A plans but since the $500 million is a pretty big number it sounds like it's fairly early on. I'm just curious if you can give us a little more help on how you guys thought about building up to that number since it is a pretty large number. I think it is even larger than $500 [million] if we take your language that says it's net of growth initiatives.

Yes, the intent would be that it would be larger than $500 million so it would be net of the investment in growth initiatives. I will repeat what you said which is it is really too early to talk about how we will get there. As you know, though, we have been pretty good at getting expense cuts once we commit to them.

Maybe I'll just ask a little bit more about Backstage, in particular the hybrid model. As we look across the sector and just think a little bit higher level here, we have seen lots of scenarios where retailers have gone maybe a bit too far in promotional intensity and had trouble backing up after training the consumer to expect a very heavy discount. As Terry said, you guys have been a promotional retailer for a long type, at least in your stores and with your business. How do you think about potentially cannibalizing a full-priced sale from your stores with a Backstage inside that store? What are the guard rails you look at to keep that from being a drag on the AURs longer term?

I think the key thing, Michael, is that is why we're testing our model, that led us feel really good about the opportunity here. We did assume some cannibalization -- A, because we're taking square feet away and, B, because we do think there will be some categories where customers may choose Backstage over the main Macy's. But we think in the longer term it may enable us to do more things in the Macy's store so there would be less overlap. So, we actually think this could be a really cool combination of concepts over time.

But in the math we have assumed cannibalization. We don't know. By the way, we had also assumed that the Backstage freestanding would hurt the main store and in the end that hasn't happened. Again, it is why we keep testing things, because you can't, with all the analytics in the world, it is very hard to predict what the customer is going to do when she is given real choices. So, we are anxious to get these first, no more than 10 stores open next year, these hybrid stores, and really see what happens.

Okay. And if I could ask one final question. I know in the past we have talked about keeping the optionality open on the off-price strategy. Should we take the announcement today that go-at-it-alone is the plan for the foreseeable future, and that you looked across the landscape and don't see anything that you would rather just acquire at this time?

I think we are still evolving with our strategy. At this point we think we are going to be opening up the 50 new stores over the next couple of years.

Thanks a lot.

Todd Duvick, Wells Fargo Securities.

Thanks for the question. Karen, I had a question for you with respect to your comments about keeping an investment grade rating. I understand that and appreciate it. In the past you have had a 2.4 to 2.7 times target leverage range, and I think that also contemplated the IG rating. My question is, at this point do you have any more details that you can give us in terms of either a target leverage range, a credit rating range or, if not, if we can anticipate maybe a finer point on some of your comments with respect to the investment grade rating in the future?

I think, Todd, what I would say is we have made what I call a slight change in the calculation methodology rather than a change in our leverage target. We did update our adjusted leverage calculation to reflect the change in Moody's treatment of operating leases. So, if we calculate it on the new basis our leverage target becomes 2.5 to 2.8.

Again, I'd characterize that as the change in calculation methodology, not a change in leverage. Having said that, for the right strategic opportunity, as has always been the case, we would consider moving outside of the stated range, assuming we were confident we would get back within the range before too long.

Okay. That is helpful. Just one follow-up question to that. Commercial paper, I think in the past, has been a factor that you like to have but it may not be a requirement. Can you just talk about that with respect to is that something that you continue to value?

I think, as you have said, you said it correctly, we like to have it. Obviously, we are in the commercial paper market quite significantly right now. We think is the right way to finance a seasonal business like our own. Having said that, if we didn't have it, we do have the bank line. So, I can't tell you we need it but it certainly is an efficient way for us to finance the business given the seasonality.

Okay. That is helpful. Thank you very much.

Priya Ohri-Gupta, Barclays.

Can you speak to how you're thinking about the investment grade rating in the context of some of the real estate alternatives being scored? Should we see any proceeds directed to that paydown? Or is there room to flex the current rating to accommodate share buybacks?

I think that is a version of the question that Todd just asked. I think that the best way of saying it is our target leverage is the 2.5 to 2.8 that I just talked about. And could that vary a little? Sure. But we do believe that Macy's needs the financial flexibility that comes with an investment grade rating.

I see. Okay. Great. Thank you.

Lorraine Hutchinson, Bank of America.

Karen, you executed a pretty significant balance of the share repurchase in the first three quarters of the year. Should we expect you to back away from that a little bit until the sales variability stabilizes or do think about continuing at the same pace?

We believe that we have adequate liquidity to continue to buy back the stock. Having said that, I'm not predicting at what pace will be buying it. But we do have the liquidity to be able to do so.

Great. And then given the variability that some of these large real estate transactions could cause over the coming years, how do you think about the payout ratio for your dividend?

It is one of those subjects that the Board addresses every year, and they will continue to do so. For this year's decision we all felt that having a competitive dividend in the range that we have been at made sense. Again, the Board will continue to revise the analysis behind that.

Thank you.

Stephen Grambling, Golden Sachs.

Thanks for all of the color and going over the questions. Given the tougher traffic trend but solid growth online, as you look at specific delivery areas are the strongest online markets the weakest in-store markets? And as a corollary, can you talk about how you are evaluating the right number of stores longer term in this impairment?

I haven't looked at that specifically, Stephen, but we tend to find that we do best in lines where our stores are strongest. So, I actually think they work together as we've said, as opposed to one cannibalizing the other. Our store analysis will always be, we look at the cash flow from operating a store given what we think the trend in sales will be over time, and compare that to the opportunity of selling the store, getting out of the lease, doing whatever.

And then, obviously, we do take into consideration the math around online. For example, we know that online returns will happen someplace else if you close a store. We also know when we close a store, Macys.com does less, or Bloomingdales.com in their context. That methodology won't change.

Okay, that's helpful. And then one other quick follow-up on, I think it was Backstage. Can you just talk to any difference in the packing and distribution that you found, and whether there may be any required step up in the supply chain or investment at some point?

It is a very different business, particularly on the subjects you're talking about. So should we continue to expand at this rate? At some point there will need to be capital invested to help on the back of the house operation.

But at this point you can support those in your existing distribution?

At this point, yes.

Okay. All very helpful. Thank so much. Good luck this holiday.

Laurent Vasilescu, Macquarie Capital.

In terms of tourism factor, it was called out that the one-year midpoint is December. Should we expect a 100 basis point drag to the fourth-quarter comp? And do you have any sense if Chinese tourists are still traveling to the US after the stock market turmoil they experienced in the summer?

I can't predict how much it's going to impact us. Our hope and expectation is that it will be better than the 1.5 points that we experienced in the third quarter. In some cases, in some countries the trends actually got worse in the third quarter. So, I think it is a complicated subject. But our expectation is the impact will be less than the 1.5 points we talked about.

To your second question, Chinese customers are still coming to the United States, not to the degree that they had been buying last year. I don't know specifically in terms of how many people are coming, but from a sales perspective it is not as great as it had been. But not one of the countries where we are seeing the biggest decline.

Great. Lastly, handbags was called out as one of the best performers last quarter. I don't think we heard anything this quarter. Can you provide some color around that category?

Yes. It was still fine. As we said, the growth has slowed from what it had been historically. But center core in total and handbags was still a good category. It is just not as good as it had been.

Okay, thank you. Best of luck.

David Glick, Buckingham Research.

Just a follow-up question on real estate, and understanding your decision to go down the joint venture route versus the REIT. Did you conclude that the joint venture path would create more value than a REIT or was it that was the next best alternative given your objective of maintaining an investment grade rating and the REIT potentially wouldn't create enough value to allow you to do that?

We are excited by the value we think can be created with these joint ventures or the partnerships, David, is I think the way I'd answer your question.

How would that value be delivered to shareholders? Shall we assume buybacks or special dividends? How do see that playing out?

I can't tell you that.

Thank you very much.

Omar Saad, Evercore ISI.

I wanted to follow up on a lot of the conversation around gross margin. You guys are thinking differently about a lot of aspects in your business. There is obviously a lot of change with the consumer, the new technologies, digital, a lot of shifts going on in your business. How do you think about the gross margin model as you work with your vendors? Have you thought differently about that? Is it potentially something you would put on the table as you think about the new paradigm of the consumer? And in discussions with vendors is it something you put on the table in terms of potentially rethinking how to do it?

I'm not sure that that is needed. Working with our vendors to help improve the sales and profitability of the business is one of the things our merchants focus on all day long. So, yes, we are always looking to work with them to improve our mutual business, both in terms of sales and profitability.

Understood. And then help us understand the dynamic around that same conversation 3Q to 4Q into next year. Where is the tipping point? Is it really just the comp level and the inventory level where there becomes a little bit of a tipping point in terms of how that burden is shared?

I'm not sure I understand the question.

It sounds like there is a little bit more gross margin pressure expected.

If you think about the third quarter we had very weak sales. As I said, we're coming into the fourth quarter with excess inventory, most of which, or a lot of which relates to the cold weather businesses. We did not want to take the markdowns and start clearing those goods in October because it will get cold. It felt like we would be taking price cuts too early and we would rather liquidate that merchandise when the customer is going to come in and want it. That is why the margin shift is happening between 3Q and 4Q.

Okay, I understand. But, the conversation with vendors doesn't necessarily change around the promotionality and the markdown support?

No.

Got it. Thank you.

Michael Exstein, Credit Suisse.

Thank you so much for taking my question and the detail that you've given us. A couple quick questions for Karen and Terry. Number one, of the $500 million that you are targeting for further reductions how much is that going to come from store closings, just the natural SG&A that you save there? Number two, what are your expectations for credit income going forward? And number three is a strategic question. Over the last 18 months the reach and breadth of Macy's as an organization has dramatically expanded -- Middle East, China, off-price, licenses in the stores. Is it possible the organization is losing focus at this stage of the game and not spending enough time on its core business?

Michael, let me take the first couple questions. At this point we are really not ready to break out the $500 million or how it will happen, including the subject on credit. Obviously, the credit profitability is a function of the sales that we are getting, and therefore the credit sales and profitability. I think we need to see the fourth quarter before I can comment on that specifically.

And the $500 million we will get back to. And remember, the savings is more than $500 million. The $500 million is the net number.

And, Michael, on the focus on the core business, I can assure you that the organization is very focused on the core business. If the core business does not perform then all of these other initiatives cannot make up the difference. We have to perform in the core business.

But I can assure you that there is a small group of people under the leadership of Peter Sachse that are totally dedicated to these other subjects. It has nothing to do with the core business and vice versa. We created a new organization under Peter Sachse of new business development which supervises international, and now supervises Bluemercury. He supervises off-price. His group is totally dedicated to those businesses and there is no overlap or mixing up from the leadership of the core business.

Thank you so much for your comments.

Stacie Rabinowitz, Consumer Edge Research.

I had a turnaround of the question you guys were talking about regarding vendors earlier. Because so many of your vendors have been reporting weaker results than in the past, do you think it is an overall industry at that level and for clothing issue? Or are you seeing some variability in performance from different brands you carry -- your private brands, Macy's versus Bloomingdale's, anything out there?

I think we talked about general weakness in the apparel categories. There are areas that are doing well. We talked about active, juniors, dresses. So, it is not that there is uniform weakness in apparel but there has been weakness. We are constantly looking to help our big vendors get better and help find new vendors that have the most wanted products -- including, by the way, our own private brands.

I would just say that -- and you can just see it as clearly as we can -- as some of these larger brands report their own results, either you believe or you don't believe that some of these big brands are going to get it right, they're going to make the necessary changes, they're going to get fashion components correct, they're going to get the basic inventory planned properly, and that they're going to respond and they're going to improve their results. The business, as we have said, is cyclical. There's no question about it.

These guys that we're talking about, specifically the ones that are have the largest relationships with us, they will get it right. It is just a matter of whether it will be the first quarter or the second quarter delivery or which one will it be. If you believe, like I do, that we're going to work very closely together and identify trends, work with them on future deliveries, we're going to get these things right, then you have confidence that both the vendors and our company will benefit from it.

Are there any small vendors in the categories where you are seeing weakness that are doing well, or newer trends that are outperforming the category average?

We can't talk -- that's why I'm trying to specifically stay away from names of vendors, because I know that my comments, as we are so important to them, will influence their value, their companies. So, I can't specifically talk -- the answer is yes, but it can't specifically name them and tell you who they are.

That's all right. That's very helpful. Thank you.

Bob Drbul, Nomura.

Just one quick question. On the inventory levels, can you just talk to any cancellations or adjustments you've made both for your branded merchandise or your private brands just around the numbers that you are reporting today, like end of October numbers, and just how aggressive you have been to try to get that to a better place in terms of inventory?

I think the key thing, Bob, is we are always aggressive in adjusting our forward-looking receipt plans and expectations category by category, vendor by vendor. There is not really one overall answer. But whenever a business is trending better we're chasing goods and when a vendor is not doing well, we're trying to figure out ways of not having too many receipts coming in. So, I would say this year is no different. It is just, obviously, a little more extreme.

I think earlier Terry mentioned the consumer trading down from time to time. Would you expect a bigger focus on some of your private brands as we look to the next several quarters?

Our private brands I wouldn't put in the category of trading down. If you think about INC, it happens to be well priced but the quality and the fashion sensibility of that product is spectacular. I would not call that trading down at all.

And, fortunately, speaking of INC, it is doing quite well at this point, so we feel very good about brands like that's going forward. So, don't always think private brand as being trading down. If you think about Hotel and the home world, doing extremely well in textiles. And, again, it is the most expensive textile products we have on the floor.

Okay. Thank you very much.

Larry Haverty, Gamco.

I'm just curious, you guys get the best financial advice in the world and I'm worried about whether your financial advisors are briefing you on the idea that this Company could essentially be bought by its dividend. I will walk you through it. The dividend right now is 3.5%. If you grossed it up for taxes it is 5.2%. It's not too terribly difficult to do an LBO, I suspect, at 10%, and half the financing costs would be the dividend. So, the math is just incredibly persuasive, especially given the free cash flow this Company generates. I'm wondering if within the Company that has been discussed? If not, why not? And how, in fact, are you coping with it? Because the other side of it is, that the economic of share repurchase, as you know, have just gotten absolutely compelling, especially with the level of the dividend being what it is.

I think, Larry, all I can tell you is, as you said, we have the best advisors in the world, and we're looking at absolutely everything.

Okay. So, this is not something that hasn't been considered?

I'm sorry, was that a question?

Yes.

Larry, all I can tell you is we are looking at every possible opportunity, and you know that.

Thanks a lot, Karen.

Charles Grom, Sterne Agee CRT.

Most of my questions have been asked. But, Karen, Terry, bigger picture here, your comps are down a lot, transactions are down a lot. But you've got some company out there. Whole Foods is comping negative. There's a lot of retailers that are seeing a big deceleration in trends. But given your breadth, the type of product you sell, are you seeing anything out there that tells you we are really on the [impedance] of a real pullback in consumer spending, something of the like that we saw back in 2008 and 2009, and the weather which obviously, is an issue, tourism is an issue, but there is just a bigger picture problem out there?

It's a fair question. Someone asked me this earlier this morning, is this similar to 2008, 2009? My answer is absolutely no, it is not similar because then it was a crystal-clear massive pullback by consumers. We literally saw them stop shopping the day of the Lehman Brothers collapse. The next day business dropped dramatically. You just saw consumers stop spending for a long period of time.

This is different. This is, we have seen a slowdown, as you said, in transactions, particularly in this last quarter. We also here can see that the fundamentals of the economy are in much better shape than they were in 2008 and 2009. We speak and point to the tourism purchasing issue. At some point, I can't tell you if the dollar is going to change in terms of its strength in the near term -- in fact, I don't expect it will -- but over time it will adjust and that subject will improve in terms of our ability to sell more products to tourists. At some point in time the weather will normalize.

When I put all of that into the way that we look at total business book potential, I think you have to say we have got to get through the fourth quarter. It's so important. It is such a big part of the overall business. And when those subjects start to -- the tourist subject begins to anniversary itself, and the weather pattern begins to normalize, and then you look at it and say there's really no improvement, then I think your point could be valid. But I'm not expecting that to be the case. I am expecting there will be some improvement when those two subjects year round and normalize.

Okay. Great. And, Karen, just on the asset sales, the $420 million to $430 million, can you just break down what you perceive to be one-time versus recurring, just so we can think about 2016 from a modeling perspective?

I think in terms of -- I don't know that I'd call it one time but the one thing as you have heard me breakout has been Brooklyn and the gain, the $250 million gain. But things like Seattle, we hope to be able to replicate, maybe not with one transaction. As we are modeling 2016 and thinking about SG&A, the only transaction that we are viewing differently would be Brooklyn.

Okay. Thank you. Hang in there. Good luck.

Dana Telsey, Telsey Advisory Group.

Can you talk a little bit about Bloomingdale's and how Bloomingdale's did relative to Macy's? And, lastly, the credit card penetration was up, I think, to 49.3%, up 60 basis points. So, obviously showing a difference in locals versus tourists. Anywhere where you saw a difference in locals performance and how you think about that? Thank you.

On the credit subject, Dana, we are obviously, very pleased with that result. I do think, as you said, it is a function of having less international tourists. And it tends -- in these kind of periods, our loyal customers tend to come out more when business is weaker. So, I think that is also part of the proprietary credit good news.

In terms of Bloomingdale's, I would say the trends actually have the same issues that Macy's does. In fact, in that international tourist business that is an even bigger impact on Bloomingdale's given where their locations are.

I would say, Dana, they're similar trends, but to Karen's point, Bloomingdale's is even more highly penetrated in the Northeast, weather issues, and more highly penetrated in international, New York particularly, as a percent of their 37 stores as opposed to Herald Square being a percent to our 750-plus Macy's stores. But I think overall when you look at it I would say that it is quite similar.

There was no major difference in the more upscale consumer at Bloomingdale's than there is for the more mid household income consumer of Macy's. It was really the swing was more along the lines I just described with that international tourism and the concentration of our business in the Northeast.

Thank you.

With no further questions in the queue I would like to turn the call back to Karen Hoguet for any additional closing remarks.

Thank you. And thank you for your patience today with the longer than usual call. I know there's a lot of material in the release. And obviously call me, call Matt, Sarah, Ryan, et cetera. We will try to get back to you as quickly as we can and help you with any of the details that you need help with.

And just know that, I think we said it loud and clear, but we are going to be so, and continue to be, so aggressive in terms of our work to right this ship, to get our business on track. We've got a strong, talented team here who has a proven track record of success. Bet on our Company for the long term and you'll be glad you did. Thank you.

Thank you

Again, that does conclude today's presentation. We thank you for your participation.